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Mastering the Art of Effective Pricing: Conquer Your Fears and Get it Right!

A Practical Guide to Effective Pricing: it’s not as hard as you think!


Pricing is a pivotal element in a company's marketing mix, profoundly influencing its success. It reflects the company's goals, market conditions, cost structures, and consumer perceptions. This comprehensive guide delves into the nuances of pricing, ensuring alignment with business objectives and market dynamics.


Steps to effective pricing:

1. Select a pricing objective

2. Determine pricing impact on demand

3. Analyze the competitive landscape

4. Select an appropriate pricing strategy

5. Set your prices and monitor market response


Step 1: Select A Pricing Objective


Objective-Driven Pricing: Align your pricing strategy with your overall business goals. Whether aiming for market penetration, profit maximization, or a strong market presence, your pricing should reflect these ambitions, considering variable and fixed costs, especially in highly competitive markets or when launching innovative products.


Steps you can take to select the right pricing objective:

  • Market Positioning: How do you want your brand or product to be perceived?

  • Production Capacity: Assess whether your capacity can meet the demand at various price points.

  • Competitive Landscape: Understand how competitors price similar products and how your pricing can differentiate you in the market.


Step 2: Determine Pricing Impact on Demand


Understanding Price Sensitivity: Assess how demand for your product varies with price changes. Luxury goods may increase demand with higher prices, while essential goods often see the opposite. Utilize historical data and market research to gauge consumer willingness to pay accurately.


Steps you can take to determine demand at different price points:

  • The Elasticity of Demand: Assess your customers' sensitivity to price changes.

  • Demand Curve Analysis: Use market research and historical sales data to construct a demand curve for your product, showing how quantity demanded varies with price.

  • Consumer Surveys and Experiments: Conduct surveys or experiments (like A/B testing different prices) to gather direct consumer insights on pricing preferences.

Practice Guide to Effective Pricing
Demand Curve For Pricing

Use your demand curve to understand the pricing range that leads to the volume you can support.


Step 3: Analyze Competitors’ Costs, Prices, and Offerings


Competitive Analysis: Keep abreast of competitors' pricing strategies, costs, messaging, positioning, and promotional offers to remain competitive and responsive in your pricing and general market strategy.


Here are some steps you can take to ensure you understand the competitive landscape:

  • Benchmark Against Competitors: Regularly monitor and compare your prices with your competitors.

  • Understand Competitors' Value Propositions: Assess how competitors’ offerings differ from yours in terms of features, quality, and services.

  • Competitive Positioning: Create a competitive positioning matrix with price versus other key attributes your customers value

  • React to Market Changes: Be prepared to adjust your pricing in response to competitors' pricing changes or promotional offers.

The bottom line is that for many reasons, including pricing, you must regularly update your competitive analysis work, SWOT assessment, and competitive positioning. The frequency of those updates depends on how fast your industry and marketplace are growing and changing, but start with a quarterly review and an annual full-scale update and adjust your periodicity as needed.


Practice Guide to Effective Pricing
Competitive Positioning For Pricing

Add your product to the competitive positioning matrix to see what price ranges match the perceived value of your product.


Step 4: Choose Your Pricing Strategy


Align Your Pricing to Your Brand Strategy: Different pricing strategies serve specific business models and product types. Determine the right pricing strategy for your product, market, and customer perceptions.


Here is a description of the main pricing strategies and when they make sense:

  1. Skimming Pricing: This strategy involves setting high initial prices for a new product to maximize revenue layer by layer from segments willing to pay the high price, then gradually lowering the price to attract broader markets.

  2. Competitive Pricing: This approach sets prices based on competitors’ strategies, prices, and market offerings, often pricing products similarly or slightly lower to gain a competitive edge.

  3. Dynamic Pricing: Prices fluctuate based on market demand, customer profiles, and other real-time variables. This strategy is common in industries like airlines and hospitality, where prices change frequently based on demand and other factors.

  4. Value-Based Pricing: Prices are set based on the perceived value to the customer rather than on the product's cost or historical prices. This strategy is common for products with high emotional appeal or unique brand positioning.

  5. Penetration Pricing: Initially setting a low price for a new product to attract customers and gain market share quickly, then gradually increasing the price. This is effective in quickly establishing a foothold in competitive markets.

  6. Economy Pricing: This minimal-cost pricing strategy focuses on a no-frills experience, offering products at the lowest possible price point. It's often used for generic or commoditized goods. If you are a small business competing with big-box stores, this is probably not a good strategy.

