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How to Price Products




Pricing the Products

Multiple internal and external factors can influence the pricing of the product. Sometimes the model or strategy we use to price a product will only apply to one industry sector or customer segment. Look out for constraints that would apply to your specific business. For businesses like children's books, the Pricing strategy of subscription type for digital commerce is relatively standard. However, a traditional retail/ wholesale pricing model would apply to storefront bookstores.


Internal factors that can influence pricing include:

• Cost of production: The cost of raw materials, labor, and overhead expenses are all taken into account when setting prices.

• Perception of value: By understanding how customers perceive value, you can set prices to reflect their perceived value.

• Industry competition: Knowing what the competition is charging can help you set prices that are competitive.

• Brand image: Prices may be adjusted to project a certain image for the company and its products.

• Profit margins: Setting prices to ensure you are making a profit is important for the long-term success of any business.


External factors that can influence pricing include:

• Market conditions: The state of the economy, consumer spending habits, and the overall market can all affect pricing.

• Government regulations: Government regulations and taxes can influence pricing decisions.

• Consumer demand: If demand is high, you may be able to charge higher prices. • Distribution channels: How you sell your product may affect how much you can charge for it.

• Seasonal factors: Seasonality can have a big impact on pricing decisions. Factors for pricing the product Multiple factors can impact the price of the product. Categorizing factors that can derive the cost into —9 Ps for determining the product's price.


Factors for Pricing the Product

Multiple factors can impact the price of the product. Categorizing factors that can derive the cost into —9 Ps for determining the product's price.




1. Patrons: These are your customers/ merchants or anyone who loves your product and is willing to pay for the services that you are offering.


2. Price for Operation: These are the costs necessary for the business; they can be the cost of raw materials or external services you are consuming for the company.


3. Prospects: These are other prospects for the users who have the potential to drive the price of the product. Competition is a major driving factor in many businesses to price the product at a relative price.


4. Possibilities: With service: Today, the product's price is a derivative of the value or extra convenience/ possibilities it offers to its patrons. At times market perception also plays into determining the price.


5. Proposition: Important to offer a better value proposition for the service provided relative to the competition. It can be more services under the Freemium model. 5


6. Proceeds: Sometimes, the price can depend on the final target profits. Most of the time, the company's earnings rely on the (revenue earned - all the costs) which gives profits. At times, the price is fixed, based on yield.


7. Potential: At times, price is determined based on the product's potential and how better the outcome is to the competition. Even including the potential to gain or lead the market segment.


8. Promotions: Extra discounts or coupons to attract or influence the signup for the product or service. Many organizations offer it as fixed days money guarantee too.


9. Place: The cost of the fixed asset in the form of location or the case of digital commerce can be based on the association with a specific platform and determine the price and traffic. E.g., Selling on Amazon vs. Shopify vs. Etsy.


How Do You Price A Product?

A genuine new product can be priced based on the assessment of these four cost structures. For determining the price, paying attention to these four costs is vital.


1. Cost of Goods Sold (COGS): This includes the direct costs associated with creating the product, such as raw materials, labor, and overhead costs.


2. Operating Expenses: This includes expenses associated with running the business, such as marketing, advertising, rent, salaries, and other overhead costs.


3. Margin: This is the amount of money that a business keeps after all costs have been taken into account. This is typically determined as a percentage of the total price.


4. Growth Potential: This is the potential for the product to generate additional revenue over time. Factors such as market demand, customer lifetime value, and customer loyalty can all be taken into account when setting the price.


By taking into account all of these cost structures, a business can come up with a pricing strategy that is tailored to their goals and objectives. When setting the price, it is important to consider the cost of production, the potential for growth, the customer 6 lifetime value, and the overall market demand. This will help ensure that the product is priced appropriately and that the business is able to maximize its profits.


1. Creation cost: This is the overall unit economics of producing your product. Including the external vendors, cost of raw materials, and inventory costs.


