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Pricing strategies are one of those things that are very commonly over looked, as well as sometimes over analyzed. So how do you find that balance and pick the correct way to price your products? Before we get into the different pricing strategies, lets consider a few things:
How much does it cost take the product from the manufacturing phase, into the hands of the consumer. There are a lot of variables to consider when calculating this including the price of rent, raw materials, labour, shipping, advertising and any other overheads that are associated with your business. From that, you can identify the revenue you need to cover your expenses, as well as identifying how many products you need to sell to make a profit.
What are your competitors doing? How are they pricing their products? This is a great starting point because it is so easy to head over to your competitor’s location and note what they are selling their products for. Be sure to note how both substitute products and alternative products are priced. Find out what their customers think of their products, if its cheap or well made, and what all your competition is doing, not just one or two places. All these factors will play a role when it comes time to decide on a pricing strategy.
You MUST know all you possibly can about your target markets. You should know your targets’:
- Psychographic Information (what they are thinking & what they want).
- Demographic Information (age, gender, income level, education etc.).
- Geographic Information (where they are).
You can of course have more than one target market, and have more depth into how to identify them. Again, this all comes back to your efforts in market research. Identify the common traits in your consumer base through research, reveal their purchasing behaviours and use that information to decide on the best way to price your product.
Once you have considered the above variables, here are some of the most common types of pricing strategies you can employ for your product:
This technique is very common, and can be employed with minimal market research. This process works by first calculating your direct costs, including raw materials, logistics, labour etc. that are incurred when you produce something. You then must take into account your Cost of Goods Sold, your break-even point, your product markup. You should then also analyse the market to see if that price point is viable and look at what your competition is offering similar or identical products for. For more on this method, visit this article by BDC.
This one will take a little bit more research outside of your company, because it is pricing based on what your competition is doing. This is when you must decide where you position yourself in the market, and whether you will offer your product at a lower price point to compete, or differentiate your product/service in order to gain market share. This strategy is often used by businesses selling similar products, since the service aspect can vary from business to business, but the attributes and features of the product remain similar.
Price skimming is a pricing strategy where a business sets a high initial price, and lowers the price as the market evolves. Businesses lower their prices as more competition enters the market and the demand for the product or service is satisfied. The aim is to attract a segment of the market that is more price-sensitive. This kind of pricing strategy is often used when there is a new product with no substitutes available yet in the market, but there is the possibility of substitutes or alternatives to enter the market later on.
This pricing strategy is the opposite of price skimming. Penetration pricing is the process of setting a low price to enter a competitive market and raising it later. The logic behind this strategy is that the lower price point will attract the customer and entice them to try the new product or service. There are disadvantages though, including the fact that increases in sales volume may not lead to profit increase if you keep prices low. Also, if the business chooses to increase the price point, the customers may switch back to their competition. Be sure that if you end up raising your price point, offer some form of differentiation to avoid losing customers.
Value Based Pricing
Where cost-plus pricing takes into account the costs or producing a product, value-based pricing focuses on the consumers’ perceived value of that product. This kind of pricing strategy can be frequently observed in the fashion industry, where similar products can have vastly different price points based on the brand. Across all industries, this strategy works best with differentiated products or services and will require extensive marketing and sales focus.
No matter which pricing strategy you choose to employ, be sure you do your research and choose the best pricing to fit your overall strategy and your place in the market.
For more on pricing strategies, and more specifically, how to employ value-based pricing, click HERE.EntrepreneursGeneral Business
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