How To Price Your Product: 5 Strategies With Examples

April 12, 2022

By: Aakash Shewakaramani

How To Price Your Product: 5 Strategies With Examples

Learning how to price your product can be a gargantuan task, both for newcomers and experienced brands.

Take Apple, for example. The Cupertino giant is synonymous with success, but even they are not exempt from pricing failures. One of their collapses came at the hands of their video game console — the Apple Pippin.

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Why did the product fail immensely? It was priced at $600 in 1996. To calculate the inflation to today’s time, that would be like paying $1,085 for the console in 2022.

Of course, many factors were involved in its downfall.

The Nintendo 64 console was released around that time for about $200. Taking that into account, plus the lack of games for the console, the Pippin flopped like a stale pancake.

Pricing is tricky. Going too low can lead consumers to think poorly of your product’s quality and look for alternatives. Going too high is a surefire way of consumers losing interest and finding a better bang for their buck.

Pricing has implications for how consumers perceive your product. The difference between the right and wrong price can make or break your business. This can seem like a lot of pressure, but this article will help ease that with strategies on how to price your products.

How Do You Determine A Price For Your Product

Like Mr. Miyagi told Daniel in the first Karate Kid film, “Balance is key. Balance good.”

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This applies as much to pricing strategies as it does to karate. The idea is to never think in extremes, and to avoid comparing yourself to other brands.

What is ‘too high’ and ‘too low’ for one brand will not necessarily apply to yours, even if you are a direct competitor. A lot of factors, like your target audience, determine the pricing strategy that is just right for you.

4 Factors That Can Help You With How To Price Your Products

These four factors are crucial when you think about how to price your products. Acknowledging them, doing your research, and implementing that data into your process will get you one step closer to the perfect pricing strategy.

1. Your Target Audience

You don’t (and probably shouldn’t) memorize all your customers’ middle names by heart, but you should have knowledge about their needs. For example, what is cheap for a millionaire is expensive for a middle-class individual. What’s expensive to a millionaire might be pocket change for a billionaire.

It goes even beyond money. What your consumers think and what they prioritize are important. Value for someone might be the best bang for the buck. While for others, value can mean something that can get them the best possible output.

There is always going to be a diversity of opinion. This is why some people consider the $3 million-priced Bugatti Chiron to be a steal!

2. Your Industry

If you want to learn how to price your product, look no further than your own industry. Twice a year, every year, European football opens what is known as “transfer windows.” If a club wants to make a profit on a player, they need to know how much other clubs are willing to pay for it.

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This kind of knowledge can come via trial and error or through industry research. The latter is definitely the smarter way to approach pricing and business in general.

Here are some things to research before you determine how to price your product:

  • The profitability of your industry
  • The kind of constraints and benefits the big players are experiencing
  • Alternatives to what your industry provides
  • Any external disasters, factors, or opportunities that have affected your industry

General knowledge about your industry will not only teach you how to price your product, but will also make you a more informed business owner.

3. Your Business Practices

Your product might be in the same category as your competitors, but your internal workings don’t have to be the same. Many companies, for example, engage in much higher corporate social responsibility.

You might even have better checks and balances during your production. Many companies also hire the best talent and incentivize them with better salaries.

These are just a few examples, but you can’t copy your competitors’ pricing because your company is unique. Take that into consideration when working up a price.

4. Your Goals With The Product

You can’t price a luxury product at a bargain rate and vice versa. If you’ve marketed your product as a high-end good, then the pricing needs to match.

Similarly, products marketed on value need to be priced accordingly. Even if they aren’t the cheapest items on the shelf, consumers need to feel like they’re getting their pennies’ worth.

Let’s say you have a lip gloss business. A wonderful example of this factor is the difference between selling drugstore and high-end makeup. Here’s the thing: they both work; they both get the job done.

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However, owners of drugstore makeup brands price their products much lower to attract more customers. High-end makeup brands price their products higher to achieve a certain reputation.

So, what are your goals for the business? Knowing this helps you choose your price.

These factors are very important when you’re thinking about how to price your product. Do your homework, assess your options, and you’ll land on the perfect pricing structure.

How To Price Your Products: 5 Different Strategies

“The best pricing strategy is the one that gets your product off the shelves.” This is a massive oversimplification of a complicated business process.

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There are a few commonly tried and tested product pricing strategies. Five of the best ones are listed below.

1. Value-Based Pricing

‘Value’ doesn’t necessarily equate to ‘cheap’.

People spend an average of $1,000 to $3,000 on engagement rings. That is a frivolous expense for an uncommitted person who isn’t ready to tie the knot yet. However, for its target market (people ready to get married), an engagement ring provides unparalleled emotional value.

It boils down to consumer perception. If your customers think that they’re getting their money’s worth, your price offers value to them. To master this kind of pricing, you’ll need to learn what your customers want and how important that want is to them.

De Beers is a prime example of this.

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Engaged couples see value in the perfect engagement ring. Their ‘A Diamond Is Forever’ slogan changed their product’s perception from a luxury to something of great value.

Can you believe it? Even something as simple as a powerful slogan can alter the perceptions of your customers and encourage them to give in to your prices.

2. Cost-Plus Pricing

One of the simplest ways of pricing a product is by calculating your costs and adding a markup to them. Cost-plus pricing can go extremely wrong if your customers think your markups are too high. Conversely, you could end up with the opportunity cost of not earning enough if your markup is too low.

An example of this is most wholesalers. When selling in large quantities, most wholesale companies simply add a small percentage-based markup above their production or buying costs. The wholesalers or manufacturers will also likely use bill of materials (BOM) software for cost estimation and inventory management.

For more information on cost-plus pricing, check out this short tutorial:

3. Competitive Pricing

Only the customer wins when it comes to competitive pricing. This strategy is exactly what it sounds like. You look at how your competitors are pricing their products, and you either match them or decrease your price.

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A consequence of this is a price war. If two companies keep lowering their prices, the bigger one will end up winning. If you’re a small business owner, it’s best to stick with value-based pricing, or another strategy that focuses on your product.

Amazon is probably the best example of this.

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Almost everything is cheaper on the e-commerce website, and it can do that because there isn’t a bigger e-retailer out there.

4. Bundle Pricing

Similar to value-based pricing, bundle pricing targets customers by creating attractive offers that allow them to save more by spending more.

This kind of pricing works well with products that people can stock in bulk (toilet paper, anyone?) or things that are consumed quickly. Additionally, some businesses bundle similar or complementary products together to create value.

The price still needs to earn a good enough profit for you. So, watch out for that! H&M’s multi-packs are a great example of this.

Taken from H&M website
Taken from H&M website

A bundle allows them to reduce the price of each clothing article to create attractive offers.

5. Penetration Pricing

If you’re creating a startup, you should definitely look into penetration pricing when thinking about how to price your product. Penetration pricing works by offering lower prices in the beginning and then gradually increasing them over time.

The initial lower price makes your product accessible to your customers. Once you establish a loyal audience, you can increase the price without worrying about a major dropout.

Startups with a lot of funding can take advantage of this by making losses early on and recovering from them with higher prices over time.

Netflix is a prime example of this pricing strategy.

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They’ve increased their subscription costs over the years. In fact, one of their plans costs double what it did in 2011!

Next Steps

Learning how to price your product never really stops. Demand, supply, and changes in usage behavior and perception can all change the price. The idea is to practice constant vigilance and evolve your pricing strategy.

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The above strategies are only five of the many pricing styles being used today. Do your homework and see what works best for you!

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