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Pricing strategy plays an important role in attracting customers for any business. In fact, setting up a pricing structure is one of the toughest tasks a business owner has to tackle. It is easy to assume certain pricing strategies such as cost plus a certain percentage, estimate your time per hour, etc. However, sometimes it seems that setting the right price is like some kind of art.
What is a pricing strategy?
Pricing strategy is a marketing strategy, the implementation of which is associated with an impact on the price of a product or pricing system.
Types of pricing strategies
Cream skimming strategy. Its essence lies in the fact that when a product is brought to the market, a deliberately inflated price is assigned for it. There is a group of consumers for whom it is important to purchase this product first, and the price is not important for them. After some time, after the hype around the product subsides, its cost drops to the objective price.
Example: The best example is that each fall, Apple releases a new model of its flagship smartphone. Its cost when entering the market is overestimated by at least one and a half times. Already after 2-3 months, the cost of a smartphone drops by 15-20%.
Low price strategy – a product is priced slightly below the average market price due to the maximum reduction in production costs. The goal of this strategy is to make big profits in the long run through sales volume, not quick profits through skimming.
Target Price Strategy – The most important constant is profit. The price of a product changes depending on changes in the cost of production (changes in prices for raw materials, increased cost of logistics associated with an increase in the price of gasoline, etc.), but the value added (marginality) of the product remains unchanged.
Discounted pricing strategy – often used when you need to make a quick profit or to smooth out seasonal fluctuations in sales.
Example: discounts in supermarkets for certain groups of goods (often goods with an approaching expiration date), for pensioners on a social card, etc.
The strategy of “following the leader” – setting prices in accordance with the pricing policy of the industry leader. The price of a new released product may differ from the prices of competitors, but within limits depending on the technological or qualitative superiority of the product over competitors. The more the product differs (superior) from competitors, the more its price can differ.
A constant price strategy is a strategy in which the price of a product does not change for years, ideally it does not change at all. The type of product, packaging (for a cheaper one, for example), volume (weight) of the product may change, but the price remains unchanged.
Example: for a long time, 48 kopecks ice cream cost exactly 48 kopecks. The price was so fixed in the memory of consumers that ice cream was recognized only by it, and subsequently the price became a name.
The psychological pricing strategy is a strategy that deceives the eyes of buyers. Seeing the price tag “999 rubles”, many subconsciously round it up to “900”, although it is more correct to round it up to “1000”. Thus, at the subconscious level, 999 is 100 rubles cheaper for the buyer than 1000.
Here’s how to rate a product or service to increase sales.
Pricing strategy options
As the most experienced entrepreneurs will tell you, a higher price may cost you a certain number of customers, but the ones you attract will be the ones you need.
It is imperative that you take the time to determine the right pricing structure for your business. Prices that are too low can lead to a loss of money, but on the other hand, prices may be too high for your target audience.
Prices for services can be even more difficult to compile than prices for retail or wholesale goods.
Use these guidelines to create a pricing strategy that makes sense for your business.
How to evaluate a product?
Most small business owners make the mistake of thinking that more customers mean more sales. However, it’s quite the opposite when you increase the numbers. This is where sales forecasts can give you a deeper understanding of today’s market.
Let’s say you have a new product that you want to introduce to the market. A pricing strategy that sells goods at higher prices will result in fewer sales but may generate more total cash.
If you price a unit at $5 and your forecast is that you can sell 10,000 units, that’s $50,000 in gross revenue (turnover). But what if you sold it for twice the price? Or even four times more?
When you lower the numbers, you will find that you can only sell 3,000 units, but that will still net you $60,000. This simplifies your production costs and allows you to find ways to improve the quality you need to make those prices justifiable. In the case of services, you can bill for fewer hours to generate more revenue.
You also need to consider the maintenance of the goods you manufacture. Whether you develop software or produce a quality central heating unit, the less you sell, the fewer products you will have to service in the future.
If you’ve sold 20,000 units versus 5,000, consider how much additional customer service staff you’ll have to hire, train, and retain. This people’s time adds up, leading to increased costs.
An example of developing a pricing strategy
Another pricing mistake many new small business owners make is focusing more on what they need than what they want. Let’s say after careful analysis, you find that your individual work from home requires a minimum of $4,000 per month.
This includes paying the mortgage, maintenance, utilities, paying for the car, food, some time for fun, and some new clothes from time to time. So you can live on $48,000 a year, which is what you need. But what if you want 75 or 100 thousand dollars?
Just think of the opportunity to earn 100 thousand a year. In order to earn 100 thousand dollars, you need to earn 8333 dollars a month. If you work an average of 8 hours a day for 22 days a month, that’s about 176 hours. That works out to $47 an hour for your services. Play around with the numbers yourself.
Competitive Pricing Strategies or Average Price Strategy. To determine the optimal price for a product, the average market price for similar products (competitors’ products) is taken. The most common pricing strategy.
Check how much other similar companies’ products or services cost. Make up your competitor’s price matrix before you decide how to price your product.
Then create a matrix that lists each company’s prices relative to each other. Determine the average price. Then think about what small added value can affect the price. It can be packaging, home delivery, “quality control”. Then add that value to your product or service to justify your higher price strategy.
You will find that people don’t always buy because the price is the lowest. Many consumers justify the higher price with higher quality.
When considering pricing, remember that there are many good reasons to charge more than your competitors. An increase in current prices may lead to an outflow of some current customers. However, it could open the door to a whole new customer base and an even more lucrative niche market.
Expert in legal marketing. Head of marketing agency MAVR.
Business degree “Master of Business Administration” (MBA).