How to Maximize Revenue Through Intelligent Pricing - 7 Steps
With the rise of online shopping, it is easy for consumers to look up where they can purchase products at a lower price. This makes it critical that retailers consider the best pricing model for each item.
By learning the best pricing methods, companies can understand how to maximize revenue and sales.
7 Steps to Intelligent Pricing
Not only should prices appeal to the shopper, but it also needs to generate a reasonable profit. Understanding how to intelligently price products enables businesses to meet customer and performance expectations.
1. Calculate the Per-Product Cost
There are many different types of pricing strategies retailers can choose from, including-
- Cost-based pricing
- Value-based pricing
- Market-oriented pricing
- Consumer-oriented pricing
- Psychological pricing
Regardless of which strategy best fits the product, businesses need to calculate precisely how much each product costs to make or procure. The primary elements that affect the cost include-
- Cost of goods sold (COGS)
- Production time
- Packaging materials
- Shipping and handling
Once managers determine how much each of these processes cost the business, they can calculate the base cost.
Retailers that personally house their inventory should also figure overhead costs, such as storage, payroll, rent, and utilities. This means that online stores typically have lower product costs since they do not have the same overhead expenses as brick-and-mortar businesses.
For example, a retailer may find that they spend $40 on an item by breaking down the different elements-
- $25 on the COGS
- $4 on production time
- $3 on packaging supplies
- $8 on shipping and handling
This means that they must charge at least $40 per product to break even.
2. Set the Desired Profit Margin
Once retailers determine their optimal profit margin, they can calculate the final price. However, profit margins vary significantly depending on the market and competition.
Most e-commerce companies set their profit margins between 20-50%, whereas traditional retailers typically hover around 25%.
Given the wide margin variance between sales channels, markets, and product types, companies must conduct thorough industry research prior to setting their expectations.
The key to choosing the right profit margin is finding the balance between maximizing revenue and setting the price too high. If the cost is too high, consumers may be dissuaded to shop at the store.
3. Analyze Competitors
Consumers will sometimes reference competitors' prices when shopping to see if they can save money elsewhere. Generally, retailers avoid charging more than twice the amount that their primary competitors charge. Businesses that go above this threshold often experience a dip in sales.
On the other hand, businesses do not want to undershoot competitors by too much, for customers may get the impression that the goods are low quality. Therefore, companies must conduct extensive research to determine what is a reasonable asking price.
4. Consider the Competitors' Pricing
Performing a competitor pricing analysis is as easy as checking prices online. Managers should continuously check competitors' prices to see how often they fluctuate. This enables retailers to gauge appropriate discounts and markups.
5. Factor in the Unique Selling Proposition
The final element that businesses should consider before calculating the final price is their unique selling proposition (USP). A retailer's USP is the component that differentiates their product from others within the same category. A USP can refer to practically anything, including-
- First of its kind
- New market
In other words, the USP is what a business can offer consumers that they can't find anywhere else. This element can significantly impact how much retailers can charge for their products, for if consumers aren't able to purchase it elsewhere, they are more likely to pay more.
Companies that offer items that aren't particularly unique need to set prices lower than their competitors in order to drive sales.
6. Calculate the Price
After determining the total price per-product and desired profit margin, it is time to calculate the market price.
Cost Per-Product / (1- Desired Profit Margin) = Market Price
For example, if the cost per product is $40 and the retailer's ideal profit margin is 35%, the market price would be $61.54.
$40 / (1 - .35) = $61.54
The business can then, of course, adjust the price to factor in competition and market fluctuations.
7. Test and Reevaluate the Price
It is vital for companies to remember that their prices are not set in stone and will eventually fluctuate. Retailers must remain flexible in order to maintain sales during economic shifts, changing customer demands, and emerging competition.
The longer a product stays on the market, the more performance information the business can collect and analyze to alter prices.
By actively monitoring sales, customer interest, and promotion engagement, companies will eventually find which price point meets their needs and the customers' expectations.