If you are planning to create your own store, whether on the ground or through e-commerce, you must go through the journey of thinking about how to set the prices of your products, trying to reach the right strategy in pricing the products that guarantee you good profits and attract customers at the same time.

This article will provide you with an integrated guide on the basic steps of pricing and the optimal strategy to ensure the success of your business, regardless of the type or category of products that you plan to sell through your online store.

table of contents:

The concept of pricing and its importance

The concept of pricing refers to the method, strategy, or steps used to give a specific value to a product or service that the customer pays for the interest or benefit that he gets from the product. In other words, pricing is the offer that the manufacturer makes to the customer in return for obtaining his products.

All different companies, institutions, and projects share one goal, which is to make profits. This common goal can be seen in the product pricing method used by each company. There are five basic points that any business owner should take into account when pricing his products or services. These five points are:

  • The type and nature of the product offered.
  • the usual price; The price offered by competitors, which is known in the labor market for that product.
  • target customer segment; Are the targets the economic or middle class or the rich?
  • costs; It includes all costs, starting from the costs of the manufacturing process and workers' wages, to the costs of raw materials necessary for manufacturing, to marketing and storage costs, and others.
  • External factors; Such as state policies and legal issues, including taxes and fees, and the general economic situation of the country.

When creating a new project, the objective of this project should be defined. Based on this objective, we can set the course of the product pricing method, in other words, the objective of the pricing process that corresponds to the reason for creating the project itself. Therefore, we can summarize the objectives and importance of pricing in the following five points:

1. Maintain continuity

In fact, this goal is the essence of the existence of any project or company, as any company will strive to set the appropriate pricing for its products to ensure its continuity in the competitive market.

All companies, at all levels, face the risk of exiting the market constantly, whether due to great competition, changes in customer orientations and desires, or changes in market requirements. Therefore, it must plan for the future while pricing its products to set an appropriate price, not only for the current time or circumstances but also to face future difficulties.

For example; A company may set an extra profit margin for the product, and this margin is allocated by the company in developing products to keep pace with the labor market and its requirements. In other words, pricing products to ensure survival in the competitive market and not for profit in itself. Most new startups approach this goal in pricing products to ensure they stay in the market.

2. Maximize profits

Many companies are trying to maximize their profits by estimating the supply and demand ratios in the market for the product they offer. For example, if these companies offer a desired product with few competitors, they can raise the price of this product and ensure both continuity and profits for them.

A common example is companies that manufacture seasonal products; Any products that are in great demand in a particular season. For example, sweets on Eid al-Fitr in our Arab countries, the demand for them is so great that many companies are unable to meet all requests. In such cases, the company can raise the pricing plan to achieve extra profits.

3. Gaining the largest market share

Many companies seek to gain the largest market share through the low-pricing method of their products, and this is evident in the fiercely competitive market. The goal of asking a low price for products is to get as many customers as possible and sell as many products as possible.

You might think that this method would be negative for the company's economy in the long run. Well, not exactly, when the company has a large number of orders, it will reduce the costs of raw materials by ordering large quantities of them. Think about it as if a confectionery company has 100 orders per day and needs to buy 100 kg of sugar and another company has 10,000 orders per day and buys 10 tons of sugar, which one will get a better price to buy the sugar?

4. Price skimming

Price skimming is what is known as (Market Skimming), and this goal relies on setting a high price for a specific product at the beginning, either because this product is a new innovative product that has not been manufactured before, or because the process of manufacturing the product requires advanced technology. Then lower this price over time. Perhaps the market for smart devices and their accessories, such as watches, smart glasses, and others, is a good example of this, as these products are launched to customers at high prices, and then they begin to decrease gradually with time.

5. Cost leadership

The term cost leadership means that companies offer their products at the lowest cost in the market, whether as the cheapest manufacturer, distributor, or supplier. This strategy is difficult to spread because it means that the company's management must constantly reduce costs at all levels, to remain competitive. Meanwhile, providing products with acceptable quality.

What is the market share?

Market share, or what is known as Market Share, is the ratio of the profits of a specific company in a specific industry compared to the total profits in that field in the competitive market. The market share can be calculated by dividing the profits that the company obtains during a specific period by the full profits of companies in a specific labor market.

Let's take the smartphone market, for example. In the sales statistics for the past year 2020, the total number of smartphones sold around the world was about 368 million phones. Apple ranked first with 90 million devices sold, while Samsung ranked second with 74 million devices sold. Now, what is the market share for both companies?

