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Pricing Strategy: How to find the Ideal Price for a Product - YouTube
Channel: Learn With Shopify
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pricing your products is a big decision
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that will ultimately have a large effect
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on your business
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a strong pricing strategy is a lot more
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than just calculating the costs and
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adding a markup
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so today i'm going to show you eight
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effective pricing strategies
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that will help you make your business
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more competitive and make more sales
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[Music]
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now pricing your products always starts
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off with math
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you absolutely need to know how much it
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costs to make a product or obtain a
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product and get it to market
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this includes your production costs
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business costs
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marketing costs and shipping and
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handling costs but though it
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always starts with simple math a pricing
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strategy
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isn't all arithmetic the reality is that
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humans are creatures of emotion
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and it's incredibly rare that we make
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all our decisions exclusively through
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the lens of logic
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here is a simple truth what a customer
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is willing to pay for a product isn't
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really about
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how much the product costs what it's
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actually about
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is how they perceive the product's value
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so let's get into some pricing
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strategies that just might change the
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way you think about pricing your
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products
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first let's talk about cost plus pricing
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cost plus pricing is by far the easiest
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way to think about pricing your products
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i'm mentioning it here first simply
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because it's popular
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not because it's the best pricing
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strategy cost plus pricing is exactly
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what it sounds like
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calculating the costs of your products
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and adding on a markup
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for retailers this markup is often
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double the wholesale price
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but the market percentage is variable
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depending on your business
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while this strategy does preserve a nice
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profit margin
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there are some issues because it doesn't
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take into account market factors
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like competition or demand for your
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product so it can actually lead to a
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situation where you're charging
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too much or too little next we have
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competitive pricing
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competitive pricing is when you check
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out what your competitors are charging
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to figure out the going rate
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then rather than focusing on profit
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margin as a starting point
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this pricing strategy is about making
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the price of your products
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comparative and you can do this one of
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two ways the first is pricing your
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products
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slightly lower than competition thereby
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attracting value shoppers who are price
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sensitive
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think walmart versus whole foods if you
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have lower costs and can actively
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promote your special pricing
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then this can communicate that your
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brand is economic and accessible
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the second is pricing your products
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slightly higher signaling that your
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product
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might be better in quality think
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starbucks versus dunkin donuts
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competitive pricing is often used in
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highly saturated markets
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with highly similar products where
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pricing can be a differentiator
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next we have price skimming price gaming
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is when a company
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charges the highest possible price for a
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product right from the outset
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and then decreases it over time this is
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a pricing strategy that apple has used
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for years
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price skimming works best when there is
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scarcity of a product
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and when new versions of that product
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will be rolled out in the future
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justifying the reduced cost of the
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previous generation because it's become
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less relevant this pricing strategy is
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best used by businesses that have
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standard products with features that
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other companies just can't compete with
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so
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if your business has a prestigious image
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and creates innovative products
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price skimming could be the pricing
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strategy for you
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however it's not going to work if you're
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in a saturated market
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and your product doesn't truly stand out
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now let's talk about penetration pricing
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which is when you use a low price to
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enter a market
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it's used to draw attention to your
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business and take away business from
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competitors
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who effectively can't match that price
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once you have more wallet share
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then you begin raising the price this
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pricing strategy is famously used by
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internet service providers
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like comcast who attract customers with
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cheap introductory prices
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but once the introduction is over the
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price of the service
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goes up in retail this means
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intentionally pricing items low
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for example the grocery store costco
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prices organic food items at lower
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prices
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than can be found elsewhere but while
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these prices are low now
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we can expect they will increase over
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time as they capture more of the organic
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food market
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discount pricing like coupons seasonal
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pricing and of course sales
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can all be forms of penetration pricing
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as well
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helping stores get rid of old inventory
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and attract some short-term traffic to
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the store
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the logic behind penetration pricing is
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that once the sale is over
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some customers will remain loyal to the
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brand in the long term
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one important thing to be aware of is
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that too many sales can make people
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weary of paying the regular price
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and too low prices can create a
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perception of bad quality products
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next we have value-based pricing
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value-based pricing is when you set the
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price
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based on how much the customer perceives
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your product to be worth
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this is done by locating data on what
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customers pay for comparable products
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then listing what makes your product
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different and better
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then you need to place a financial value
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on those differentiating features
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lastly you need to communicate that
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extra value your product provides to
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customers
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now value-based pricing is one of the
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most ideal strategies for entrepreneurs
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however it only works if you have a
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differentiated product
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and you are genuinely providing more
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value than your customers pay in price
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value-based pricing when done right is a
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great way to build customer loyalty
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but it demands you stay in lock step
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with your customers desires
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now let's talk about loss leader pricing
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loss leader pricing is a strategy
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where you price a product for a loss
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intentionally to attract customers to
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get them in the door
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or to your site where they may buy other
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items now while this might sound a lot
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like penetration pricing on the surface
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it's only tangentially related because
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the motive is entirely different
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the goal with loss leader pricing is to
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make your profit on other items
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not by increasing the price of the item
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you're taking a hit on
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lost leader pricing is heavily employed
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in the video game industry
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where game consoles are sometimes sold
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for less than the cost to build
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because the profit is made on video
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games and subscription services
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a loss leader strategy is best employed
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by larger companies who have other
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products they can sell to make up for
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the loss
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now let's talk about bundle pricing as
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the name
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probably implies bundle pricing is when
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you sell two or more complementary
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products together for a single price
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now this doesn't require much
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explanation but it's used by companies
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to add value for customers at a lower
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cost
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hopefully increase the number of sales
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and increase loyalty
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to the brands for example getting a new
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phone with your data and phone plan is
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an example of bundled pricing
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now let's talk about anchor pricing
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anchor pricing is the use of comparison
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and everyone knows humans love to
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compare things with anchor pricing a
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retailer lists both the discounted price
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and the original price right beside each
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other to establish the savings
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you'll gain from buying right now anchor
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pricing triggers what is known as the
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anchoring cognitive bias
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where an initial piece of information is
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used as the anchor
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by which all following judgments are
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made if you've ever seen
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a price flashed out and a discount next
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to it and thought i'd better take
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advantage of this will it lasts
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well you have just participated in
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anchor pricing
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now if you're looking to get started
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shopify is offering a
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free 14-day trial simply click the link
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above to take action
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to level up your ecommerce business
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hopefully this video has given you a
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broad understanding of pricing strategy
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and how it can be used to effectively
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grow your business if there are any
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videos
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you'd like to see make sure to put them
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in the comments and we'll make them
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happen
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also don't forget to like and subscribe
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for more simple actionable tips to grow
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your online business
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workshop for small business owners with
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big plans i've been your host tyler and
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i'll see you next time on learn with
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shopify
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