Pricing Strategy -

What is Pricing?

It is the process of determining the value for which a business will exchange its products and services. The determining factors may include the cost of acquiring the products, cost of manufacturing, product quality, market conditions, company brand, and competition. Pricing is a method of setting prices to suit both the manufacturer and the consumer.

Static vs Dynamic Pricing

Static pricing has to do with a situation where prices remain the same from day to day, it allows for easy profit margin and revenue calculation, a business making use of a static pricing strategy loses customers due to their unwillingness to pay certain prices for a commodity.

In dynamic pricing, the business adjusts its prices to fit the different price points that consumers are willing to pay. The difference in prices most times is offered to customers through discounts and geo. pricing differences. Dynamic pricing is related to some other strategies: Dynamic Pricing, Sliding Scale Pricing, and Time-Sensitive Pricing.

What is the Cost?

It is defined as the value of a specific resource used to produce a finished product or service. The cost includes the cost of labor, equipment, materials, and infrastructure.

Pricing vs Cost

The cost to manufacture a product or provide a service is the expense a business incurs to make the product or provide that service. The cost of raw materials and labor typically go into determining the prices of the product/service, and the cost of those raw materials and labor can be affected by market prices.

Cost is ascertained from the producer’s perspective, and the price is from the customer’s perspective.

Cost is the number of expenses incurred by the producer of the product to produce the goods, and the price is charged by the customer for the goods % the services that are sold to them.

Costs result in an outflow of cash, and price results in an inflow of cash.

Cash doesn’t include the margins of the product, the prices include the margins of the product.

Margin is applied to cost, while markup is applied to the price.

The business intends to decrease the cost and intends to increase the price.

What Is the Pricing Strategy?

It is the process that businesses use to decide how much they will charge for the products/services they offer. To determine the price of a product, businesses need to take into account many factors. It includes the cost of goods/labor/ads expenses/competitive pricing/margins and overall market conditions.

Common Pricing Strategy

Premium Pricing Strategy: to some companies, high price is synonymous with quality. In those circumstances, a high price can be a good way to signal that you are the best at what you do. It works particularly well in industries where there is little competition and where customers need what you have to offer.
Penetration Pricing Strategy: when a new product is launched, companies often set their prices low to secure market share quickly. Once they have succeeded in doing so, they will raise prices to make greater profits.
Economy Pricing Strategy: it is all about offering a low-cost product, with margins kept to a minimum. The emphasis is on big sales volumes, which are more likely to come from targeting the mass market than from concentrating on a small, high-quality niche.
Skimming Pricing Strategy: in many industries, new products/services are offered at high prices to discourage competition. Once the market becomes more crowded, however, prices tend to drop.

Pricing Strategy, Pricing Tactics, Pricing Policy

Pricing strategy takes into account long-term goals such as profitability, while tactic pricing can take into account short-term factors such as demand shifts and competitive actions. Too much emphasis on pricing strategy can lead to missing opportunities or losing market share to competitors who change prices aggressively. However, if your focus is on pricing tactics, you may not get the bigger picture and fail to develop long-term strategies that bring you greater profits.

Pricing policy refers to how a company decides on the prices of its products/services. Pricing strategy refers to how a company uses pricing to achieve its strategic goals. The main difference between the two is that pricing policy includes all pricing decisions (setting the price of a product/service), whereas pricing strategy specifically focuses on how different prices can be used strategically for long-term goals.

What To Consider When Setting Pricing Strategy?

Costs: gathering financial info is the 1st step in pricing your products. Info on fixed costs and direct costs are included here.
Customer: keeping an eye on what your customers want from your products and services is essential for business success.
Competitors: it is important to do research about competitors’ pricing and offerings. By looking at their prices and the customers they attract, you’ll get a good idea of how much you should charge.
Market Position: consider how you want to position yourself in the market. Having determined your positioning, you will be able to decide your price.
Profit: as a business owner, you need to determine how much profit is enough for you. Keep in mind what the market is willing to pay is also very important.

Different Types of Pricing Strategy

Absorption Pricing

It is a way of setting prices for products where all the costs associated with producing that product are factored into the selling price. The costs include variable costs per unit, overhead costs, and administrative costs. OC=Overhead Cost, AC=Administrative Cost, VC=Variable Cost “VC+(OC+AC)/Units Produced”. The variable cost includes the direct labor cost and direct raw material cost, while the overhead includes the variable operating/manufacturing costs of the company. The admin cost is all about the fixed operating/manufacturing costs of the company.