With a simple arithmetic operation, by dividing the sales of each company by the total sales in that year, we can obtain the market share, as the market share of Apple is 368/90 = 23.4%, and the market share of Samsung is 368/74 = 19.1%, in other words, Apple dominated Almost a quarter of the smartphone market in 2020.

Direct and indirect costs

The costs spent by any organization, regardless of the product or service it provides, are divided into two basic types of costs: Direct Costs and Indirect Costs. Familiarity and understanding of both types are required to develop a successful product pricing strategy for any product or service.

  • direct costs

Direct costs relate to the expense of manufacturing the product, which can be calculated directly and easily, as it is clear and specific and is directly related to the manufacturing line of that product; In the sense that any change in these costs will lead to a change in production costs directly, let's take an example in the manufacture of home furniture:

    • raw materials from which the product is made; Such as the costs of importing wood and fabrics to make furniture.
    • employee wage costs; Such as the wages of carpenters and those responsible for upholstering furniture, and others working directly in the production of the product itself.
    • Operating costs; Such as electricity or fuel needed to operate the machines responsible for cutting or drilling furniture.
  • indirect costs

As for the indirect costs, they are not primarily related to the process of manufacturing the product, but rather play a secondary role in it, or these costs are involved in the manufacture of several types of products and not a product in itself. It is often difficult to trace and relate indirect costs to the total cost of the product itself. In our previous example, each of the following is an indirect cost:

    • Indirect employee costs, such as marketers and supervisors of several production lines.
    • Equipment and equipment maintenance costs.
    • equipment costs and fees; For example paid temporary use of a device or even a factory.
    • Costs of marketing and advertising campaigns for the product, taxes, and others.

What is the profit margin?

Profit Margin is defined as the amount of profit that an organization or company collects from sales of its products during a specified period. Specifically, it represents the proportion of sales that are converted into net profits after subtracting direct and indirect costs of production and manufacturing and is a percentage.

To make it simple, imagine that you are calculating the number of cents you earned from selling one dollar of product. If your net profit is 35 cents, then your profit margin is 35%.

Product pricing steps

Now that we know the basic concepts that play a role in pricing strategy, we'll look at the steps that product pricing must go through to be successful in the long run. There are five essential steps to successful pricing as follows:

First: Determine the objectives of the project

Before moving forward with developing a product pricing strategy, you must first define the objective of the project you are about to launch. Defining project objectives will direct you to the correct method of pricing, marketing, production, and follow-up. In other words, define the final point or goal for your project and chart a path to reach that point.

Of course, it is up to you to determine the goals of the project that you will launch, however, there are several goals that entrepreneurs generally share when starting their business, including: increasing profits, or increasing the cash flow of the capital participating in the project, or obtaining the largest market share and leading competitors, and so on.

Second: conducting a comprehensive market survey

Why is conducting a competitor survey so important? In fact, studying the target market for your project is important for two main goals. The first goal is to choose between cost leadership and quality leadership. In cost leadership, competition is intense, and many competing companies offer products similar to yours, while competition in quality leadership focuses on the luxury and quality of products and efficient customer service.

The second goal of a market survey is to find out how much effort you have to make. If you decide to launch a project that targets a market that includes many competitors, you should study the prices offered by competitors and try hard to offer competitive prices by reducing production costs to the lowest possible level.

On the other hand, if your project is directed at wealthy customers, here you must investigate the quality of the products and services offered by competitors and strive to provide a more unique and attractive experience for these customers.

Third: Analyzing the target customer base

The pricing strategy of products is related to the target customers of these products. During conducting this study, you must answer several questions, including:

  • What is the core benefit or benefit that your product provides to the customer?
  • What is the problem facing customers that they need your product to address?
  • What will customers gain from using your product?

All subsequent stages from pricing the product to marketing and ending with after-sales services are all related to the target customer base, the extent of their need for your product, and the value they give to that product.

Suppose, for example, that you offer a distinctive product that meets one of the customer's essential needs in a different way, then it would be a good idea to adopt a high-pricing method and market the products in a luxurious style. On the other hand, if you launched modest marketing campaigns and low prices for your distinctive product, this would confuse customers, reduce the value of your product, and narrow your profit margin.

One of the important points that you have to consider is the extent to which the price of your product is flexible in the market, and by that, we mean how the change in the price of the product can affect the customer’s motivation to buy it.

