Choosing how to price your products as a business is one of the most critical steps when deciding on your business model.
There are many choices and variables and merchants should consider each one to ensure their business is successful. There is no right answer in this regard and different business models in different niches may each have a very different pricing strategy.
For example, a luxury brand may have a very different pricing strategy than a company looking to sell a popular consumer product in a crowded market.
The market you choose to sell in also plays a role in your pricing decisions. Some industries are highly price-sensitive with many competitors in that industry advertising on price alone. While other industries may have players at several price points ranging from economical to upscale.
A perfect example of this is bicycle sales. Some bicycles sell for barely over $100, while others easily fetch $10k or more.
This example shows us that even in the same industry and in the same product category, merchants can choose wildly different pricing strategies. Merchants should carefully consider each price point.
Below, we’ll go over the key strategies to help you decide how to charge for your products depending on your intended market and the industry you are in.
How To Price Your Products For Retail
Determining your pricing structure for retail products should start by having a full understanding of what it costs to either produce or acquire the products you are selling. Merchants should nail down this number accurately as it will serve as a basis for determining profit margins.
You’ll next need to determine the other costs of running your business and how they relate to the products you are selling. These are operational costs. Operational costs are costs not directly related to producing a product. But instead, are used to run the business. Things like your rent, your payroll, and your utilities are examples of operational costs.
The reason these are important is that if you set your profit margins to cover the cost of producing or acquiring a product, it may be profit, but not enough of a profit to cover your operational costs or fixed costs on a monthly basis.
These different levels of profit are gross profit, net profit, and operational profit.
Gross Profit
A company’s gross profits are the measure of revenue minus the direct cost to produce those products.
For example, if you sell a pair of shoes for $100, but the shoes cost you $50, your gross profit on those is $50. The first $50 to acquire the shoes or produce them is known as the cost of goods sold (COGS).
Net Profit
Net profit is often used interchangeably with revenue. It’s the measure of money left over after expenses have been paid.
For example, these expenses may include taxes, debts, depreciation, and interest payments. This may also include certain variable costs such as marketing, although marketing expenses can be handled in several different ways in corporate accounting.
Operating Profit
Operating profit is similar to net profit, the difference is these calculations are made pre-tax and pre-interest. So this metric can be seen as somewhere in between gross profit and net profit. It’s more of an accounting metric and less influential on pricing than gross or net profit calculations.
The key aspect here is that for determining your product price, many new businesses only worry about gross profit margins. This is why you often hear about new businesses being “in the red” despite having customers and sales. The problem is, they are making good gross profits, but their net profits are likely negative. In essence, they can’t cover their bills.
This means you either have to raise prices or reduce costs. This situation sets up an example of why determining your prices ahead of time is extremely important. It’s often difficult to suddenly raise prices, as you may chase off regular customers or lose your place in the market to lower-priced competitors.
Cutting costs can also be difficult unless you happen to have a wasteful budget. If you’re not being wasteful, then cutting costs may be difficult.
This is why it’s best to launch with the most appropriate pricing that gives you a comfortable net profit margin. Having to make an emergency adjustment soon after launching a product or business is generally a bad move and one that will likely make things worse.
How To Price Your Products For Wholesale
Pricing products for wholesale has many similarities with pricing for retail, but there are a few key differences to be aware of.
Below, we’ll go over some wholesale pricing strategies for small businesses.
Know Your Customer
Of course, every business should know their customers as well as possible. But when it comes to wholesale, your customers are retail businesses. This means they have different needs and concerns than direct consumers.
It’s important to understand your wholesale customers and know what they’re looking for as well as what their pain points or friction points are. By doing this, you can use this information to better implement a pricing structure that attracts and retains the most customers.
As a side note, you also may find areas where you can offer various services, such as financing or payment plans, which help the customer and allow you to increase your profits.
Overall, there are two main methods of determining your pricing for wholesale products. Those are to either use the absorption pricing method or differentiated pricing
Absorption Pricing
This is the most basic method for pricing products for wholesale. You essentially combine your cost price and your desired profit margin, which gives you your final price or product cost to your customers.
It’s called absorption because all of the costs are calculated or “absorbed” in the final price.
The benefit of the absorption-based pricing method is that it’s the easiest to use and calculate. It can also work well as a baseline or gauge compared to other methods or when comparing prices to competitors.
