Just like determining how much every household chore costs for your domestic help, putting the right price on a service or product is crucial for businesses. Product pricing and quality are the keys to determine a successful business. Pricing can be regarded nowadays as the harbinger of the company’s strategy, segmentation, growth and success.
Warren Buffet has rightly said, “Price is what you pay, value is what you get.”
In this new era of COVID-19 times the strategies for growth and success have changed dimensions as the fear has evoked different concepts of purchasing. Some are buying to conserve, so value for money products become important and some for the same reason have started buying unaffordable products thinking it is now or never. Premium products and pricing come into full play here.
The price of a product can affect its fate, adequacy and acceptability especially in today’s volatile world, as buying decisions and patterns can change on a weekly and monthly basis. A well thought product pricing strategy could be the key to the financial growth drivers of the company and also to get a market share.
When it comes to new and small businesses, an effective product pricing strategy assumes even more significance, as the size of these businesses and their financial acumen bring their own challenges and in initial stages pricing and product quality would be the keys to get a toehold on the market.
The e-commerce space has grown in leaps and bounds, with the Amazons and the Reliances of the world vying for this market but the fact remains that competition is fierce. Therefore, along with strategising one’s product pricing one has to keep an eye on the competitor’s pricing plan as well, to maximise profitability, cope with this competition, and to simply stay in the market.
Strategies For Pricing A Product
The market speaks its own language. That language is price action. Pricing has a huge impact on a company’s revenue and is not just an afterthought. Right pricing is now a need and the key to success and growth.
How to price products can be a puzzle as it is a tricky task but one must get it right as it is a fundamental part of marketing. The pricing has the challenge to cover all costs of manufacturing, distribution and all other overheads and still make good margins.
The highly astute Indian consumers expect great quality, comfort, latest designs but still at an effective price before they decide the purchase. Therefore, product pricing could be one of the keys that open up the doors to business success.
Key Factors That Determine The Pricing Of A Product
1. Business Objective
If the objective of a business is to earn maximum in a short possible time then they may choose to price their products accordingly.
2. Correlate To Brand Strategy
You may have to strategise towards brand positioning, correlating your pricing to match with this objective.
- Fixed Cost (Building Rent, Salary of permanent staff)
- Variable Cost (Material, Labour).
- Distribution costs
- Marketing costs
- Labour laws
4. Market Dynamics
A detailed study of the market, the competition, segmentation is very important to a pricing strategy.
5. Product Demand
In case the demand for a product is more than supply, one may consider a premium pricing
6. Target Consumers
Study the need and purchasing power of consumers. Market segment you can cater to like industrial users, commercial, individual, or householders. Demographics like age, city, urban, rural also contribute to segmentation.
7. Pricing Methodology
The pricing technique influences the marketing scheme, for instance, the commission paid to a middleman for the sale of products is added to the price. Likewise, if the customers are being provided with an ‘after-sale service’ product, then that price should also be added.
8. Pricing Of Contemporaries
In situations of fierce competition, one may consider putting a lower price to gain maximum revenue and cut the competition. You have to play according to the given crisis and be street smart. The price shouldn’t be too high or too low in comparison with equivalent manufacturers.
9. Government Regulations
If the price of an item or any service is fixed under the regulations laid down by the government, then you must abide by those rules.
4 Effective Pricing Strategies
1. Skimming Pricing
The price skimming technique aims at generating as much profit as possible from the few people who can afford a product at a high price, before lowering the price.
Then one can move ahead and take off profits from those portions of the market which are price sensitive. Price skimming is mostly applied to markets that have a large number of new launches, and where the quality and originality of a product is important.
The lifespan of a product is not very much because of the high launch activities in such markets. This strategy ensures that all the production costs are covered well. Price skimming technique needs proper timing and execution otherwise it may annoy buyers and can ruin the loyalty of the brand. An issue with skimming as a strategy is that it cannot last for long, soon the competitors may launch a rival product, (the launch of contemporary products to the iPhone or iPod). If you observe the marketing strategies of famed organisations like Apple and Sony, you will find out that they rely on the skimming principle for the marketing of their iPhones, iPods, TVs, and other electronic products. First set a high price for a low-quality product and then lower it.
2. Premium Pricing
A premium pricing strategy can help to enrich a brand’s identity if there is a highly valued product that has the potential to achieve a high-profit margin. Premium pricing is a little risky as it may get marked down by discount rivals. The risks associated with over-or under-producing high quality and high-priced products may be disadvantageous. This strategy can be observed mostly in SaaS industries like Salesforce and HubSpot.
3. Economy Pricing
Of all the types of pricing strategies this strategy only works when one has lower overheads and costs than the opponents. Economy pricing allows one to sell products at a discounted price to gain high revenues from the market. Not only it helps to cope with economic fluctuation but also provides a competitive edge. New and small businesses can be a little less benefitted from this approach as the sales needed for this method to be profitable is high. An example of an economy pricing strategy can be seen with the marketing of generic goods.
4. Penetration Pricing
Penetration pricing puts up a ‘unique introductory offer’ to a high-quality product. The penetration pricing strategy is generally used to enter a new market. After successfully launching a product, one can begin to move to a higher pricing strategy. This allows one to use a lower launch price as a competitive tool against more established competitors.
This pricing is the fastest way to earn revenue from the market and get ahead of opponents. Pricing should ideally not be in the bottom quadrant as people who really matter may correlate this to lower brand value. Increasing product prices later has its own challenges as people can shift to alternate products. You can observe the penetration pricing strategy in the marketing plan of mobile phone and housing loans in India.
General Steps To Ensure A Better Pricing Plan
It may be apparent now that pricing is an art and a science. As an answer to how to calculate product cost is that the pricing policy or strategy needs to be dynamic and evolving.
You can use the guidelines below to formulate an effective pricing plan:
- Understand the pricing methods mentioned above and identify which one of them works the best for your company as each of them has its pros and cons
- Calculate the total costs it takes to manufacture and sell a product, add a percentage mark-up to it, and then deduce the final price of your product
- Try and keep your pricing more market-oriented and engaging
- Explore the market by running trials with intelligent and differential pricing
- Constant redefining your strategy, vis a vis sales volume or margin
- Ensure that your business gets long-term profits from your pricing
- Evolve strategies like a premium price on bestsellers, keep the competition on the edge by using seasonal discounts and innovative publicity
- Last but not least be inventive, pliable and be dynamic with your product pricing methods, because success comes from constant changes and taking paths trodden by none. Lead the way through innovation and quality
When your product adds value to your customers, this automatically increases the worth of your product in the market. In a market full of homogenous goods, it becomes necessary for a business to price their product according to its Unique Selling Proposition. Let the buyers know about your product and what sets it apart from the crowd.
The logic is simple, the higher your product’s valuation, the higher will be your price and profits. A consumer will not buy your product if it does not solve a particular problem or serve a purpose to them. Hence, the value you give out to your product is what your customers pay. So, add value and price your product wisely.