Contribution Margin-Based Pricing

The contribution margin is the money that a company generates for each product sold after deducting the variable costs. It’s calculated as the selling price of the product, minus the variable costs incurred. Price Charged — Variable Costs = Contribution Margin

Cost-Plus Pricing

It is a simple way to determine the price of a product. You make the product, calculate the direct material cost, direct labor cost, and overhead costs for a product, then add them together and add a percentage on top to create a profit margin. Cost x Desired % Profit Margin (Desired Profti) = Price

Creaming or Skimming

When a company sells a product at a high price but does not sell many products, it is called skimming. It is used to pay for the money that was spent to develop/improve the product/service. It is best to use price skimming for a limited period so that the early adopter market can become saturated. If a price reduction occurs too late, buyers might turn to cheaper competitors, resulting in a loss of sales & revenue.

Decoy Pricing

It is a strategy that uses Three products, with two having similar prices. The most expensive products should be the most attractive ones – one of them should be less attractive than the other. When people see the 3 options, they will buy the more expensive and attractive one.

Differential Pricing

It is a strategy that involves charging certain customers less than others for the same product. This can be tailored to fit a customer’s portfolio, geographic area, demographic segment, and the intensity of competition in the region. By utilizing differential pricing, you can make your business more accessible to potential customers.

Double Ticketing/Dual Pricing

It is a common tactic where the same product/service is sold for different prices in different markets. The reason for this practice varies from one business to another but capturing market share is often the primary goal. The long-term intent is to drive out competitors by pricing them out of the market, dual pricing is however illegal in some circumstances.

Freemium

A company offers basic products/services free of charge while charging consumers for premium versions or advanced features of the same offering. The basic idea behind a freemium pricing strategy is that the company offers a limited version of its product/service for free, hoping that users will like it enough or find a need to upgrade to a paid option.

High-Low/Skimming Pricing Strategy

High-low pricing is a strategy for getting people to buy your product by offering it at a lower price than usual. This strategy involves establishing a high price for products and then lowering it via sales promotions such as coupons and seasonal discounts. Normally, the prices go up and down over time. In essence, the product is introduced at a high price, and through discounts, the product attracts more users. As demand decreases, the price is also decreased.

Keystone Pricing

It is basically when you take the amount you paid for an item and double it to set your retail price. The formula is simple: Price=Wholesale Cost x 2.

Limit Pricing

It is a price set by a monopolist to discourage potential rivals from entering its market. The limit price is the lowest price at which an entrant would break even if it tried to enter the monopolist’s market, assuming that the monopolist did not cut its output.

Loss-Leading Pricing

A loss leader is a product sold at a price that is not profitable but is used to entice customers into the store, where they are likely to buy additional products and services. Loss-leaders are mostly used by retailers to build customer loyalty and attract new customers. Typical examples of this model are the Printer + Cartridges & Razor + Blades models.

Marginal-Cost Pricing

Pricing a product at marginal cost means that the seller charges only for the cost of making one more item. Marginal costs are made up of both fixed and variable costs. They include the cost of production, which can be broken down into fixed and variable components.

Odd-Even Pricing

It is a common strategy used by sellers to make their products appear less expensive or more valuable than they are. For example, Odd pricing=590, Even pricing=600.

Pay What You Want (PWYW)

It is a pricing strategy model that lets buyers decide how much they want to pay for a given product. In some cases, the seller may set a minimum price or suggest an amount to pay. Historically, PWYW has been used on occasion for special promotions and marginally in the economy, but there are efforts afoot to make it more widely available.

Penetration Pricing

It is used as a marketing strategy to attract customers, by offering a lower price to help the new offering penetrate the market and compete with similar offerings from competitors. A company using penetration pricing with the sole aim of increasing its market share. It is often used when there is intense competition in the market or when a business faces hardship in releasing its product in the market due to an extremely large rate of competition.

Predatory Pricing

It is when a company sells its products below cost to drive out competitors and this happens during price wars as it’s hard for other businesses to tell what’s going on. It can lead to complete business failure in the long run.

Premium Decoy Pricing

It involves artificially setting one product’s price high so that customers will opt for the lower-priced product. Bag manufacturers often use a similar tactic by introducing a limited-edition handbag and setting its price high, through customers are drawn to other affordable options from the same manufacturer.

Premium Pricing

It is a strategy companies use to keep their products/services high-end. In other words, you’re more likely to pay more for a product that has a reputation for being exceptional. It is the practice of charging a higher price for a product/service than is customary or reasonable, to make buyers believe that the product or service is of exceptional quality.

