In the world of business, pricing is a very important component of marketing. This is because the pricing of your product can either make or break your business. Learning how to create a competitive product pricing strategy is crucial, especially if the goal of your marketing plan is to increase market share and survive in a very competitive environment. In order to establish a competitive pricing strategy, certain factors as outlined below must be taken into consideration.
Firstly, the perceived value of your product influences your product pricing strategy. If your product is priced too low, customers may feel that the materials used in production of the goods is inferior and the product is of a low quality and therefore, may shy away from purchasing this product. Therefore, it is imperative when pricing your product to strike a balance between the price of your product and its perceived value.
The second factor that influences your product pricing strategy is the level of competition. If your competitor sells the same product you are selling but at a lower price, this may affect your business negatively. The more intense the competition in your industry is, the more flexible your product pricing strategy and policy will have to be. Alternatively, if you have a monopolistic hold on the market, you can certainly consider selling your product at a high profit margin.
The level of market demand is another factor that influences your product pricing strategy. When demand for a product is expected to be high, you have more flexibility in choosing pricing strategies because customers are less likely to be concerned with price since they really want your product. For example, consider the prices people are willing to pay when new video game consoles debut.
The fourth factor that influences your product pricing strategy is the demographics of the targeted customers, including age bracket, educational status and income levels of the targeted customers. For example, there are cars for the rich and cars for the middle class but both cannot be sold in the market place with the same product pricing strategy. Before Henry Ford, founder of Ford Motor Company, cars were exclusively for the rich. His company’s mission statement, however, was “Democratize the automobile”. Another example is Sam Walton, founder of Wal-Mart. His product pricing strategy was summed up in the company’s slogan “Always low price”.
There are several types of pricing strategies that can be implemented but careful consideration must be made to the aforementioned factors before developing the pricing strategy. Additionally, the pricing objective of the firm needs to be clarified before developing the pricing strategy. If one of the overall goals for the business is to become a leader in terms of market share that the product has, then the business has to consider the quantity maximization pricing objective. If the mission of the business is to be a leader in the industry, then the business has to consider the quality leadership price objective. Revenue maximization objective is useful when introducing a new product into the market. with the goal of growing market share and establishing long term customer base.
Once the firm’s pricing objective has been determined, the pricing strategy can be determined. Some of the most common pricing strategies are explained below.
One of these strategies is competitive pricing, which is pricing your product based on the prices your competitors have on the same product. This strategy can be considered in instances where there are many of your product already existing in the market and you are unable to differentiate your product to an extent that customers are willing to pay more for your product. For example, if the price range for pepper sauce currently in the market is $20.00 to $25.00 per bottle, you may price your bottle at $23.00 per bottle to fall in line with the competition.
Penetration pricing is a strategy used to gain entry into a new market to attract and grow market share. Once desired levels are achieved, product prices are increased. For example, if you have created a new bottle of barbeque sauce and based on your market research, the price range for competitor’s barbecue sauce is $22.00 – $30.00, you may want to price it slightly lower than the competition for the first six months, perhaps at $20.00 to entice customers to purchase your barbecue sauce while still covering the cost of production.
Premium pricing is a strategy that can be adopted when there is something unique about the product you are selling, when the product is of a very high quality but you only expect to sell a small amount or when the product is first to market and there is a distinct competitive advantage. Premium pricing can be a good strategy for companies entering the market with a new market and hoping to maximize revenue during the early stages of the product life cycle. Apple, for example, despite high competition, has succeeded in creating demand for its products, given the company power over prices through product differentiation, innovative advertising, brand loyalty and hype around the launch of new products.
Skim pricing strategy is similar to premium pricing strategy. However, with this strategy the price will eventually be lowered as competitors enter the market. This strategy is mostly used on products that are new and have few, if any direct competitors. When iPhone 4s was introduced in the market 4 years ago, its price was very high. Few people could actually afford an iPhone. With the passing of time, prices of the iPhone 4s decreased gradually such that nowadays many people can afford an iPhone.
The loss leader pricing strategy refers to products having low prices placed on them in an attempt to lure customers to the business and make further purchases. In addition to attracting new customers, this strategy can be used to eliminate slow moving merchandise. For example, supermarkets may use bread as a loss leader product since if customers come to the supermarket to purchase bread, the customer is more than likely to purchase other grocery items as well. Some clothing stores may advertise discounts on their existing merchandise to attempt to get rid of existing stock and make room for new trending clothes. For a loss-leader strategy to work, the profits made on other merchandise sold during the loss-leader promotion must cover the low profits or losses taken on the featured merchandise.
Multiple pricing is also a strategy used to get customers to purchase a product in greater quantities by offering a slight discount on the greater quantity. For example, 1 pair of jeans may cost $150.00 but two pairs may be priced for $280.00. Customers therefore will feel that they are getting a $20.00 discount if they purchase two pairs of jeans. However, $140.00 is the price the store would typically charge for the pair of jeans if it was not employing a multiple pricing strategy. A customer purchasing just one item will pay more for the item than what you would typically charge if you were not using a multiple pricing strategy. Multiple pricing should increase the quantities of items being sold, hopefully resulting in fewer unsold items.
Product line pricing is used when a range of products or services complement each other and can be packaged together to reflect increasing value. For example, when purchasing a cell phone, the retail outlet may offer a screen protector and a phone case as well. Rather than purchasing each item separately, they may bundle the products and offer all three items at a discounted rate.
Choosing a pricing strategy is more than just simply calculating your cost of production and tacking on a markup. Many factors need to be taken into account when developing the pricing objective and pricing strategy of the firm. This is certainly an important element of the business planning process and can be further explored in CARIRI’s Business Hatchery Programme.
For further information on this programme, visit www.cedcariri.com or contact us at 299-0209 ext 2661.