Overall, it’s a good method to be aware of even if you don’t ultimately use it as your pricing model. It can serve other purposes as well when doing market research.
The downside of this method is that it essentially determines your price in a bubble. It doesn’t take into consideration things like perceived value or competition in the market.
Differentiated pricing
You can think of differentiated pricing as a type of dynamic pricing formula where you set different prices for different customers. The factors for determining price changes can be things like demand or the willingness of certain customers to pay more or less.
The goal of differentiated pricing is to maximize your ROI (return on investment) for your inventory. You’re essentially always looking to sell for the highest possible return or reduce your own inventory as quickly as possible if need be.
Merchants receive the benefit of maximized margins from differentiated pricing. The downside is that customers may see this sort of pricing as predatory if they discover it.
Customers may also grow tired of constantly changing prices or fluctuations. Businesses want stability so they can create accurate forecasts. They might rather pay a slightly higher set price than one that is inconsistent in fluctuations.
If choosing this method to set your prices, it’s best to use a variation of it or only apply it to specific situations, such as high-demand times when you need to control inventory.
How To Price Your Products For Amazon
Amazon can be a very unique environment for retailers, even those familiar with eCommerce. The platform is known for being highly price-sensitive, so pricing accurately in certain niches can often be the difference between success and failure.
On the bright side, there are a lot of tools available to do your pricing research for Amazon. It’s also easy to conduct other forms of research on your competitors. This means that while pricing is very important on Amazon, at least it’s easy to determine what range you should be operating in. From there, it’s simply a matter of deciding where in that range you want to be based on your brand image and value proposition.
Maximum and Minimum
To begin, you want to determine your minimum and maximum price for a given item. You may not sell at these extremes, but you want to learn your range.
To do this, take the product you want to sell and determine how much it costs for you to source that product from your supplier.
Assuming you’re using Amazon for your fulfillment, you can use Amazon’s FBA revenue calculator. What this does is calculate your fees depending on the item’s price, size, and weight. Amazon recommends retailers use the FBA revenue calculator. This is a common method used by most sellers.
Likely, someone else is already selling an identical or nearly identical item on Amazon. You can use that product’s ASIN to plug into the FBA revenue calculator.
From there, you can adjust your calculation until the net profitability is zero. This means you will break even on each sale based on your costs and Amazon’s fees. You don’t sell at this price, but you now know that’s the minimum you can sell this item and at least get your money back.
This is mostly to set a range, but it can also be useful if you need to unload some inventory or liquidate poorly selling items to raise cash for other products. Just remember, this number doesn’t take into account any advertising or other promotion you may have spent, so consider that as well.
Similar Product Research
Next, you research the price of all similar products. You can do this by simply browsing the site, but a faster way is to use one of the many price comparison extensions available online. Look at the average price.
You’ll likely notice a few sellers are outliers with much higher prices than everyone else. That sort of sets your maximum price. Those sellers with the outlier prices are generally hoping to score buyers who simply click on the first item and buy it. So they aren’t going for volume.
Find a price somewhere that is competitive with the average but still gives you a solid profit margin. You can determine your needed profit margins using the tips from the previous section on gross and net profits.
Remember, you may not always want to undercut everyone on pricing via sale price or other means. Some sellers may have higher volumes than you and can then undercut you. They will still make a profit while you are now left with no options to further reduce your price.
Not only that, the floor price for that item is now lower. So you may have just chased yourself out of the competition.
Because of this, be cautious when looking to undercut the entire market. Make sure you can sustain that strategy or have the volume to still make a profit if you create a price war.
If you’re a new seller, there is little chance you will be able to beat established sellers unless you have a large starting budget. Established sellers also have access to the Amazon buy box and other features to help them increase their volumes.
New Sellers May Have To Price Lower
One thing to also consider is how new you are and whether your products have reviews. New sellers may have to entice customers with slightly lower prices. But as we warned about, this doesn’t mean trying to undercut everyone. Instead, try to just be at the lower range if it’s needed.
For some products, you may be able to gather reviews quickly enough that there’s no reason to use a lower price. A lot of this will depend on your timeframe for returning a profit on your items. Those with larger budgets can likely be more patient while their business builds over time.
