Price is the amount of money that is paid to a seller by a buyer to acquire a product or service. A firm must consider many factors before deciding on the price of its products. By doing this, a firm sets prices that are profitable, competitive and acceptable to customers. Pricing strategy varies from one business to another due to the differences in product type and quality, competition structure, product cost and desired profit.
You need to listen to your customers
Customers decide on the level of prices by buying products to meet their needs and paying for the value of the product. Customers hire products to do a job for them; for example, they may buy cars to transport them. In the competitive market, customers decide on the most suitable product related to its value, and they avoid buying both very expensive and very cheap products.
Have you studied your rivals?
Competitors are similar firms that operate in one market and strive to win the same customers. A business should search the prices of any competitors, before deciding on the prices of its products. Competitors differentiate their products to gain a competitive advantage that justifies their prices by making changes, including the design, packaging, quality or cost to win customers. They also decide on their prices to enforce their market positioning and maintain their market share. Setting higher prices may work out if products have better features and quality than rival products, although in most cases setting higher prices results in lowering sales and losing customers.
Your cost is a strong determinant
Firms set prices of products to cover costs, make money and survive, and they strive to reduce the cost of their products to enable them to offer competitive prices. Many businesses use the Cost-Plus method to price their products, although this method has some drawbacks as it may lead to unworkable prices because of inflated costs. Price is the total cost of the product plus the profit margin. Pricing strategy plays a crucial role in shaping the overall cost of products; for example, reducing the price of a product may lead to increased sales and reduced overheads per sold product.
Wait, profit is first
Businesses are of two kinds, for-profits, such as a supermarket, or not-for-profit, such as a charity or social enterprise. Any corporation with a profit mission sets its prices to make money, and business may use the Cost-Plus or market penetration methods to win the market and achieve this goal. A firm achieves profit after the break-even point, where it makes zero profit. Thus, businesses choose a pricing strategy that will help to grow sales and make money.
But, chosen prices must enable your plans
Business is created with a mission, vision and plans to adhere to. Planning is a useful tool that provides a company with a road map to achieve its mission and vision. Any new business plans to survive initially, then to grow and make money and for this reason, it will draw up a marketing and sales plan to win the market and increase its revenue. Companies use a pricing strategy that will help to achieve their business plans, for example, a new business may reduce prices to launch its products on the market and attract customers. Alternatively, it may lower prices and invest in a costly promotion campaign to penetrate a new market.
Have you thought of your product?
Products can be a physical product or a service. In physical products, the inputs are materials, labours or machinery, while a service requires labours and overheads. The product pricing varies from that of service because of the differences in costing, storing or distributing each. This significant difference means that the pricing method applied to a product may not apply to services.
Don’t forget that pricing influences your marketing-mix offer
The marketing mix of a firm defines the 4Ps and how to market its products. It comprises information on product, price, place or channel and promotion. Price is one of the critical factors for fixing a profitable marketing mix, which conveys a message to customers about how a firm market and sells its products.
Be aware of the pricing methods
A business may choose between various pricing methods to launch or grow its operations. Such methods include penetration, skimming, cost-plus, breakeven, promotional or competitive pricing. In penetration pricing, a firm sets a relatively low price to boost sales of its new products, while the skimming pricing enables a firm to set a relatively high price to boost profits. The cost-plus pricing exists when a firm prices a product based on the cost-plus profit margin, and a firm uses the break-even pricing to reach the breakeven point and making a profit. The promotional pricing is applied by a firm to set discounted or lower prices to promote its products, and a firm uses competitive pricing to set prices that enforce its competitive positioning in a market.
This article is extracted from my new book- Mastering Enterprise Skills for Potential Entrepreneurs, which can be found on www.amazon.co.uk. If you want to receive more information about the book and our activities, you can register in our newsletter by using this link.
Prepared by: Munther Al Dawood
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