Developing the Right Pricing Strategy
Establishing the right pricing strategy for a business’s products and services is a critical element in whether a company thrives or dies, but many businesses set prices without really understanding their costs, their competition, their customers’ needs and the economic climate.
Setting the price too high drives customers away, while setting it too low may attract customers in the short term but could ultimately drive a company out of business. In a difficult economy, strategic pricing — the active use of pricing to drive growth in sales and profits — is critical to success, and there are many factors that successful businesses consider when determining the “right” price for products or services.
- Know your customer. The most important factor to consider is the customer. The more a company understands about its customers’ wants and needs, the more likely it is to offer the things that those customers value, increasing the amount it is able to charge for meeting that need. By doing in-depth market research, a company can better understand what its customers are looking for, be it value, status, convenience, etc., then target those “wants” and price accordingly.
- Know your costs. Even the largest companies make the mistake of setting prices without understanding exactly what it costs to manufacture a product or offer a service. Too many businesses price products or services based only on the actual cost of producing them. Creating a spreadsheet that includes costs such as utilities, salaries, debt service costs, capital for equipment replacement, etc., will allow a business to access expenses and price according to maintain profitability.
- Know your competitors. Customers are looking at competitors’ pricing, and companies should be doing the same. Look not just at the offering price but the net price, the cost that some customers may be paying after rebates and discounts. However, while it is critical to pay attention to what rivals are doing, it is equally important not to copy them, as a company should strive to be a market leader, not a follower. In addition, if a company simply follows a competitor’s pricing strategy, it risks following a business that has a poor grasp on the market and the costs of doing business.
- Know where the market is heading. In today’s economy, it can be difficult to determine where the market is going and how to price products and services appropriately. But keeping an eye on market conditions can provide clues to how a product or service is perceived and how changing market conditions could impact the perception and reception of a product in the future. In addition, companies should continuously monitor the marketplace to be aware of what competitors are doing and how that could impact the market for a product or service.
- Know the product's life cycle. Adjust pricing strategies according to where the product is in its life cycle. During the growth stage, continuously assess whether the product is generating as much revenue and gross profit as it could be. If it compares favorably to other companies’ offerings and is not generating the return it should be, consider raising the price. In the “leveling out" and “decline” stages of a product’s life cycle, price sensitivity often becomes a bigger consideration in the marketplace and, in the decline phase, the market may become saturated. Smart companies are attuned to these developments and may lower prices accordingly. However, do not decrease the price so much that the product or service is only breaking even, or worse, losing money simply to maintain a hold on the market.
Determining the “right” price of a product or service is crucial to the survival of a company. The market is not static, and the pricing a company sets today may need to change in six months as the marketplace continues to evolve. Taking this approach can help a business maximize prices over time and improve returns. Used wisely, strategic pricing can be a powerful tool in a company’s marketing strategy.
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