2. Enterprise cost: This is the added cost on top of the creation cost, which includes the price of employees and cost to run the business, and licensing costs.


3. Marketing cost: This gets added, especially when marketing is an additional cost post-product creation. Usually, when the sale is an external part of the original product team.


4. Delivery costs: Costs for mailing, postal, and delivery, including the last mile delivery cost and also adding to it the costs of return, refunds, and refurbishment if it applies.


What Structure Works to Determine the Price?

Based on your industry, we might see various price determination structures.


Price Determination Structures


1. Cost+ markup structure: This is the most commonly deployed method to establish the price point for newer markets and new segments of products. Where cost is the overall cost of producing the product from scratch to the finished product into the hands of consumers, and markup is the additional profit the firm is planning to take per unit.


2. Competitive pricing: This is popular in businesses with stiff competition, and the products offered are similar, resulting in pricing products very closely and relatively at the same price point. Ensuring consumers are kept from the competition.


3. Skimming: is deployed where the premium is charged for limited available products and newer models. E.g., For next year, model cars and tech gadgets are at a premium compared to older generation cars or tech gadgets. This extra premium is for the latest product/product line models. 8


4. Marketing pricing: is the price advertised to get the consumer into the door, a bait-and-hook pricing model. The marketing team gets deployed based on discounts offered, coupons, or even seasonal events based on temporary price adjustments.


Is Lower Pricing or Higher Pricing Better?



When Businesses Mark Prices Low

• Organizations will only assemble sufficient capital to remain in business for a short time.

• You attempt to run a thrashing because you don't have adequate finances to spend on marketing.

• Not to say the perception you permit your consumers to have around your products and brand: inexpensive, inferior quality, subordinate value, bargain buy, unremarkable.


When Businesses Mark Prices in the Middle

• Organizations will need additional cash on hand to grow. 9

• You'll eternally be in that process of constructing, marketing, building, and selling, but never smashing out of it to build more and market additionally because you need additional capital for more.

• Yes, companies need additional finances to produce more of it.


When Businesses Mark Prices High

• Organizations gamble estranging consumers.

• You might obtain a deal now and then and earn a large sum, but the idea of when you'll get your subsequent deal intimidates you because your product ought to be priced better in your demand.

• By pricing high, you frighten your consumer.


How to Convince Customers This is the Right Price?



Value-based pricing: This is based on the scientific method of understanding the cost of the product/service to build based on cost + markup structure, adding to it markup and genuine value addition or differentiating services being offered. Consumers should be able to realize differentiating value add-ons and willing to pay for them.


Loss leader pricing: This applies to some sectors and a few products, where the business is able to sell the original product for loss so that the business can gain profits from subsequent recurring sales. e.g., printers are sold at a lower price, but profits are expected from toner. Alexa is sold at a lower price, expected to gain from overall amazon sales and to gain user data.


Bundle pricing: This is where organizations bundle together two or more individual products which are higher priced to a lower price so that customers it can be offered at a lower rate. e.g., a washer can cost $1000, and a dryer unit can cost $1000, but the bundle can cost $1800. This is a way of convincing customers to buy the bundle together as a better deal.


Anchor pricing: This is considered a hybrid of bundle pricing & value-based pricing, where consumers are shown an option of "gold, silver & platinum" or "lite, plus and premium," where the price and relative prices are features offered are visible. At times the consumer is offered the original price and discounted price making sure the consumer understands the value he is gaining by this purchase.


Types of Pricing Models?

A pricing model is a framework or formula used to determine the price of a product or service. Pricing models can be based on a variety of factors, such as cost, value, competition, market dynamics, and customer segmentation. A pricing model should be tailored to the specific needs of a business and should be regularly reviewed and adjusted to ensure that it remains effective. pricing model types:


1. One-Time Fee: This model involves charging customers a flat fee for a one-time purchase or service.


2. Subscription: This model charges customers a recurring fee for access to a service or product.


3. Pay-As-You-Go: This model charges customers for the specific amount of a product or service they use.


4. Freemium: This model offers a basic version of a product or service for free, with the option to upgrade to a premium version for a fee.


