Secrets of product pricing and the latest strategies to boost profits and success

Looking at the current market landscape, we find that pricing products or services is more than just putting a numerical price on the product or service. Rather, it is an art that requires a deep understanding of the economic, psychological, and social factors affecting consumers' purchasing decisions, as well as the pricing and marketing strategies used by merchants to attract customers' attention and persuade them to buy products.

The process of product pricing may be one of the complex processes that commercial activities go through when launching their products and services, entering new markets, or seeking to increase market share. The secret of this complexity is in determining an appropriate price that achieves a balance between achieving profitability and maintaining competitive opportunities in the market and gaining customer satisfaction.

This matter requires double effort and in-depth study to professionally determine product prices to attract consumers' attention and achieve more profits. Therefore, in this article, we will discuss the meaning of product pricing, the steps followed to price a product, the best pricing strategies relied upon, and others.

Explanation of the concept of product pricing

Simply put, product pricing refers to the process of setting the selling price for a product or service as an important part of the commercial activity strategy, as it directly affects profit margins, consumer behavior, and purchasing decisions.

This term expresses the method, strategy, or steps followed to price a product or service and determine the value that the customer will pay in exchange for the benefit they will receive.

There are five basic points that must be taken into consideration when pricing products or services, which include:

• The cost of producing or providing the product or service, including the costs of raw materials, labor, equipment, marketing, operation, and any other costs associated with the process.

• The state of supply and demand and the nature of competition in the market.

• The added value that your products or services offer compared to competitors.

• The target customer segment, whether the targets are from the economy, middle, or wealthy class.

• The policies of each country regarding taxes and fees, and the general economic situation of the country.

What are the goals and importance of sound pricing?

Sound pricing is considered one of the basic pillars for the success of any commercial activity, as its role is not limited to achieving profits only, but goes beyond that to affect the brand's position and customer behavior. The goals of sound product pricing are numerous, including:

• Ensuring cost coverage and achieving an appropriate profit margin that guarantees the sustainability of the project.

• Attracting larger segments of customers, especially when offering added value commensurate with the price.

• Supporting market share and strengthening the company's position in the market compared to competitors.

• Motivating consumers to make quick purchasing decisions, especially in price-sensitive markets.

• Achieving other marketing goals such as introducing a new product to the market, liquidating inventory, or repositioning the brand.

The importance of sound product pricing lies in:

• Maintaining a balance between value and cost: Price reflects the value of the product or service in the customer's eyes, and sound pricing balances what the customer pays with what they expect in quality.

• Enhancing the brand image: Well-studied prices contribute to building a positive mental image of the brand, whether it is luxurious or economical.

• The ability to adapt to market changes: Sound pricing allows flexibility in facing inflation or changes in consumer behavior or competition.

• Supporting financial and strategic planning: Accurate pricing facilitates setting accurate financial forecasts and helps evaluate the performance of marketing activities.

• Reducing commercial risks: Incorrect pricing may lead to losses or loss of customer confidence, while sound pricing reduces these risks and contributes to enhancing sales movement and increasing profits.

The process of product pricing goes through several steps, the most important of which we review below.

How to price products professionally

First: Determine the desired goal of product pricing

This is a crucial step in product pricing, as it is the cornerstone for building a successful pricing strategy. Before determining the price of any product, it is necessary to determine the goal you seek to achieve through its price. The goals of product pricing vary to include, for example:

• Achieving the maximum possible returns on investment.

• Market penetration and enhancing competitive value.

• Maintaining market share.

• Increasing sales movement.

• Getting rid of excess inventory.

To determine the desired goals of product pricing, it is necessary to:

• Study the market and understand its dynamics, demand volume, and level of competition.

• Identify the target audience and know their needs, preferences, and their purchasing power.

• Understand the product and what distinguishes it from competing products.

• List all costs associated with production, distribution, and marketing.

• Calculate the break-even point to determine the minimum price that covers costs.

