What is your pricing strategy?
Working out how much to charge for your products or service is a key decision process that will have an inevitable impact on the success of any business.
The pricing reflects your brand, the type of customer and target market you are appealing to, your promotional strategy and ultimately, your financial performance. Go in too low, margins are squeezed and it’s incredible difficult to convince customers to part with more money when it comes to raising your prices; go in too high you could be alienating lucrative markets or missing out on business to the more relevantly priced competition.
The four traditional strategies used by businesses taking into consideration the quality and price of your business proposition, includes economy, skimming, penetration and premium pricing as demonstrated below. However, there are a number of other options, with value-based strategies becoming increasingly popular.
Cost plus pricing is a simple and easy strategy that takes the cost of the goods and puts an agreed mark up on top to generate a profit. This doesn’t take into consideration segmentation, it isn’t market orientated and it can leave money on the table.
Value based pricing is primarily based on the perceived value of a product or service by the consumer – the added benefits, the emotional connection and comparison against the competition, generates the price they are willing to pay for this ‘value’.
This is quite different to promotion pricing strategies which ignores any of the perceived value established with the customer. Companies are tempted to heavily discount or use promotions to entice customers which can be effective short term but do irrevocable damage in the long run. Take for example Pizza Express who became so reliant on their offer of two courses for £12.99 it devalued the brand. The offer ran so frequently, no one was inclined to pay full price when a promotion nearly halving the bill would be around the corner. What was a ‘treat’ visit now had become pretty standard and expected.
Setting the right price can have a big impact on net profit yet can be overlooked in favour of one of the other four levers of profitability (sales/price/fixed costs/variable costs) despite it possibly being the most effective solution.
Through research and testing, you can gain an understanding the value your product has to your customers and how sensitive they are to an increase, which may only be small, for example 1%, but which could significantly increase your profits, especially when this is integrated with a complementary promotional marketing strategy. For example, Dolan and Gourville demonstrate in their Harvard paper, ‘Principles of Pricing’ that if Coca Cola could increase its prices by 1% it would increase net profit by 6.4%, which equates to around £300 million based on an average increase of 1c. on a can. Not bad.
Getting pricing right is also important legally. There are certain pricing practices that could be deemed illegal, or unethical at the very least, if seen as being anti-competitive including:
· Predatory pricing – setting price so low to drive a competitor out of the market place
· Price fixing – colluding with competitors
· Price maintenance – requiring distributors or retailers to sell at a specific price
Whichever pricing strategy you decide, the cost of your product or service to your customer is something that should be regularly reviewed, and done so with instinct and as much intel, insight and research as you can get.
Sticking your finger in the wind and hoping for the best when it comes to price increases or reductions will not end well. Having your finger on the pulse instead of in the wind will help avoid being caught off guard when it comes to changes in the market or running cost increases and making knee jerk reactions to your pricing.