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Pricing: How Much is Too Much

Pricing: How Much is Too Much

September 28, 2023

For new businesses, pricing strategy should be carefully considered before starting. Established companies, on the other hand, can improve their profitability through regular pricing reviews. 

When setting prices, you must ensure that your price and sales levels will make your business profitable. But how do you determine whether you price your products too much?

Pricing is not simply a matter of getting one fundamental thing right. Proper and adopted pricing strategy comes from careful and consistent management of market situations. The pricing process has many parts, including the following;

  • Accounting, which provides cost estimates.
  • Marketing, which communicates pricing strategy.
  • Sales, which offers specific customer input.
  • Production, which sets supply boundaries to cover costs.

Today, we will dive into pricing and value, two essential concepts of pricing strategy. Then, we will detail the steps to find the optimal pricing for your product.

Let’s start!

Pricing Strategy and Value

Price represents the monetary amount customers are willing to pay for a product. On the other hand, value encompasses the perceived benefits and satisfaction derived from that purchase. These two are closely tied together since customers’ perceived value determines the price customers accept.

A balance between price and value is essential for businesses to attract customers, maximize revenue, and maintain a competitive edge.

Some retailers ask for higher prices than the average market prices. Because they perceive that extra value to customers. Determining the right price for ecommerce is key, majorly involving costs incurred in providing the product or service, competitor prices, and willingness to pay.

Setting too high may deter potential customers, while offering too low may signal inferior quality.

To find the optimal price, let’s break down the steps!

1. Optimal Pricing Structure

The resources allocated to pricing are often misallocated. Most companies invest too little time, money, and effort in determining the pricing structure. But, by following the steps we are about to mention, you will choose the optimal pricing model that will align with your business goals and objectives.

The traditional way of pricing for most companies is cost-plus pricing. Therefore, the dominant factor in pricing is product cost. But if you are selling in ecommerce, there are better pricing models than cost-plus pricing. The main reason is that you sell in a competitive, fast-paced digital world. It would help to choose a flexible model to keep up with the changes.

An excellent first step is to examine the critical factors influencing price in three areas:

Customer economics

Customer search and usage

Competitive situation

Consider customer economics and whether price sensitivity is high for your target customers. If price sensitivity is high, any price change can significantly impact your sales and overall profit margins. Customer search and usage is also a crucial metric for finding the pricing structure. Because customers actions can change the market situations such as when you lower your price you observe an increase in sales. That way, your competitor’s might do the similar action and the average market price has declined. 

Ultimately, your competitive situation allows you to have insights about competition. You can get closer to choosing the pricing method that would fit your business perfectly.

2. Consider Competitor’s Reactions

Most often, any pricing action a company takes will provoke some response from significant competitors. What you need to do is research your competition and market trends. It will give you an idea of how products are being charged in the market and help you identify the price point you should aim for.

It would help if you kept an eye on trends. Such as consumer preferences are crucial in fast-paced ecommerce, where consumers are always looking for the better experience since their expectations have increased over time. Different types of trends can significantly impact the pricing strategy of your products, and it is essential to keep up to date with them. That way, you can win potential opportunities for driving sales and revenue.

After analyzing the competition and tracking competitor’s prices, you can gain more insights into the market. Then, you start to offer pricing strategy aligned with your business. Your actions can have a definite impact on your competitors. At that point, you need to monitor your competitors’ reactions after your move. It will not only allow you to strengthen your competitive edge but also have a better understanding of how the competition works in your market. It will show you how to compete with your pricing and get closer to finding the optimal price for your products.

3. Analyze Customer Response

If a customer believes your product is unfairly priced, the negative message they will send to potential customers can devastate your business. At that point, the problem for the company is the communication. You had to explain how your product justified its price correctly. The ultimate solution would be to increase brand awareness. It requires an investment in reformatting your marketing message.

Source

For example, Apple is a well-known company and it offers high-priced products. And still have a loyal customer base that frequently purchases from their store. The reason is behind a pricing strategy. In an interview, Apple CEO Tim Cook said, “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost.” Therefore, customers have high expectations while purchasing from Apple and don’t primarily consider the price.

Like Apple, if you want to offer high prices, you must make it straightforward for your customers. They should be aware that you are selling high-quality products, and you ask for higher prices compared to the market average. In that way, your prices would apply to your customers. But ensure that you analyze your customers’ response from your pricing. Do your new prices increase or decrease your sales volume? And how well do your profit margins perform after the price change?

Answer these questions so that you can ensure you optimize your pricing.

4. Experiment with Pricing Strategy

To experiment with your pricing, you need to collect data. You will require a large customer base, including different customers from your usual repeat buyers. Therefore, if you are new to ecommerce, applying this step is not possible since you might need more data. But if you are selling for a while, you need to take this step, which can support your strategy to find the right price.

Keep in mind that experimentation is ongoing with your pricing. You may need to adjust your goals and work new practices into your strategy and operations. Also, you can test potential prices with your target audience. After some exercise, you need to analyze the results and determine which prices perform better for your sales numbers. 

Ultimately, you will monitor and analyze your pricing performance. It will clearly explain how your pricing strategy impacts your sales and overall business performance. When monitoring your pricing, carefully consider your profits and customer feedback. It can guide you to understand how your pricing strategies impact customer behavior and your business.

Takeaways

Pricing strategy is a crucial part of businesses that need to be considered carefully. When setting prices, you must ensure that it improves your sales volumes and maximizes your profit margin. But the best way to find the optimal pricing asks for some of your effort. First, you must define an optimal pricing structure that meets your business goals. Then, you need to keep track of your competitor’s reaction to your price change. 

After analyzing your rival’s reaction, you must also check your customers’ feedback on your new prices. And ultimately, you should experiment with your pricing strategy if you have enough data to keep track of. Test and monitor your pricing performance, which will give you a clear understanding of how your pricing impacts your business. 



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