Pricing is based on three critical points:
- What your product or service is worth to your customers (it's value).
- What it costs you to produce your product or provide your service.
- The price your competitors charge.
Is it about time to update your prices?
At the very least, reviewing your prices on a regular basis makes complete sense to ensure you remain competitive.
Pricing is a major element of marketing any product, and it is vitally important to set the right price. A price that is too high or too low for the target market can seriously affect sales. Elements such as target market, profit margin needed, growth strategy for the company and market share all play a role in what pricing strategy is used.
A business develops the pricing strategy for a product after performing a marketing analysis. Product distribution, positioning and promotional decisions are made and demand is estimated. A pricing strategy is formulated taking into consideration factors of cost, competitors and profit objectives.
Your price relationship to your competitor falls into one of four categories says Laurus Nobilis at Biz Development. These are pure parity, dynamic parity, premium pricing strategy or discount pricing strategy. In pure parity, your price always equals that of your competitor: they set the price and you will match it. Dynamic parity happens when you pick a competitor and keep the gap between their price and yours the same. Premium pricing is when you price higher than the competition, but you gain a position of higher perceived reputation. In discount pricing, you always keep the price cheaper than that of competitors. Discount pricing is most commonly used by generic or store brands.
Many small businesses have reacted to difficult times by discounting heavily to attract cash-strapped customers. However, just because a rival has slashed their prices doesn’t necessarily mean that you have to follow suit.
It's best to begin by considering why a competitor has lowered their prices. Are they new to the market and trying to establish themselves by offering the cheapest product or service? Are they launching a new value range because this is what they perceive the market needs - or have they been forced to cut prices to try and boost sales? Their reasons for discounting may not be the same as yours.
Consider this first – can you be confident that discounting will at the very least protect your profit – and hopefully increase it? There are cases when it might even be more profitable to sell fewer products at a higher, sustained price than to sell more at a lower price.
Reducing your prices might even do more harm than good. If you lower them too much, you risk creating the impression that your product is low value as well as low priced. The focus of your pricing strategy should be on how you can ensure customers buy from you, instead of a competitor, rather than just concentrating on price.
Instead of discounting, see if you can offer something better than your competitors. Improve your relationship with existing customers by being more personable, attentive, knowledgeable and flexible. Looking after them is vital, or they will be targeted by your competitors.
You could offer customers a free warranty or after-care service to make your product stand out. You need to ensure you have a unique selling point and focus on communicating that to your customers.
You need to find ways of making your product or service less price sensitive – that way you keep the focus on value rather than volume.
Would discounts/special offers help?
There are times, especially in price-sensitive industries, when matching your competitors’ prices will be necessary. Weigh up how much of a hit on price you can afford to take without jeopardising the health of your business.
You could start with small discounts and see if that makes any difference to sales. Lowering your prices should be seen as a short-term tactic to boost cashflow, not a long-term strategic move.
If discounts are imperative, make sure the cuts are communicated as special offers, or one-offs to help loyal customers. Remember, you will need to increase prices again in the future, which could be more damaging to your long-term survival than price cuts now.
Advantages of Discount Pricing
Discounts to reward volume customers, repeat customers and employees build customer loyalty. Loss leaders are effective for retailers who need to increase traffic to their store. Promotional discounts, used sparingly, offer temporary advantages including maximizing sales, revenue and profit. During a short-term discount period, more units are sold, allowing your company to decrease stock and temporarily raise revenues.
Disadvantages of Discount Pricing
Consider product positioning before choosing a discount pricing strategy. Consumers often associate low price with low quality, particularly when the brand name is unfamiliar. Pursuing a discount pricing strategy increases the chance that your product will be perceived as lower quality. While you may gain customers who make decisions on price alone, other customers may choose competitor products because of perceived quality.
Low prices may drive sales for a limited time, but do not build customer loyalty. When a lower priced alternative comes along, you may lose customers. Competitors can simply match your prices, or beat them. When prices have been driven down to the point of no return, it is difficult to raise prices again, especially if your product is perceived as being lower in quality.