We point out that the specified goals should be divided into short-term and long-term according to the nature of the commercial activity's general plan to achieve the desired balance between customer satisfaction and increased profitability.

Second: Study competitors

This is one of the vital steps in the product pricing process, as it helps e-commerce stores and companies determine the ideal price that suits the nature of consumers and gives the commercial activity a competitive value. To understand and study competitors professionally, it is necessary to:

• Identify direct and indirect competitors for the product to be priced.

• Collect and analyze all data related to the pricing of competing products and the pricing strategies adopted by your competitors to know the strengths and weaknesses and rely on the ideal strategy.

• Compare the features and benefits of the product to be priced with competitors' products to evaluate the value offered.

• Monitor and analyze customer reactions to prices and promotional offers and how the market interacts with competitors' pricing strategies.

A comprehensive study of competitors is useful in:

• Determining the appropriate price: By understanding the needs of the target audience and comparing competing prices, the optimal price that achieves a balance between profitability and attracting customers can be determined.

• Improving the value offered: Studying competitors helps to improve product features and provide added value compared to other products available in the market.

• Adapting to market changes: Continuous analysis helps to adapt to changes in consumer preferences and competitors' strategies, which enables the brand to maintain its competitiveness in the market.

Third: Calculate the total cost of production

This step is one of the pivotal steps in the product pricing process, as it helps determine the appropriate price for the product or service that guarantees coverage of all costs and achievement of profits. This step requires considering a variety of costs associated with the production process, which are divided into:

• Fixed costs: These are costs that do not change with the volume of production and remain constant regardless of their quantity, and include: rents, employee salaries, insurance and maintenance costs for properties and equipment, and other costs.

• Variable costs: These are costs that change directly with the volume of production, so the more it increases, the more these costs increase. These costs include, for example: the cost of basic materials used in production, the costs of electricity and fuel used in the process, the costs of transporting raw materials to the factory and final products to the markets, etc.

• Mixed costs: These are diverse costs between fixed and variable, such as marketing and advertising costs. Part of these costs may be fixed, such as mandatory advertising contracts with marketing agencies, and another part may vary according to the volume of sales or other conditions followed in affiliate marketing strategies.

Calculating the total production costs is useful in:

• Ensuring cost coverage and achieving an appropriate profit margin.

• Helping to determine the lowest price at which products or services can be sold and avoiding losses.

• The ability to compete in the market by pricing products at competitive prices based on accurate calculation and understanding of the total costs.

• Making strategic decisions such as: determining the need to reduce costs, increase prices, or adjust the volume of production.

To accurately calculate the total production costs, it is necessary to:

• Determine and calculate all fixed and variable costs related to production and each unit produced.

• Review and analyze previous financial data to help accurately predict future costs.

• Include indirect costs that may not be directly related to production but affect the total cost, such as: storage costs for raw materials and final products, shipping and logistics services costs, and operations coordination.

• Use advanced accounting tools and software to help track costs accurately.

Fourth: Choose the appropriate pricing strategy

This step is considered one of the most dangerous steps you will go through in product pricing, as it will directly affect the achievement of profits and attracting customers. Therefore, accurate, calculated, and carefully studied decisions must be made regarding the chosen pricing strategy from among the various strategies to ensure the success of products in the market and increase the return on investment.

You can use these tips to choose the ideal pricing strategy:

• Calculate all costs related to your product or service, including direct and indirect costs, and ensure that the chosen pricing strategy covers these costs and achieves the required profitability.

• Use comparative point analysis to determine the position of your product or service in the market in terms of price and value.

• Identify the strengths and weaknesses in competitors' pricing strategies and benefit from them to choose an ideal strategy that gives you a competitive advantage.

• Be keen to understand consumers' pain points related to product prices and try to understand the purchasing power of the target segment.

• Analyze the various available pricing strategies and choose what meets your requirements based on the goals set in advance.

• Be interested in conducting A/B experiments to test different pricing strategies and determine the best strategy that results in the highest conversion rate.

