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Posted By:  IToris Inc on 12/05/2017 in Ecommerce

How to Set a Correct Price for Your Products and Services

How to Set a Correct Price for Your Products and Services

When it comes to deciding on the optimal price for products or services, many companies often face a difficult dilemma. In the first situation, setting a high price might scare a lot of potential buyers and hence have a negative effect on sales. In the second instance, introducing a deliberately low price might decrease revenues/profits and even give customers a wrong feeling that a product’s quality is below the one of its nearest competitors. The best thing to do in this case is to introduce an optimal price which will keep your profits at the maximum level, enabling products to be sufficiently competitive on the market. How to set that optimal figure? In the article that follows we are going to list 6 characteristics of an optimal pricing strategy.

Setting the right price for your products and services

1. Get to know the market. This means finding out more information about the customers’ willingness to pay, as well as the prices at which your competitors sell their products or services. After that, it is going to be up to you to decide whether to set a similar price or a higher one.

2. Work on the optimal pricing model. This is going to differ from case to case, depending on the business strategy you have. Do you want to set a higher price compared to your competitors but offer some major discounts through promotions, advertisements or coupons? Then high-low pricing is a strategy you might want to go for. Do you wish to recover your material, direct labor, overhead and any other costs you’ve incurred during the product’s development and manufacturing? Then take a look at the absorption pricing method.

3. Calculate your final costs. Upon introducing a new pricing model, include your R&D, variable and fixed costs so that they will be included in your final price figure. The formula for calculating a break-even point, i.e. a point where your revenues will be equal to your cost is:

The resulting figure will be a point at which your sales will exactly cover all the expenses.

4. Make a decision about cost-plus pricing. In order to earn a profit, there is a need to add a price margin to a break-even point mentioned above. In order to make a decision on its size, use the common industry norms, company experience and your personal knowledge about the market your company is operating in. Adjust your costs based on the information about the optimal prices in that particular segment. Keep in mind that this method will make an assumption that your company is able to sell every single product you are manufacturing. If that is not the case for your business, consider other pricing models.

5. Don’t forget about other factors. This includes the things which are directly impacting the prices you charge, such as VATs, market conditions, competitive pricing, customer preferences, national laws and regulations. Therefore, another useful decision which you might want to make is to set specific prices for the different markets where you are going to sell your products.

6. Adjust your prices if and when necessary. Keep in mind that markets are not always stable. National economy changes, jumps in your fixed and variable costs, changes in the consumer preferences and competition are just some of the reasons why you would have to keep a closer look at your prices. Always try to stay competitive on the market by adjusting the prices whenever necessary.

Setting up a correct pricing model for your Magento store

 Some Magento store owners might struggle with setting up a custom mathematical formula based on the product options selected or on the quantity ordered by their customers. If that is also the case for you, take a look at some of the Magento 2 Product Price Formula extensions which will help you in using any custom mathematical formula to calculate the final product price. The price formula can be of any complexity, have math functions and constants as well as conditional branching.

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