Pricing is one of the most complex parts of running a business. Why? Because there's never really a right or wrong way to do it.
Undoubtedly, you've seen price tags running the gamut in just about every market. Take fashion, for example, where you can see exorbitantly high prices for products like exclusive, luxury handbags to lower prices for fast-fashion, trendy accessories.
And these prices matter. For 60% of online shoppers, pricing is the first criterion that affects their buying decision, says e-satisfaction.
Seeing such diversity in pricing can make it seem like pricing is just one big guessing game—but it's not. There are tried-and-tested ways to successfully price products for continued profitability and business growth.
Let's take a look at how to approach product pricing and why dynamic pricing is the best way for ecommerce brands to optimize prices.
Why so many companies get hung up on pricing
If you’re struggling to figure out how to find the right prices for your small business, know that you’re not the only one! So many companies get hung up on trying to wrap their heads around which price is best that they can end up slowing down operations and cutting into their own productivity.
When it comes to determining the right selling price, maybe you feel like you don’t have all the information or the expertise that you need. Or maybe you’re simply feeling overwhelmed trying to juggle all of the key factors that go into product pricing.
Dynamic pricing software helps you solve this problem by determining the right price for your products based on hundreds of data points like market conditions and competitor pricing data. This way, you know you're hitting the right price point—without having to worry about doing all the math yourself.
But before we dive into how dynamic pricing can help you optimize your prices, let’s take a look at the traditional approach to product pricing.
How to price a product the traditional way
While there are several different strategies for product pricing, one approach has stood out as the industry standard in recent years.
Let's take a look at the most common pricing strategy business owners have used to help them calculate sustainable prices for their products.
1. Determine the cost of each product
The first step in pricing a new product is determining the COGS.
COGS stands for the Cost of Goods Sold; it’s all the expenses you incurred in order to produce your products. These expenses can include things like the cost of materials, labor costs, overhead, etc.
But we can get more specific. COGS is made up of both fixed costs and variable costs.
Fixed costs are costs that never change for your business—no matter how many units you produce. Examples of fixed costs include rent, mortgage payments, insurance premiums, utilities, and equipment maintenance.
Variable costs, on the other hand, will change depending on your level of output. Variable costs could be production supplies, delivery costs, commission payments, credit card fees, etc.
When determining the final selling price of a product, it’s important that you factor in both the fixed costs and variable costs of your business operations.
Here are a couple of examples:
Product 1: $5 raw materials + $1 labor costs + $2 overhead = $8 total cost per unit
Product 2: $10 raw materials + $3 labor costs + $3 overhead = $16 total cost per unit
2. Add in the markup percentage
Once you’ve calculated how much it costs you to produce each product, then it’s time to add a markup.
The markup percentage is the amount you add to the cost of each item in order to turn it into a sellable product for which you can earn a profit.
For example, let’s say the cost of your new product is $10. If you sell it for $20, then your markup percentage is 50%.
When determining a retail price, keep in mind that the standard profit margin for the retail industry is 50%.
3. Calculate the final price
After figuring out the cost of each unit and deciding on a markup percentage, there’s just one last step to determining your final price point.
Simply use the cost + pricing formula to calculate the optimal sale price:
Cost + (Markup Percentage x Cost) = Price
Here’s an example: If your product costs $3 to produce and you have a 30% markup, then your final price will be:
$3 + ($0.30 x $3) = $3.90
How dynamic pricing takes it to a new level
The above method is the traditional approach for determining product prices. Unfortunately, the many businesses who continue to choose this method to set their market prices just don’t know what they’re missing out on.
Unlike dynamic pricing, the traditional approach to setting market prices leaves out dozens of factors that can significantly affect not only your market share but also your ultimate business health and profitability.
Without taking into consideration the current state of the market, the traditional approach can only ever give you a ballpark idea of the optimal price for your products.
This is what makes dynamic pricing a gamechanger when it comes to calculating the ideal retail price.
Why use dynamic pricing to price products
Dynamic pricing is the most effective way to price products.
The dynamic pricing method allows companies to adjust their prices in real-time based on market conditions.
By giving you the ability to track customer demand, this method not only helps you better understand your target customer base, but also gives you the insight to pivot and make adjustments accordingly in order to optimize your business operations.
Here are three reasons why dynamic pricing is the way of the future.
1. It takes out the guesswork
Dynamic pricing is so powerful because it takes the guesswork out of finding the right price.
With the traditional approach, it’s too easy to waste time doubting yourself. “Should I pick a lower price? A higher price?”
Instead of fretting about when and how to make price increases, you can make dynamic pricing do the work for you and your small business.
Because dynamic pricing allows you to adjust your prices for each product on-demand, you can always be sure that you’re charging the most optimal retail price for your product and/or services at any given moment.
2. It maximizes profits
If you rely on manual strategies alone, you’re likely leaving serious money on the table.
With dynamic pricing, you can be sure that your products are always primed to capture the most profits possible. Dynamic pricing allows you to maximize profits for one simple reason: It shows you how to charge different prices for the same product.
This works because it makes the price of your product a living, breathing entity that responds to the real-time conditions of the market, such as:
- How many people are buying the product?
- When are people buying it?
- Where are people buying it?
By listening to the active market and adjusting your product prices accordingly, dynamic pricing helps position your small business for regular, continued profitability.
3. It analyzes data points in real-time
What sets dynamic pricing apart from legacy methods of product pricing is data analysis.
For example, Profasee’s intelligent pricing algorithm analyzes millions of data points to surface real-time insights and dynamic pricing recommendations.
Our algorithm is designed to predict the perfect price to win the sale—every time. It assesses all the variables that can impact sales velocity—from search performance to seasonality—so it can recommend the best price for your products, help you beat out similar products on the market, and take home profits.
Set up your dynamic pricing strategy with Profasee
Get ready to embrace an automated dynamic pricing strategy done right.
No matter how much you already know about dynamic pricing, we can help you discover a more profitable future for your small business.
See how in a demo with Profasee.