5. Tiered Pricing: This model offers various levels of a service or product at different price points.


6. Performance-Based Pricing: This model charges customers based on the performance of the product or service they use.


7. Volume-Based Pricing: This model offers discounts to customers who purchase a certain amount of a product or service.


Challenges with Pricing Modelling?

1. Dealing with Seasonality: Seasonality can cause pricing models to become outdated and inaccurate over time. This can be especially challenging when forecasting the demand for seasonal products.


2. Incorporating Multiple Variables: Pricing models often involve multiple variables and pricing levers, such as discounts, promotional offers, and competitor pricing. Accurately incorporating all of these variables into a pricing model can be complicated and time consuming.


3. Accurately Forecasting Demand: Accurately forecasting demand is key to making sure that pricing models are accurate and up to date. This can be difficult, especially when dealing with short-term trends or new products.


4. Avoiding Price Wars: Price wars often occur when companies compete on price. This can be damaging for businesses, as it can lead to unsustainable pricing models. Companies must be mindful of this when setting prices.


5. Determining the price elasticity of demand for a product or service: Price elasticity measures how a change in price affects the demand for a product or service. It can be difficult to accurately measure the price elasticity of a product or service due to the complexity of the market and the number of factors that can influence demand.


6. Forecasting demand for a product or service: Accurately forecasting demand for a product or service is critical in pricing modelling, as it helps to inform pricing decisions. This involves collecting data on the past demand for the product or service, analyzing trends, and considering external factors that may influence future demand.


7. Developing an appropriate pricing strategy: Once the price elasticity and demand for a product or service are established, a pricing strategy must be developed. This strategy should consider factors such as competitor pricing, customer expectations, and the economics of the market.


8. Accounting for external factors that may influence demand: External factors such as economic conditions, seasonality, and competition can significantly influence the demand for a product or service. Accounting for these factors when modelling prices is essential for accurate pricing decisions.


9. Testing and validating pricing models: Testing and validating pricing models is essential to ensure accuracy. This involves running experiments, collecting data, and making adjustments as needed.


Pricing and Compliance Relationship?

Pricing for software and services depends on the complexity of the project and the level of customization the customer requires. Generally, software and services are priced on a subscription basis or on a per-project basis. Subscription-based pricing typically includes a one-time setup fee, a monthly or yearly maintenance fee, and a discounted rate for any additional features or services. Per-project pricing may include a one-time setup fee and a flat-fee quote for a particular project.


Compliance standards must be met in order to ensure that software and services are secure and compliant with regulatory requirements. This is typically done through the use of third-party audits and certifications. Companies must also ensure that their software and services comply with any industry regulations and standards, such as the Payment Card Industry Data Security Standard (PCI-DSS) and the Health Insurance Portability and Accountability Act (HIPAA). Additionally, companies should ensure that their software and services comply with the various privacy and data protection regulations, such as the General Data Protection Regulation (GDPR).


Near Term Future of Pricing

The future of pricing largely depends on the market conditions. Prices may fluctuate due to changes in supply and demand, economic conditions, and other factors. In general, technology is likely to continue to drive down prices as companies are able to automate processes, reduce labor costs, and create more efficient supply chains. As the global economy continues to become more connected, the prices of certain goods and services may be subject to greater variation due to foreign exchange rates, availability of materials, and other factors


Conclusion

What works best depends on many factors as the maturity of the market, competitors, and category of the product/service. Also, this whole process is part of art and partly scientific to determine the right optimal price point, and it can take some iterations to finally settle down at the optimal value and at times it’s a continuous process where you need to experiment the price continuously and adjust to the market changes and demands. So don't be afraid to try and 13 experiment a bit by running multiple prices treatments and offerings before settling down on what works for your business.



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