  7. Premium Pricing: Prices are set high to create a perception of quality and exclusivity. This strategy is often used by luxury brands and products with unique features or prestige.

  8. Cost-Plus / Target-Return Pricing: A straightforward approach where a fixed percentage or amount is added to the cost of producing the product to determine its price. It ensures all costs are covered, and a profit margin is included.

  9. Freemium Pricing: A two-tiered approach where basic services or products are provided for free while advanced features or functionalities are priced. This strategy is popular in software and online services to attract users and upsell premium features.

CAUTION: Many new to price strategizing will go straight to a cost-plus or target-return pricing method. Please don’t do this! Your customers do not care what rate of return or margins you want to achieve for your product. They care about the value your product brings to them. You could be wildly over- or under-priced if you set pricing based on your costs. See below to learn what cost-plus assessments tell you and how to use them (hint - it's not to set your pricing).


Other Considerations When Setting Price

  • ·Psychology Of Pricing: Consider strategies, like charm pricing, that affect consumer behavior and perception of value, making products seem more attractive. (ie: round numbers are big psychological hurdles for consumers - the difference between $95 and $100 is much more than just $5.)

  • Geographic Influencers: Tailor pricing to different regions or countries, taking into account local economic conditions and purchasing power.

  • Market Segmentation: Offer different prices for various market segments, addressing the needs of a diverse customer base. (For instance: special pricing for high volume, introductory promotions, or repeat customers.)

  • Buying Seasonality: Alter prices in response to seasonal demand changes, which is crucial for businesses with marked seasonal variations. (ie: holiday shoppers)

  • Technological Advancement: Consider leveraging AI and machine learning software to create dynamic and customized pricing models.

Step 5: Set the Final Prices


Market Research for Final Pricing: The final step involves setting the actual price based on the previous analysis and conducting some final market research to ensure your pricing is not too high or too low and aligns with customer expectations.

  • Set The Initial Price: Look at the demand curve (Step 2) and competitive positioning (Step 3) work you completed above to understand the range of appropriate pricing. Then, using the strategy you selected (Step 4), set your prices.

  • Analyze Customer Feedback: Gather feedback from potential customers regarding pricing.

  • Conduct Market Tests: Test different price points in the market to see how they perform.

  • Monitor Sales and Adjust Prices as Needed: After setting the price, monitor sales performance and be ready to adjust prices based on market response and sales data.

Step 6: Confirm Viability at The Market-Driven Price


Ensure Your Business Is Viable: Although I would never recommend a cost-plus pricing strategy, it is important to ensure that your pricing covers your costs. If it doesn’t, there is work to be done so your business remains viable.

  • Analyze Fixed and Variable Costs: Break down costs into fixed (e.g., rent, salaries) and variable (e.g., materials, labor per unit) categories. Make sure your expected volume at the price you set will not put you in the red.

  • Economies of Scale: If your business is new, you might be unable to price your product at a profitable level until you achieve higher volumes. Consider how the cost per unit may decline as your volumes grow (this is called “economies of scale”). It may be worth taking a short-term loss to achieve long-term sustainability.

  • Break-Even Analysis:

    • Calculate the break-even point where total revenue equals total costs to determine a minimum viable price.

    • If you are considering taking an initial loss to drive economies of scale, calculate the volume you need to reach your break-even point and estimate when that might occur based on your anticipated adoption. This will be important to determine financial plans and business viability.

CAUTION! Again, be careful with step 6. Step 6 will tell you if your pricing model is financially feasible, but as I mentioned earlier, cost-plus pricing strategies are myopic and not generally effective. Always remember that what the customers are willing to pay for your product is about your product’s perceived value. Your costs are not necessarily the same or even related to that perceived value.


If you complete step 6 and find it's impossible to be profitable at the price point the market will accept, you need to go back to the drawing board. You can do many things to increase the perceived value of your product. Consider working with a marketing professional for help if this happens to you!


Conclusion

Effective pricing is a dynamic and multifaceted discipline, requiring an understanding of market, costs, competition, and customer perceptions. It is a science backed by an art. Make an informed decision about pricing, but be ready to adjust it if needed. Keep an eye on customer responses to pricing and refine your demand curve, competitive positioning, and your own perceptions about the value of your offerings. It is not uncommon for new businesses to have a false impression of the value of their own offerings – don’t let that discourage you! Keep abreast of your customers and marketplace and adapt your pricing strategy accordingly.


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