Putting a price on the products that you sell can be a hand full especially in terms of the items and niche that you aim to specialize in. To set the price right you will need to invest some time in setting up a pricing strategy. Setting up a pricing strategy is going to be the backbone of how you will make a sale. Before we dive into the different pricing strategies that you can use to set your price right, let’s dig into what a pricing strategy is. A pricing strategy is a set of rules or methods that businesses can use to price their products and services. Setting up a pricing strategy will require you to invest time to set the price right for the products that you are selling. This statement serves to be true for new and experienced entrepreneurs alike.
When planning a price strategy you need to put all costs into consideration (e.g. production, shipping, marketing costs, and even making sure that the prices are appealing to your customers). The common pricing strategies used in the market are: (1) Cost-based pricing (2) Competition-based pricing (3) Value-based pricing. The next few paragraphs will tackle the three (3) pricing strategies, how they work, their pros as well as their cons.
(1) Cost-based pricing
This type of pricing strategy is the simplest of the three revolves around two factors: the total cost of the item that you have produced and the profit margin. If you are a business owner who manufactures his products then it is likely that this pricing strategy would be in your favor. To start, this is the simplest pricing strategy because all you need to do is calculate the cost of your product and the margin. Here’s a simple example of how this pricing strategy works:
Marie is a young entrepreneur who manufactures and produces sweaters. As she plans to expand her business reach she has decided to sell her products on Amazon. To get the most out of selling her products on such a marketplace she decides to put her profit margin at 20% as well as make use of the cost-based pricing method. She begins to list how much time and finances were used to create one sweater and the shipping and return costs. After placing two and two together she realizes that the total cost to produce a single sweater is €15. Now that Marie has her total cost, she now needs to calculate how much she should sell her seaters by multiplying the amount with her desired profit margin. €15 *1.20 = €18. After careful calculation, Marie has decided to sell her sweaters at €18.
Pros: In-depth research on your customer or the market that you are selling your products it is not necessary. You set your price based on the total manufacturing and margin.
Cons: The biggest problem with this pricing strategy is that it is not customer focused, It is business-focused. It’s more about how much you want to make and not how much your customer wants to spend on the product that you are selling.
Advice: If you choose to make use of this strategy, put your customers into consideration when you calculate your final price. Always keep in mind “a business does not run on its own, it’s your customer that fuels your business”. 😉
(2) Competition-based pricing
It is a pricing strategy that focuses on reaching the competitors in your niche. Right now you might be asking what “makes this pricing strategy different from cost-based pricing?”. The answer is simple: this strategy focuses on analyzing the prices set by your competitors. Competitors in this type of pricing strategy refer to companies/ other individuals who sell products that are similar to what you are selling, plus, you share the same target market. There are two ways of making this work (1) select a group of competitors that sell the same products as you at jot down their prices (2) use a tracking tool that will collect the data on your behalf. Let’s illustrate how this pricing strategy works in a real-life situation:
John is registered in vidaXL’s Drop-shipping program, the major category that John aims to specialize in is toy cars. Since John is new to Drop-shipping he decided to research how much his competitors are selling the same item. By using the EAN numbers of the toy cars that he is drop-shipping he found the following:
After analyzing the prices set by his competitors John has decided to sell the toy cars at €15 per-piece. For John to stay up to date with how his competitors are pricing the items, he decides to invest in a tracking tool that alerts him when his competitors update their prices.
Pros: It helps make sure you are selling your products at the right rate. It’s time-consuming, but it helps make sure that the prices you offer are fair to your customers.
Cons: Knowing how much your competitors price the same item, might lead you to slash your margins so you can offer your customers the cheapest product; doing this will mean you will need to sell more products to earn the same amount of profit as your competitors.
Advice: slashing prices doesn’t always mean better, find an alternative way to attract customers to your store as offering low process can negatively impact your business.
(3) Value-based pricing
revolves around the “value” that your products have in the market and pricing them accordingly. To make use of this pricing strategy you will need to start by setting your “baseline”, your baseline is the lowest price that you can sell your product. Your baseline should derive from the total cost of sourcing and shipping the product, plus the additional costs like marketing to sell your products. Add those numbers together and you come up with your baseline.
Once you have your baseline you will need to lean into competition-based pricing tactics and do some market research. To do that, it’s super simple. Just add all of the prices together, and divide the sum by the number of prices that you wrote down. Let’s execute this in an example:
Roel is Drop-shipping high-end sofas but is unsure with how much they need to be priced, he sets the B2B price of €2,000 as his baseline. To set his value price he decides to select 5 competitors who are selling similar items and takes note of 10 prices. He then adds the prices that he has listed down and divides the sum by 10.
Roel now has his baseline price of €2,000 and his value price of 2,350. Doing the most logical Roel has decided to sell his products at a fair price by selling his high-end sofas at €2,350.
Pros: The price that you set your products will be fair to both the brand and the customer purchasing them.
Cons: It is difficult to put a figure on “value”. At the end of the day, the value that you provide is only worth as much as people are willing to pay.
Advice: Try to sell your products at a fair price and not aim to be the cheapest or most expensive in your niche.
GREAT! Now you know the strategies, its time to set the price right and try them out for yourself. 😊
By admin|2020-02-12T08:14:15+00:00February 12th, 2020|
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