If you launch a new product with no competitors and there is no law for pricing, how do you determine its price? Do you start with a low price and then increase it or vice versa? How do they determine the optimal price?
The way of pricing can be the guarantee of the survival and profitability of the business as well as the bane of its life!
That’s why we decided to introduce you to 8 common and useful pricing strategies and 4 tactics in this article.
Are yo ready? Let’s get started!
What is meant by pricing strategy?
Simply put:
Pricing strategies determine how to price a product or service.
Based on available statistics, 18% of startups fail because of wrong pricing! Having a pricing strategy is one of the must-haves that many businesses neglect and, of course, see their loss.
Having this strategy means that you have a detailed and practical plan to determine the price of your product or service.
You can’t do this without thinking; Because the wrong price will end in nothing but failure.
If the price of the product is too high, you will lose many customers; Also, if you set the price lower than usual, many will think the product is of poor quality and you will still lose a lot of customers.
Let’s take a closer look at why this is important.
Why is it important to choose a suitable strategy for pricing?
One of the first and main factors that influence customers’ decisions is price. That’s why it should be determined correctly!
If you don’t do this well, your business will suffer:
- You cannot meet market expectations;
- You cannot have the maximum possible income;
- You’re likely to outcompete competitors who do it right;
- You cannot convey the true value of the product.
Instead, when you adopt the right pricing strategy, the benefits will accrue to your business:
- correctly conveying the value of the product and meeting the expectations of the audience;
- Correct targeting of target audiences and potential customers;
- The possibility of distinguishing yourself from competitors and having a winning card.
Because of these advantages and disadvantages, choosing the right strategy becomes very important and you need to spend time on it.
Types of pricing strategies
1. Cost-plus pricing
Every product or service is made at a certain cost. Cost-plus pricing strategy means adding a certain percentage to the initial cost of making a product or providing a service.
This method is also called markup and cost-based pricing.
Let’s open the issue further with an example:
Suppose a furniture factory wants to use markup pricing to determine the price of its products. Considering various factors, this workshop has come to the conclusion that it is better to add 30% to the product manufacturing price in order to obtain the necessary profit.
In this situation, if the cost of making a sofa is 10 million tomans, this workshop should sell it at a price of 13 million tomans.
This formula is true for the rest of the products, including sofa beds, classic sofas, Chester sofas, etc.; That is, 30% of the production cost is added to it and the final price is determined.
Reminder: In this method, the price is determined based on the production cost.
2. Competitive pricing
In the competitive pricing strategy, the price setter has nothing to do with the cost of production and only considers the price set by the competitors.This strategy is to steal the competition in markets that are saturated. In these markets, the smallest price difference can turn the tide in your favor.In this pricing model, first, complete statistics of other competitors’ prices are collected. Then you decide whether the price is lower, equal or higher than the competition. This issue depends on the quality of the product you offer and the market demand.You probably thought that competitive pricing meant lowering prices; But the thing is, customers are looking for the value you provide. For this reason, sometimes the higher price is justified.Of course, keep in mind that if the price is higher than the rest of the competitors, you should offer special offers so that the price difference is not noticed by the buyer.For example, consider a tuna factory. If the standard price of one ton per month is 30 thousand tomans, our factory may set the price of its product at 35 thousand tomans; Because he claims to use high quality oil for his products. High-quality oil is the special offer that makes up for the price difference.
3. Value-Based Pricingv
This strategy also means that we fix the price of the product at a rate that the buyer is willing to pay!
Even if the seller can set a higher price and make more profit, he still tries to act according to the wishes of the audience.
One of the most important achievements of this pricing strategy in marketing is increasing loyalty among people who are your customers.
Also, value-based pricing requires you to constantly obtain up-to-date information from your target audience; Because you must know what value they attach to your product or service.
Tip: If you’re going to raise the price, you need to provide added value.
It doesn’t matter how much you spend to make your product or service, it doesn’t even matter what your competitors charge! The only thing that matters is what the customer is willing to pay. In other words, the price is determined based on the value perceived by the customer.
4. Dynamic Pricing
In our country, Canada, changing prices is not a strange thing! At any moment, a parameter may change and the price of all goods may change. This is why dynamic pricing strategy is used by many businesses.
In this model, prices change depending on the time of the transaction. It can be said that price determination in this method is completely dependent on market supply and demand at different times.
