As Business Owners, do you ever realize the impact of not having a sound Pricing Strategy?
If not, then you must!
Because it can otherwise cause substantial damage to your business and its future growth.
- You fail to meet market expectations.
- You fail to capture the targeted revenue.
- You lose business to competitors.
- You fail to communicate the real value of your product.
- Your marketing strategy fails miserably.
As an inevitable corollary, either of two things will happen:
- Your price is too high. Most of the market is not going to buy from you.
- Your price is too low. The majority of the market sees your product as cheap, inferior, and not worth purchasing, as your price fails to indicate the product’s true value.
So, neither of the scenarios is worth adopting!
In the absence of a well-developed Pricing Strategy, pricing across your product range is likely to be disconnected. Consequently, the existing customer base gets alienated.
Evidently, it is crucial to deploy effective Pricing Strategies as they help to:
- Communicate the value of product and create expectations.
- Target the right customers to increase average deal size.
Differentiate offering from competitors and yield a competitive advantage.
Connotation of Pricing Strategy
Pricing strategy entails the various methods deployed by small businesses for setting prices for their goods or services.
It broadly encompasses parameters like:
- Market conditions
- Actions that competitors take
- Account segments
- Trade margins
- Input costs
- Consumers’ ability to pay
- Production and distribution costs
- Variable costs
A pricing strategy stands for instrument deployed by businesses to decide how much to charge for their goods and services.
In the process, the interaction between margin, price, and selling level is given specific consideration.
The component of price affects a company’s revenue significantly. It forms the key variable in the company’s:
- financial modelling
- income, profits, and investments in the long term
- behaviour towards competitors
- value creation for customers
A good rule of thumb for pricing strategy is that your customer base would not purchase your product if it is set too high,
On the other hand, your business would not be able to cover expenses if you price it too low.
“Pricing is the only element in the Marketing Mix that produces Revenue; the other elements produce Costs”( Philips Kotler)
Role of Pricing Strategy
Pricing Strategy for a business:
- Conveys value to customers.
- Attracts customers.
- Inspires customer trust and confidence.
- Boost sales.
- Increases revenue.
- Boosts profit margins.
Components of Pricing Strategy
Pricing strategy encompasses components such as:
- State of the market
- Competitors actions
- Account segments
- Profit margins
- Input costs
- Financial capability of the average consumer
- Amounts spent on manufacturing and distributing products
- Variable costs
Pricing Strategy in marketing entails adjusting prices according to market determinants.
A pricing strategy considers:
- Market conditions
- Consumer willingness to pay
- Trade margins
- Costs incurred
Pricing involves setting a price for ownership and usage of goods.
Pricing starts with:
- Assessing the business requirements and the goals it aims to achieve.
- Market research and evaluation of the level of competition.
- Exploring with the target audience about their views regarding the brand, product, or service.
Setting a price varies from pricing strategy.
It employs an approach which considers:
- Timing of the market.
- Seasonality of demand.
- Customer’s preferences and purchasing patterns,
- Analysis of the products available in the market.
Considerations for Choice of Pricing Strategy
Pricing Strategies account for several business factors.:
- Revenue goals
- Marketing objectives
- Target audience
- Brand positioning
- Product attributes
Influence of external factors like:
- Consumer demand
- Competitor pricing
- Overall market and economic trends
The best Pricing Strategy maximizes profit and revenue.
Price Elasticity of Demand
Price elasticity of demand is applied to determine how a change in price affects consumer demand.
Price elasticity of demand can be calculated by using the formula:
% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand
The concept of price elasticity enables to understand whether a product or service is sensitive to price fluctuations.
Ideally, product should be inelastic — so that demand remains stable if prices do fluctuate.
Factors in Choice of Pricing Strategy
- Determine value metric.
- Evaluate pricing potential.
- Review customer base.
- Determine a price range.
- Review competitors’ pricing.
- Consider the industry.
- Consider brand.
- Gather feedback from customers.
- Experiment with pricing.
- Consider pros and cons of different pricing strategies.
Notable Pricing Strategies
While adopting the most suitable and appropriate Pricing Strategy, the business owners have to identify:
- company’s price position
- pricing segment
- pricing capability
- competitive pricing reaction strategy
Here, we attempt to:
- Identify various Pricing Strategies
- Define them
- Ascertain their suitability for business
- Critically evaluate them in terms of Benefits and Drawbacks
1. Penetration Pricing
Entering the market at a low price and eventually increase the price.
The objective of Penetration Pricing Strategy is to attract buyers by offering lower prices on goods and services than competitors. This strategy can help increase:
- brand awareness and loyalty
- long-term contracts
- drive profits
After penetrating a market, business owners can increase prices to better reflect the status of the product’s position within the market.
Small businesses aiming at building brand loyalty and reputation.
