Major Things to Consider When Changing Your Pricing Strategy

Posted by Moira McCormick on August 1, 2016
Moira McCormick

What to Consider?

Need to change your pricing strategy? That's a pretty big deal and a decision not to be taken lightly. The best way to avoid having a heart attack whilst you ponder this knotty issue is to break down (not literally) all the things you need to consider into smaller "compartments" and resolve each issue separately before you come to a final decision on your optimum pricing strategy and how you are going to achieve it.




1. Consider your costs

Naturally you need to ensure that the price of your product(s) generates sufficient revenue to cover your costs. Ask yourself "how much does it cost to take my product from manufacture to purchase?" Do not forget to include the price of raw materials, assembly, labour, rent, delivery and any other overheads you incur. Add these up and divide by the number of products you produce in the given time period. Once you’ve pinpointed the average cost per product, you’ll see precisely the revenue you need to cover all of your expenses.

You will be hoping to achieve rather more than just break even. A healthy profit would of course be most welcome. The percentage that you’d like to make from each item is called your gross profit margin target.

You need to decide just what profit margin you are aiming for. The target percentages vary based on the type of business and your circumstances. Manufacturers and retailers often set a target of 50% while distributors target something around 30%. However, if you are just setting your margin target based on your costs, you could be missing out on profits because the customer may actually be willing to pay much more than that.


2. Know your customers

The more you know about your customers the easier it will be for you to arrive at the best price. Conducting market research will outline the demographics and psychology of your target audience and reveal their purchasing behaviour. Basic databases, surveys and internet research should expose common traits among your customer base. If you want a more in-depth understanding consider hiring a third-party market research company. This type of research demonstrates trends like how crucial your product is to their lifestyle. If your product provides a function that they can’t live without, a higher price point will not deter them. As an example, smartphones have become so essential that even a high price tag will not deter a new purchase every couple of years.


3. Consider the competition

How is your competition pricing their products? You want your price to be competitive, but also reflect your product's value. You will need to find out if their product has the same perceived value as yours. How do customers compare the products? What types of reviews is each product getting? Again, conducting market research and even performing your own internet searches will provide useful insight on this topic. If your product clearly provides more value than the competition, a higher price point will help indicate to your customers that it's a superior product. If the competition's product proves more valuable, try pricing your product just below theirs as a less expensive, but high-quality option.

Whatever you do, don’t let what your competitors are doing control your pricing strategy because then things will disintegrate into a price cutting war. There are no real winners in that war except for a customer who then expects everything for the lowest price possible – and they rarely remain loyal. When you let the competition control your pricing strategy, you are being completely reactive, which is never a position that will increase your profit margins.

If your competitors are bigger than you, especially in terms of volume, this allows them to lower the price lower than you can afford, which means you will lose out. Instead, focus on adding other types of incentives or features likely to add value.


4. Introduce tiered pricing

Does your product have options that vary in value? If so, you should consider adding a tiered pricing structure. Tiered pricing appeals to customers because it allows them to choose the price level that best fits their budget. If your product(s) can be differentiated through additional features, price them at points that reflect their individual values. Try using a pricing structure that offers “good,” “better,” and “best” options for products or services that have increasing levels of value. Applying this strategy can help you capture a larger portion of the market by offering multiple options for a larger range of shoppers.


5. Try psychological pricing

Odd-number pricing is a pricing strategy that's been around for decades and suggests that a product retailing at £39.99 is much more appealing than one at £40.00. This is psychological pricing in it's simplest form. Studies have concluded that this pricing strategy is successful in most cases. Once you know that you're competitively priced and covering your costs, test out this pricing strategy to find which prices best fit your target audience.

The massive amount of available data about customers and what they want or need has provided a way to look deep into the psychology of buying. You need to use this information to shape a pricing psychology that speaks to your customers‘ buying mindset.


6. Remember, one price does not fit all customers

What you think is value and how the customer perceives value may be two entirely different things. You need to think like your customers. As an example, street vendors know that customers will pay £3 or more for a bottle of water in the height of summer, but those same customers will not pay that price in a highstreet store in winter.

Not every customer sees the same level of value in a product or service, so they will place a different preferred price on what they think they should pay for that product or service. While you cannot charge an individual price for each customer, you can introduce different prices in various regional markets or create a product with multiple models.

Other strategies could involve offering some type of installment payment plan or financing that provides more than one price dependant on how the customer is willing to pay.


7. Do not rush to offer a discount on a new product

You may be tempted to offer an introductory price on a new product or service to draw customers in. The discount is offered as an incentive meant to attract price-conscious buyers.

In reality, however, if a customer wants to try something new, they will try it regardless of whether or not you lower the price initially. When you are ready to sell it at the original price you had planned, your customers may not be prepared to fork out the extra amount – and consequently move on to another product.

It's better therefore to introduce a product or service at the price you have decided on after researching what customers are actually willing to pay. Offer temporary discounts or promotional prices during specific seasons or periods, but don’t downplay the value of your product or service. If anything, set it higher so that your potential customers get the idea that it’s something special.



No pricing strategy is perfect but you can at least strive for the very best strategy to suit your business. Continue to focus on improving aspects of your pricing strategy as you see changes in your environment, including customers, prospects and the competition. It is imperative you keep abreast of market conditions – and what that market will allow in terms of price. Consider first making small, incremental changes and then you can spend time planning more dramatic alterations to your pricing strategy when you know with some degree of certainty that it’s the right time to change.

Topics: Margin Growth, Pricing Strategy, Willingness to Pay, Pyschological Pricing

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