When selling products online or offline, pricing your products is indeed a cornerstone decision. How you price your product will impact every aspect of your business. Whether it is business-related cash flow, profit margins, or other miscellaneous expenses you can afford, product pricing is a deciding factor related to multiple sides of your business.
But there’s a catch here:
The amount you need to pay to accept payments online (commonly known as MDR or Merchant Discount Rate) is yet another hurdle in determining the final product pricing.
This is why it is quite obvious to feel stuck on product pricing at the time of launching a new product or store. The best way to set the price of a product is to launch and test it with real customers. Other than the product quality, pricing also determines if it will succeed or fade away in the market over time.
It’s better to understand the ins and outs of product pricing before it can delay the product launch.
What is product pricing?
Technically, product pricing is the technique of selecting the price at which you should sell products under your brand name. It is basically the combination of the impact of multiple factors including:
- Raw material cost
- Manufacturing cost
- Market condition
- Brand value
- Product quality.
A deep marketing analysis is required to come to a competitive product pricing that can give your products an entry into the target market. Besides this, you also need to know the following things to set the right pricing strategy:
|When products are priced too low||When products are priced too high|
|It can attract a lot of customers.||Fewer sales can generate significant profit.|
|The sales may not be profitable in the short term.||The initial revenue can reimburse the investments in the short term.|
|It is best suited for product launch.||It is suitable for premium product ranges.|
How do payment acceptance charges impact product pricing decisions?
Let’s consider your mindset as you step forward toward launching an online store:
Product range – checked. Product sourcing – checked. Product packaging, shipping, and marketing – checked. What about payment gateway selection? Have you thought about it yet?
Accepting payments online from your targeted customers via a website or mobile app requires you to integrate a reliable payment gateway. A payment gateway will charge fees to facilitate transactions in real-time as and when they happen. You should anyway not look for, or select a free payment gateway.
If you haven’t considered the payment gateway selection prior to finalizing product pricing, the chances are that you will need to rethink the same. Many business owners often need to delay the product launch because they didn’t think of the payment gateway charges earlier. Besides this, they even worry about the profit angle related to the selected pricing.
Ultimately, the more you spend on maintaining operations, manufacturing, or marketing, the higher the final product price would be, which may not be suitable as per market conditions.
Let’s come to the straightforward question you might want to ask at this stage –
‘Should you also worry about payment acceptance charges while finalizing the product pricing?’
The answer is – Not at all.
In simple words, the right way to balance product pricing with competition is to cover all the expenses incurred prior to finalizing the pricing.
Let’s get to the actionable part then.
How should you price your product?
When you search for product pricing advice, it is no wonder you would fall into a black hole. It can be because pricing touches almost every side of the business. It is a key decision to be made and it is as much science as it is an art.
If you are struggling with finding the right product pricing, just remember that the price you set for the product launch may not be the price you will use forever. If you price the offerings at a loss or an unsustainable profit margin, you will most likely face issues with growth and scalability.
3-step formula for sustainable product pricing:
Identify and enlist fixed costs involved
Fixed costs are the ones that you need to pay while running the business no matter what, and that stays the same whether you sell 500 items or 5,000. They are an integral part of running the business and are mostly covered by product sales.
It can be tricky to understand how the fixed costs will fit in while picking a per-unit price. Hence, a better way to approach this is to see how many units you need to sell to break even at a chosen price. It will also require you to consider various variable costs related to effective product pricing.
Add the variable costs involved (including PG charges)
In terms of variable costs, you need to know about the costs associated with getting each product out of the door of your facility. If you source products externally, you will have a straight answer of per-unit cost. For other products, you need to dig deeper and look at the bundle or the lot of raw materials purchased. Dividing the cost of a bundle by the number of units you create from it will give you an estimated per-unit cost.
That’s not all as you should also include the time you/your employees spend on the business, which is also valuable. To price the time involved, you can set an hourly rate you expect to earn and divide it by the units you can make in that period.
Here’s a sample list of several variable costs involved in product pricing:
|Cost of raw material per product||Rs. 100|
|Production time||Rs. 50|
|Product packaging cost||Rs. 20|
|Shipping cost||Rs. 10|
|Affiliate commission if any||Rs. 10|
|Total selling price per unit||Rs. 200|
|Payment gateway charges for online payment acceptance (@ 2% MDR)||Rs. 4|
|Final Price||Rs. 204|
Add a profit margin
Now, it’s time to add the profit angle to your product pricing approach. Once you have enlisted the total number of variable costs, you need to set a percentage of the profit margin on top of the variable costs.
Assuming you want to earn profit at a 30% margin over the total variable costs, you also need to remember a few more things:
- You need to include the fixed costs beyond the variable components.
- You need to analyze the market and ensure that the final selling price of your product per unit falls within the acceptable price range in the market.
Use the following formula to get to the target price:
Target Price = (Variable cost per unit) / (1 – Desired margin in decimal)
Select Paytm Payment Gateway for Its Most Competitive PG Charges
Coming back to the payment acceptance side, you want the chosen payment gateway to offer the best payment solution for various customer-centric needs, be it success rate, refunds, or payment security. Integrate Paytm Payment Gateway for your business website and avail of the following benefits:
- 100+ payment options for your customers
- 99.99% PG uptime guarantee
- EMI subvention facility
- Brand or bank offer extension
- PCI-DSS compliance for payment security
- Trust of 330 million+ Paytm users
Switch to Paytm Payment Gateway