Fifth: Set an initial price for the product and test customer response

After studying and analyzing the various data, you should determine an initial price for your product and then test customer response in order to evaluate the extent of customers' desire to purchase the product at its specified price based on several methods, including:

• Launching questionnaires to a group of target customers to find out their opinions about the product and its price.

• Conducting personal interviews with customers to collect their opinions and detailed evaluations.

• Displaying the product at two different prices to two different groups of consumers and comparing conversion rates.

• Analyzing customer behavior on the website or in the store to find out how they interact with the product and its price.

After collecting data from customer response tests, the results should be analyzed to determine whether the initial price is appropriate or not. If the results show that customers are satisfied with the price, the commercial activity can launch the product at the specified price. If the results show the opposite, the price must be reconsidered or adjustments must be made to the product.

These are the most important steps followed in the product pricing process, and as we mentioned earlier, there are many different pricing strategies that commercial activities rely on, some of which we will discuss in the following paragraphs.

The most important product pricing strategies

1. Pricing at a Premium strategy

This strategy relies on setting a price for the product higher than the market price, and it is primarily based on customer expectations who link the high price of the product or service provided with high quality. The premium pricing strategy is often applied in the early stages of the product life cycle.

Here is an illustrative example to explain the strategy in a practical way:

Suppose you own an e-commerce store specializing in selling watches, and you decided to launch a new watch characterized by high manufacturing quality, an elegant design, and presented inside a luxurious box, with a two-year warranty and excellent customer support service. Instead of pricing it within the prevailing price range in the market (300 to 500 Saudi riyals), you decided to price it at 1,250 Saudi riyals, based on the premium pricing strategy. This high price is not only aimed at covering costs, but also seeks to establish the product's image as a luxury option, and attract a segment of customers who see the high price as an indication of quality and prestige.

To achieve the full benefit of this strategy, it is necessary to:

• Building a strong brand known for providing high-quality products and services to justify high prices in exchange for purchasing the product.

• Offering the product or service for exceptional and unique value that is not available to competitors to encourage customers to pay a higher price in exchange for getting a distinctive experience.

• Providing excellent customer service that meets customer needs and exceeds their expectations, which helps in enhancing the brand image and building strong relationships with them, which will make them more willing to accept the premium pricing strategy.

2. Cost-based product pricing strategy

This is one of the basic strategies used by commercial activities of all kinds to determine the prices of their products. This strategy relies on calculating the cost of producing and distributing the product and then adding a reasonable profit margin to determine the final price for selling it in the markets.

All direct and indirect costs are collected to reach the total cost of producing one unit of the product, and then the required profit margin is determined based on the financial goals and the general strategy.

It is worth noting that this profit margin can be a percentage of the total cost or a fixed monetary value added to the cost.

For example, if you run an e-commerce store that sells shirts, and the total cost of producing one shirt is 50 riyals, including the cost of fabric, design, packaging, shipping, and labor, and you decided to add a profit margin of 40%, the final price of the shirt will be 70 Saudi riyals. In this way, you ensure cost coverage and achieve a balanced profit.

This strategy has many benefits, including:

• Providing a clear vision for the commercial activity about costs and target profit margins, which facilitates the product pricing process.

• Ease of application and understanding, especially for small and medium-sized commercial activities that may not have large resources for in-depth market analysis.

• Maintaining price stability by reducing fluctuations resulting from dynamic market changes.

3. Value-based product pricing strategy

This is an innovative strategy that relies on a unique approach to determining the price of a product based on the perceived value it offers to consumers rather than the actual costs of production or competitors' prices.

This strategy focuses on a deep understanding of the nature of the market and consumers to develop unique features in the product that attract customers to pay a certain price, such as those found in technical products such as smartphones and computers that are priced based on their features and innovations compared to competitors.

Applying this strategy requires going through several stages, including:

• Understanding value from the customer's perspective by collecting detailed data about customer preferences, purchasing behavior, and perceptions of value through surveys and interviews.

