In many cases, product pricing may be the main reason behind your business's sales decline while blaming other factors such as marketing.
Pricing here refers to the process of determining the financial value that we obtain from the consumer when purchasing the goods or services we provide to him. Therefore, the price of the product here must be mutually satisfactory, whether for you as a merchant or for your customers.
Thus, the method of determining the price of the product is not a random process, but rather is based on foundations, principles and studies until it reaches a competitive value that can sell well. 💰
And when your customers feel that you offer value for a price, this is exactly what will definitely make your sales increase exponentially.
In this article, you will learn how to price products and what steps are required in practice.
What is the concept of product pricing?
Is there a product pricing software that can set an appropriate price for any product or service? Or is there a reliable product pricing calculator?
The answer will come with your understanding of the function of product pricing and the goals you seek to achieve. Let's first explain the concept of pricing!
Product pricing is the process in which we set an appropriate price for a product 💰 whether a good or service based on the analysis and study of the product itself, the market, competitors and also the target audience; In the end, we reach a satisfactory price for the merchant and the customer at the same time.
By reaching this stage of satisfaction from both ends of the different business processes (the merchant and the consumer), we can judge that the process of pricing products is very successful and effective.
Good pricing is a powerful element in the process of penetrating the market and capturing a greater percentage of the market share for the product or service you provide.
When asking how to price a product, there are several factors that basically control the price Which leads you to put the right price, the most important of which are the following:
- The nature of the product, whether a good or a service.
- The value the product adds to the consumer.
- Prices offered by competitors in the market.
- The nature and needs of the audience you are addressing.
- The nature of the market in which you operate.
- The nature of the geographical environment you are working on.
- Production cost includes all factors contributing to production.
All of these factors must be affected by your pricing process, and we can call them the product pricing schedule. Each of them has an impact on the price of the product according to the time you launch your product, whether a good or a service.
When you keep all of these elements in mind while trying to set an appropriate price for what you are offering be it goods or services, you can actually come up with good pricing that is able to penetrate the market no matter how competitive it is.
Which we will learn step by step in the next paragraph. ready? Let's go.🚀
What are the product pricing steps?
Until you reach the right price for your products in general, and you know how to price the product correctly, the steps for pricing the product go through five basic stages:
- Calculate all production costs.
- Determine the profit margin.
- Consider competitors' prices.
- Determine the goal of pricing.
- Choose an appropriate pricing strategy.
These are simply the initial steps needed to reach the right price that achieves the satisfaction we talked about at the beginning. Now, we explain each step in detail:
1. Calculate the total cost of production
The total cost of the product is the cornerstone of product pricing in general. In all cases, decision makers will not be able to price the product at less than the cost price.
The cost of production constitutes the minimum price of the product, which cannot be quoted in any way. The calculation of the cost of the product includes several important elements, including:
Which does not change with the change in the amount of production and the rate of service provision (such as the place used in production, office rent or activity, etc.), and other costs that do not change or affected by negative or positive compared to the volume of production.
Which is represented in the variable factors with the change in the volume of production, the most famous example of which are the wages of workers or employees, transportation expenses and the means of shipping products.
Those factors that are directly affected positively and negatively by the volume of production, as they increase in the case of increased production and decrease in its absence, and can be measured on an average and divided within the total cost.
It means the sum of fixed and variable costs for a certain number of units produced, which are directly affected by the number of products or services, as they increase at the rate of increase and decrease at the rate of decrease in production.
Average unit production cost
It is done by dividing the total costs by the number of units produced.
2. Select the desired profit margin
The common goal of all businesses is to generate profits, hence the role of effective product pricing.
Each business owner determines the profit margin he or she wants to make on the sale of each unit of the product. This ratio is added to the total cost of production.
💡 Practical example: Assuming that the total cost of a product after calculating the total of all factors involved in the production process, whether fixed or variable, as well as external factors such as taxes imposed = $10.
The business owner has set the profit margin he seeks to achieve from each unit at 50%. So the price of the product is assumed to be $15.
To make the task easier for yourself, you can use a calculator to get the exact price of your product after adding your desired profit margin to the total cost of producing the product.
The profit margin calculator is a great way and tool for calculating the price of the final product after adding the profit margin. It is, of course, an easy-to-use tool that does not require many steps.
Just enter the total cost of each unit of your product, and the percentage of profit you'd like to generate from each sale on the unit.
3. Competitor Pricing Study
There is no doubt that calculating the cost saves a lot of time that you need to determine the right price, but do you think that you are the only one who decides to price your product in the market?!
If you think so, you are definitely wrong; Because the influence of the competitive market is very large in determining the price and the customer is what decides which is best for him.
Therefore, you should pay attention to studying competitors' pricing and the percentage of profits they place on their products.
This is done in several ways, either directly through the purchase of products, or by communicating with one of the field research companies that work in market research, and then these companies start creating reports based on price research in the market.
Countries’ politics plays an important role in this particular part. There are some countries that operate on the open market system, which is the freedom to trade prices and display differences.
Accordingly, we see that there are some companies that take advantage of this point in advertising campaigns, where they display the difference between their company and competing companies in terms of prices.
On the other hand, we find other countries that consider prices one of the most important business secrets and prevent their circulation among competitors; In anticipation of a market war of price cuts.