If we are not mistaken, you have already thought about the price of hotel reservation and plane ticket. You guessed right! These companies and other businesses like forums make decisions in the moment more than anything else. For this reason, it is also known as time-based pricing.
Let’s give another example and introduce the next strategy. Google Ads also uses this strategy to determine the price of each click. The amount of demand and competition makes the price of each click different at the moment.
5. Penetration Pricing
When a business is newly established, it should do its best to stand out among established competitors. In order to achieve this, the use of penetration pricing can be a solution.
In this strategy, the price is considered much lower than the competitors. Of course, a similar or even greater value should be provided.
The purpose of this work is to attract customers of other competitors and create a base of potential customers. Of course, there are problems. Usually the profit is minimal and you have to have many customers to compensate.
Even in some cases, businesses suffer because of using this strategy; But because of the profit they will get in the future, they will bear this loss.
In general, the disadvantages of penetration pricing are the following:
- You have to have a lot of customers to make a reasonable profit;
- There is a possibility that you will lose many customers by increasing the price;
- There is a possibility of bankruptcy due to the low interest rate.
For example, consider a car wash established in a Toronto neighborhood. If the rate of washing the inside and outside of each car is 100 dollars, the car wash in our example only requires 50 dollars for this work. In this way, it can attract the attention of many people of that place who were previously customers of the rest of the car washes.
In this pricing strategy, the focus is on high sales to compensate for declining profits. You have probably heard the following term many times:
Less profit, more sales!
6. Economy pricing
In most of the examples, we talked about maintaining quality; But in economy pricing, we are not necessarily going to offer the same quality as our competitors. In the economic strategy, the product has a lower price due to the low cost of production. As a rule, the quality will be lower; But the material will also be offered cheaper. Keep in mind that by reducing the price in this way, the product will be known as second-rate or even third-rate material! Therefore, this method may not be suitable for many businesses that want to build a long-term relationship with their customers.
This method is to attract customers who are highly sensitive to the price of various goods and services. Sensitivity that can be caused by various factors.
How to price?
We said above, various businesses do not pay much attention to product pricing and see its loss. If you don’t want to be one of them, stay with us in the continuation of the article.
In the first step, you should have familiarized yourself with various product pricing strategies. What was done in the previous section. Now we want to teach how to price:
1. Evaluation of different potentials
In order to choose the best strategy, you need to know the pricing potential of your business; That is, the price that you can ask the customer approximately and according to the costs, supply and demand.
Some factors that can affect this evaluation are the following:
- geographic characteristics of the market;
- executive expenses;
- product inventory;
- demand fluctuations;
- competitive advantages;
- Demographic characteristics.
We will talk more about the last option in the next section.
2. Defining buyer personas
Like any other work in the field of marketing and attracting customers, you must first know the target audience well. In fact, pricing is done according to the type of persona and the amount they are willing to spend.
To get the most out of this step, we recommend talking to existing customers and getting more information about them.
Learn from the past!3.
Take a close look at the old information. If you were using a different pricing strategy before, analyze the data and see where the strengths and weaknesses were.
4. Balance business value and goals
When you price, you want all of your target audience to be able to buy from you. You shouldn’t let this approach negatively impact your business goals.
In addition to the fundamental values of the brand, you should pay attention to the fact that the pricing ultimately fulfills the business goals. Things like:
- Increase in profit;
- increasing liquidity;
- penetration in the market;
- expanding market share;
- Increase conversion rate.
In fact, it’s a good strategy for you to keep both sides. Adhere to the values and move towards the goals.
5. Keep an eye on competitors’ prices
Pricing is impossible without knowing the prices and offers of competitors. When you see the price difference between your similar product and the competitor, you have two options:
- Offering a product at a cheaper price
- Providing a higher quality product
It is better to have a complete research to know the strengths and weaknesses of competitors. The more complete your information, the more appropriate pricing strategy you can adopt.
Setting the right price = more revenue
If you want your business to be profitable, you need to set the right price for your goods and services. A price that is not so high that the customer skips buying, not so low that it conveys the feeling of poor quality.
During this article, you found out what pricing strategy is, why it is important, and you got to know 6 common ones. We also answered the question of how to price
If we forgot something, be sure to write in the comments section so that we and other readers can benefit from it.