A premium pricing strategy involves setting the price of a product higher than other similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume.
Premium pricing can also be used to improve brand identity in a particular market. The high price signals to consumers that the product is high in quality. Some companies use this strategy to give their product an aspirational image. For example, according to BetaNews, Apple now has 91 percent of the market in computers costing $1,000 or more. The company has used premium pricing to capture the market for high-end, high-quality computers.
Premium pricing is not generally used when there is direct competition for a product. Competition tends to undercut prices and lead to poor sales. For this reason, premium pricing is often a short-term strategy. The longer a company can keep its competitive advantage, the longer it can charge a premium price. Many products start out at premium prices, but the price is cut once competitors appear on the market.
Some brands can continue to charge a premium price because their entire brand image is based around luxury. According to John Quelch, of Harvard Business School, it is very challenging for companies to maintain a premium-priced brand while trading as a public company. Luxury brands, such as Prada, often choose to remain private businesses, so they can stay exclusive and continue to use premium pricing.
You may have a unique product and this is when you have the best chance of commanding premium prices. This is one reason why pharmaceuticals - where the product is protected by patent - tend to be very expensive. This is especially true of technology products. A more recent example of this may be 3D games. According to EA CEO John Riccitiello, in an interview with Videogamer, game titles that support the new 3D format may be sold at a premium price.
When two products have similar basic features, but are produced by different companies, competition will result. Competition-based pricing strategy involves setting your prices based on your competitors’ prices rather than on your own cost and profit objectives. Before pricing your product, research your competition to figure out where you fit in or what needs to change.
Your price environment determines the level of control you have over competitive pricing. Price environments are either market-controlled, company-controlled or government controlled. A market-controlled environment shows a higher level of competition, similar products and little price control by individual companies. A company-controlled environment shows moderate competition, unique goods and services, and a lot of price control by individual firms. In a government-controlled environment, the government takes information from related companies and then determines prices; bus fares or university tuition fees are examples of the latter.
Competitive pricing relies on three product styles: lasting distinctiveness, low cross elasticity and perishable distinctiveness. Products with lasting distinctiveness are ones that will always stand out from the crowd, such as medicines protected by patent laws. Low cross elasticity means the demand for the product will rise, such as with software upgrades. Products with perishable distinctiveness are unique in the beginning, but fall to medium distinctiveness after a period of time and would include popular technology products with a certain 'shelf life'.
Every product has a price range; look at your competitors pricing to find the range for your product. To decide where you fit on the current price range, or if you should choose something outside it, compare your product to those of your competitors. Customers use the existing prices as a guide to what is normal or a good deal, so be prepared to handle the backlash of pricing outside the standard range.
The products with the most features can be sold at the highest price, so research what your competitors are selling first. Basic features of all the products may be similar, if not the same, so you need something unique to raise the price of your product. If, instead, you would rather be the cheapest, let that be your special feature and leave everything else out.
Figure out what market your competitors are targetting, and pick a different one. Even though the products are similar, you can charge more if you design for a specific group. Certain markets will always pay higher prices, or are willing to pay for the perceived exclusivity, so take advantage of that in your marketing strategy.
These are good barometers of how important particular products or services are to the profitability of your business. The higher the margin, the more lucrative it will be. Low margin, low volume products should not occupy your time or storage space at the expense of higher margin products.
During your review/update you are likely to find that customers will tolerate a price rise driven by inflation or interest rates, but not if it seems to come for no good reason.
Consider whether it's worth offering extra value at the time of a price increase, so customers don't feel like they are being conned. You could also consider trialling your price changes to see how they are received.
You should aim to review your pricing regularly. That way you can keep on top of market changes and amend prices to reflect your costs and changes within your marketplace. This will help avoid the situation where you are faced with having to make massive price hikes because your prices haven't been reviewed for ages. It's also imperative to have some kind of pricing plan and strategy and your pricing should be consistent with this.
- Harvard Business Review on Pricing.
- Confessions of the Pricing Man: How Price Affects Everything by Hermann Simon.
- Discounts and Establishing Price Structures by Tim Smith.