There are some products that the customer will seek to buy, regardless of their cost, perhaps the best example of this is cigarettes and car fuel. This type of product is called an “inelastic product.” On the other hand, “elastic products” suffer from constant price fluctuations, in addition to changing customers’ demand and need for them when their prices change.

Determining whether your products are flexible or not helps you anticipate the extent to which demand them will change in the markets and the extent of their stability in the competitive market. In the ideal case, you will want your products to be inelastic so that the demand for them will be constant when their prices fluctuate in the labor market.

Fourth: Study your competitors and prices well

To outperform your competitors, you must analyze their work style, whether you choose the strategy of cost leadership or quality leadership. In either case, you have competitors who offer attractive prices or high quality. Here are two important points while studying competitors in the labor market:

  • Investigate at least three main competitors for you in the labor market. How do they price their products and what are the foundations they place in marketing and winning their customers? Are their prices competitive and offer attractive offers, or do they care more about customer satisfaction and securing luxury products?
  • Prepare well for your indirect competitors, and here we mean the products that the customer may rely on to solve his problem instead of buying your products.

For example, if a customer is looking for clean alternative energy to feed his house or farm with electricity and tends to buy solar panels that you provide, but the price of these products or subsequent maintenance makes him hesitate to buy them and eventually chooses to buy wind turbines to generate electricity by Wind Energy.

Although companies that sell wind turbines are not on your list of direct competitors, they are indirect competitors that may affect your sales. At this point, the basic plan that you must follow in your project will be clear, and all you have to do is choose the right product pricing strategy for you. It may seem simple, but it requires careful consideration and a good study of all the details of the work you are about to launch.

pricing strategies

After we have gone through the details of pricing and the factors affecting the selection of the appropriate strategy, we are ready to choose the appropriate strategy or strategies for pricing the products. Below is a list of the most prominent pricing strategies today.

General pricing strategy

This strategy is useful if you want to set up an online store or are currently running one. Most shop owners, when developing a pricing strategy for their products, tend to a common formula that guarantees a “healthy” profit margin for their trade. You may want to set the prices of your products less or more than this formula, as it is up to you and your appreciation of your market.

We can summarize the pricing formula in this strategy with the following simple equation:

Product selling price = [product cost ÷ (100 – desired profit margin)] x 100

Let's say, for example, that there is a product that costs you $10, and you want a profit margin of 45%. The generally accepted profit margin in shops is 50%. You can calculate the selling price of this product as follows:

Product selling price = [10 ÷ (100 – 45)] x 100

The selling price of the product = [10 ÷ 55] x 100 = $18

In other words, the ideal product selling price is $18.

Of course, this formula, as we mentioned, is general and may not be applied to all types of products or shops. Each has its own specificity, which we will detail through subsequent pricing strategies with their pros and cons.

But it is worth noting that if the appropriate profit margin is 45% for your product, you may want to explore the response of customers to the price resulting from the previous formula. If the demand is good, you may raise the price of the product to $19 or $20 and see the result. If customers are also satisfied, you can fix the price of the product. at that point.

Simple pricing strategy

This strategy relies on doubling the cost of the product, meaning that if the product costs you $50, the selling price is $100. This strategy cannot be generalized as there are cases where this price is low, high, or perhaps very suitable for the product.

The key to deciding if this strategy is appropriate for you is to determine the value of your product. If the product is valuable, required, and rare in the market, or if its shipping, storage, and handling are complex and difficult, then the strategy of doubling the cost price and leaving a large profit margin (100%) would be very appropriate.

But if the product is popular and widespread and does not include distinctive features in itself, or if shipping and storing it is simple and does not require large additional costs, doubling its price may alienate customers from your store. We can summarize the pros and cons of this pricing strategy in these two points:

  • Pros: Simple pricing provides an easy and clear pricing formula and guarantees a good profit margin.
  • The negatives: It may not be appropriate at all to set a high-profit margin if the availability of the product and the amount of demand for it do not support that extra profit.

Recommendation pricing strategy

In this strategy, the price is set by the manufacturer or the exporter of the product, so that the manufacturer recommends to store owners, whether traditional or electronic, to sell the products at a predetermined price. The aim of this strategy is to unify the prices of certain products in different places and in all stores.

Store owners typically rely on recommendation pricing when selling standard and pervasive products, such as electronics.

