Setting pricing strategies for a business is easy to do but hard to do correctly—many bases their pricing on intuition or reference points from the market. Generally, most people we meet charge too low for their products or services. As a rule of thumb, people should charge higher yet, at the same time, impose some service guarantees to create a win-win situation for both vendors and clients.
Knowledge Of Pricing Behavior Is Useful For Both Business And Personal Consumption
There are some mechanics of pricing behaviour which will go through in this info piece which can be helpful for anyone running a business or even for personal lifestyle consumption behaviours. After reading this piece, you should gain insight into specific players and setting prices in a certain way. What methodology are they using in the background, and how can you prevent yourself from being gamed?
Pricing is the fourth of the four marketing elements: promotion, placement and distribution. It represents the firm’s attempt to capture the profit’s value. If we consider product development, advertising and placement as sowing the seeds of the business, effective pricing will be the harvest. To most business managers, pricing is the most important. Getting your pricing strategy will have the biggest payoff to your bottom line.
Technology, regulation, market information, consumer preference and relative costs challenge today’s ability to harvest potential business profits. Making sales profitability should be the priority of a strategy for driving growth. Creating and communicating superior value propositions to deliver value at a lower price is needed for sustainable revenue growth.
Common Pricing Methods
Here are some standard pricing methods used by the market, and some insightful descriptions are used to break them down.
Cost Plus Pricing
Cost plus pricing is the most common method as it is simple but ineffective. So instead, you slap on a markup or multiple of your cost of production. The problem is that it is hard to determine a product’s unit cost before deciding the price, as unit costs change with the volume. Pricing managers assume a level of sales and then set prices without accounting for the effects of price on volume. Cost plus pricing leads to overpricing in weak markets and underpricing in strong ones. There is a flawed circularity of cost-based pricing as sales volume depends on price. It is good to start with but not the final optimized pricing method.
Customer Driven Pricing
Businesses need to realize the need for pricing strategies to reflect market conditions and understand the value to the customer. As a result, some firms shift pricing authority to sales and product managers from the marketing team.
The job of sales and marketing is not simply to process orders at market clearing prices but to raise customers’ willingness to pay to a level that reflects the product’s actual value. Customers need more prior experience to judge the product’s value. Prices have little impact on whether customers are willing to pay. They need to understand the value of the product. Low pricing is usually related to inadequate marketing and sales effort.
Share Driven Pricing
Share-driven pricing is determined by competitive conditions and is also used to gain market share. Cutting price is a quick, effective way to achieve sales objectives, but financially, it could be a better decision. As it is easily matched, it offers a short-term market advantage at the expense of permanently lower margins. The long-term costs usually exceed any short-term benefits. Product differentiation, advertising and improved distribution are more sustainable and cost-effective in the long run.
Pricing aims to maximize profitability over the long term via a combination of margin and market share. Strategic pricing involves making trade-offs between price and volume to maximize profits.
In strategic pricing, the goal is sustainable profitability—nearly all successful pricing strategies embody value-based, proactive and profit-driven principles.
- Value-based – the difference in pricing reflects differences in customer value.
- Proactive – businesses should anticipate disruptive events and develop strategies to deal with them like new competition.
- Profit driven – the company evaluate what it earns relative to alternative investments rather than vs the competitors.
Strategies for Conveying Value
Experienced salespeople enjoy two-way conversations about how much value their product creates. Speaking with users allows the salespeople to justify the price premium, which might initially be unacceptable to a non-product user. High prices are prevalent in the B2B space, where the layperson needs to understand enormous prices for specific software products or services. The high price is because of the value it unlocks to the consumer, which could be impossible otherwise if not for the service provider. Salespeople should focus on high-value benefits that customers might need to consider and raise the perception of the product benefits that may take time to be judged.
Competitive Reference Effect
In the real world, consumers need more time to make informed decisions. In addition, they are often overwhelmed by data and need help understanding the consequences of poor choices. One shortcut they take is to find a competitive reference product to access relative value.
With an array of options and without knowledge of the product category, the customers’ perception of value is influenced by the range of prices available at the time of purchase. Usually, an in the middle of the options is selected. That is why you see multiple price tiers from consumer software products offered to consumers, and the consumer usually chooses the middle-tier solution.
Difficult Comparison Effect
Sometimes it takes work to compare alternative supplies and a product’s accurate attributes before purchase. As a result, buyers are less sensitive to a known supplier, and they settle for what will be a satisfactory purchase. Their confidence in a brand lies in their experience or the experience of people they trust.
For industrial players, when products are difficult to compare, and the cost of failure is high, they tend to be brand loyal and price insensitive. They will often develop trustworthy relationships with a list of approved supplies for which they had a good experience. Even if a competitive supplier offers a lower price, they will not consider that. The cost of switching a supplier and potential personal career risks makes it not worth it.
