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4 Effective Ways to Price Your Online Products

VitaliyKolos Inspiration Nov 04, 2020

"The moment you make a mistake in pricing, you're eating into your reputation or your profits" - Katharine Paine.

This line hits the nail on the head. Pricing is the most critical aspect of increasing revenue and profits. Harvard research states that a 1% improvement in the pricing of products increases profit by 11.1%.

Setting the right price is similar to balancing a weighing scale. A low price product generates a constant revenue stream without turning into profit. Similarly, a higher price product reduces market share resulting in fewer sales.

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Pricing your product boils down to striking the right balance between the two outcomes, but it's easier said than done.

With every 9 out 10 customers checking the price of an online product on Amazon – getting the pricing strategy right is no longer an option.

The point here is the digital shoppers are smart, so you have to be, too.

Luckily for you, there are many ways of optimally pricing your products, and this guide will lay out the best possible ways for you.

4 Effective Ways to Price Your Online Products

When pricing your products, it's essential to account for all the costs you incur (including manufacturing, interactive marketing, digital marketing, and more) and come up with competitive prices, which your customers will love. Here are four practical ways of pricing your online products.

Pricing survey

You've probably spent days, months, or even years creating the perfect product.

How do you ensure your efforts and investments yield the desired result?

That's where price surveys come to your rescue.

A survey helps in finding the difference between too low and too high a price. And, you discover what customers are willing to pay for your product. This helps in determining the right price, which eventually results in higher profits and market share.

Benefits of pricing survey

  • Uncovers the customer's willingness to purchase your product.
  • Lets you understand the highest possible ROI on the product.
  • It helps in preserving brand value.

Techniques for pricing survey

Using three techniques, you can find your customer's willingness to pay for your online product.

The high cost of ignoring pricing survey: According to McKinsey, in the 1990s, manufacturers of hard-disk drives invested a whopping $6.5 billion in R&D to increase the drive's storage capacity. However, the manufacturers failed to understand the importance of pricing surveys resulting in incorrect pricing. This pricing error resulted in net losses of $800 million.

Additional tip: Use a pricing survey template for making an informed decision.

Cost-plus pricing

If a product costs $10 to make, most companies will charge $15-$20 for it. This is called cost-plus pricing.

It involves calculating the total cost of manufacturing, labor, and overhead costs to make the product and then adding a fixed percentage mark-up to determine the price. Usually, the mark-up is a target rate of return, similar to a wishlist a child makes to Santa on Christmas, when he knows his parents are fulfilling the wishes.

Cost-plus pricing is an effective way for companies looking to pursue a cost-leadership strategy.

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Benefits of cost-plus pricing:

  • Easy to use: You only have to analyze the manufacturing and production cost. It doesn't involve thorough market research.
  • Reduces the risk of incomplete knowledge: It safeguards you when there is a lack of information on customer's willingness to pay, and you don't have direct competitors.
  • Provides a constant rate of return: Due to the mark-up percentage, companies usually get a continuous rate of return.

Additional tip: There is no point in implementing cost-plus pricing as the sole pricing strategy as it doesn't account for competitive growth. Instead, make it a part of your dynamic pricing strategy for a win-win situation.

Ideal for: Retails companies

Online retailers need to have competitive pricing to attract price-sensitive shoppers and provide the best deals for online products.

Not ideal for: SaaS businesses

Value-based pricing

If, in the above example, a customer is ready to pay $500 for a product costing $10 or $50, you are successful in creating a product that strikes a chord with the customers.

Here, the customers are paying based on their perceived value of the product. Value-based pricing is an umbrella term for pricing strategy, which accounts for its value in the customer's eyes.

According to Bain & Company, 76% of the top-performing firms believe that their pricing strategies maximize return at both product and customer level.

That's why you need value-based pricing as it maximizes return by determining the price and adjusting the cost.

Benefits of value-based pricing:

  • Accounts external and internal variables: It considers essential factors other than cost when creating a price.
  • Focuses on customers: It lets you have products with features your customers cannot overlook to understand the customers.
  • Results in a better product: You cannot use a value-based pricing model unless you create value. This results in creating a better product.
  • Keeps an eye on competitors: It considers market competition before pricing a product.

Cost of ignoring value-based pricing: Before filing for bankruptcy, Toys R Us, a leading toy brand, undercut the prices by 10-30% in an attempt to bring back the lost customers. Even after the discount, the company was selling toys at a premium rate. With the rise in technology and market evolution, the company ultimately failed to understand its products' value in the customer's eye. Had the company given importance to their product's perceived value, they would not have to shut the door.

Additional tip: Unlike cost-plus pricing, a value-based strategy is ideal for a single market. Targeting everyone across the segment will not yield results. Choose a separate value-based price for every segment.

Ideal for: Fashion, cosmetics, technology, and SaaS companies

Competitive pricing

Undoubtedly, customers prefer products that are available at the best price. As a brand, you always want your prices to be lower than competitors.

But, how can lower pricing result in profits?

That's where you need competitive pricing.

As the name suggests, in competitive pricing, you price the products relative to your competitor's price. In other words, the competitor's prices are set as the benchmark, and instead of focusing on customer research or value-based pricing, you price the products.

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With price comparison influencing 51% of shoppers to purchase from a company other than the one they initially intended to – resorting to competitive pricing is a must. There are three ways of pricing your products based on a competitor's research.

Pricing below the competition: Follow this strategy only when your product offers a bare minimum or limited functionality and features. You can also adopt when benefiting from economies of scale, and you want to grab customer's attention to gain market share.

Pricing at the same level: Use this strategy when the product's functionality and features are similar to the competitors. Here, focus on the added value your product offers to stand out in the competition.

Pricing above the competition: Use this method only when your product offers superior functionality and features than the competitors. It's highly adaptable in industries where customers buy based on quality instead of price, like Apple's iPhone.

Benefits of competitive pricing

  • Easy to use and implement: The only research it requires is acquiring information about the competitors and pricing. You let the competitors incur the cost of setting the price.
  • Has low-risk: Since your competitors are thriving on their pricing strategy, the chances of your pricing strategy going for a toss is less.
  • More efficient: You can combine competitive pricing with other strategies to ensure the online product's best final price.

Additional tip: Try using competitive pricing with other pricing techniques because you don't have details on how your competitors arrive at a price. If they go wrong, it might reduce your profits and revenue.

Ideal for: Business selling similar products

Conclusion

Ron Johnson once said, "Pricing is pretty simple...Customers will not pay a penny more than the true value of the product."

There's never a black-and-white approach to a pricing strategy. Not every strategy will work for online products. Do your homework, weigh your options, and decide what's best for your product and customer.

Nailing the pricing involves everything from conducting competitors' research to pricing survey. Also, remember that pricing is fluid, and they keep changing with time. You need to revisit and update the prices as you're running the business.

And don't forget to make the website that you're selling your online products on user friendly. You can use a guide to UX research to learn more about this important aspect of online sales. When visitors find your site user-friendly, you'll see a surge in brand loyalty and sales.

In conclusion, pricing evolves with your business, and as long as it's covering the expenses and yielding some profit, test different strategies, and adjust as you move forward.

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