Core conclusions:For setting prices for new domestic products, follow these three steps: First, calculate the total cost (including materials, labor, overhead costs, and a portion allocated for after-sales service). Then, determine the price range by comparing with competing products. Finally, set prices according to three tiers: “low-volume tier”, “main promotion tier”, and “image-tier”. The ratio between these tiers should be 2:6:2. Pricing isn’t just about assigning a number; it’s about leaving sufficient profit margins for each tier within the channel. Once the ex-factory price is determined, any subsequent promotions or rebates will be meaningless.
When a factory releases a new product, the pricing is usually decided by the boss alone: they set the price based on the cost plus a 30% profit margin. This approach works fine for established products and channels that have been well-established over time. But when it comes to new products or new channels, problems arise—dealers feel that there isn’t enough profit to be made, e-commerce sales are difficult to boost, and promotions aren’t feasible due to limited resources. By breaking down the pricing process into three steps, each step can be calculated carefully.
Step 1: Calculate the total cost. Don’t just consider raw materials and labor costs alone.
Total cost = direct materials + direct labor + manufacturing overhead allocation + allocation of three types of operating expenses (sales, management, finance) + after-sales reserve. For example, the cost of a new product per unit is 58 yuan. With a monthly production volume of 5,000 units, the manufacturing overhead allocation amounts to 12 yuan per unit. The allocation of the three types of expenses is estimated at 8 yuan per unit, based on the proportion of revenue. After-sales and compensation reserves amount to 4 yuan per unit, making the total cost 82 yuan. If the selling price is only set at 58 yuan, the greater the sales volume, the less noticeable the losses will be. It’s important not to cut corners on after-sales reserves: the return and exchange rate for domestic markets is higher than that for foreign markets, especially in the early stages of product launch. Setting aside 3 to 5 percentage points as a reserve is a valuable safeguard. The cost table should be updated regularly as materials prices change or production processes evolve. Pricing should be determined based on this cost table, rather than subjective decisions.
Step 2: Compare with competitors to determine the appropriate price range.
- Collect prices from three locations:The transaction prices of e-commerce platforms for products of the same specification (weighted based on sales volume, not based on listed prices), the factory prices provided by distributors to you, as well as the actual transaction figures from exhibitions and markets.
- Identify the differences:What makes your new product better than its competitors? What are the advantages (such as lifespan, certifications, after-sales support)? What are the disadvantages (such as brand reputation, distribution channels)? These differences determine where you can position your product within the price range. The advantages should be backed by test results regarding lifespan, and certifications should be accompanied by official certificates. Only when these points are clearly defined can they serve as a basis for pricing decisions.
- Leave space for channels:The competitive prices refer to the final retail price. To calculate the factory price, it’s necessary to deduct the additional markups imposed by distribution channels. In traditional channels, the factory price is usually 50% to 60% of the retail price. However, direct sales through e-commerce platforms allow for a higher degree of control over pricing.
- Focus on both ends of the price range:Check the top of the price range to see if there are any vacant positions (when competitors are all concentrated in the middle range, it’s more likely to get a chance to buy at a favorable price). At the bottom, look for potential disruptors—if there are companies using clearance prices to drive down prices, don’t follow suit. Instead, stick to your own cost threshold.
Step 3: Three-tier pricing structure, with ratios of 2:6:2
| gear | pricing method | Suitable for the scene |
|---|---|---|
| Pedal range | Total cost plus an additional 10-15% markup | E-commerce platforms for customer acquisition, initial trial sales for new distributors |
| Recommended runnings | The total cost includes an additional 25-35% as gross profit, allowing channels to have some room for promotion. | The main products promoted by dealers and used for evaluating sales staff performance |
| Image file | Above the top end of the price range. Gross profit must be at least 50 units. | Enhance the brand image, highlighting the “affordable” nature of the main product. |
The “three levels” aren’t just three separate SKUs, but rather a set of psychological triggers. With the help of these levels, customers will feel that the main offering is more worthwhile compared to the other options. When negotiating prices, sellers can make concessions gradually—from offering something at the lower level to moving up to the main offer, which represents a “show of respect.” But once they reach the main offer, they may have to compromise further (such as reducing the quantity ordered, paying in installments, or accepting a lower annual price). I wrote about the three-step approach to bargaining yesterday. The difference in pricing established during the negotiation process is precisely what creates room for negotiation.
After the pricing is determined, there are still two steps that need to be carried out in the contract.
- Distinguish between the two types of prices:The factory price (the price at which dealers purchase goods) and the recommended retail price are listed separately on the price list. It should be noted that the recommended retail price is not a mandatory requirement, thereby avoiding any compliance issues related to resale prices.
- Reserve price adjustment clause:When fluctuations in raw material prices exceed the agreed range (e.g., ±5 percentage points), both parties shall adjust prices according to a predefined formula. This clause should be included in the contract to prevent situations where new products are sold for half a year, only to have price increase notices issued but no actual sales occurring.
The last step is the coordination of prices among different channels: the prices set for direct sales through e-commerce platforms, the prices offered by distributors, and the prices agreed upon with key customers. These three sets of prices should be listed on the same table at the time of pricing determination. It’s necessary to calculate the profits and potential margins for each price point carefully, rather than making adjustments afterward. It’s better to communicate these rules with distributors in advance, rather than trying to explain them retrospectively. In the first month after a new product is launched, it’s important to monitor three key indicators: sales volume at the retail level, inventory levels in the channels, and the rate of returns. Resources should be allocated based on sales volume, not just on factory prices. If inventory levels are high, efforts should be focused on lower-tier channels. If the return rate is high, quality control and consistency of product descriptions need to be reviewed. Pricing is dynamic, but every adjustment must be based on solid data. Don’t make changes based on intuition alone.
common problems
Is it possible to offer new products at a low price to gain initial sales?
It’s possible to set prices at a certain level, but don’t lower the factory price below that level. Once sales start to decline due to low prices, it will be more difficult for dealers to recover, and customer loss will be even more severe. Using promotional measures like gifts, discounts, or time-limited offers is more sustainable than simply lowering the factory price.
2. The competitors offer 30% cheaper prices than us. Are you interested in joining them?
First, it’s important to understand the reasons why it’s convenient for the other party to do so: cost savings due to reduced scale, or simply clearing inventory. For the first scenario, you can assess your own opportunities for cost reduction. For the latter two scenarios, there’s no need to worry too much; just clarify the differences and focus on delivering the main product. Using comparative data can be more effective in educating customers compared to simply offering price reductions.
3. Will the three-tier pricing structure lead to dealers exchanging products with each other?
The root cause of inventory shuffling lies in the difference in product prices between regions, as well as regional performance evaluations. These factors are not related to the three-tier classification itself. E-commerce products should be differentiated by specifications (model, packaging, etc.). The contract should clearly define the boundaries between different regions and channels. Combined with a system for tracking product codes, this approach can effectively address the issue of price differences between regions.
For factories engaged in domestic trade, setting prices for new products is the starting point of their channel strategy. It’s important to calculate costs accurately, determine the right price range, and leave enough room for discounts at all three levels. Only then can promotions, rebates, and price negotiations be effective.
Qihang Zhilian Foreign Trade Research Institute
