In this article, we will explore what SKU-based pricing is, share our SKU based pricing process and apply it to a real-world example to better illustrate the process. Read on to learn more.
SKU-based pricing, or Stock Keeping Unit-based pricing is a pricing strategy used by businesses to set the prices of their products or services based on the individual SKU codes assigned to each item.
Example: A technology company may offer different pricing tiers for its software with each SKU representing a version tailored to specific user needs, such as basic, pro, or enterprise, each priced differently to cater to distinct customer segments.
Here are some of the reasons why you should use SKU pricing in your business.
Maximizes Profitability: This strategy allows businesses to tailor pricing strategies to each product or variant, optimizing profit margins based on factors like cost, demand, and competition.
Diverse Customer Segmentation: Businesses can appeal to a wide range of customer preferences and budgets by offering various products at different price points.
Competitive Advantage: Strategic SKU pricing enables businesses to differentiate themselves from competitors whether by offering budget-friendly options or positioning products as premium offerings.
Effective Inventory Management: It helps in managing inventory by adjusting prices to match demand fluctuations ensuring that products move efficiently through the supply chain.
Data-Driven Decision-Making: Leveraging data and analytics, this pricing strategy enables businesses to make informed pricing decisions and adapt strategies based on real-time market insights.
Here's our step-by-step guide to creating a pricing strategy for your business:
Calculate the cost of producing or acquiring each SKU. For example, if you sell t-shirts, consider the cost of materials, labor, and manufacturing for each shirt.
Research your competitors' prices for similar SKUs. If you sell smartphones, compare your pricing to other brands with similar features.
Determine the profit margin you want to achieve for each SKU. If you want a 30% margin and a smartphone costs you $300 to make, you'd price it at $429 (adding a 30% margin).
Categorize SKUs based on factors like product type or customer segment. For example, you might have premium and budget smartphone categories.
Analyze how price changes affect demand for each SKU. If you find that a 10% price reduction for a budget smartphone increases sales by 20%, it indicates elastic demand.
Account for seasonal demand fluctuations. For winter coats, you might increase prices in the fall when demand is high.
Plan periodic discounts or promotions. Offering a "Back-to-School" discount on laptops in August to attract students.
Continuously monitor sales and market conditions. If a new competitor enters the market, adjust your pricing strategy accordingly.
Collect customer feedback on pricing perceptions. If customers consistently mention high prices for a particular SKU, consider reevaluating its pricing.
Periodically review and refine your pricing strategy. Reassess your profit margin goals and adapt to changes in market dynamics.
Let's apply these steps to a company. Apple Inc. is adopting SKU-based pricing to boost profits and meet the needs of diverse customer segments across its wide range of products.
Apple calculates the cost of manufacturing or acquiring each SKU. For instance, the cost to produce an iPhone 13 Pro Max might include the bill of materials, manufacturing costs, and R&D expenses. This cost is used as a baseline for pricing.
Apple extensively researches competitor pricing. For example, when pricing the iPad Air, Apple considers the prices of similar tablets from Samsung and Microsoft to determine how competitive its offering should be.
Apple sets specific profit margin targets for each SKU. If the cost to manufacture an iPad Pro is $500, Apple may aim for a 40% profit margin, resulting in a target selling price of $700.
Apple assesses how customers perceive the value of each SKU. This is evident in their product lineup, which includes premium products like the MacBook Pro and budget-friendly options like the iPad Mini.
Apple analyzes the price elasticity of demand for each SKU. For instance, they might find that the demand for high-end iPhones is less sensitive to price changes compared to their budget-friendly options.
Apple adjusts prices seasonally. They typically release new iPhone models in September and may adjust prices on older models accordingly to stimulate sales during this period.
Apple periodically offers promotions and discounts, such as back-to-school discounts for MacBooks or trade-in programs for iPhones.
Apple closely monitors market conditions. If a new competitor introduces a similar product, Apple may adjust its pricing strategy to remain competitive.
Apple listens to customer feedback regarding pricing. If customers consistently express concerns about high prices for certain SKUs, Apple may explore pricing changes or bundle additional services to justify the cost.
Apple reviews its pricing strategy periodically, often aligning it with product release cycles and market trends. This ensures that their pricing remains relevant and profitable.
We hope that you now have a better understanding of the SKU-based pricing strategy and will apply these techniques to your own business.
If you enjoyed this article, you might also like our article on SKU management or SKU formats.
