Product Pricing: An Important Step for Entrepreneurs

Just when you’re all set to bring your product in to the market, one question is bound to trouble you more often than not- What should be the price of the newly made product? The way you set prices is quite variable as is the industry as well as the expectations of the target customers. Also, there is no certain way or strategy that can be followed; instead, you need to take care of a lot of things simultaneously. Most of the consumers link price with quality and there are many organizations that carefully reinforce the quality of their product, using price as a surrogate cue (or substitute indicator) for quality. Also, as an entrepreneur, one thing that should be kept in mind is that it’s not just the initial profit that always counts but sometimes the revenue generated can go a long way in building investor’s confidence.

The different ways of pricing your product are-

Cost-based Pricing- In this method of pricing, the customer demands are not considered and the price is decided solely by taking the production costs into consideration. This is again done in three different ways-

  • Mark-up pricing- The profit you want from the product is simply added to the production cost in the form of a percentage.

  • Cost-plus pricing- This method is applied when the cost of production is not known and both buyer and seller settle down to some profit percentage.

  • Planned profit pricing- It does not focus on the per-unit price, instead, it ensures that you will have a certain total profit on the total sales. It considers the production costs also.

 

Competition-based pricing- In this method, you are focused towards the industry which not only includes all existing competition but also all the emerging competition in that field. The main advantage with this type of pricing is that as you take all your decisions keeping in mind your competitors, it is much more efficient as well as effective. If your product is unique, you can charge a little more than the other products in the market and this will not only increase your profit per-unit but can also increase the sales as often the customers relate the product’s price with its quality.

You can also go for the Market-penetration pricing that is selecting a price that can attract as well as hold a large number of customers. In a highly competitive market, in order to enforce market penetration of your product, you can even lower the prices to attract a large pool of customers who seek a product of the quality same as the other products in market but of a price which suits their pockets. And, this lowering cannot always mean a loss because more sales mean bulk buying of raw materials and thus a reduction in production costs. Another important type of pricing that comes under it is Market-share pricing which aims at a bigger market-share. In most of the occasions, it comes after Market-penetration pricing. Let us consider an example to understand what market share is. For example, out of the 10 million jute bags sold in the market in total, you sell 0.4 million jute bags, then your market share will be 4%.

 

Customer-based pricing- It is the type of pricing which focuses on what customer thinks of a particular product being available in a particular rate. Your product can be very innovative or unique, but if the customers think that it is too expensive, it is certainly going to hurt your sales.

 

On the other hand, a price set that a customer feels is optimum for that kind of product, can do a lot of good to its market demand. This includes-

  • Bundling of products to reduce the inventory,

  • Segmentation to provide a range of prices for a single product,

  • Setting a price that does justice with the image it is intended to create in the market,

  • Setting a price that enhances sales,

  • Giving offers like coupons, buy-one-get-one-free, holiday offers, etc.

 

After discussing the different methods of pricing, it would be incomplete, if I do not mention some concise guidelines to product pricing. Here are some-

  1. Always remember that the most important thing is differentiation of your product from others in the market. You can lower the prices or can increase them substantially but in that case the quality of the product also needs to be class apart.

  2. When the number of sales is going to be quite less, for example jewellery, you need to ensure that the profit margin is quite big.

  3. Take care of the “fixed overhead”, that is the other costs of running the company because in order to ensure a profit, you can’t just ignore them while considering the production costs.

  4. You can just step out of your office and ask 10-20 people whether they will buy the product having the features as well as the price as that of your product. This can help you a lot.

  5. It is a very important thing that where you want to position your product in the market. For example, if you want to position your product as an exclusive luxury product, a low price can hurt the image of the product in the market.

  6. Be flexible and continuously review all the factors so that you can change the price of product according to the market response.

  7. Also maintain all the records and do a lot of homework as it can help you think in similar patterns later.

 

Thus, to sum up, one needs to take care of the three C’s that are the basic elements of pricing- Cost, Competition and Consumers. A right blend of the above discussed pricing methods can ensure that these three C’s are in a right balance and a right balance ensures a right price which you are looking for your product!

 

Contributed by Shashank Garg

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