Introduction
Have you ever wondered how pricing is determined and what are the different strategies companies use to market their products and services? In this blog, you will learn the basic aspects of pricing and how it can affect your business.
What does it mean to determine the price?
When starting a business or evaluating an existing strategy, one of the most important questions you should ask yourself is how to price your products or services. This is called PRICING.
Pricing is the process by which a price is set for products or services offered in the market.
Pricing is important because it has a direct impact on the PROFITABILITY of your business. If you set the price too high, you may not attract enough customers. On the other hand, if you set the price too low, you may not earn enough to cover your costs and turn a profit.
Therefore, pricing is a BALANCE between setting a price that will attract customers and one that will allow you to make money.
There are several pricing strategies, usually based on your business goals and market conditions. Various factors need to be considered, such as competition, costs, value of the product or service, target audience and industry trends. All of these can affect how you price your product or service.
Difference Between Cost and Price
It is important to understand that there is a difference between PRICE and COST. Price is the amount of money that a customer pays for a product or service, while costs are the total expenses required to produce and market the product or service.
Cost represents the amount of money required to produce a good or service, while price represents the amount of money at which the good or service is sold to customers. Essentially, the price should be high enough to cover costs and make a profit for the seller.
Therefore, it is important that before determining the price of a product or service, carefully analyze the costs of production or service provision, understand the market and competition, and take into account the expectations and needs of the target audience. In this way, you will be able to determine the optimal price that will be competitive in the market, and at the same time allow you to make a profit.
In the next section, we will look at different pricing strategies and what factors should be considered when making this decision.
Basic Strategies for Pricing
When it comes to pricing a product or service, there are a number of different strategies that can be employed. Each strategy has its advantages and disadvantages, and choosing the right strategy depends on the goals you want to achieve.
One of the most common strategies is the Cost-Based Strategy.
This strategy implies that the price of the product or service is formed based on the costs that need to be invested in order to produce or provide the product or service, with a certain profit. This strategy is simple to implement, but can lead to problems if costs are not accurately estimated or if the market changes.
1. First, calculate all costs associated with the product or service (for example, materials, labor, packaging, etc.).
2. Next, add any costs associated with the production or provision of the service (for example, office space rent, electricity, marketing, etc.).
3. Add these costs together to get the total cost of producing or providing a service.
4. Determine the desired profit (for example, 20%).
5. Multiply the total production costs by the chosen profit rate (for example, if the total costs are 1000 USD and the desired profit is 20%, the selling price would be 1200 USD – that is, 1000 USD + (20% x 1000 USD) = 1200 USD).
Another popular strategy is the Competition Based Strategy.
This strategy implies that the price is formed based on the prices offered by COMPETITORS for similar products or services. This strategy can be useful if you want to position yourself in relation to the competition, but it can lead to problems if you do not follow the competition closely enough or if the competition has a significantly different cost structure.
The third strategy that you can apply is the Strategy based on the Value that the product or service provides to customers.
This strategy implies that the price is formed on the basis of the VALUE that the product or service provides to customers, regardless of the costs invested in the production or provision of the service. This strategy can be useful if you focus on creating a unique product or service, but it can lead to problems if the value you provide to customers is not clearly defined or if the price does not match customer expectations.
More information about what makes a product worthwhile can be found on the blog “What is Value?”.
In the following sections, we will look at what are the other tactics for determining the price of your products and services.
Creaming and Skimming Prices
Creaming and skimming are pricing strategies that are used when a company wants to enter the market with a new product or service.
The creaming strategy involves setting a high price for a new product or service, in order to make a profit from the original group of consumers who are willing to pay a higher price.
On the other hand, skimming involves setting a high price at the beginning and then gradually lowering the price in order to spread the product or service to a wider group of consumers who are willing to pay a lower price.
With a creaming strategy, prices are set high for a new product or service that doesn’t have much competition in the market. This strategy is used when the product has unique characteristics or high quality that justify a higher price. An example of a creaming strategy would be the launch of a new mobile phone model with unique features at a high price, which is ready to be paid by customers who are looking for the latest and best device.
On the other hand, in a skimming strategy, prices are set high for a new product or service that has a limited number of customers or has no constant demand in the market. After the initial profit is made, the price is gradually reduced to make the product or service more accessible to more customers. An example of a skimming strategy would be the launch of a new VR (Virtual Reality) technology at a high price that enthusiasts or professionals are willing to pay, while the price would be reduced once the device is expanded to a wider population of users.
Price as bait
Using price as a bait is one of the popular strategies that is often used in marketing. This strategy is based on offering three products, two of which are similar in price, while the third product is the most expensive. It is this most expensive product that should be the most attractive, while other products should not be so attractive. The goal of this strategy is to get users to buy the most expensive product, because it will look the most cost-effective.
In fast food chains, this strategy is often used. When ordering a burger, you may notice that the price of an ordinary burger and cheese burger is not so different. However, if there is a third option with a double serving of meat, which costs almost as much as a burger with cheese, then that double-serving burger could be bait. Customers will often opt for that burger, because it will seem to them that they are getting a lot more for their money (a double cheeseburger at McDonald’s).
