Pricing strategy can be challenging, complex - and offers no shortcuts. Unfortunately there is no magic wand to wave nor just one pricing strategy that will produce the greatest profits under ALL conditions.The "best" price for a product is not necessarily the price that will sell the most units. Rather, the "best" price is one that will maximise profits for your company. The "best" selling price should be both cost and market orientated - high enough to cover your costs and help you make a profit but low enough to attract customers and build sales volume.
In addition to the physical factors of cost and profit, pricing is subject to psychological factors, some of which I'm sorry to say are out of your control. The best you can do to have any control here is to do a good job on your corporate image and positioning.
If you want to meet your pricing challenges head-on, and to get better at finding the "best" price, read on:
1. Use Pricing Analytics
Use a predictive, analytic tool to identify what is likely to happen in the future and to set your pricing/performance strategy to better react to those predictions.
The pricing analytics will evaluate past performance in specific market conditions and suggest what you’ll be able to sell in a particular product line. These analytics will allow you to track prices, goals and performance.
Pricing Analytics allow you to look at a wide variety of direct and indirect competitors to gauge where your price falls. You can evaluate your competitors on a regular basis to ensure that you’re maintaining competitiveness.
2. Provide Up-to-Date Pricing For Your Sales Team
Having effective pricing software enables businesses to automate the pricing process and really make inroads. With an automated pricing system, you can reset prices many times a day based on real-time information from the marketplace.
It allows your sales team in the field to quote prices to customers from information and updates sent in real-time to their smartphones. The more accurate information your sales team has available, the better it will help with sales negotiations.
3. Focus on Customer Satisfaction
The whole purchase decision should be as pain-free as possible. Ensure that your customers realise you'll be there to provide exemplary customer service – and keep providing that good service throughout the lifespan of the relationship.
A pricing software system with a product analysis tool will boost customer satisfaction and improve efficiency, speed-up order processing and help identify substitute product lines that might better fit a customer's needs or budget.
This analysis allows your sales team to look at the whole picture, rather than just on a transaction-by-transaction basis. This can help identify customers who purchase multiple products across different product segments.
Your sales team will have the advantage of being able to create a 'package deal', a one-stop shop for customers, allowing for up-selling and cross-selling opportunities.
4. Determine Price Sensitivity
Estimate how sensitive your customers are to fluctuations and it will help you determine the right price and volume combination. More importantly, you can estimate how a price change can impact on your profits.
A higher price typically means lower volume, yet you may generate more total revenue and/or profit with fewer units at a higher price; it depends on how sensitive your customers are to price fluctuations. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume.
5. Build and Deliver Value
Value-based pricing considers the value of your product or service, as opposed to the costs incurred to create and produce it. You will need to determine how much money or value your product or service will generate for your customers originating from factors such as increased efficiency, happiness or stability - and entails putting yourself in their shoes.
Your price sends a strong message to the market and it needs to be consistent with the value you’re delivering. Customers will evaluate a product and its next best alternative(s) and then ask themselves, “Are the extras worth it?" or is the discounted product as good as the "high end" one. They will ultimately choose the product that provides the best deal (price vs. attributes).
When you create value in the eyes of your buyer, the product or service you’re offering becomes more desirable, and price becomes less important. By establishing value early on, you can actually make a higher price work for you as a competitive advantage. Sensible buyers realize that with most purchases, you get what you pay for, and when you do reveal your price, it can make a statement about the quality of your product.
6. Identify Underperformers
In good times companies focus less on identifying areas that are underperforming because rising profits tend to hide loss-making products. However, it becomes important in a down economy to identify underperformers so you can understand why certain customers or certain product lines might be costing your company money. Be prepared to ditch both if necessary!
7. Understand That Not All Your Customers Are The Same
Pricing is the one area of business where companies behave as if all their customers are identical - by setting one price for each product. The key to developing a comprehensive pricing strategy involves embracing (and profiting from) the fact that customers’ pricing needs differ - and setting prices accordingly.
One of the easiest ways to enhance profits and better serve customers is to offer basic, standard and premium versions of your product or service. These options allow customers to choose how much to pay for a product – and what will best suit their requirements.
8. Implement Differential Pricing
For any product, some customers are willing to pay more than others. Differential pricing is a method in which a product has different prices based on the type of customer, quantity ordered, delivery time, payment terms, location, etc. Sometimes called discriminatory pricing or multiple pricing.
9. Try Price Anchoring
One of the best ways to sell a £1,000 ring is to put it right next to a £5,000 ring. Why? The answer is a common cognitive bias called anchoring. Anchoring refers to the tendency to rely heavily on the first piece of information offered when making purchasing decisions.
Placing premium products and services near standard options may help create a clearer sense of value for potential customers, who will view the less expensive options as a bargain in comparison.
10. Don't Be Tempted to Discount
Faced with heavy competition, you may be tempted to resort to all sorts of price promotions - coupons, quantity discounts, referral discounts, bundling, and targeted promotional offers. Research shows how counterproductive these can be. Far from suppressing customers’ price consciousness, promotions actually heighten it. If you want customers to deliberate about your offering’s selling points, don’t offer them a special price.
The beauty of pricing strategies
In a highly competitive environment, companies need to capture the full value of their product lines throughout their entire life cycle and through multiple distribution channels in order to be a leader. Since pricing is an underutilised strategy, it creates fertile ground for new profits.
The beauty of focusing on the pricing strategies mentioned here is that many of the concepts are straightforward to implement and can start producing profits almost immediately.
Harvard Business Review on Pricing, 2008
Pricing with Confidence:10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014
Value-based pricing:drive sales and boost your bottom line by creating, communicating and capturing customer value, Harry Macdivitt and Mike Wilkinson, 2011