Pricing, thankfully, does not have to be a sacrifice or a wild guess. There are thousands of market pricing strategy and models available to assist you in better understanding how to determine the proper costs for your audience and revenue goals.
If you set your prices too high, you will lose valuable sales. If you set them too low, you will lose out on crucial revenue. Pricing your goods and services might be difficult. That is why we created this article.
Whether you’re a new business owner or a seasoned pricing expert, the tactics and ideas in this article will help you get comfortable pricing your products.
What is Pricing Strategy
A market pricing strategy is a model or method for determining the most competitive price for a product or service. It assists you in determining pricing that maximizes profitability and shareholder value while taking consumer and market demand into account.
The market pricing strategy takes into account various aspects of your organization, such as revenue targets, marketing objectives, target audience, brand positioning, and product features.
External factors such as consumer demand, competitive pricing, and broader market and economic developments all have an impact on them.
Pricing is something that many entrepreneurs and business owners overlook. They frequently analyze the cost of goods sold (COGS) and rival rates and adjust their own selling price by a few dollars. While your costs of goods sold and rivals’ are important, they should not be the focus of your pricing strategy.
The top market pricing strategy
Pricing issues can keep you awake at night. If you price your offer too cheap, you will lose money. If you overprice it, you may lose sales that may have made your year.
Finding the best price entails deciding on a pricing plan that is suited to your company’s situation.
According to Eric Dolansky, an associate professor of marketing at Brock University in St. Catharines, Ontario, “How much the consumer is willing to pay for the goods has very little to do with the seller’s cost and has very lot to do with how much they value the product or service they’re buying.”
1. Cost-plus pricing:
Many entrepreneurs and customers believe that markup pricing, also known as cost-plus pricing, is the only acceptable method of pricing. With a set percentage added to the subtotal, this technique adds up all the costs that contribute to the selling price of the unit.
Dolansky emphasizes the ease of cost-plus pricing, saying, “You only have to decide how big you want this margin to be.”
2. Competitive pricing:
“If I’m selling a product that’s comparable to others, like peanut butter or shampoo,” Dolansky explains, “part of my job is to make sure I know what the competitors are doing in terms of pricing and making any required adjustments.”In a nutshell, that is a competitive pricing strategy. When it comes to competitive pricing strategy, you have three options:
“You’re saying aggressively, ‘If you raise your price, I’ll keep mine the same,'” Dolansky adds. “And if you decrease your pricing, I’ll lower mine even more.” You’re attempting to put more of a gap between yourself and your competitor. You’re saying that whatever the other party does, they better not meddle with your rates or things will get much worse for them.”
Obviously, this strategy is not for everyone. A company that prices aggressively must be flying above the competition, with healthy margins to eat into.
The most likely trend for this technique is a gradual decrease in prices. However, if sales volume falls, the company risks going bankrupt.
You match what your competition is doing with cooperative pricing. A one-dollar increase by a competitor causes you to raise your price by one dollar. Your two-dollar price reduction is equivalent to theirs. You are maintaining the status quo by doing so.
Cooperative pricing is comparable to how gas stations sell their products.
According to Dolansky, the downside of this method is that it “leaves you prone to not making optimal judgments for yourself because you’re too focused on what others are doing.”
A dismissive pricing strategy may be a possibility if you lead your market and sell a premium product or service.
In this method, you set your own prices and do not respond to what your competitors do. Ignoring them can enlarge the protective moat surrounding your market leadership.
Is this strategy long-term? It is if you are confident that you understand your customer well, that your pricing accurately reflects the value, and that the information on which you draw these ideas is reliable.
On the other hand, this confidence could be misguided, which is the Achilles’ heel of dismissive pricing. By neglecting competition, you may leave yourself open to market surprises.
3. Price skimming
Companies utilize price skimming when launching creative new products with no competition. They charge a high fee at first, then gradually drop it.
Consider televisions. A company that introduces a new type of television can charge a high price in order to tap into a market of tech enthusiasts (early adopters). The high price assists the company in recouping some of its development costs.
The producer then reduces the price to reach a more price-sensitive part of the market when the early-adopter market becomes saturated and sales decline.
