Author: Anna Steinfest
Pricing decisions refer to the choices businesses make when determining the prices of their products or services. Regardless of the complexity of the pricing strategy, a company needs to understand its customers and how price affects their purchasing decisions. Additionally, it is crucial to be aware of competitors’ offerings and pricing strategies, adapt to market changes, help customers understand the reasons behind pricing decisions, negotiate with suppliers and resellers, and track how pricing impacts sales.
When it comes to setting prices, there are several factors to consider. Choosing the right pricing strategy is key to finding the ideal price for a product or service. What customers are willing to pay for a product or service is primarily based on how much they value it, rather than the seller’s cost.
There are five common pricing strategies to consider:
Cost-plus pricing – Calculate your costs and add a mark-up.
Competitive pricing – Set a price based on what the competition charges.
Price skimming – Set a high price and lower it as the market evolves.
Penetration pricing- Set a low price to enter a competitive market and raise it later.
Value-based pricing- Base your product or service’s price on what the customer believes it is worth.
Can you combine pricing strategies?
Some of these pricing strategies can coexist as your product evolves through its lifecycle in the market; some elements must coexist. You need an overall price strategy (e.g., cost-based or value-based), you need to determine generally how high or low the price will be (skimming and penetration pricing), and you need to respond to competitors (competition-based pricing).
For example, you may want to initially price your product using a value-based approach, then switch to a skimming strategy and conclude with penetration pricing.
How does your pricing strategy fit into your marketing strategy?
Pricing is one of the most important and visible aspects of your market strategy, which also includes promotion, placement (or distribution), and people (the classic four “Ps” of marketing).
The price you offer must be consistent with how you would like to be seen among your competitors, and consistent with your promotional messages, your packaging, and the types of stores that your product is in.
Let’s say your product is a luxury handbag brand. Your pricing strategy should reflect the premium materials and craftsmanship of the bags, as well as the upscale branding and distribution in high-end department stores and boutiques. A value-based pricing strategy may be appropriate for limited edition or one-of-a-kind bags, while a skimming strategy may work for new product launches. Penetration pricing may be effective for expanding market share, but it should be carefully balanced with maintaining the brand’s exclusivity and perceived value.
All pricing strategies are double-edged swords. What attracts some customers will turn off others. You cannot be all things to all people. Just remember that you want the customer to buy your product, which is why you must use a strategy appropriate to your target market.