Price Discrimination

It is a sales strategy that charges different customers different prices for the same product/service. The seller bases the different prices on what he/she thinks each customer will pay. A pure form of this strategy would be charging each customer the highest price he/she would agree to pay, but most sellers use more common forms of price discrimination, such as classifying customers by certain characteristics and charging each group differently.

Price Leadership

It is when one company sets the price for an entire market. It can occur in a variety of situations, including oligopolies (markets with few sellers) and monopolies (markets controlled by one seller). Price leadership is most effective when there’s little to no competition so that the leader has more pricing power than its competitors.

Psychological Pricing

It is a marketing strategy that takes advantage of consumers’ ignorance of the value of products. Consumers are therefore more likely to purchase products when they’re listed at prices lower than what they would normally expect or when similar products in their category are priced higher. For example: $99.99 instead of $100, $199.99 instead of $200.

Performance-Based Pricing

It gives sellers an advantage in attracting customers because it reduces buyers’ upfront risk, and increases the seller’s risk – but also their potential rewards. Sellers & buyers who use performance-based pricing have to be sure that clearly define and quantify the outcome they want with each customer before they start working together. It is widely used in online advertising platforms, by real estate agents, and personal injury lawyers.

Sliding Scale Pricing

It is an approach to pricing a service or product that can help make it more affordable for everyone. The prices are based on an individual’s income and ability to pay. People choose how much they want to pay for a product or service, knowing that others who have more financial resources will cover the expenses. It is a way to calculate fees based on income.

Target Pricing Business

It is a method businesses use when setting their selling prices. First, the firm determines how competitive it wants its price to be based on market research and what similar products are selling for. Once the business figures out its product’s price, it then sets its desired profit margin, that is how much profit the business wants to make from each product sold. It allows a company to earn a specific rate of return on its investment in a product, given a certain volume of sales. Target Selling Price Based on Research + Profit Margin Expected = Target Cost

Dynamic Pricing

Merchants can change their prices depending on how much their customers are willing to spend. It is a strategy in which the prices of your products/services change over time. The change can be daily, weekly, monthly, or even hourly. It can be useful for companies that deal with inventory-based products since it allows you to reduce prices if your stock is low, or raise prices if demand increases.

Time-Sensitive Pricing

It is a way to sell goods that have a short shelf life. If the expiration date is soon, the goods are sold for less money than their original prices. This method increases sales and decreases losses/wastage.

Value-Based Pricing

It is a strategy that charges customers based on the value of a product rather than its cost of production. It is frequently used when the perceived value of a product far exceeds its cost of production. If a company’s product is unique or significantly better than the competition, value-based pricing can work well for them.

Variable Pricing

It can be defined as the pricing strategy of a business to optimize its profits by offering different prices for the same product at different times or in different places. It is a marketing strategy that allows retailers to charge different prices for their goods depending on demand or location.

Yield Management

It is a strategy used by airlines/hotels/car rentals, among many other businesses that deal in limited goods or services. It aims to monitor consumer behavior to gain maximum profit through selling goods or services that are perishable. It is about finding a balance between supply & demand that makes you the most money.

Economy Pricing

It is used to sell products that have low production costs, it considers the cost of making and transporting a product, which results in a low price compared to other products with high production costs. Product Cost + Profit Margin = Price

Bundle Pricing

It is a business strategy in which multiple items are sold together for one price, as opposed to offering each item for a separate price. This way, businesses can show customers that they’re getting a better deal by purchasing multiple items at once.

Competitive Pricing

It is the process of identifying an optimal price for a product or service based on its value to the competition. The strategy often works best when there are many substitutes for a given product or service since competitive pricing can require a business to undercut its competitor’s prices.

Promotional Pricing

It is a sales strategy used by brands to attract customers by reducing the price of a product/service for a short time. It is effective in the short run, helping to attract cost-conscious shoppers. It can increase revenue and build customer loyalty, as well as improve short-term cash flow. And it works best when combined with other strategies, like coupons or discounts.

Geographical Pricing

Some companies charge different prices for the same item based on where the buyer lives, the price difference may be due to the cost of shipping. Nevertheless, it can also be dictated by how people in different places are willing to spend their money. Companies will attempt to make as much money as possible in the markets they serve, and geographical pricing can help them achieve this.

Anchor Pricing

Retailers use anchor pricing to lure customers into a purchase. They list both the discounted price and the original price to create a favorable comparison in the minds of customers. A cognitive bias known as anchoring occurs when the reference price is used in this manner.

