Pricing Strategy as an Important Aspect in Marketing
It is no secret that the majority of the customers are price sensitive. Obviously, when a customer happens to see something in the mall that he or she is attracted to, the first thing they will check is not the quality of the product, but its price tag. Thus, how set the price of your product plays a vital role in your marketing strategy. If the price is too high, it can potentially send the customer away and find something that he or she can afford. On the other hand, if you price your product too low, you can potentially sacrifice your profit or the customer will think that it is made of low-quality materials. Moreover, you may have sold volumes of products, but you would not be having enough capital to cover the other expenses need to keep the operation of the business running. Confusing, right? As an entrepreneur, it is important to know how to strategize the pricing of your products in order to make sure your marketing efforts successful.
Importance of Pricing Strategy for Business Marketing Success
The price of a product and/or service is the first thing that a customer checks before deciding to purchase your business offering. The price of a product is not only important to customers but to marketers as well because it speaks for the marketer’s ability to assess and evaluate how target customers see the value of the product and/or services and how much they are willing to pay. Hence, pricing can determine the success or demise of a business.
We all know that a majority of the companies, whether small-scale or large-scale, always base the prices of their business offerings on the promotion expenses, production, and labor. To make a profit, some companies add a certain percentage of the product and/or services so that they can use it to buy and add supplies and materials crucial to make the operation running. Since pricing is considered to be an important factor that can directly impact the profit, revenue, and the overall marketing plan and advertising plan of the company, it is highly vital to make sure to set the right pricing strategy to ensure the growth and success of a business.
Pricing Objectives to Keep in Mind
According to the Business Dictionary website, pricing objective is defined as “a goal that guides a business in setting the cost of a product or services to potential customers. A pricing objective underlies the pricing process for a product, and it should reflect a company’s marketing, financial, strategic, and product goals, as well as consumer price expectations and the levels of available stock and production resources”. Oftentimes, the pricing objectives of most companies include the following:
- Boosting short run profits
- Maximizing the company’s monthly sales volume
- Being able to match the prices set by the competitors
However, it is essential to remember the each pricing objectives needs a various strategic price-setting plan to ensure the company is able to achieve their business goals. One of the most common reasons why there are a lot of newbie entrepreneurs fail is that they price their products and/or services too low to attract customers to maximize their brand strategy.
Factors that Affect Pricing Decision
So before you make a final decision to reduce the prices of the products and/or services that your company is offering, it is important to take some time to research and contemplate whether you are not putting the overall well-being of your business at risk or not. As an entrepreneur or a marketer, it is essential to conduct a research or survey and study the collected information before deciding to set the pricing of our products and/or services in your target market.
Sometimes, having a pricing objective for your business is not enough because there are a lot of factor that you must consider before setting the prices. Such factors include the cost and demand of the product and/or service, the customer demographics, the external environment, nature of the products and/or services, product or shelf life, as well the method of promotion and distribution. Now, let us examine and analyze each of the factors that were mentioned and understand what they entail.
Target Customers
There are three major elements that can affect how your target customers respond to the products and/or services that you are selling in the market: how they apprehend the value that your products offer to them, the number of customers buying your offerings and how they are sensitive they are when the products increase or reduce in price. Moreover, the information that was gathered in the research helps you effectively determine how the product prices affect price-sensitive customers. A good way to start is to ask yourself these questions:
- Are your target customers willing to purchase the product and/or service at a given prices?
- Is the value of your product and/or service equal to its given price?
- Are they willing to pay for the products and/or service your business has to offer?
- What are the things that you can do when a customer opts another brand? How will you get them back?
Determining how the customers will respond to your pricing strategy often involves good and fair judgment, as well as proper and thorough market research.
Competitor Brands
Another element that can affect your pricing decision is how other companies are pricing and selling their products and/or service in the market. Let us take for instance that you are an appliance store and that your competitor store is offering a 25 percent discount on a certain television brand. Take note that the price they are offering for the said appliance is 25 percent lesser than what you are offering. There is a huge chance that more customers will be coming into their store because they can save 25 percent of their allotted budget. So what are you going to do? We all know for a fact that it is important for companies to establish a good relationship with their customer and maintain loyalty that is why there is a need to match the prices offered by your competitors. And since most customers use the Internet nowadays, they can easily compare the prices offered by different retailers before deciding to purchase a product and/or service.