- Quick adoption and acceptance by customers.
- Generation of high sales.
- Creation of large inventory turnover.
- Boost to positive word of mouth.
- Can create pricing expectations for customers.
- Customers will be bargain hunters.
- Can trigger price wars.
- Customers could perceive discounted products as cheap or bad quality thereby hurting brand image
2. Economy Pricing
Pricing a product low because of low costs of production, marketing, and advertising, and relying on high sales volume to generate profit.
Economy pricing aims to attract the most price-conscious consumers.
It involves minimizing marketing and production expenses.
Companies can set a lower sales price and still turn a slight profit.
Small businesses desirous of keeping overhead costs low.
- Easy implementation
- Low customer acquisition costs
- Attracts price-sensitive customers
- Best strategy for an economic downturn or recession
- Cutting production costs can be challenging.
- Works only if there is steady stream of customers.
- Potential to negatively impact brand perception.
3. Premium Pricing
Pricing a product deliberately high to encourage favourable perceptions of the brand based on the price.
With premium pricing, businesses set costs higher because they have a unique product or brand that no one can compete with. This strategy is appropriate with a considerable competitive advantage.
Business owners should ensure that the product’s packaging, the store’s decor, and the marketing strategy support the premium price.
Small businesses enjoying considerable competitive advantage.
- Improves desirability of brand .
- Higher profit margins
- Provides a competitive advantage.
- Higher cost of production and marketing
- Smaller target audience
- Reduced sales volume
4. Price Skimming
Setting new product prices high and subsequently lowering the price as competitors enter the market.
Price skimming is designed to help businesses maximize sales of new products and services. This involves setting rates high during the initial phase of a product introduction.
Prices are gradually lowered with the entry of competitors.
Small businesses having products that are in high demand.
- Allows businesses to maximize profits through early adopters.
- Easy to recoup development costs.
- Creates an illusion of exclusivity and quality
- Creation of excess inventory.
- The quality of the new service or product must justify the higher cost to be effective.
- Fails to work if competitors are creating similar products.
- Simplifies the decision-making process for customers
5. Value Pricing
Pricing a product based on how much the customer believes its worth.
Value pricing implies setting prices based on customer’s perceived value of what is offered. This occurs when external factors, like a sharp increase in competition or a recession, encourage the small business to further provide additional value to its customers to maintain sales.
This strategy recognizes that customers ignore product costs so long as the consumer derives an excellent value with the purchase.
Small businesses specializing in SaaS or subscriptions.
- Potential for high profit margins.
- Increased perceived value in brand and services.
- Increased customer loyalty.
- Warrants additional market research to determine value to target audience.
- Markets tend to be very niche being high-end.
- More cost of production
6. Dynamic Pricing
Pricing that varies based on marketing and customer demand.
Under Dynamic pricing different prices are charged depending on who is buying the product or service or when it is bought.. It is a flexible pricing strategy that takes many factors into account—particularly demand and supply.
Dynamic pricing is also called:
- Demand pricing
- Surge pricing
- Time-based pricing
The greatest risks emerges when variable prices are applied to products or services that are typically bought by price-sensitive customers.
Small businesses looking to maximize their profit margins and boost declining sales.
- Pricing reflects the market demand for the product or service.
- Provides more insight into customer demand and purchase patterns.
- Helps to maximize profits by matching price to the demand.
- Customers may be scared of fluctuating prices.
- Higher risk of price wars.
- Increases competition within the industry.
7. Competitive Pricing
Pricing products based on the price of competitive products, rather than cost or target profit; usually cheaper than competitors.
Competitive pricing is when prices match those of similar products that are sold by competitors.
It involves selling products or services at a better price.
Could choose to offer better payment terms.
Small businesses that are just starting out.
- Simple implementation.
- Can be combined with other strategies such as cost-plus pricing to make efforts more rewarding.
- Not good to use long-term since competitors will catch on and modify their strategy.
- Not a strategy to use if you want to stand out.
8. Cost-Plus Pricing
Adding a fixed percentage on top of the cost of producing a product, regardless of consumer demand or competitors’ pricing.
Cost-plus pricing is a strategy of marking up (adding a fixed percentage) the cost of services and goods to arrive at your selling price.
We can include fixed and variable costs that will be incurred in manufacturing product. Then add the mark-up percentage to that cost. This strategy is widely used since it is fair and non-discriminatory.
Small businesses with a cost advantage. Also, in using price transparency as a differentiator.
- May result in positive differentiation and customer trust.
- Reduced risk of price wars.
- Can provide predictable profits
- Simple implementation.
- Discourages efficiency and cost containment.
- Customers can perceive the product negatively.
- Much of the calculation is a estimation.
- Can be difficult to change prices when needed.
9. Freemium Pricing
Offering a product for free alongside paid versions with more features.
