Pricing
April 9, 2021
Written by Scott Lancaster
Read Time 6 Minutes

5 steps to perfectly pricing any product or service

Branding articles, how to build a brand, building a brand, starting a brand.

How to perfectly price your products and services

Is there an ideal way to price your brand's product or services? Or is it a case of just testing the market and going with what works?

In this article we'll cover the simple, but effective, step by step process you can use to discover the best pricing strategy for your business and the products or services you offer.


Why is pricing strategy so important?

A good place to start is to clarify why having an effective pricing strategy is so important.

In a nutshell, any business' focus is to generate as much profit from each transaction as possible.

In the same breath, they have to also make sure the price is right for what the customers are willing to pay.

So the first lesson here is the market dictates the price you can charge.

There's no point trying to charge 10x what your competitors are charging if your product isn't at least 10x better then theirs.

Customers have never had more power. With a few clicks of a mouse, they can browse alternative options and see which suits their needs best.

This means it's never been more important to understand how best to price your products and services.

By getting your pricing wrong, you're likely losing customers or potential clients right at the end of your sales funnel.

If a customer is looking at the price of your product, they are most likely ready to make a purchase.

So getting your pricing right is essential if you truly want to convert as many prospects into new customers.

And speaking of customers, that takes us swiftly to the first step of our Perfect Price Process.

1. Know your market

The first step to any marketing or branding related process of activity is diagnosis.

We first need to understand what we are working with before we start suggesting solutions.

Taking some time to assess your market if key.

You need to take some time to gather data on your top competitors who offer the same product or service as you.

By doing this, you can begin to realise what price range you are likely going to be able to work within.

Understanding what your competitors charge means you can then decide how your product compares to theirs.

If it is around the same and you don't offer anything extra, you're likely going to have to work within that range. This method is very much based around a market-orientated pricing approach.

However, if your offering has something unique or special about it, it is likely you could price yourself above the current range and charge more.

2. Understand how good your product really is

Being honest with yourself and deciding how good your product or service is in comparison to your competitors can be a humbling process.

Your business is your baby and it's sometimes hard to be frank and realise your product or service isn't as good as others out there.

If you want to charge more then the current market range, you have to offer something different or of higher value then the other players in your market.

The more honest you are with yourself at this point, the far less painful it's going to be later on.

Instead of lying to yourself and thinking your product is amazing (when it simply isn't) and selling nothing, you could just be realistic and actually generate a respectable number of sales.

A variable factor which sets the lower limit to what you can charge is how much it costs for you to deliver your product or service.

3. Work out your costs

This should be something you're already fully aware of, but you obviously can't sell your product for less then it costs to make. That isn't bad business, it's just stupid.

Something else to keep in mind is you have to calculate your costs including tax.

For example, if the cost of making a product is $100 and you sell it for $130, the tax man is going to take around 20% that $30 profit margin (at least).

That leaves you with only $24 profit from each transaction. So keep taxes in mind.

Be as detailed as possible regarding your fixed and variable costs. You need to know exactly what it costs to make every single product or service you're selling.

Without having complete clarity here, it's going to be very difficult to be confident in your pricing over the long term.

4. How to choose the best pricing strategy for you

So you know how much your competitors are charging, you've been honest with yourself and decided if your product or service is worth more then the range currently at play in the market and you know your costs, it's time to decide which pricing strategy is best for you.

There are a couple of key methods which are commonly used, but after your've completed the previous 3 steps, it should be far more clear which approach is going to work best for you.

COST-BASED PRICING

So Cost-based pricing is pretty simple.

It basically means calculating the costs needed to make your product, then adding a percentage markup which helps you come to the final price.

An example of cost-plus pricing would go a little something like this:

  • Materials costs = $30
  • Labor costs = $20
  • Overhead = $11
  • Overall Costs = $61

You then have to add your how much mark-up you'd like to add. Let's imagine you wanted to mark your product up by 50%. This means your price should be around $91.50.

You could round that number up or down, but you'll at least have a good idea of where you need to be pricing wise to make a 50% profit on your product or service.

