Determining the best prices for products can be a complicated undertaking. That's why many businesses are always trying out new methods in the hopes of landing on the most optimal retail prices.
But no matter what method you're using, it's important to take a multi-faceted approach, analyzing a number of key factors like your specific business model, your location, the size of your competition, and more.
Together, all of these different factors and data points add strength to your pricing strategy—the more information you have to work with, the better you can home in on the most optimal price.
Let's take a look at the three most common methods of finding the optimal price of a product.
3 common strategies for finding the optimal price
Whether you’re a laser-focused marketer, a strategic business owner, or a jack-of-all-trades entrepreneur, learning how to determine the optimal selling prices for your products is one of the key skills that will determine the success of your business.
Where to begin?
The most common strategies businesses use to determine price are: cost-plus pricing, competitive pricing, and dynamic pricing.
Cost-plus pricing
With a cost-plus pricing strategy, you evaluate all of the costs of product production to determine the product’s final price. This means totaling up the cost of everything it takes to produce the product; then, you add a markup percentage to create your desired profit margin.
For example, suppose you want to sell sweatshirts. If each sweatshirt costs you $15 to make and you want a 20% profit margin, then you would calculate:
20% of 15 = 3
15+3 = 18
So you would sell your sweatshirts for $18 a piece.
The cost-plus pricing strategy is one of the most straightforward methods for determining retail prices—but that doesn’t necessarily make it the best.
Unlike more sophisticated pricing strategies, the cost-plus pricing method doesn’t take into account diverse variables like seasonality, buyer behaviors, competition, and others—all of which can dramatically affect your optimal price.
So while this stripped-down method may be quick and easy, it can actually cause you to miss out on big money in the long run.
Competitive pricing
Competitive pricing is a strategy that uses the prices of your competitors’ products to determine your own optimal prices. Basically, the idea is that if you price your products somewhere between those of your competitors, then you’ll be less likely to lose customers to those brands.
For example, let’s say you’re selling a product that’s very similar to another company’s product. Their sticker price is $5, so you decide to price your product at $4.99 in hopes of attracting customers who are looking for a discounted price.
While this may seem like a sure-fire win, the problem with this approach is that it’s just too simple. After all, with competitive pricing, you’re picking your retail prices based on just one factor: your competitor.
Like the cost-plus pricing strategy, this method forces you to put all of your eggs in one basket, hyper-focusing on one factor and ignoring the hundreds of other relevant data points that can help you find a better price.
By confining yourself to a one-factor approach, you’re missing out on the opportunity to use robust real-time data to your advantage to prime your prices to capture the most profit possible.
Dynamic pricing
Unlike cost-plus pricing and competitive pricing, dynamic pricing is a pricing strategy that gives companies the dexterity to nimbly adjust their retail prices based on market demand and other real-time factors.
Whether you’ve realized it or not, you’ve likely already experienced dynamic pricing as a customer. For example, airlines use dynamic pricing strategies to charge more for flights during peak periods (i.e., when there are fewer seats available and more people want to travel) and less during off-peak periods (i.e., when there are more seats available and fewer people want to travel).
This strategy allows them to always take advantage of the biggest profit possible.
The airline industry is one of the most well-known proponents of the dynamic pricing strategy—but the method is now quickly gaining traction amongst e-commerce companies because it allows them to maximize profits by intelligently charging customers different prices for the same product.
The beauty of dynamic pricing lies in its agility.
By giving companies the ability to charge different customers different prices for a single product, the dynamic pricing strategy positions companies to maximize profits in every possible situation. Unlike other pricing strategies that rely on just one factor to make a pricing decision, dynamic pricing intelligently synthesizes hundreds of different data points to determine the optimal price at any given moment for any given customer.
4 benefits of using dynamic pricing to find the optimal price
Dynamic pricing is a highly effective strategy that can help businesses find and sustain success. By allowing you to bend with the market, this strategy empowers you to seize real-time opportunities so you can always be maximizing profits.
Want to dive a little deeper?
Here are four benefits of using dynamic pricing to find the optimal price:
1. Leverage millions of data points to make an informed decision
While other strategies like cost-plus pricing or competitive pricing completely rely on one variable, dynamic pricing leverages the power of millions of data points to make informed decisions about how to price products.
An intelligent pricing algorithm, such as Profasee’s, analyzes millions of data points to surface real-time insights and determine optimal price recommendations. With this information in hand, you can improve your profit margins and increase sales—all while shortening the time it takes for your products to sell.
2. Maximize profits
Because dynamic pricing leverages powerful algorithms to monitor your business, it can intelligently adjust your retail prices based on what’s happening in the market right now.
Basically, it’s an automated approach to price optimization. This means you can confidently make more money from your products without having to spend time worrying about how to manually adjust your prices by yourself.
3. Take out the guesswork
Traditional pricing strategies rely on manual calculations and adjustments—but in today’s modern markets, these methods can only get you so far. When it comes time to compete with other brands, you’re essentially taking a shot in the dark and hoping for the best.
Dynamic pricing software removes the mystery and gives you confidence that your products are optimally priced to sell.
It’s not about guessing; it’s about insights.
By using insights from historical data, dynamic pricing can deftly predict future demand and adjust prices accordingly so you’re always positioned to increase revenue.
4. Use preconfigured models to land on an optimal price in seconds
Today, dynamic pricing is truly the only strategy that companies can count on to remain competitive in the market—and Profasee is taking it one step further.
With preconfigured pricing models tailored to your unique product catalog, Profasee gives you the tools to follow a straight path to success. Use these models on your entire catalog, or cherry-pick and use them individually on each SKU—either way, you can rest assured that your products will be priced to sell during each second of the day.
Ready to find your optimal price with Profasee?
Is dynamic pricing the missing piece to your business’s success?
We’re here to help. Simply sign up for a demo with Profasee and see how you can realize a more profitable future for your business.
