FACTORS IN ARRIVING AT A PRICING STRATEGY

FACTORS IN ARRIVING AT A PRICING STRATEGY

Intelligent pricing is one of the most important elements of any successful business venture. Yet many entrepreneurs fail to educate themselves adequately about various pricing components and strategies before launching a business. Smart business owners will weigh many marketplace factors before setting prices for their goods and services. You must understand your market, distribution costs, and competition. Remember the marketplace responds rapidly to technological advances and international competition. You must keep abreast of the factors that affect pricing and be ready to adjust quickly.

Arriving at a pricing strategy

Entrepreneurs encounter numerous considerations that should be weighed when assigning a price to their goods and services. These considerations range from the needs and desires of the target consumers to general economic conditions. The following factors are among the most important to consider when arriving at a pricing strategy:

• Is the price of the good or service of significant importance to target consumers?
•  How popular is the product or service being offered?
• What pricing and marketing strategies are compatible with the business’ other characteristics (location, service reputation, promotions, etc.)
• Does the owner enjoy final pricing authority?
• Are there opportunities for special market promotions?
• What are competitors charging for similar goods or services?
• Should competitors’ temporary price reductions be matched?
• What level of mark up can be achieved for each product line or area of service?
• Will prices generate a satisfactory profit margin after calculating operating expenses and reductions?
• When reducing prices on goods or services, do you consider competitors’ likely reactions?
• Are there legal factors to consider when establishing price?
• Should “odd pricing” or “multiple pricing” practices be introduced?
• Should marketing efforts highlight sales of selected high profile products to attract customers?
• If coupons and other discount measures are offered, how will they impact on net profits?
• Will characteristics of the product sold (handling costs, installation requirements, alternations, etc.) meaningfully add to operating costs?
• Will product quantities be unduly reduced as a result of spoilage, breakage, employee theft, or shoplifting?
• Will services such as home/office delivery, gift wrapping, etc. be included in the purchase price?
• Are economic conditions in areas of operation particularly good or bad?
• Will employees receive discounts on store items that they purchase?
• What markdown policies are in place?

Revisiting pricing strategies

Since pricing is one of the most important factors in determining whether a business will be successful, business owners should continually review their pricing policies to make certain that they remain in keeping with marketplace realities. Business environments can change quickly, and the successful entrepreneur will learn to change his or her pricing strategies accordingly.

Described here are six different circumstances in which business owners should review their pricing and make changes if necessary:

1. When introducing a new product or product line;
2. When testing for the best price;
3. When attempting to break into a new market;
4. When competitors change their prices;
5. When general economic conditions become inflationary or recessionary;
6. When weighing major changes in sales strategy.

Indeed, any significant change in any aspect of a business’s operations, from rising cost of raw materials to changing insurance premiums, should spark a review of company’s pricing strategy.

Raising Prices

Business owners are often reluctant to raise prices once a good baseline price has been established. They worry that a price increase will alienate customers and drive them to the competition. Faced with such resistance, a lot of businesspeople are tempted to forgo price increases altogether or at least put them off as long as possible. If you do either one, however, you are making a big mistake.

Your profit margins will be shrinking, and you are gradually undermining the perceived value of your services or products. Many business costs such as payroll, insurance, and utilities, tend to rise every year, slowly cutting into profit margins. In addition, customers tend to associate with quality. A business that does not increase prices to keep up with the competition risks being regarded as the cheap alternative in the marketplace.

When prices increases are implemented, businesses may be able to keep their customers happy while also keeping their profit margins intact. Customers typically base their purchase decisions on more than just price. Other factors influencing the decision process include quality, features, guarantees, and personal desires. In addition, people will always pay more for good, reliable customer service.

In order to make an effective price increase, you must convey the reasons for the increase to customers and give them a perceived increase in value for their money. The message for companies is clear: Those that differentiate their products from the competition’s and are able to articulate that difference to customers are more likely to be able to raise prices, and keep them raised, above the competitor’s.

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