4 effective methods for pricing your products

Pricing a product is a complex process and takes time to research properly. A price has to cover production, staffing, sales and marketing costs and still leave a profit, while also reflecting the company's reputation and holding up against competitors. There are many pricing strategies and methods, and the right one depends on what the business is aiming for: entering a market, beating competitors, or growing profit or market share. In the article below, Mona Media will rounds up the product pricing strategies and methods that are most widely used today. Let's take a look.

Why product pricing matters

Price matters to a business in several ways:

• It is one of the 4 elements of Philip Kotler's 4Ps marketing mix.
• The price of each product affects the company's revenue.
• A product's listed price directly affects how well it competes in the market.
• The listed price is how a business shows its position against competitors.

Factors that affect your pricing method

There are 9 factors that affect how a product is priced, split into 2 groups: internal factors (production cost, financial resources, pricing strategy, positioning strategy) and external factors (the economy, seasonality, market demand, competition, and the financial strength of target customers). The chart below gives you a clearer picture of these factors.

4 common product pricing methods

Pricing methods based on production cost (cost-based pricing)

1. Markup pricing (cost-plus pricing)

With this method, a business works out the cost of producing one product, then adds a profit amount on top. The formula below makes it easier to picture: Example: Company A calculates that the total cost (materials, labor and so on) to make one bicycle is 1 million VND. Based on the competition at the time, A sets its markup at 200,000 VND and lists each bicycle at 1.2 million VND. Company B works in the same field and targets the same market segment as A. It also calculates a total cost of 1 million VND per bicycle. But B has stronger finances and wants to compete with A head-on, so it sets a lower markup and lists its bicycle at 1.1 million VND. In some cases, such as when a business wants a competitive edge or simply wants to clear old stock and pull the product from the market, the markup can be zero or even negative. This is one of the most common and easiest methods to apply, and many businesses and small shops around the world use it. Its strengths are that it is easy to calculate, easy to adjust to market conditions and company strategy, and it lets you predict the profit on each product in advance.

2. Break-even point pricing

Break-even pricing sets a product's price based on the relationship between the break-even point, fixed costs and variable cost per product. A few terms to know before going into the details:

• Break-even point: The number of products you must sell for total revenue to equal the total cost you have spent.
• Fixed costs: The total fixed cost of production.
• Variable cost per product: The changing cost of selling one product (businesses usually set it at the average, the lowest or the highest level, depending on their own situation).

A business can apply this method in 2 ways:

• Approach 1: Estimate or set a specific break-even target, then work out the fixed cost of producing a given quantity for the market, estimate the variable cost per unit, and use the formula below to get the product's price.

• Approach 2 (the reverse of approach 1): Estimate a price first, then work out the fixed cost of producing a given quantity for the market and estimate the variable cost per unit. Use the formula below to find the break-even point, then adjust the price until the break-even point suits the company's current situation and its business strategy.

Pricing methods based on the value customers receive (customer value-based pricing)

1. Good-value pricing

This method does not start from the cost you spent. It starts from the value customers get after buying your product or service. A business uses the factors below to decide the price:

• Product quality and design compared with competitors
• The features the product has
• The experience the product gives customers
• The product's technology compared with what is available today
• The brand value the business brings to customers along with the product
• How scarce the product is on the market

2. Value-added pricing

This method compares the value your product or service gives customers against the value of a competitor's. If your product offers more value, you set a higher price than your competitors. In other words, the price gap reflects the gap in value. If your product offers less value than competitors, you need to research further and add value to the product until it beats theirs, then price it the same way. This method is usually applied when a business competes directly with one or more competing products in the same market segment, and wants to assert its position and brand standing against those competitors. MONA hopes this article has helped you understand the 4 product pricing methods most widely used today. You should also now have a picture of the basic factors that affect how a product is priced and why pricing matters. Weigh your options carefully and choose based on your business's needs and goals to get the best results.