According to Dolansky, the manufacturer is “wagering that the product would be desired in the marketplace for the corporation to execute its skimming plan.” This wager may or may not be profitable.
Price Skimming risks
The manufacturer runs the danger of imitation items being released in the future at a lower price. The final phase of the skimming approach can have all of its sales potential stolen by these rivals.
The product rollout presents another earlier danger. The manufacturer needs to convince early adopters of the value of the expensive “hot new product” there. The success of such an enterprise is not guaranteed.
You might not be able to profit from a skimming approach if your company advertises a follow-up product on television. That’s a result of the inventive maker having already utilized the early adopters’ sales potential.
4. Penetration pricing
According to Dolansky, penetration pricing makes sense when a low price is set early on to attract a sizable client base.
For instance, a much lower price can make your product stand out in a market with many similar products and price-conscious consumers. Customers might be encouraged to switch brands, which can increase demand for your goods. As a result, your unit cost may decrease due to economies of scale brought on by the increase in sales volume.
Instead, a business may opt to establish a technology standard via penetration pricing. According to Dolansky, certain manufacturers of video game consoles (such as Nintendo, PlayStation, and Xbox) adopted this strategy and set low prices for their products since “the majority of the money they gained was not from the console, but from the games.”
Penetration pricing misconceptions
“Businesspeople believe that increasing their sales will increase their success,” adds Dolansky. That’s only accurate if your margins are high enough. In order to achieve your objective of producing the most profit, it’s crucial to keep in mind that penetration pricing fulfills a strategic requirement and that higher volumes are advantageous in and of themselves.
The dangers of penetration pricing
- Customers may anticipate perpetually reduced costs from you.
- Customers who shop around can be dishonest.
- There may be a price war with your rivals.
If your business is not in jeopardy, consider if you can maintain this pricing over time.
5. Value-based pricing
In value-based pricing, the considered worth to the client is largely determined by how well it meets their individual requirements and wants.
According to Dolansky, a business using value-based pricing can outperform its rivals in a few different ways.
- The cost more accurately reflects the customer’s viewpoint.
- Pricing generates higher profits, enabling you to expand your business and buy additional resources.
Instead of simply lowering a price when it doesn’t work, the solution is to figure out how to better align it with what the client values. That can entail making product changes to better suit the market.
Dolansky contends that in a perfect world, value-based pricing would be used by all businesspeople. However, business owners who offer a product or service that is similar to a commodity, such as warehousing or plain white t-shirts, are more inclined to compete on low costs and cheap pricing.
Value-based pricing will assist in better communicating the distinctiveness of what entrepreneurs are giving when they sell things that stand out in the market, such as handmade goods, high-tech goods, or distinctive services.
How is a value-based price determined? Dolansky offers the next piece of guidance to business owners who want to establish a value-based price:
- Find out how much the consumer pays for a product that is similar to yours.
- Look for ways that your product differs from similar products.
- Put a monetary value on these variations, add all the positive aspects of your product, and subtract any drawbacks.
- Ensure that the client value exceeds your costs.
- Customers should be contacted in order to explain the price.
- You can learn more about what people expect to pay for a product in an established market by looking at its existing price range.
What role does your market pricing strategy have in your marketing plan?
Your market pricing strategy, which also involves promotion, placement (or distribution), and people (the traditional four “Ps” of marketing), includes pricing as one of its most crucial and obvious components.
Your price must be consistent with “how you would like to be seen among your competitors, and compatible with your promotional messages, your packaging, and the types of stores that your product is in,” according to Dolansky.
Consider that your offering is premium olive oil. It requires a premium price that accounts for sophisticated packaging, distribution in superior grocery shops, and upscale marketing strategies.
Every market pricing strategy has two sides to it. Some clients will be turned off by what draws them in. You can’t please everyone all the time. Just keep in mind that you want the buyer to purchase your product, so you must employ a technique that is suitable for your target audience.
Is it possible to combine market pricing strategy?
While your product develops throughout its existence in the market, some of these pricing schemes can coexist; others must. You must decide on an overall market pricing strategy (such as cost- or value-based), estimate the price range (using skimming and penetration pricing), and react to competitors (competition-based pricing).
A value-based technique might be used to price your product initially, followed by a skimming strategy and, finally, penetration pricing.