Factors Affecting Pricing Strategies

Price-quality relationship: customers associate higher prices with higher quality. This is true in cases where quality can not be easily measured or evaluated.
Negotiating margins: retailers who order from a company often ask for discounts, and the company may give them. A few types of discounts include volume discounts, competitive discounts, and fast payment discounts.
Product line pricing: when a low-price competitor comes into the picture, it’s always tempting to reduce your prices. But it makes more sense to come up with a new brand that directly competes with your competitors’ low-price brands. And this new brand can be designed to appeal to people who are looking for low prices.
Explicability: when your prices are higher, you need to prove that they’re worth it.
Earning very high profits: it is often wise to earn a reasonable profit, even if current circumstances allow the company to charge high prices.
Political factors: if a company has a monopoly, it might make a lot of money in the short run, but then there might be an official investigation into its prices. It may cause customers to switch to something else.
Setting low prices: the problem with very low prices is that it’s difficult for companies to offer cheaper prices than their rivals. Customers often assume that it’s impossible to provide quality at lower prices. In this case, the company may not be able to sell the product because customers think it is of low quality.
Competition: a company should take into account the reactions of its competitors to its pricing policies and moves. The company reduces its price to gain market share, but one or more competitors can decide to match the cut. It prevents the ambitions of the company from gaining market shares.
Effect on distributors and retailers: when products are sold through retailers, the list price is often higher than the price at which manufacturers sell them to retailers. Retailers need a higher list price so that they can make more money, some retailers can afford to sell at low prices and make a lower profit per sale.

Internal Factors Affecting Pricing Strategies

Organizational Factors: pricing decisions are made at two levels within an organization. Top executives determine the general price ranges for a product based on market segments. Lower-level employees choose the actual prices for individual products.
Marketing Mix: marketers see price as only one piece of the marketing mix. Changing one element will affect the other three – production/promotion/distribution.
Price Differentiation: certain features may be added to a product to increase its desirable attributes – including quality/size/color. Products with new styles/attractive packaging are more likely to be purchased by customers.
Cost of the Product: the price of a product depends on its cost of production and what the public is willing to pay for it.
Objectives of the Firm: price is one of the factors that contribute to a company’s goal. A firm may pursue a variety of objectives, such as increasing its sales revenue, increasing its share of the market, increasing its volume of customers, maintaining an image, or maintaining stable prices.

External Factors Affecting Pricing Strategies

Demand: a product/service’s demand has a significant impact on its price. Demand is determined by taking into account the number of prospective buyers, their ability to pay, and their preferences.
Competition: when faced with competitive conditions, you can choose to price your goods/services by either pricing them lower or at a comparable level.
Suppliers: the price of a shirt is determined by how much it takes to make and sell, as well as how much profit the manufacturer makes.
Economic Conditions: when the economy is booming, prices tend to rise. This can be explained by the increasing cost of production and distribution.

How to Create a Winning Pricing Strategy?

Evaluate Pricing Potential: considering the following factors “Geographical market details, Inventories, Operating Costs, Demographic Data, Competitive advantages and concerns, Demand Fluctuations”.
Define Buyer Personas: to price a product correctly, you need to understand your customers and what they want to buy. You need to look at their customer lifetime value, their customer pain points, and their willingness to pay.
Identify Historical Trends: use closed deals, average customer tenure, and churn data, as well as sales volume to measure which strategies were most successful.
Balance Business Goals with Value: when setting prices, it’s important to keep both customers’ needs and your business’ profits in mind.
Analyze the Prices of Competitors: make your price more affordable than your competitor’s (undercut), or offer greater value than your competitors (value-based pricing).

The 4C of Pricing Your Product

Customers: how you price the products/services affects the purchasing behavior and attitudes of your customers. Price points can communicate a lot about a brand, make sure they align with an image you want to project and that they speak to your ideal customer.
Current Positioning: pricing needs to be appropriate to your product/service. To establish the image of your company that you desire, your product & pricing must work together.
Competitors: prices from competitors are an excellent way to get an idea of your pricing. Make sure you know all the major differences between you and your competitors so that you can be flexible with your pricing.
Costs: keep your costs as low as possible and make sure that you are making a profit on each unit sold. One way to do this is to make sure that you have enough of a margin between what your customer pays for a product and what it actually costs you to produce it.

