Why Finding the Product Pricing Sweet Spot is About More Than Math

Why Finding the Product Pricing Sweet Spot is About More Than Math

Finding the pricing sweet spot | Shopify Retail blogStruggling to set the right price for your retail products? You’re not alone. Hitting that pricing sweet spot requires you to look at a number of factors and perform a lot of complicated calculations.

Right?

While it is important to consider things like production and business costs, revenue goals, and competitor pricing, getting the price right isn’t just the math. In fact, that may be the most straightforward step of the process.

That’s because numbers behave in a logical way. Humans, on the other hand — well, we can be way more complex.

Yes, you need to do the math. But you also need to take a second step that goes beyond hard data and number-crunching. The art of pricing requires you to also calculate how much human behavior impacts the way we perceive price.

Start With the Math

Finding your pricing sweet spot starts with running the numbers first. You need a grounded, realistic understanding of your costs and your product’s value.

You also need to evaluate the market’s ability to pay for your product. And don’t forget to factor in the market’s willingness to pay for your product at certain price points.

Try these strategies to crunch the numbers and get an estimate of your product’s price:

Know All Your Costs

Product pricing sweet spot | Shopify Retail blog

How much does it cost you to run your business? This includes hard and fixed costs, like office space, inventory, and all your other operating costs.

How much does it cost you to run your business? This includes hard and fixed costs, like office space, inventory, and all your other operating costs.

Don’t forget to account for labor costs, too. And factor in any other variable costs that you have. These might be things like advertising, shipping, and hiring contractors to help you.

Do Market Research

Again, you need to understand the people who will buy your product. What is the demand for the product you provide? What is the market able and willing to pay?

You can conduct surveys, host customer conversations, or organize market research groups to determine what kind of price your target market has in mind — and how they feel about it.

Set Your Revenue Goals

Knowing how much you want to gross with your business will help you determine an individual product’s price. That’s because your price needs to cover all your costs and all your profits.

How much profit do you want your business to generate? Calculate that like you would a cost when determining your price.

Evaluate Your Competitors

It’s possible that you ran all your data and came up with a price estimate that works well for you. It covers your costs, allows you to meet revenue goals, and you know your market is able and willing to pay for it.

But you may still undercharge and miss out on potential profits if you don’t evaluate your competitors. What do they charge for similar products?

Businesses that successfully sell similar items can help you set the floor on your own pricing.

Let’s say ABC Company can sell a widget similar to the one you make to the same target market for $100. Logically, you can also sell your similar widget to the same market for the same price — or more, if you can add more value or prove to the market why your widget is actually superior to your competitor’s.

Not sure how to gather this information and understand what it means? You can:

  • Go on the company’s website and browse their ecommerce portal. Check other portals they may be on, as well, like Amazon. This will allow you to view retail prices.
  • You can also call the company directly and simply ask. You don’t need to give a lot of background; simply ask about the cost of products similar to yours. Stay friendly and polite, and you can even ask how the company set the price.
  • Be a secret shopper and evaluate the products as a customer would. Ask questions and probe for information. Stay curious (and again, friendly; you want to be inquisitive, not lead an interrogation).
  • Visit relevant forums and search for customer reviews. This can help you understand the market’s perception of the company’s products and more importantly, value for the cost.

These steps outline the basics of doing the math on price. (You can start taking a deeper dive into pricing strategies with our tips on setting ecommerce pricing.)

That math gets you in the ballpark. But the art of pricing requires you take a step beyond the numbers and look at the human elements in play.

Here’s why.

Why You Need to Optimize for Human Behavior (Not Just the Numbers)

In a world where every human being acted rationally all the time, the art of pricing wouldn’t be an art at all. It would be a science that relied on straightforward formulas.

You could do the mere math using some of the points above. You could reach a reasonable number, put your product on the market, and successfully sell.

But we don’t live in that world where every human being acts rationally all the time (or even most of the time.) In our reality, humans are emotional creatures. How we feel often dictates how we behave.

And the price of something affects how we feel about a product in a number of interesting and subtle ways. That’s because we’re susceptible to a number of cognitive biases and logical fallacies that make us think we’re acting rationally — even when we’re not.

You can engineer your pricing to take advantage of the mistakes we make as non-rational creatures.

This is why you need to go beyond calculations of cost to determine price. When you look for your pricing sweet spot, consider how you can optimize for the quirks of human emotion and behavior.

Specifically, watch out for these three psychological triggers that can influence consumers —and therefore help you find the right price that encourages customers to buy.

Using the Anchoring Effect

The “anchoring effect” is a cognitive bias to which we all fall victim to from time to time. It describes our tendency to heavily rely on the first piece of information we receive when making a decision.

That first piece of information is the anchor, and we base our understanding of what comes after that anchor. You can see this at work in pricing strategies that show the “original” price of an item and then display the current — and lower — price.

