What factors must be taken into consideration to determine the right price for a product?

Pricing is one of the most difficult decisions for companies to make when it is time to launch a new product or service. Even though there are many types of pricing strategies in business there is not one formula-based approach that suits all types of products, services or businesses. In contrast, pricing is complicated, constantly-changing and based on many different factors.

If you are thinking of introducing a new product/service, or just making price changes on the existing ones, here are the factors to consider when creating a pricing strategy.

1. Identify your Business Goals

A company without a business goal can’t succeed. The first step is to be clear about what you want to achieve with your pricing strategy — is it maximizing profits or maximizing market share with your products and so on. For example, one of your goals can be to maximize market share with your product — that might result in costs decrease or in what economists call “network effects”, i.e. the value of your product increases as more people use it. Apart from that, while listing your goals, you need to understand that prices are not enough to drive sales alone. That’s why it is vital to be aware of your ability to sell and avoid making poor pricing decisions.

2. Know your Costs

Before setting a price for your products or services you need to know the costs of running your business. The first thing that you need to think of when developing a pricing strategy is the following — you must cover your costs and then consider a profit. Basically, the fact is that the cost of a product is more than the exact cost of the item, it also includes other additional costs.
To be more precise; let’s split costs under two headings:

Fixed costs: Regardless of how much you sell, it is a cost that you always need to factor in. For instance: rent, labor costs (salaries), materials and so on.

Variable costs: This type of cost mainly cover extra things such as additional materials, labor or transport, and therefore they can fluctuate over time. Once you calculate the cost of producing your product and service, you must set your prices higher than the variable costs — to be able to make a profit.

3.Know your Customers

Another important aspect to consider when setting the pricing strategy is the customers. It is vital to investigate what do the customers want from your product or service. Are they driven by the cheapest version available on the market, or they consider that expensive is equal to quality? What role does the price play in their purchasing decision? Answering these questions will give you a better insight into who your audience is and which are the points that affect their purchasing decision. But how can you learn more about your customers? Your research can range from some informal online surveys sent out to your already existing client base, to hiring a market research agency to conduct this research for you. Therefore, you’ll know if you are targeting the right group and what would be the most suitable pricing strategy for them.

4.Positioning

Understanding your customers is also important when it comes to deciding what should be your market position. You need to make a decision do you want to be the most expensive, luxurious, high-end brand in your industry, or maybe the cheapest one. Of course, you can always choose to be somewhere in the middle. Why it is so important to decide in which direction you’ll go? The price that you set for your product or service will create a brand perception in the eyes of your potential customer. For example, you can position yourself as a low-cost leader, where customers will know that low price is your strongest weapon.

5.Value

What is your product worth to your customers? Does it save them money or time? If that is the case, then you can base the price more on the value that it has for customers instead of minimally exceeding its production price. As you’ve probably realized by now, there are many factors that should be taken into consideration when deciding on a pricing strategy. Therefore, it would be useful to run a few pricing calculations in order to come up with the best solution. There are a few of them that you can use as a starting point:

cost-plus pricing: this should be your minimum price. You need to set a price that will cover your production costs because after all, your aim is to make some profit.

fair pricing: no matter how good or useful your product/service is, no one will be willing to pay for it if they find the price unfairly high

price based on the value: as we have already explained, this should be your maximal price

6. Do your Market Research

Market research is necessary in order to decide how much you are going to charge for your product or service. On top of that, for products and services already available, market research can tell companies whether they are meeting success criteria or not. For example, while conducting market research you can use the results either to create a business and marketing plan or to measure the success of your current plan. Another key component of market research is comparing, monitoring your prices against your competitors continuously and discovering underlying profitability on a monthly basis. However, checking out the overall profitability of your company every month is not enough. You have to focus on the profitability of every product you sell. That means you have to analyze your product one by one. Such great analysis is a matter of time and a huge effort.

Fortunately, you do not have to spend endless hours to do it. Instead, price monitoring tools like Price2Spy are a great way to track competitor prices and determine pricing opportunities for each product. Moreover, you can use price monitoring tools when it is time to segment your market and differentiate your product or service from your competitors.

After everything being said, we can come to the conclusion that some of the most important things to focus on are listening to your customers, keep track of your competitors and have a budget action plan in place. Remember, in order to maximize profitability, pricing should be in balance with the value of the benefits that your business provides for its customers and for itself.

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