  • Pros: You can save time and get the manufacturer's recommended price.
  • The negatives: The recommended price does not leave you a sufficient margin of flexibility to estimate competitive prices, or even set the appropriate price for your store. You may offer services in your store that the manufacturer did not take into account when proposing the recommended price for the product, for example, you may provide your customers with a free delivery service, which The company did not include when calculating the profit margin of the product.

wholesale pricing strategy

This strategy is very common when selling consumer products or fabrics and clothing, but it can often be generalized to all types of products. In bulk product pricing, store owners place a single price on many different or similar products linked together. This method of selling is known as bundle pricing.

This method provides a very successful strategy to draw customers' attention to what they see as a bargain when buying several products at one common price, which leads to several sales at the same time.

  • Pros: The golden point of this strategy is the double profit through what is known as marketing psychology.

In short, imagine that you sell a razor and an electric massager together at one price of $50 while offering the selling price of each tool separately from the other is $35. Of course, the pricing process and profit margin will depend on the combined price of $50.

In this case, the customer will think that buying both tools is a profitable deal, but if the customer decides - for some reason - to make the wrong decision and buy one tool at $35, then you will have succeeded in doubling your profits.

  • The negatives: Wholesale can cut into your profit margin, so if your wholesale offering doesn't attract more purchases, you'll quickly find yourself suffering a decline in profits.

Strategies for breaking prices and offers

It is indisputable that customers love sales, discount coupons, seasonal offers, and other sales that they see as bargains. Therefore, offers and price-breaking are very successful strategies for various types of products and services.

Most entrepreneurs adopt this strategy when introducing new products to the market, to attract as much attention as possible to them. Of course, the large offers of these new products are temporary and their primary goal is to obtain the largest possible market share during the first period of their launch.

  • Pros: This strategy is very useful and yields three positive results for your store. The first is an increase in visitors and loyal customers to your store. The second is disposing of unsold stored products. The third is attracting loyal customers to your store or brand, especially those customers who are looking for attractive offers and prices.
  • Negatives: If you follow this strategy excessively, it may reflect negatively on the sales and reputation of your store, as it will settle in the minds of customers that your store is a “market”, meaning that it is a place for cheap products, and this prevents customers in the future from buying your products at the normal or traditional price for them.

In addition to establishing a negative idea about the quality of the products you offer, even if they are of high quality, repeatedly breaking their prices will reduce their real value to customers.

Psychological pricing strategy

You should know that the buying process is a psychological process in general, and the evidence for this is the tendency of customers to buy products at specific prices or brands over others that may be better or even less expensive. Product pricing itself plays a fundamental role in this area.

You must have noticed during your shopping that there are products offered at prices that may seem illogical, but they are very attractive, such as finding, for example, a shirt that costs $14.99 instead of $15. The difference is negligible, but the customer thinks about this difference, in fact, rather than what he thinks He will pay $14 and “extra fractions” instead of $15.

A study was conducted at the Massachusetts Institute of Technology at the University of Chicago to study the effect of the pricing strategy of psychological products through the number 9, where the same products were offered at three different prices, namely: $34, $39, and $44. Guess which one got the highest percentage of sales?

Believe it or not, the $39 products have gotten more sales than their lower $34 counterparts. In Priceless, economist William Poundstone writes that a psychological pricing strategy involving placing whole numbers next to whole numbers increased sales by 24%.

  • Pros: Attracting more customers to products through the psychological effect of “fractional” pricing, as customers will see it as a bargain that it would be a bad decision to pass up.
  • Cons: Some customers may view this method of pricing as an understatement of reason or logic, and this can lead to a lack of customer confidence in your products.

Competitive pricing strategy

This strategy may seem good at first glance and can be generalized to all types of products, as many customers put the price of the product in the first place when making a purchase decision.

But this is not the case, the competitive pricing strategy for products is useful only in the case of popular products in which many competitors manufacture the product with the same specifications and efficiency. Then the only solution to attract and attract customers and gain a large market share is by offering competitive prices.

To offer a lower price than your competitors on the same product, you need to either reduce your profit margin or reduce manufacturing costs and rely on a large number of sales, and in both cases, you will need a large market share to survive and continue in the competitive market, and this is what the pricing strategy provides rival.

  •  Pros: Attracting more customers and obtaining a larger market share.
  • The negatives: You need your store to be large and with strong financial capacity to be able to reduce manufacturing costs, or reduce the costs of purchasing products from the factory by purchasing large quantities of products and obtaining good prices.

Correct product pricing is the foundation of a successful business, so do not hesitate to give this stage enough time and explore all the different pricing strategies and all the factors that affect the business market, starting from competitors to the target customer base, and accordingly choose the appropriate pricing strategy for your project, and quickly You will see signs of success for your store.