End Benefit Effect
Price sensitivity is often influenced by the importance of the benefit they try to derive from the purchase. The purchasing agent faces a personal risk if he procures a lesser-known brand that does not deliver the desired performance.
Price Quality Effect
The adage – you get what you pay for has particular resonance. Price is just an attribute and applies to products in three categories – image products, exclusive products and products with no cues to the comparable quality. However, higher prices positively influence buyers, which may signal better quality. People buy items to communicate that they can afford them.
Consumers value these products when the product reflects on them and offer them prestige. In the luxury goods segment, a consumer’s price sensitivity decrease to what they love, the recognition or gratification the premium brand gives them.
A prestige image and the exclusivity that discourages some people from buying at a higher price can objectively add to the value. Many professionals set high prices to limit the clients, enabling them to be scheduled further so they can serve at the appointed time without value. Business travellers fly first class to reduce the probability of sitting next to a noisy noise that interferes with their work on the flight.
The perception of higher quality at high prices often reduces price sensitivity even as the client seeks neither prestige nor exclusivity. This occurs when buyers need to ascertain the objective quality of a product before purchases and need available cues like brand names, country of origin or trusted endorsements. Wine prices in Singapore retail outlets are a perfect example! Subjects show higher pleasure when tasting high-priced wines than lower-priced wines.
An effective price communications strategy requires a nuanced assessment of the quantifiable benefits a customer can realize from the transaction and a careful understanding of the psychological factors that might influence a customer’s decision.
Pricing differently across customer segments
A market needs to determine how to capture market share in volume and margin. Individuals value differentiating features with differences in their ability to pay, subjective preference, usage and prior experience with the product category. In addition, the timing of customer needs, speed of payments, level of service and support affects the cost to serve them.
Apart from highly competitive commodities, charging the same price per unit is rarely the best way to generate revenues. Instead, a more profitable strategy requires creating price structures that align with the differences in economic value to serve across customer segments.
Industries with high fixed costs will find it profitable to serve additional customers like transport infrastructure.
A seller can segment the market by configuring different offers of bundles of features and services for different segments. First, the seller should determine the features and services in a bundle. A single price for a bundle reduces transaction costs for all parties.
Policies for Price Negotiation
Well-thought-out policies are implemented, so customers and sales reps know what ad hoc exceptions to policies will not be granted. Putting a no-exception stake onto the ground makes profit-enhancing pricing strategies decisions. Most discount proposals have an immediate reward but a delayed corresponding cost—pricing by policy forces the company to consider the impact on the entire market.
Policies also influence how your sales rep sell, which ones succeed, and who is rewarded most. Policies should be transparent and consistent, enabling companies to address pricing strategies challenges proactively. Consistently communicates that customers can’t game the system by contacting multiple points in the company.
Here are some common tactics used by professional purchases to disconnect price from value, and effective pricing strategies & policies are adopted to defend against them:
- Commoditising the offer – customers distribute specifications of precisely what they require and solicit bids to meet or exceed the specification. Usually, a way companies counter this is to reduce costs by cutting quality and service levels to meet but within the specifications. You must have a few service upgrades that the customer can buy as needed, like expedited lead time.
- Some buyers offer sellers incremental volume for a price concession. The right way for the seller to respond is to focus the discount on the incremental volume and offer it as a rebate. However, they only get the savings once they have bought the required volume.
- Discounting to compensate for past failure. Sellers are vulnerable when it fails to meet commitments like delivering on time or delivering the promised quality. Purchases may exploit this vulnerability by demanding special price concessions. The seller should compensate the cost of legitimate failure as a lump sum payment than reducing the established price point or make the compensation a credit that the buyer can use for future invoicing. This preserves the integrity of the price.
Setting prices to capture the share of the value created
Price setting is the intersection of value creation and value extraction.
- We need to define the viable pricing strategies range. The price ceiling is the maximum price before a buyer sees a competitor as the better deal. The price floor is the price of the following best competitive alternative.
- Make strategic choices and prices to support and advance the firm’s marketing objectives. Skim the market – capture superior margins by charging a high price to price-insensitive customers. Then, the firm should have some competitive protection. Penetrate the market: Set a low price to attract and hold customers. It works if a significant market share is willing to change brands in response to a lower price.
- Neutral Pricing – The firm does not aim to use price to gain market share. Instead, we are minimizing the role of cost as a marketing tool to favour other tactics that are more cost-effective for a product market.
Measurement of Price Sensitivity
Quantitative estimates of customer price sensitivity can substantially improve price setting and segmentation.
An excellent way to measure the price sensitivity of actual purchases will be historical sales data, panel data from marketing research companies, and store scanner data.
To measure preferences and intentions, we can do direct questioning, buy-response survey and in-depth interview.
Pricing is an exciting endeavor for every business, do it correctly, make your client satisfied with the value they are paying and add to your business’s financial bottom line. Sales and optimized pricing strategies are the lifeblood of any business.