Although this strategy has its advantages, care should be taken not to manipulate prices and not to harm the long-term relationship with customers. It should be guided by the fact that clients get what they paid for and that they are satisfied with their purchase.
Different prices for different buyers
Different prices for different customers can be useful for attracting new customers and retaining existing ones. This strategy involves charging a LOWER PRICE to certain groups of customers, while others are charged full price for the same product or service.
There are different ways in which different prices can be applied. For example, students can get discounts on tickets to museums, cinemas, swimming pools and the like. This strategy can be targeted at different demographic segments, geographic areas or user portfolios.
Lower prices can attract people who are not willing to pay full price for a product or service. If a customer likes what they buy at a lower price, there is a possibility that they will continue to buy from you at full price.
It is important to keep in mind that this strategy can lead to dissatisfaction and a sense of injustice in customers who pay full price. Therefore, it is important that different prices for different customers are well thought out and transparent, in order to avoid negative consequences.
Odd and Even Price Setting
If you want to set a price for a product or service, you can opt for odd or even price determination.
An odd price is when you set a price that ends with a figure other than zero, such as $99. Even price fixing, on the other hand, ends with zero, such as $100.
While it may seem that setting a price of 99 USD instead of 100 USD will not make much difference, research shows that this approach can lead to an increase in sales. The reason for this lies in the psychological effect it has on customers – they perceive the price as LOWER than it really is.
On the other hand, an even price can be used when you want to send a signal about the QUALITY of a product or service. High price can be perceived as a sign of quality.
By combining both strategies, you can use odd and even pricing to attract a wider range of customers and increase product sales.
Psychological pricing
Psychological pricing is a marketing strategy that is based on exploiting psychological factors to influence the perception of the value of a product in consumers. Essentially, this strategy takes advantage of consumers’ “ignorance” about the actual value of the product, which increases the likelihood that consumers will buy the product when the price is lower than expected, or when a similar product in the same category is more expensive.
There are different psychological strategies for determining prices, and the most common are:
- Artificial time constraints: This strategy is based on creating a sense of urgency in consumers by setting a timeline for purchasing a product. For example, a store may start a one-day sale, although sales will actually continue for a few more hours or days. This creates a sense of urgency and forces consumers to react faster and buy the product. This type of strategy is often used in selling airline tickets or accommodation, and can be very effective in attracting customers;
- Innumeracy: This strategy is based on choosing a mathematical option that sounds better and more attractive to customers, even if the offers are essentially equal. For example, the customer is likely to opt for the option “Buy one box, get another for free”, instead of the option “Get 50% off the other box”;
- Price appearance: The way the price is displayed can also affect the perception of the consumer. For example, even though $1,000.00 and $1,000 look similar, people will feel like they’re spending less money when the number isn’t that long. Similarly, removing currency symbols can help customers feel that the product is CHEAPER.
Psychological pricing is a very popular strategy in marketing and can be very effective in attracting consumers. It is important to use this strategy in an ethical way and not use manipulative tactics that could lead to consumer dissatisfaction and damage the reputation of your brand.
In addition to these tactics, there are many others, some of which are: “Dynamic Pricing”, “Bundle (package) Price”, “Premium Price”, “Penetration Strategy”, “Pay As Much As You Want” , etc.
Key Questions when determining the Price Strategy
There are many things to consider when setting prices, and some of them are:
- What is the price of the competition for the same product? Should you offer a price that is lower, higher, or still the same price?
- How much is your product or service worth ? How much are consumers willing to pay for it?
- What is your target audience? What are their financial capabilities and what would drive them to buy your product or service? (More information on how to determine your target audience can be found on the blog “What is advertising?”)
- What is your growth strategy? Do you want to increase your market share or increase profits?
- Do you plan to use any of the above-mentioned pricing strategies?
- How will you monitor and adapt your strategy to meet changes in the market or the needs of your customers?
Thinking about these issues can help you create a clear and effective pricing strategy that will help you achieve your goals and grow your business. It is important to remember that your pricing strategy is likely to evolve over time and that it will be necessary to monitor changes in the market and adjust your approach accordingly.
The importance of a good pricing strategy
A good pricing strategy allows for better sales and marketing results. It is key to attracting real customers and closing more sales. When you understand your market well, it helps you develop a strategy that is aimed at your target audience and communicates the value of your product in a way that convinces them to buy it. In addition, a good pricing strategy gives your customers confidence in your product by matching the price with its quality, which creates a position of trust with your customers. So a good strategy isn’t just about price, it’s about how you communicate the value of your product to your customers in a way that will attract them to buy it.
Conclusion
Setting a price for a product or service is a key part of a successful business strategy. The goal of pricing strategies is to maximize demand for products or services by reducing or removing barriers to purchases by forming attractive prices and promotions. There are many different approaches to pricing, but what works for one industry (or even a company) may not be best for another. A good start would be to explore the competition, but over time you have to create your own pricing strategies because the market is constantly changing. In this article, we’ve looked at some of the most common pricing approaches, as well as some of the best practices you can apply in your business. I hope this information will help you find the right pricing model for your business.
Resources: https://businessmodelanalyst.com/downloads/pricing-strategies-for-ecommerce/