• Identifying the tangible and intangible benefits that the product offers.

• Market segmentation to distinguish between different customer segments, as not everyone sees the same value in the product, so in this stage they are divided into segments based on their preferences and needs, and each segment is targeted with a specific price according to the value achieved for each category.

• Analyzing the pain points that customers suffer from and how the product can solve them effectively, and then determining the price that reflects this solution.

Applying this strategy contributes to:

• Increased profitability: When customers realize the value they receive, they are more willing to pay a higher price, which leads to an increase in the profit margin and improvement of the company's financial performance.

• Increasing the customer base: Consumers who feel that they are getting value for their money are more likely to return to purchase again and recommend the product or service to others, which leads to building a loyal customer base and achieving sustainable growth in the long term.

• Enhancing competitive value: By focusing on value, brands can differentiate themselves from competitors who focus only on price, which contributes to attracting new customers and gaining a competitive advantage.

• Greater flexibility in pricing: Value-based pricing strategy allows commercial activities more flexibility in determining prices so that they can adjust prices based on various factors, such as market conditions and individual customer needs.

4. Market penetration product pricing strategy

Penetration strategies aim to attract consumers by offering competitive prices lower than the final market price for products or services. This strategy is usually applied with the aim of increasing market share or sales volume rather than achieving short-term profits.

For example, if you own a new e-commerce store selling wireless earphones, and the prevailing market price ranges between 200 to 250 Saudi riyals, you can use the penetration pricing strategy by offering your product at a price of 149 Saudi riyals only. This relatively low price will quickly attract attention and encourage a larger number of customers to try the product, especially if it is coupled with good quality and reliable service. Over time, after building trust and increasing the number of sales and positive reviews, you can gradually adjust the price to align with the market value, without negatively affecting the loyalty of customers who first learned about your brand because of the attractive price.

This strategy has requirements for its professional implementation, summarized in:

• Sufficient profit margins: Companies must have sufficient profit margins to absorb the price reduction resulting from the penetration strategy used.

• High operational efficiency: Commercial activities must have high operational efficiency to control costs and maintain profitability with lower prices.

• Strong financial capacity: Penetration strategies require large investments in marketing and advertising to attract customers, so they require strong financial capacity to support these investments.

• Desired products or services: Products or services offered at reduced prices must be desired by consumers and attractive enough to persuade them to buy.

5. Dynamic Pricing Strategy

This is a pricing strategy in which the prices of products or services are constantly adjusted based on a variety of factors including: changes in supply and demand levels, product availability, consumer behavior, nature of competition, timing, etc.

This strategy aims to achieve maximum profits by taking advantage of changing market conditions and adjusting product prices in line with them. This is done by:

• Collecting and analyzing real-time data and using big data analysis and artificial intelligence technologies to analyze consumer behavior, monitor competing prices, and identify seasonal patterns and changes in demand.

• Using complex algorithms to determine optimal prices based on previously analyzed data according to several factors such as price elasticity, customer preferences, inventory levels, and competitor behavior.

• Segmenting the market into different segments based on demographic, behavioral, and geographical characteristics of consumers to help customize prices for each segment in a way that increases profits.

Adopting this strategy is useful in:

• Increasing revenues by adjusting prices based on supply and demand levels, and taking advantage of periods when demand is high, such as seasons and holidays.

• Improving inventory management and reducing surplus or deficit inventory.

• Quick and instantaneous response to changes occurring in the market.

• Gaining customer satisfaction by offering customized offers and competitive prices.

6. Psychological Pricing Strategy

This strategy relies on creating a state of comparison for the consumer between the price of one product and another or one service and another offered by the same seller by creating a feeling of possibility to prefer between two products on the basis of price.

For example, a shoe worth 199 riyals can be offered next to another shoe worth 200 riyals. Here, the psychological theory is applied which says that consumers always pay more attention to the first numerical value of the product despite the small difference. The success of this strategy depends on:

• The slight difference between the prices of the displayed products is enough to create a sense of value for the consumer, while maintaining a sufficient profit margin for the merchant.