Under Freemium pricing strategy a service or product is given to a customer free of charge unless they want to access premium features or services within that product.
Small businesses that intend to offer both free and paid versions of their product, and those that offer free trials.
- Potential to unlock viral growth.
- Creates a no-risk environment that attracts customers who want to try something for free.
- Opportunity to monetize on advertising.
- A majority of free users may never convert.
- Cash reserves can be depleted quickly because of a large number of non-paying users
- May require additional customer service support for freemium users, which can be costly.
Pricing Tactics in Vogue
Discount pricing encompasses a variety of pricing tactics aimed at
- increasing demand,
- clearing out unsold inventory, or
- raising sales.
Bundle pricing allows small businesses to sell many items at a lesser price than they would if they sold them separately.
When a product’s life cycle is nearing its end, many small businesses opt to use this method,
The commercial practice of putting prices lower than a whole number is known as psychological pricing. Buyers would read the slightly lower price and treat it as cheaper than it is.
If an item costs $3.99, it is an example of psychological pricing because shoppers see it as a better deal than $4.00.
Two phrases are combined in freemium pricing: premium and free. It’s a pricing structure that provides free fundamental services and premium options.
By delivering some services for free, this method provokes the interest of potential clients. Customers must pay a fee to access the other features.
But Wait, There’s more
This phrase is effective if you are offering your customer a gift with purchase or upgrading the size of their purchase for free.
It encourages customers to buy so they do not miss out on a good deal. It adds urgency to purchases by ensuring customers know they are getting value for their money..
E-commerce businesses can use a BOGO approach with spending limits to control the average transaction size by incentivizing larger purchases, like upselling.
Companies and stores that provide discounts to their most loyal consumers use coupon marketing as a technique.
Code Marketing allows customers to “test before they buy,” which fosters customer confidence and reduces hassle throughout the online purchasing process.
Price Relativity is the price of a product or service in comparison to another.
Six Crucial Steps involved in Selection of Ideal Pricing Strategy
1. Conduct Target Market Research
A thorough understanding of customers’ challenges, goals, and demographics is vital for marketing a product.
Moreover, some technical details are required to formulate an appropriate pricing strategy.
A customer profile may be analysed in the backdrop of pricing strategies.
Data guiding pricing strategy choice includes:
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (LTV)
- Acceptable pricing range and “indifference” price point
- Compelling value props
- Feature preferences
2. Assess Your Competitors’ Pricing
It is essential to know what your competitors are charging, so you can position your most basic product package at a much lower price point.
3. Consider Your Revenue Model
Revenue model has a significant impact on the appropriateness of different pricing strategies.
4. Get Absolute Clarity on Costs
It is imperative to understand the total cost of production.
This will help you to ensure pricing more than covers that cost .It will be crucial in conducting analyses like calculating breakeven point.
5. Evaluate Company’s Strengths and Weaknesses
Evaluation of Company’s Strength and Weaknesses shall facilitate formulation of solid Pricing Strategy.
6. Alignment with Business USP
Pricing Strategy has to align with company’s USP (unique selling point) be it, Convenience, Financial Savings or Customer Revenue Growth.
Additional Parameters in Selection of Pricing Strategy
1. Quantify Your Buyer Personas
Build out your buyer personas to make sure you ‘are attacking the right customer(s) in the proper markets. Everything in your pricing strategy and wider company strategies will stem from these personas.
2. Finding Right Features For Each Persona
The respondents must make decision about features. Align these features to each persona, which will induce pricing tiers to emerge.
3. Determining Value Metric and Bundling
A value metric is essentially what you charge for (per user, per visit, etc.),
Value metrics are so important, because they are the main drivers.
Ensure adoption of value metric because it may make or break your prices.
4. Pricing the Product
Chat with your customers or future customers about pricing.
Requisites for Success of Pricing Strategy
- Ensure your pricing manager is experienced professional having excellent skills to handle a large pricing strategy roadmap.
- Define your KPIs in advance.
- Start small. Then, gradually ramp up your strategy.
“The moment you make a mistake in pricing, you are eating into reputation or profits”(Kathereine Paine)
Company’s financial data and external situations exert tremendous influence on Pricing Strategy:
- Knowledge of price of goods or services facilitate better business decision making.
- Close monitoring of expenses helps business floating in profitable trajectory in the long run.
- It is imperative to watch the behaviour of consumers, the market, and competitors.
- It is essential to keeping abreast of changing customer tastes and as well as potential supply chain problems.
Setting accurate prices for inventory always stands in good stead.
Undoubtedly, creation of an effective and efficient pricing mechanism and following viable Pricing Strategy for the business can only deliver goods in achieving both revenue and growth.—sine qua non for survival of business in the midst of fierce competition and rapidly transforming dynamics of global business.
“The single most important decision in evaluating a business is Pricing Power “