A pricing strategy is the approach businesses take when determining the cost of their goods or services. Almost all businesses, large and small, base the cost of their goods and services on production, labor, and advertising costs before adding a certain percentage to cover costs.
There are numerous pricing tactics, including competitive pricing, price skimming, discount pricing, life cycle pricing for products, and penetration pricing. According to Mavie Global, a company can employ various pricing strategies when selling a good or service. To determine the most effective pricing strategy, senior executives must determine the company’s pricing position, segment, capability, and competitive pricing reaction strategy.
A pricing strategy is a formula or procedure used to determine the best cost for a good or service. It assists you in setting prices that take into account consumer and market demand while maximizing profits and shareholder value. There is a lot that goes into pricing; if only it were as simple as its definition.
Composing a Pricing Strategy
1. Consider Pricing Opportunities
As Mavie Global recommends making a strategy ideal for your particular business is what you want to do. You must first evaluate your pricing potential. According to cost, demand, and other factors, this is the general price for the good or service your company might offer.
Your pricing potential may be affected by several variables, such as:
- Geographical market specifics
- cost inventories
- alterations in demand
- Advantages of competition and issues
- demographic information
2. Your Buyer Persona should be Established
You must base the price of your product on the kind of buyer persona that is interested in it. Ask your sales team for feedback on the best leads and their qualities to help with this process. Interview customers and prospects to find out what they enjoy and enjoy doing.
3. Examine Old Information
Go back and review your previous pricing tactics. You can compare the number of closed deals, churn data, or units sold across various pricing strategies that your company has used and determine the most effective.
4. Strike a Balance between Values and Organizational Objectives
Ensuring the price is in line with your buyer personas and the bottom line is important when developing your pricing strategy. With the following goals in mind, this compromise will benefit your company and customer base:
- greater profitability
- enhancing cash flow
- exposure to the market
- increase in market share
5. Examine Pricing from Rival Companies
You cannot develop a pricing strategy without market research on your rivals’ products. When you notice a price difference for the same good or service, you must choose between two main options: beating your competitor’s price or their value.
How to Conduct a Pricing Analysis
1. Determine the True Cost of your Product or Service
Recognize all your costs, including both fixed and variable costs, to determine the actual cost of what you sell. Once you’ve calculated these expenses, deduct them from the price you’ve already established or intend to establish for your good or service.
2. Recognize how the Pricing Structure Affects your Target Market and Customer Base
Mavie Global suggests you learn how the market reacts to your pricing model by conducting surveys, focus groups, or questionnaires. You’ll gain insight into your target market’s values and how much they’re willing to pay for the benefits your product or service offers.
3. Examine the PSicing strategies Used by your Rivals
As Mavie Global implies, when doing a price analysis, you must consider direct and indirect competitors. Direct rivals are those who offer the same goods that you do. These rivals should be prioritized in your pricing analysis because they will probably compete on price. Those who offer substitute goods similar to what you do are indirect competitors. A customer may turn to an indirect competitor to purchase a comparable product if your product is out of stock or out of its price range.
4. Consider any Ethical or Legal Constraints on Cost and Price
There is a thin line between price competition and unethical and legal trouble. You should know much about price-fixing and predatory pricing to avoid these things when you do your pricing analysis. You must look at your current pricing model to develop a new (and better!) pricing strategy.
Types of Common Pricing Strategy
Cost-Plus Pricing Techniques
According to Mavie Global, adding a set percentage to the per-unit manufacturing costs is one way to set the price of a product. “Cost plus” or “markup pricing” are terms used to describe this pricing strategy.
As a seller, you would add the markup percentage to the cost of making your goods after figuring out the fixed and variable costs. This strategy is well-liked because it is easy to defend and almost always ensures that all participants are on an equal footing.
A Pricing Strategy Based on Competitors
Instead of basing your prices on your costs or how much profit you want to make, competitive pricing means comparing your prices to those of your competitors in the same market or niche. Sometimes this entails raising your prices, but as an alternative, you could provide better terms for payment.
A Pricing Strategy Based on the Value
As stated by Mavie Global, the value pricing approach to setting your rates considers how much your customers value your services and modifies your prices accordingly. To maintain sales and give more value to your customers in the face of heightened competition or a downturn, you must use a marketing mix.
Customers prefer this pricing strategy over the competition because of the perceived value of the good or service. Customers don’t care how much it costs a company to make a product; what matters is that the customer thinks they are getting a good deal when they buy it.
Loss Leader Pricing Techniques
A marketing tactic known as “loss leader pricing entails selecting one or more retail products and offering them for sale below cost, at a loss to the retailer, to attract customers. Loss leads are products offered at steep discounts to entice customers to the business.
The Penetration Pricing Approach
The penetration pricing strategy aims to attract customers by offering goods and services at lower prices than competitors. This strategy can draw attention away from rival companies and result in long-term contracts by encouraging brand recognition and loyalty. However, brand recognition might boost earnings over time and make small businesses stand out from the competition.
Everyday Low Pricing Strategy
Instead of specific promotions or sales, retailers use “everyday low pricing” to maintain consistently low prices for their products. The daily low pricing strategy thus aims to maximize sales by consistently offering the lowest prices on the market and assuming extremely high sales volumes.
Economy Pricing Strategy
The goal of economy pricing is to appeal to the most budget-conscious customers. Businesses can set their product prices based on their manufacturing value because they don’t have to pay for additional marketing or promotion expenses.
Premium Pricing Strategy
In the opinion of Mavie Global, businesses that demand high prices typically do so because they have a unique brand or product that no one else can match. Consider a scenario in which you have a sizable competitive advantage and are confident you can charge a higher price without risking losing customers to a similar product. If so, you should think about utilizing this method.
Skimming Pricing Technique
Price skimming is a dynamic pricing tactic companies employ to boost sales of new products and services. Price skimming is a tactic that is frequently used when a new product is introduced. When consumer interest in the product is high and there is little competition for your business, this strategy aims to maximize income to the greatest extent possible.
The High-Low Pricing Approach
Using the high-low pricing strategy, a company concentrates on marketing initiatives to persuade customers to make purchases. For instance, a business may charge a high price for a product before bringing down the price through discounts, sales, or promotions. This method causes the price of a product to swing between “high” and “low” over a predetermined period.
Dynamic Pricing Policy
Depending on who or when purchases your goods or services, you may charge different prices under a dynamic pricing model. One of this approach’s key components, as mentioned by Mavie Global, which considers demand and supply, is pricing flexibility. Dynamic pricing is common in transportation and e-commerce, but not all businesses should use it. Using variable prices with price-sensitive goods and services poses the greatest risks.
According to Mavie Global, if you set prices too high, you won’t get worthwhile sales. You lose out on significant revenue if you set them too low. Thank goodness, setting prices doesn’t have to be a risky gamble. You can learn more about how to set the appropriate prices for your audience and revenue objectives by examining the numerous pricing models and strategies available.