The Basic Knowledge of Pricing

When you want to upload product on your online shop, one of the most important things for you to work is pricing. Pricing is so important that it is counted on the famous marketing mix concept of 4Ps(price, place, product, and promotion). The right price will help you to improve your online business, satisfy your customer needs, and of course to your business grow. Now it’s time to learn the basics to define your product price.

 

Pricing is key for successful business

1. Cost-Based Pricing

This method is to determine the price from the buying price with the profit you want to have. Also you need to count on operational costs such as employees salary, rent warehouse, electricity, and promotion, and etc. You should understand exactly how much cost you spend for all of the cost above to determine the price.

 

A. Cost Push Price

Product price determination using this model is by calculating the production cost then margin the profit you want to get.

The formula is:  SELLING PRICE = ASSET (PRODUCT COST) + PROFIT

For example:
You want to t-shirt. The cost you spend to buy the raw material Rp 500,000, the operational cost to make the t-shirt (employees salary, electricity, machines, etc) Rp 1,000,000. So the total cost you spend Rp 1,500,000. If you want 30% profit, the price for the t-shirt should be:

= Rp 1,500,000 + (30% x Rp 1,500,000)
= Rp 1,950,000 (selling price for 10 products)

Selling price for 1 t-shirt is Rp 1,950,000 : 10 = Rp 195,000

B. Mark Up Price

If you buy product from supplier, you just need to add purchased price and the profit you want to get.

The formula is:  SELLING PRICE = BUYING PRICE + MARK UP

For example:
You bought accessories (10 pieces) from suppliers at Rp 300,000 and you spend transportation to get the accessories Rp 25,000

= Rp 300,000 + Rp 25,000
= Rp 325,000 (modal that you spend for 10 pieces accessories)

If you want profit Rp 100,000 for 10 pieces accessories
= Rp 325,000 + Rp 100,000 (profit)
= Rp 425,000 (mark up total price)

Selling price for 1 piece accessories is Rp 42,500

 

 

2. Competitor-Based Pricing

You can make reference by looking at price competition in the market. Also, by knowing your competitor price as your reference at least you already have benchmark price.

This does not mean you have to give the same price as the price offered by a competitor. If your product is more qualified, more attractive, and more useful packaging, or your online store provide much better customer service than your competitors, you deserve to set your price higher.

Disadvantages of this method is that you might ignore the cost of production if you are too focused with the price setting by competitors. This price setting is often used as one of the tactics to confront the competitors by setting a cheaper selling price in hope of attracting more consumers. Thus, it often cause a price war.

 

 

3. Target-Based Pricing

In this method, the specified product price is based on the customer’s perception on value received, perceived quality, and price sensitivity of products. Also it is very important to target your customer segment by carefully researching the market. Please see the articles below to learn more to determine your target customer.

Conduct Market Research
Find Niche Market

In your market research, please check the following factors to define your product price.

– Does the customer assume that the price describes the quality of the product?
– Do customers feel that money is worth the value they receive?
– Is the customer more concerned with prestige than price?

As well as the competitor-based pricing model, the disadvantage of target-based pricing is that you will ignore the cost of production if it is too focused on the customer.

 

Pricing flow map

 

Secret Combination

What to recommend for you to determine the adequate price is that the combination of these 3 pricing methods. The Flowing is the steps which you can follow to find the best price set.

Setp1: Target-Based Pricing

Once you conduct market research and find your target customer, you can find the pricing range which your target market is comfortable.

Step2: Competitor-Based Pricing

Then, you can take a look how your competitors in your target area are pricing. Consider your products and customer service are worth qualifier compare to others, then you will decide if you will set the price higher, or lower than them.

Step3: Cost-Based Pricing

Use this method to verify if your price setting meets the revenue model. By examine your revenue and cost comparison at the last phase of your pricing work, you can always go back and modify its strategy and make it possible to keep being your business on the track.

 

 

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