How To Improve Pricing Capabilities

Develop a 1% Pricing Mindset: everyone must understand how important every 1% is to their bottom line and fight for it. Rather than offering discounts, focus on the value you delivered.
Price Strategically, Not Opportunistically: companies can strip some features from their main product and offer it at a lower price to price-conscious consumers so that they can maintain their core business customers.
Diplomacy with the Competition: gathering info about competitors is a key part of business strategy. Having a knowledge of the competition’s business can help a company to maintain an edge over its rivals.
Consistently deliver more Value: serving your customers is key to business success. By providing value, you provide an incentive for customers to return to your business again and again.

KEY Questions When Setting Pricing Strategy

Is your company creating a new market?
How do you define your target audience?
Do they use any products similar to yours?
How do you differ from your competitors in terms of Advantages & Benefits?
How valuable are those advantages to consumers, and do they value them enough to change?
How and where can customers purchase the product or service?
Who are your competitors?
How much do your competitors charge?
What sets you apart from your competitors?
Are there growth trends in the market, is it a well-established market that is static?
Are your customers likely to make repeat purchases or just one-time purchases?
Do the products come with consumables?
By choosing your service/product, what risks are consumers taking?
Are the benefits of the product worth those risks?

Pricing Strategy Advice

Think about the VALUE for customers: study the market and think about how you’re going to enter it. You can always lower the price, but it will be difficult to raise it later. Make sure you deliver a high-value product, it will justify any price you set and attract more customers.
Be tactical and consider the big picture: take the long-term into account when pricing the product or service.
Case studies boost willingness to pay quite a bit: when customers see that other people have had great experience with your company and its products, they are more willing to buy from you.
Don’t discount over 20%: the businesses that offer 20% discount to clients will suffer higher churn.
Keep reviewing your profit margins: the more you know about your value, the easier it is to sell yourself. When customers know the value of your product, they’ll never feel like they’re being taken advantage of, even if you are charging more than your competitors.
Understand what the market dictates: it may be more profitable for you to sell to one customer in a given market than to another customer in the same market if you know your customers’ preferences.
Don’t use % for upgrades to annual discounts, try offers: you’ll get better results from your customers if you offer discounts in the form of a whole dollar amount instead of 10%.
Integrations boost retention and willingness to pay: the more add-ons/integrations a customer uses, the more likely they’re to pay and the longer they will stay with your service.
Your prices should NOT be inflated: taking advantage of high prices is a short-term strategy that will lead to long-term failure. Your goal should be to maximize sales by offering value, not to gouge prices. Clients will come back again if they feel you’re giving them a good deal.
Utilize freemiums for customer acquisitions, not for product pricing: freemium can be a great way to drive leads, but only if you know how to convert those leads into paying customers.
Know the difference between Value v.s. Cost: consider the value of what you’re offering versus its cost when you price your services. Your clients may not always be focused on the economic value of what you do, they may place a higher perceptive value on what you offer.

Pricing Policies For New Products

Identify the value of a product – what it offers a customer and whether they will pay what you want
What are your competitors charging – does your product/service differ from theirs, or are you following the market trend?
What channel would you like to use? – it impacts your marketing budget and distribution expenses
What is the timeline of your product/service’s establishment?
What is the expected lifespan of your product or service?
Calculate how much you should charge to cover your costs.

Skimming/Penetration/Premium/Economy/Bundle/Value-Based/Dynamic Pricing.

Pricing Models Based on Industry or Business

Product pricing model: it’s important to consider the costs of shipping/production/storage when selling tangible products. Also, be aware of your competitor’s price, CompetitiveValue-based, and Cost-plus/Premium pricing can all work in this sector.
Digital product pricing model: software and e-book, you should reflect the value of your brand, industry, and overall product when setting your prices.
Restaurant pricing model: it is complex because it involves the cost of food and labor, you need to consider customer base, overall market trends, location, etc. Cost-plus, value-based, and premium pricing models are suitable.
Event pricing model: competition-based, value-based, and dynamic pricing model.
Services pricing model: take into account experience and quality, using project-based, hourly, and value-based pricing strategies.
Nonprofit pricing model: cost-plus, demand, and competitive pricing.
Education pricing model: cost-based, competitive, and premium pricing models.
Real estate pricing model: competitive, premium, dynamic, and value-based pricing models.
Agency pricing model: project pricing, hourly pricing, and value-based pricing models.
Manufacturing pricing model: competitive, cost-plus, value-based pricing models.
E-commerce pricing model: cost-based, competitive, dynamic, penetration, freemium, and value-based pricing models.

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