Cost of Production
The cost of production is considered to be one of the most crucial factors in pricing decision. Obviously, you cannot sell your products and/or service at a price that is lesser than the cost of production. Otherwise, your company will have a difficult time accomplishing your target revenues and bankroll the other important expenses needed to run the business. Before price fixation, you must consider the elements of the production cost such as the amount of money that your company spent on developing, testing, and package the product, as well as the advertisement and distribution.
Supply and Demand of the Product
I bet every one of us is familiar with the law of supply and demand. This basic economic principle explains the relationship between the supply and demand and how both can have an impact on the prices of goods and services that are sold in the market. According to the law of supply and demand, the prices of the commodities will fall if there is an oversupply of goods or service and the prices in the market will increase once there is a shortage of products and/or services. When there is a high demand for the products and/or services, their prices will increase while low demand means reduced price of the commodity.
Types of Pricing Strategies
Product, place, and promotion, pricing is considered to be another most important components of the marketing mix. In order for entrepreneurs grow and make their businesses successful, they must take pricing strategy seriously as it helps them boost their sales and profits by determining the perfect price point. With regards to their unique marketing objectives and goals, there are a variety of pricing strategies that a company can use when selling their products and/or services. The company can set the price to boost the profitability of the each product unit that is sold in the market. Incorporating an effective pricing strategy can a great tool that you can use to safeguard your target market from new competitors, boost your market share, or when you enter a new market.
In this article, we have provided a rundown of the different types of pricing strategies that you can use to achieve your profit and revenue goals:
Premium Pricing
This type of pricing strategy is only used when you have a unique and popular brand. Most often, the prices of your products and/or services are higher than your competitors in the market, meaning that you have a substantially bigger competitive advantage than other brands. It can be considered to be a great strategy for popular companies who want to introduce their business in a new market and want to maximize the profitability of their products in a short period of time.
Penetration Pricing
This pricing strategy aims to capture market share by setting the products and/or services at a relatively yet artificially low price to attract their target customers. When the strategy works effectively, the company will eventually and gradually increase the prices of their products and/or services. The main goal of penetration pricing is to be able to establish a strong brand recognition and awareness and enticing the customers to try and buy their product. Although this strategy can be initially disadvantageous for the company in terms of profit and revenue, the main goal of penetration pricing is to boost word-of-mouth, make the customer become more aware of the brand amidst the number of competitors in the market.
Price Skimming
Price skimming strategy is often used by businesses with a higher competitive advantage to maximize their revenue before other business competitors can enter the market and offer similar products. However, this strategy may not always work because it can attract new competitors offer the same products at a much lower price. When there is an increase in the supply of the same product, its prices are expected to fall.
Economy Pricing
The economy pricing strategy is viewed as a no-frills low price and is often used by companies, such as Wal-Mart and Aldi, whose marketing strategy includes a very fundamental, low-cost approach by keeping their products at an affordable and friendly price to attract and capture a particular segment of the market. What is great with this pricing strategy is that it can generate more sales during times of recession.
Psychological Pricing
This type of pricing strategy is often used to make the customers respond emotionally rather than rationally to the prices of the product. When a certain product cost $9.99, it can instantly instill in the minds of the customers that it is cheaper than a product that is priced $100. The $0.01 can differently make a big difference when it comes to your sales and revenue. This is also a powerful marketing strategy that you can use when you want to establish a new product in the market if it is implemented properly. However, as a marketer or entrepreneur, it is also important to understand that there are some customers who avoid buying a new product, especially if they know nothing about its quality. Although there are people who would automatically purchase cheap products, there are also a significant number of customers who are wary about buying unfamiliar products with a cheaper price tag. Therefore, it is safe to say that the price may not be directly proportional to the quality or benefits of unfamiliar products.
Tips on How to Effectively Price a New Product
Pricing a product can be tricky, especially when it comes to determining the price of a new product. When you price a product too high, you will be sending customers away; price the product too low and the customers will think that you are selling a poor quality product and what’s even worse is that it will be tough for you to recover and bankroll your investment. A lot of marketers and entrepreneur, especially the new ones, should carefully consider the factors and the different pricing strategies that perfectly suit their marketing strategy.
