HOW TO DEVELOP A MARKETING PLAN (4)
Strategies For Pricing
Pricing a product or service is as much a part of the marketing strategy of the financial strategy. Pricing is one of the many features associated with a product or service; it becomes the central selling point when the product or service is a commodity – that is when the only feature differentiating the product or service from those offered by competitors is the price.
Some examples of commodities are basic food products, such as milk, and most electronics categories that have been in the market for some time, such as computers and printers. Entrepreneurs can price new technology higher because it offers features and benefits not currently in the market, but it quickly becomes a commodity as competitors introduce their version of the new technology.
How a product or service is priced is a function of a company’s goals. If the goal is to increase sales or market share, prices may need to be lowered to raise the volume sold.
If the goal is to maximize cash flow, raising prices and reducing direct costs and overhead may be the answer.
Maximizing profit can be accomplished by raising prices, lowering prices and increasing volume, or decreasing overhead.
If the goal is to define an image, setting a higher price based on higher perceived and/or actual quality is one way of establishing a particular image in industry.
To control demand when a company doesn’t have the resources to meet it may mean setting prices at a level that discourages sales to a particular degree.
Knowing what a pricing strategy is supposed to accomplish in advance of setting a price will ensure compatibility with the company’s goals. With a pricing strategy in place, the components of pricing can be considered.
Cost-Based Pricing
In this pricing strategy, the entrepreneur adds the cost of producing the product, the related costs of running the business, and a profit margin to arrive at a market price.
Demand-Based Pricing
Demand pricing is based on finding out what customers are willing to pay for the product and pricing it accordingly. For new products or services with no direct comparison, a combination of this approach and cost-based pricing is often used to arrive at a satisfactory price.
In general, customers recognize several prices for anyone product: the standard price, which is the price normally paid for the item; the sale price; the price paid for specials; and the relative price, which is the price of the item compared to the price of a substitute product. For some products, customers may have to add the normal cost of shipping, handling, or installation to their comparison with like products.
Competition-Based Pricing
When a product has direct competition, it is important to study the competitors’ pricing strategy and to price the product or service in line with theirs – higher if it is determined that one’s own product has added value or lower if one has decided to compete on price.
Psychological Pricing
Using an odd-even strategy can suggest a pricing position in the market: an odd number (N254.99) to suggest a bargain, an even number (N600) to suggest quality or a higher than average pricing to suggest exclusivity.
Distribution Channel Pricing
The channel of distribution through which an entrepreneur chooses to move a product or service affects the ultimate price to the customer, because the costs and profits for each intermediary (distributors, retailers), it is important to ensure that the final price to the customer or end-user is tolerable, given all the mark-ups along the value chain. That is why it is crucial to compare what the market will bear with the cost of getting a product to the market.
Extrapolation from Other Industries
It is essential to look at the pricing strategies of businesses in other industries. The fact that one’s own industry does not seem to employ a particular strategy does not mean that the strategy won’t work. Staying competitive on price means always looking for new methods of pricing products.