This approach is pretty fool proof as long as you have your costs calculated properly. It's also really simple and ensures every product you are selling is generating a healthy profit, if sold at the full price.

MARKET-ORIENTATED PRICING

The second method of pricing your product and services is very similar to the approach we covered originally.

By understanding the market you are looking to compete within and comparing your product or service with alternatives your customer could choose, you can begin to estimate how much someone would realistically spend on yours. You're basically setting your pricing based on how well your product or service matches with existing offerings in the same market.

There are variants to this market-orientated pricing, including:

Pricing above the market or premium pricing

This approach simple gives the perception that your brand and offerings are more high-end or better quality than the products of your competitors. In order to pull this approach off, you do need to have a product which could legitamitly be seen as the best quality product in the market.

Copying the market

As the name suggests, this approach simple means finding a competitor which has a similar product to yours (in regards to quality), and then just copying their price in order to be competitive.

Penetration pricing or pricing below the market

By pricing your product lower than your competition, you do increase the likelihood that price sensitive customers will choose you due to price alone. This appoach can be great for when you initially enter a market. But beware, if your customers get used to paying a certain price for your product or service, it's going to be difficult to convince them to pay double or even triple in future for the exact same product.

Each of the above strategies in the market-oriented model has its pros and cons. With market-oriented pricing, it’s important to understand the costs of making your product, as well as the quality compared to competitors to accurately price your product.

DYNAMIC PRICING

Also known as time-based or demand based pricing, this methods means adjusting the price of a product based on the level of demand for a product or service.

Airlines use this approach to optimise the profitability of each flight. By altering the price based on the type of seat, how many seats are left and also how soon the flight is to departing.

Amazon uses the approach in a slightly different way, but utilising the dynamic pricing to automatically meet or beat competitors prices online. This basically means they are always either matching or priced just below the rest of the internet. This is why the majority of customers go to Amazon first to check pricing, which is why dynamic pricing can be so effective for certain types of brands and if your business model allows it.

ANCHOR PRICING

Anchor pricing is rather clever and is used by many leading businesses in a range of industries. It is basically creating a perception around your product or service by setting a higher price for a product or service, only to reduce that price to make it seem like the customer is getting a really great deal.

This is often used in retail spaces and online pricing pages.

It is fairly common for stores to place certain products they want to sell close to other products which are significantly higher or even overpriced. This makes the more moderately priced product look like a far better deal, encouraging the customer to perceive the level of value they are receiving as much more then they are in reality.

Likewise, online pricing pages often price the most expensive package or option as high as possible, in order to make the middle package look more desirable.

Anchor pricing can be incredibly effective if you know how to use it properly.

ALWAYS OFFER FREE SHIPPING

Heres the thing about free shipping.. customers love it.

If we're on Amazon and comparing two products, which would you buy. The one which is $50 with free shipping or the one which is $40 with $10 shipping?

It's obvious.

Because in our mind, we're getting a $50 product vs a $40 product.

It's as simple as that.

Although this isn't a pricing strategy per se, just make sure you include the shipping costs in your original price for the product.

Trust me, you'll sell more.

5. Be open to change

So you've followed the steps and you finally feel like you have your pricing perfect.

Give yourself a clap, pat on the back or eat some cake our something...

But the truth is finding your perfect price right now may not last forever.

Keeping an open mind and understanding that you may need to change your pricing depending on how the market evolves and how your product ro service performs is going to be important.

Raise Your Prices On Best-sellers

Supply and demand is a pretty simple concept. If supply is high and demand is low, the price is generally lower. And vice versa.

So the same applies if one of your products is outselling the rest.

use this to your advantage and don't be afraid to raise your price, if you feel like customers would be happy to pay it.


You have to put a little time into getting your pricing strategy right to begin with, but over time you can begin to understand how much your customers value your product and service by learning what price works best for each.

When determining the best pricing strategy to adopt for your business, you also need to keep your brand in mind. There are lots of moving parts to be aware of.

If you want to discuss these moving parts, feel free to connect with me on a one-on-one discovery call by clicking here.

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