Choosing the appropriate price at which to sell a product or service is more than just a challenge for every business. Getting it right is crucial to its eventual survival.
Pricing Strategy is the underlying process by which a company makes this critical decision.
Pricing Strategy Considerations
Many factors go into pricing, most of which can be studied and directed to favor your company.
All markets are not the same. In some regions, there may be variations in
- Production costs due to real estate or labor rates
- Number of potential customers
- Cost of delivering your goods
These known factors can generally be predetermined and controlled.
How do sales objectives guide pricing strategy?
Listed below are several common goals which often change over time depending upon their success rate and reactions from both customers and competitors.
- Elicit a trial
- Elicit repeat business
- Open a new market
- Grow an existing market
- Expand a product line – offer different models or features at different price points to broaden overall appeal to customers
- Cross-sell several products (life, auto and home insurance; air, hotel and car)
- Increase market share
- Defend against competition; create barrier to entry
- Seek a specific profit margin over cost of production, promotion and distribution
Market research and testing can guide one to identify optimal price points for each situation. Here are a few examples:
- What price will maximize a trial?
- How low should initial price be? A survey can ask questions about different prices, or a market test can compare percent who take the offer.
- After trial, will additional discounts or offers be needed, or can prices be raised without losing customers?
- Will package or bundle pricing be effective in selling more than one item or service?
- A variety of offers can be tested, e.g. “BOGO” or “twofers”, 50% off a second entree; a golf bag with a set of new clubs; free checking with a brokerage service.
- Will it be possible to sell enough commodity products or supplies for home or office at a low price and still make a profit?
- Research can help to analyze a market, its customers and competition with regard to current pricing and purchase activity.
- Should you set a price to match your competition to take away that differentiator?
- In some cases, such products as batteries, printer paper, or cleaning supplies may be sold as “loss leaders” (even below actual cost) in order to generate sales of more, and higher margin items.
- Will enough of a market pay a premium price?
- Is there support for high priced, exclusive or luxury items? (e.g. Tiffany, Prada, Mercedes, Apple)
- Are there other customer tiers which can later be sold less expensive models at lower prices? Or can you customize a product or service and charge an even higher price for an exclusive version to satisfy specific customer needs?
Do you need help with Pricing Strategy?
You do not need to roll the dice and hope. Rather, you can calculate all costs that go into producing, promoting/selling, and distributing a product, and then set a price that covers expenses while providing some level of profit.
However, in order to approach an optimum price point, it may be useful to observe and/or survey your customers. Even better, get a sense of what your competition is, or might be doing, with regard to pricing.
Asking customers about what they would pay for a product or service is tricky. Getting insights into the strategies of your competitors is a bigger challenge.
Customers may be exposed to the product via a survey (online or phone) or in person.
- Here, a set of variables, including price, might be presented to a subject and a statistical technique called conjoint analysis may be applied to determine the optimal tradeoffs of features and prices.
- You will be able to assess price elasticity and experiment within such a range.
- Further, you can identify matched groups of prospective or current customers, offer each a different price via online, coupons, ads, etc., and then measure the percent who purchase at each price.
- (Note: there are instances where you might want to find out what a customer would pay based on a concept or prototype – before beginning production – to be sure there is room for profit!)
Competitive activity can be monitored by following their channels of distribution (e.g. site visits to stores, following online and offline ads), attending trade shows, and perhaps speaking with your own customers.
- But to learn their future plans it is almost always necessary to use a third party to conduct interviews in an effort to uncover such information.
Unfortunately there is more to the equation! Your company is not operating in a vacuum. As such, just like you, your competitors may alter pricing to achieve specific objectives. Thus, pricing strategy is an ongoing process that needs almost constant attention and tweaking.