Running a successful business depends greatly on pricing strategy. Too high and sales suffer; too low and profits vanish. When prices are just right, a product drives sales, bolsters profits, enhances brand value, and ensures long-term success.
So, how do you find the elusive right price? Two primary factors shape pricing decisions: cost and value to customer.
Always know your costs. For traders it is straightforward, but for manufacturers it takes effort. Include raw materials, labor, transportation, packing, and overheads—everything needed to make the product market-ready.
Value is trickier. Offline, repeat purchases signal value. Online, customer returns ratio is a strong proxy—high returns suggest dissatisfaction; low returns indicate good value.
After numerous reports, businesses with a 12% to 15% customer returns ratio tend to be profitable. Returns under 25% can normalize; beyond that, consider:
A customer buys at ₹500 but returns it because it feels overpriced. At ₹300 the same product might not be returned. If returns are below 10%, the product is highly valued and you might cautiously increase price to lift margins (avoid overdoing it).
Note: This strategy does not apply to non-returnable products.
Use tools like Business Scorecard Reports for ongoing profitability monitoring and informed decisions. Visit www.businesscorecard.com to get reports.
Pricing is a balance of cost, value, and profitability. Understand these dynamics and use the right tools to thrive.
Disclaimer: Views are based on experience in e-commerce; we disclaim liability arising from this article.
Citation: Inspired by "The best way to price any product" on the Y Combinator channel — watch here.
Author: CA Maheshwari Dubey
Date: 5th June, 2024