How to Set the Retail Price of a Product

Do you know that setting the price of a product goes a long way in making your product a success? Most especially if you’re an eCommerce business owner. Majority of the retailers and business managers regard price setting as not important or an afterthought. Most times, entrepreneurs copy their competitors, fix any price that comes to their mind, or do the worst which is; guessing. You should know that to set the retail price of a product is a balancing performance.

It is not always ideal to set your product’s price very low. The reason is that you may be enjoying a healthy stream of sales, but you are not making any profit. That is not good at all since everyone likes to pay their bills and gain from their business. On the other hand, it is not ideal also to set the retail price of your product high. 

For instance, if the price is on the high side, you can only have fewer sales. Moreover, most of your budget-conscious customers are likely to go elsewhere. Thus; you are losing your market share. That is why; as a retailer, there is the need for you to carry out a market survey before setting your price. 

Also, there are certain factors which you need to consider before you can set your product price. Such factors like;

• Cost of production
• Business costs
• Revenue goals
• Competitor’s pricing

Also, you need to calculate the rate at which human behavior affects the way price is set. If you want to consider this particular factor, you will have to examine the many different strategies of pricing.  Also, you need to check how it affects your customers psychologically and decide from your results. You may not know it, but psychological is vital in setting a price. 

For instance; strategies like selecting the perfect pricing strategy to suit your product. It is a known fact that most retailers use keystone pricing, which means doubling the product cost as their price. They want to get a high-profit mark-up.  However, you need to consider your particular situation before deciding whether to mark-up lower or higher. 

If you want a simple formula to calculate your retail price, you can always use; 

Product Cost ÷ 100- Markup Percentage x 100

  Although this formula is quite simple, it may not be suitable for every item in each retail business. Retail businesses are unique from each other. As a result, we have provided likely pricing steps for the benefit of Prestashop Users and every eCommerce business owner. These steps will help to simplify your pricing policy. They are as follow;

First Step: Search out the Pricing Strategies Common In your Industry to get your Base

Decades of study and millions of precedent eCommerce business owners have made things easy. They have used their knowledge to prepare a base for new entrepreneurs to formulate a strategy that can use available pricing options. When you are aware of the successful pricing models in your industry, setting a price will be easy for you. Also, you will be confident knowing fully that you are setting the right price and not guessing. Such models like;

Pricing Based on Cost

This is an easy way to set the retail price of a product. It only requires calculating the total product cost and adding your markup percentage to arrive at your final price.   

For instance, if the cost for producing a particular item is;

1. Cost of material - $40
2. Cost of Labor -    $20
3. Factory Overheads - $10

Total Costs = $70

If you add your percentage markup of 50% which is the industry standard for retail price, you will get $105.00 {70 x 1.5}. Using the ‘charm Pricing Strategy,’ you may set your product price at $105.99. That is ending the price of your product with a 9 or 5, which is a perfect psychological way to maximize your discount magnitude.  

Market-Oriented Pricing

This pricing strategy is otherwise known as competition-based pricing. It is set using the price of your competitors in the industry. In this situation, a business owner may set the product price lower or higher than their competitors. That is according to how your product compares to that of your competitor. You may use below the market price, above the market price, or you copy the market pricing. 

Dynamic Pricing

This particular strategy involves using flexible prices for your product according to the present market demands. You may change your price many times in a week, month, or day to suit your customer’s purchasing habits. This strategy is used to maximize profit.

Second Step: Using Price Elasticity or Experimenting with Prices to Catch Higher Market Share

Many eCommerce business owners mistakenly think that when they lower their item prices, they can generate higher sales and increase their revenue. However, there is a probability that you may win or lose. Lowering the costs of your products strategically is beneficial and may even result in more revenue. For example; consumer surplus is minimized. That is for the customers who are ready to purchase at several price rates. Simply put, the difference between what the customer was willing to pay and what she pays is ‘consumer surplus.’

With this strategy, you need to know more about the sales volume of your item at a particular price rate to maximize profit. You should also know the factors that enabled you to make a profit, which is ‘price elasticity.’ This term is used to measure the relationship between the change in the quantity demanded of a specific product and its price change. If the change is huge, it means that the price is ‘elastic.’ 

Third Step: Ensure that the Pricing of your Product Generates Long-Term Profit for your Business.

If you want to make sure that your product generates long-term profit, you will have to analyze your present business metrics. You should also strategize how you can constantly move forward. 

You should analyze your present business metrics in other to generate enough profit to meet up your overhead costs. At the same time, you should allow enough profit to boost your continuous growth. You should calculate overheads costs such as;

1. Tax
2. Personal income
3. Cost of website maintenance
4. Costs of shipping
5. Packaging costs
6. Permits, licenses, or professional fees
7. Costs of marketing
8. Employee’s salaries
9. Utilities
10. Facility costs
11. Manufacturing costs
12. Rent 

Make sure these overhead expenses are calculated monthly. By so doing, you will be able to get the precise idea of how your business is moving. You can then base your product price setting on it.

Conclusion

If you want to gain more share of this competitive market, you should set the retail price of your product with a dynamic strategy. That is; a unique strategy that will enable you to remain profitable and at the same time go along with the market. You wouldn’t want to lose your customers because you cannot adapt or update your product value. There is no need to fear for such occurrence since you are a Presta User or e-commerce business owner who is making use of this guide. Make sure to use it regularly, and your retail product price will remain up to date.