Customers will base their decision off the anchor piece of information. In this case, the anchor is the original, higher price of the product. They make the decision to buy after seeing the lower price because it feels like a bargain or a deal, and therefore a smart purchasing decision.

And that happens regardless of the actual value of the product. The value and the price may not line up at all. But it’s all about perception.

ThredUp uses this strategy brilliantly. They sell secondhand clothing and accessories for women. Check out how they list the prices of each item:


ThredUp pricing | Shopify Retail blog

ThredUp lists out the price they sell the item for. And next to that, they have a struck-out price that represents what the item originally retailed for.

A woman who may not normally spend $50 on a thrift store find could feel like she’s getting an incredible value for her money. With the anchoring effect, it isn’t just a $51.99 dress — it’s a $325 dress that she can buy for only $51.99.

You can also see this if you place similar items together, but put a much higher price on some and not all of them.

A customer might look at a $500 product and decide that’s much too expensive. But if that customer looks at a $1,500 product, a $1,000 product, and then a $500 product, the $500 product suddenly becomes a fantastic deal. That’s thanks to the higher price the customer used as an anchor.

Playing with Comparisons

It’s difficult for your customers to make a purchase choice in a vacuum. The idea of a product being “cheap” or “expensive” is generated when it’s compared to another product.

Take Paul Lee’s case study of the Williams Sonoma bread maker as an example. In the 1990s, the company launched one of the first bread makers available on the market in the US.

It cost $275. Sales weren’t great.

After consulting with a marketing firm, Williams Sonoma launched a second bread maker. This one was bigger and better than the first. It cost twice as much.

And sales of the original bread maker soared. The second, higher-priced product put the first, lower-cost product into a context and helped customers understand the value of the bread maker.

You can use various price points for their products and display the options in a single pricing chart to provide context. By doing so, you can position the product you want to sell the most next to another, higher-priced product.

Doing so puts the main product in context. It appears to be a better value, because it’s relatively less expensive than the highest-priced product — and because you can list out benefits and features, you can also position it as justifiably higher-priced than the lowest option.

One key here is to make sure you give solid reasons for the difference in price. In other words, help your customers make the comparison and see the differences at each tier.

Arbitrarily throwing out three separate prices without giving a context for the tiers can backfire and turn customers away.

Companies like Kissmetrics and BombBomb do a great job of setting up attractive pricing tables. These influence customers and guide them toward a popular option with clearly communicated differentiators:


Kissmetrics pricing | Shopify Retail blog
BombBomb pricing | Shopify Retail blog

Freshbooks demonstrates a great example of a comparison chart that directs people to a most popular option:

FreshBooks pricing | Shopify Retail blog
But what might be missing here is a clear explanation of what’s different. Why is this the most popular plan? What are the features that set it apart and make it a great value?

You shouldn’t leave your customers guessing at the answers to these questions. Knowing what’s similar between all the options may leave some people wondering what makes the more expensive options worth the additional cost.

Creating Perceived Value with the Number 9

There’s a famous, classic way that you can influence a customer’s perception of a product’s value. Although this trick has been around for a long time, it still impacts us.

Try ending your prices with the number 9 instead of using numbers like 0 or 5. Why?

Because we tend to get lazy when we make decisions.

That makes sense from a cognitive load perspective. We can only make so many decisions in a day — literally. Decision fatigue sets in when we’ve made too many decisions and literally exhausted our ability to continue making good choices.

Our desire to make processing a decision easier influences how we see numbers. We stop processing the numbers in a price after we take in the first one or two digits.

The result is that a product listed at $50 feels exponentially more expensive than a product with a price of $49. This may be even more true when the price is $49.99, because the addition of the $0.99 tends to make us feel like the product is on sale (even when it’s not). Therefore, we’re getting a deal.

This tip has been around for so long that some companies are trying to exercise the same concept with new numbers. Check out XY Planning Network’s price structure, featuring membership options that end in the number 7:

XY Planning, number 7 | Shopify Retail blog

Finding Your Pricing Sweet Spot Requires More Than Math

People are funny, and we all make logical mistakes and thinking errors. You can capitalize on that and use these tricks to influence how customers view the price of your product.

When you set the price for your products, consider:

  • Using an anchor price to set your customer’s expectation around the product you want to sell.
  • Providing context for your core product by placing it next to similar products that are priced higher, and a product that is both priced lower and clearly offers less value. (Make sure to clearly communicate the differences in value, too!)
  • Pulling a classic page from pricing psychology 101 and rounding your prices down from whole numbers (like $50) to numbers that end in 9 (like $49).

The way in which we perceive information changes the way we behave, even if we don’t realize it. This is why it’s important to go beyond hard numbers when you want to find that perfect spot with your pricing.

Photo of Kali Hawlk

About the Author

Kali Hawlk is a writer passionate about using her skills and knowledge to help others make, do, and create more. She’s been featured as a financial expert for Millennials in many online publications including Forbes, Fast Company, US News, and Mashable.

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