- Welcome to The Journey!
Today, we'll be talking about seven competitive
pricing strategies to make a profit.
- Make that money!
- Cha-ching!
- So when it comes to pricing a product,
there's a lot more to it
than just slapping on a price tag, right?
So, there are about 1.3 million
eCommerce websites in North America alone
and then in the world, excluding China,
there's two to three million.
So that's some stiff competition.
- So pricing your products is not an exact science,
it's not even an art form.
It is dynamic.
It's gonna change and it's gonna depend
on a few things like your niche, your goals,
your product or even your industry.
So here are seven competitive pricing strategies
for your products.
- So number one is know your local competition.
So whether you're a new business
or a really well established business,
you know that competition research is really invaluable
to know your competitors' prices and not only,
even if you are an eCommerce website,
people love to shop local so you need to see
those local prices, so you know how to price accordingly.
- Exactly.
50% of consumers say they would rather buy in person
and of those that buy in person,
80% still go online to compare
those online prices to make sure they getting the best deal.
- And that brings us to our next point.
Understand the online market.
So not only do you need to know your local competition
but it's just as important to know what else is out there
because people can go online nowadays and buy anything.
- So the next thing to consider is
what do you want to be known for?
Do you wanna be known for the lowest price
or the best quality but maybe at a more higher price point?
- Yeah, actually only 2.4% of online consumer visits
actually converted into a sale.
So I know for me whenever I'm online shopping, right?
I'll add all of these items into my shopping cart
and then I get preoccupied with something
and I end up leaving all of that
and I don't end up buying it most of the time.
And I totally forget about it.
So it's really important to know
what sets you apart
and then really use that to develop your pricing strategy.
- Next is to assess your cost.
Now there's two major types of cost,
you have fixed and you have variable.
Now fixed are those things that are not gonna change
no matter what you do with pricing your product.
You have to pay a certain amount
for your employees or you have to pay for hosting fees
or your lease to your building.
You need to figure out
what those are and then you'll be able to, afterwards,
know how much you need to price your product.
- And your variable cost are your costs that change
based on different production or sales volume.
- So you also have some things that vary by season.
Say you're an ice cream store and in the summer,
of course you're going to be selling like crazy.
But in the winter, in your area, you may not sell too much.
So you may have to adjust your pricing
depending on that time of year.
So bottom line, you need to know how much it's gonna cost
to run your business and price your products accordingly.
- That way you can definitely make sure
you're sustaining and maximizing your profits.
So the next strategy is to determine your profit margin.
So your profit margin is the percent of revenue
you make on each unit after deducting those fixed
and variable cost for each product.
- Say your product cost $80 to your consumer.
After you deduct how much it cost you to make it,
let's say $60, then that means you've netted
$20, which is a 25% profit margin.
- Now keep in mind, these profit margins
definitely vary based on different industries.
- Exactly, everyone's not gonna have a 25% profit margin.
That would be ideal however, for instance,
the clothing industry it can range from four to 13%
based on the data that's out there.
- The next strategy is A/B Testing.
So if you wanna try out a few different
pricing strategies and see which one works best,
you can actually test them out both at the same time.
- And there are many pricing models
you can choose from and we're gonna give you some examples.
First, pricing at a premium.
Pricing your product higher than all of your competitors
and seeing if you're actually able to justify that
in comparison to what's out there in the market.
- Yeah and with those higher prices,
you have to create a perception of value for your customers.
So I'd like to think of this with like
high quality makeup lines, right?
So, not only does your makeup have to be high quality,
but the packaging, you're gonna get glass bottle
rather than a plastic one. - Plastic.
- So really creating that illusion
of a high quality product.
- And opposed to that is Penetration pricing.
Say you have a hot, new item
that is just new to the market place, you can see
if you could price it a little bit lower and get a lot
of attention around that product.
- So that's really good
for introductory specials, right?
For grand openings, for a limited-time
we're gonna be giving 20% off.
The next thing you could try is Economy pricing.
So this is typically kind of difficult
for smaller businesses but essentially
it's lowering your prices to really attract and appeal
to that budget conscious shopper.
- (chuckles) Like me.
You can think of this as if you're going to Walmart,
you see a lot of the deals
but if you go to Whole Foods, it's a higher quality
at the same time you might wanna think of it
as spending your whole check.
Next is price skimming.
It's a new, unique product and you initially set
your price high, however, when you have either competitors
coming in with the same type of product
or interest isn't there where it used to be,
you start to slowly decrease the price.
- Yeah this happens with paper straws, right?
So once everyone wanted to start saving the turtles,
first there was a company that only sold the paper straws.
They could really dominate that market and set that price.
But then once all these other competitors
starting entering the market,
you can buy a metal straw now, you can buy
all these different types of straws so no longer
do they have that control
and you have to kind of lower your price
to work with your competitors.
Another option is Psychology pricing.
So this is one you're really appealing
to the emotions of a shopper by creating this illusion
of a really great deal.
- So instead of paying for something, let's say $100,
they'll price it at 99.
You save a dollar and it doesn't really seem that much,
but when my emotions are involved, a dollar is a lot.
And last is Bundle pricing.
You set your prices lower when people buy more things-
- So this would be like, buy two, get one free.
So if you were originally just planning
on buying one, all of a sudden now you're buying two
so you can get that third one for free.
- And it makes people think that they're saving some money,
however, they are paying a little bit more
and you are getting the benefit for selling it as a bundle.
- And it's a really great opportunity
for if a product isn't selling well to sell more of it.
So if jelly is not selling well,
"Hey buy this peanut butter and get jelly for free,"
there you go!
♪ Peanut butter jelly time ♪
- Now it's important to recognize
the downfalls of underpricing.
So when you set the lowest possible price,
you're really diminishing the profit margin
that you're able to make.
- Yeah.
For instance, MoviePass.
It was awesome when it came out, you can see
unlimited movies, one a day and then, unfortunately,
when they priced it so low
that they couldn't keep up with it,
certain people couldn't use it anymore.
- This one really cuts Sam deep.
This also doesn't leave any room for possible
discounts or adjustments, so think about
if you wanna run a Black Friday special, right?
But you're already offering the lowest possible price
and you can't offer that discount.
- So the last strategy
is consistently review your pricing.
You can't just set it and forget it.
You have to make sure that you're staying on top of this.
- Yeah you can actually set scheduled times
for you to review and update your pricing strategies
like once every quarter.
- And there's also some unscheduled times
where you wanna review your prices.
- For example, if your cost change.
- And also what if the economy changes?
- Or if your competitors change their prices.
- Another, if you're launching a new product.
- Or if you're entering a new market or vertical.
- And demand is up.
For instance, back when Popeye's came out
with that chicken sandwich and they sold out,
whenever they thought to bring it back in,
they can potentially increase their price
because so many people wanted it.
- So there you have it.
There's seven competitive pricing strategies
that you can use to make that money
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Thanks for watching, this is The Journey.
See you next time.