• Highlighting the low-priced product through the use of visual effects to attract the consumer's attention or by using marketing phrases that highlight its value.

• The proximity between the quality of the displayed products so that the consumer believes that they are getting greater value in exchange for buying the low-priced product.

From pricing strategies, we move on to talk about pricing policy by answering this important question.

How to maintain the flexibility of your business's pricing policy?

The term pricing policy refers to the approach followed in the process of pricing the product or service offered in the market, which gives commercial activities the necessary flexibility and the ability to adjust prices quickly and efficiently in response to market changes and surrounding conditions. To ensure and maintain this flexibility, many measures must be taken, including:

• Continuously analyzing the market and monitoring changes in supply and demand, monitoring competitors' pricing strategies, and collecting data on customer trends and preferences.

• Using dynamic pricing systems that allow prices to be adjusted based on real-time data.

• Preparing different scenarios for pricing policies according to market changes, and keeping alternative pricing plans to face challenges that may arise in the future.

• Understanding the impact of price changes on revenues and profits, and continuously evaluating the company's financial performance to ensure the ability to adjust product prices without harming profitability.

• Achieving a balance between supply and demand by adjusting prices based on the quantities available of products and the extent of demand for them, and relying on promotional offers and discounts during periods of low demand.

• Ensuring that pricing policies comply with local and international laws and regulations, and monitoring any regulatory changes that may affect your product pricing strategies.

By implementing these procedures, you can maintain the flexibility of your store's pricing policy, which leads to quickly adapting to changing conditions and ensuring continuity and profitability.

The most frequently asked questions about product pricing

How do I calculate the price of a product?

To calculate the product price efficiently, follow these steps:

• Collect direct costs such as the cost of raw materials + packaging + manufacturing.

• Add indirect costs (distributed) such as rent, salaries, marketing, and shipping (and divide them by the number of products).

• Then calculate the total cost of the single product, including direct and indirect costs.

• Determine the profit margin you want, for example, 30% or 50% depending on your goal.

• Calculate the final selling price using this equation: Selling Price = Total Cost ÷ (1 - Profit Margin as a decimal percentage).

Example: If the cost of the product is 30 riyals, and the required profit percentage is 40% (written in the equation as 0.40), we say Selling Price = 30 × (1 + 0.40) = 30 × 1.40 = 42 riyals.

When do I know if the price is expensive or cheap?

You can judge whether the price is expensive or cheap by comparing it with the prices of similar products in the market, and evaluating the quality and benefits the product offers. If the price is higher than the market without clear added value, it is considered expensive, and if it is much lower to the extent that it harms the profit margin or the product image, it is considered cheap. Know that the appropriate price is what covers costs, achieves a reasonable profit, and convinces the customer that what they pay is equal to what they receive.

What is the meaning of dynamic product pricing?

Simply put, it is the continuous and automatic change of the product price according to factors such as supply and demand, intensity of competition, time of purchase, with the aim of achieving maximum profit and attracting customers at the right time.

What is the difference between price and pricing?

• Price is the final value at which the product or service is offered for sale, and it is expressed as a specific monetary amount paid by the customer, such as the product price being 100 riyals.

• As for pricing, it is the process that precedes the determination of this number, and includes studying production costs, analyzing the market and competitors, understanding consumer behavior, and determining the appropriate profit margin.

So price is the result, and pricing is the method that leads to it.

A final word

The process of product pricing is not a short or easy journey, but a continuous journey that requires effort and perseverance. With the development of the market and the change in customer needs, it is necessary to keep pace with these changes by periodically reviewing pricing strategies and making the necessary adjustments to the pricing policy to ensure the continued competitiveness of products and attract more customers.

Know that product pricing is just one of the tools for success, so it must be supported by effective marketing strategies and excellent customer service to build a strong brand, which leads to achieving the desired success in the long term.