In this section, we have listed down some smart tips that can help our set the price of a new product effectively:
Know your Market
When we say to get to know your market, it means that you have to conduct a market research not only to find out how much the customers are willing to pay and patronize your products, but also the pricing strategies of your competitors, the current state of the economy, and consumer trends. By studying the marketing report, it will help you make an informed decision whether to match their strategy or come up with a better one that can beat them. Sometimes, simply matching the pricing of their products and/or services can cause a negative impact on your business. This is because it is important to ensure that you can cover all the direct and indirect cost of the company’s day-to-day business operation.
Have a Clear Set of Pricing Objectives
The pricing objectives of your business are essential in defining the goals that you want to accomplish through its products’ prices. When laying out the pricing objectives, you should consider how the view of your company on market share, customer satisfaction, competition, sales, profit and image can influence the said objectives.
Choose the Right Pricing Strategy
When choosing the right pricing strategy for a product, it is important to consider the factors and ensure that they all meet the pricing objectives. Found below are some of the most common pricing strategies to grow your business into a huge success:
- Cost-Plus Pricing — The main decision factor that is used in this strategy is the cost of the product. Depending on the product, type of business, and sectors, a markup percentage is added to make sure that it can cover the cost of the product development. By doing so, it will help the entrepreneur or marketer determine the appropriate the sale price of the product.
- Market Value Pricing — How your customers value your products and/or services is the determining factor on how you should price your offerings. Aside from the market research, you will need a market analysis to collect accurate data on the needs, preferences, and expectations of the customers on the products and/or services that you have to offer. Once you have carefully and thoroughly analyzed all the data that you have gathered, you can confidently set the prices of the things that you can offer to your customers.
Calculate all the Costs
One of the effective ways to determine the right price of a product is by calculating all the direct costs (the investment for product or service development). Once you have the result, you can then calculate the value of the variable costs spent on materials, package, etc. Your variable costs become higher when you have more products to make or sell. The next step to do is the work out your fixed cost percentages that you need to cover the cost of the product. The fixed cost often includes the rent, rates, and wages. After you have all the results, make sure to add all costs and divide by volume to generate the break even figure of a single unit.
Develop Pricing Tactics
While a lot of people consider pricing tactic and pricing strategy as one and the same, it is important to know that there is a unique distinction between the two business terms. According to the definition provided at the Business Dictionary website, a pricing tactic is defined as “a short term attempt to manipulate the price of a good or service in order to achieve a particular business objective”. A great example of a pricing tactic is by reducing the price of a certain product temporarily or any forms of sales strategy that is financially motivated in the hopes of boosting the short term product sales and turn prospects into paying customers.
Develop a Workable Pricing Mix
Developing and assembling a workable and effective pricing mix is the last stage of determining the appropriate price of a product. A lot of business experts considered this last stage as the nut and bolt of pricing. When you want to develop a powerful pricing mix, it is highly crucial to consider and evaluate the possibility of offering discounts to your target customers, as well as other factors such as the cost of product shipment, term and conditions, applicable tax, payment terms and methods, licence fees, and other relevant factors.
Sample Price List Templates that You Can Download and Use as Your References
If you are an entrepreneur or a marketer, you should understand the huge importance of using a price list when marketing and promoting your products and/or services to your target customers. No matter where you sell your business offerings, whether in a brick-and-mortar store or online, the first thing that customers want to know is the prices. Having a price list available for your customers can help them determine whether the prices of your goods or services are perfect for their budget. Check out the following sample price list templates that are found below.
Graphic Design Price List Template
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Final Thoughts
Now that we have reached the end of this article, we can conclude that it is essential for the company to set the right pricing of their products and/or services. As what you have learned, the pricing strategy is an extremely vital factor in the success of a business. Setting the right price can be a bit tricky but keeping all the information that we have shared can help you not only determine the right pricing strategy but also attracting more customers, increasing your sales, as well as the profitability of your products or services. You may also want to download our price quotation templates and price chart templates.
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