If you have a lot of money tied up in inventory, you may need to be more aggressive with your pricing to start moving products to create greater cash flow.
Monitor Competitor’s Prices And Sales
Once you’ve set your prices, it’s important to monitor the prices of your competitors as time goes by. Prices can fluctuate and there may be changes you need to respond to.
But beyond just prices, you want to know if your competitor’s products are actually moving at those prices. There are various paid and free tools you can use to track products and sales on Amazon.
Unlike some other retail environments, Amazon can have a more dynamic pricing environment where new competitors enter the market or old ones move on to other niches. This creates a much more dynamic shopping environment. So sellers need to be aware of this and ready to respond if needed with small changes to their pricing.
This is also why knowing the profitably at different price points is important. It means you can quickly respond to price changes while being able to accurately predict your profits at those new prices.
Your Prices Play a Part in Your Competition
On another note, the price you choose will also play a big part in the overall competition you have.
Products priced between $16-$25 will have the highest competition from other sellers. This is on average and individual niches may be different. But taken as a whole, that price range has the highest number of sellers. For items under $3 and over $100. the number of sellers drops by over half.
So more expensive items have less competition and better margins. This is mostly due to the need for a larger budget to hold inventory of more expensive items. So most new sellers enter the lower price categories and therefore have the most competition.
By knowing this, you should have a better idea of how much competition you have overall. If you can afford to stock a few expensive items over $100, you can often price those items more comfortably to maintain profits.
How Brand Image Will Impact Your Pricing Strategy
One important aspect when it comes to setting your prices is to take into consideration your brand image.
It’s important to understand what your brand stands for and what customers should expect from it. This should all be done at an early stage as you’re formulating and documenting your business plan.
There is no right answer here as any business from a deep discounter to an ultra-luxury brand can be successful. The important thing is to not send mixed signals with your pricing that can muddy your carefully curated brand image.
For example, if you build a brand image by offering discounts and the best pricing, you are going to attract price-sensitive customers who are likely knowledgeable about pricing. If you don’t deliver on the prices, they’ll have a very bad initial experience with your brand, even if everything else about your brand is superb.
The same thing goes for high-end merchandise. Such a brand image will attract those expecting luxury, both from the product and the overall experience of interacting with your brand.
This can go beyond just discounts and luxury goods. Your level of service can also be a part of your pricing strategy. If you can offer more value in other areas of the buying experience, you may be able to command a higher price for your products.
Many of these examples are explaining a certain “x-factor” when it comes to pricing. While formulas are a good starting point to help you determine how much you need to make to stay in business, your brand image and business model will act as a variable to further customize your pricing.
The key is to make sure your pricing strategy matches whatever brand image you are pursuing.
How To Conduct Market Research
During your planning stage and while you were constructing your business plan, you should have been conducting research on competitors who sell the same product or service as you plan to.
This is a great way to help decide your pricing strategy and where you want to position yourself in the market. But there’s also a field of pricing research that looks to figure out how much people will pay at the maximum.
You can do this through research groups or focus groups conducted by companies you can hire. Small focus groups and research like this can cost anywhere between $5K and $10k. The research company will use various standardized methods to discover how much consumers are willing to pay as well as why.
This can be helpful for a business entering a new market that wants to know about its target consumer. If you are new and don’t have the budget for such research, you can likely find completed research that is related to your industry.
For example, if you’re in the restaurant industry, there is likely quite a bit of completed research on pricing strategies and focus groups. Some of it likely very recent. You can find these in trade publications or journals.
With a little searching, you should be able to find research that was already paid for and done by others that can give you insight into your own industry and pricing strategy. Just make sure the research you look up is current.
For example, research conducted during an economic expansion will not be relevant if you’re starting your business during an economic recession.
Final Tips on How To Price Your Products
Figuring out how to price your products is about combining research, simple math, and your brand image into one cohesive strategy that sets your business up for initial prosperity. Once you’ve begun pricing and selling, you can always look into your retail analytics to see if there are any areas that need to be altered for future growth and expansion.
When that time comes, contact ECS Payments to help with your payment solutions. We help merchants all across the country implement the right payment processing strategies so they can maximize their sales and revenue no matter what their business model happens to be.
Contact ECS Payments to learn more about our payment solutions and how they can help your business succeed.
