Pricing for products and services is a challenging task, and a company may use a range of pricing strategies according to its position in the marketplace. There are numerous variables to consider when determining pricing, such as the behavior of the target audience and their sensitivity to price increases and decreases.
The right strategies for product pricing are critical to the success of any business, regardless of its size. It is essential that a business’s pricing is flexible, allowing for adjustments due to market fluctuations. When creating pricing, the most important thing is being disciplined.
Many companies neglect their pricing strategy, setting it and forgetting it. This is unfortunate since pricing can have a substantial and immediate effect on a business’s profitability. Small variations in the price of a product, for example, can significantly increase or decrease profitability.
Key pricing strategies
Companies have completely different approaches to pricing. However, most end up basing their prices on these three factors:
- Competition
- Business costs
- Customers’ sensitivity to price
While these factors affect the parameters in which prices are fixed, it is necessary to consider other factors like the ones below when optimizing price.
Return on invested capital
Return on invested capital is similar to the return on investment, which refers to the percentage of net income that covers the total amount of capital invested, that is, equity and third parties. If you and your investors can allocate your resources to options other than your business, it is very important that you set return targets that outweigh the initial investment.
Market analysis
Another important factor to consider is the condition of your market. There are business conditions inherent in certain segments, and these depend not only on the public, but also on your competition.
You must position your product in relation to the market. In this way, the pricing strategy can be adapted according to the positioning that the product will have. That is, will your product be set in specific niches of the market, thus prioritizing margins while reducing volume, or will it reach a greater number of customers with more affordable prices?
Cost analysis
The correct analysis of costs due to the process of acquiring (or manufacturing) products or services is another factor that impacts pricing. Determine how fixed costs and expenses will be prorated in this process, since these values may directly influence the company’s competitiveness. Tax laws also has a considerable impact on pricing, so it is important to understand the tax laws of your country.
Other pricing strategies
In the business world, there are a number of practices widely used to determine the prices of products or services. Here are 6 of these pricing strategies.
Absorption costing
This widely used strategy consists of considering all manufacturing costs, whether direct or indirect, fixed or variable, in the formation of the price. After the costs have been determined, a proportional portion of the expenditures are equally distributed among the products made.
Margin or markup pricing
In this scenario, the sales price is determined by calculating a standard margin plus the cost of the product. One feature of this model is that it facilitates the trading of large volumes by reducing the margin.
Creaming or skimming pricing
In this strategy, the product is assigned a high price, which decreases over time. This model allows the business to quickly recover costs. Then, once the demands of the first customers are met, the price is lowered to attract more price-sensitive customers, allowing the business to better compete against new businesses that offer substitute products. Creaming pricing can be used, for example, for the entry of a new and unique product on the market.
Bid pricing
A competition-oriented strategy, bid pricing means offering the lowest price possible in order to win the customer. With this strategy, the company is able to control how far it can go in terms of price and can project what the profit in the negotiations will be.
Price of perceived value
Under the system, the price is determined by the perception of the value of the product or service by the consumer. This makes it necessary to understand, in great depth, how customers react in relation to the product. Product durability, reliability, service, warranty, and other factors can drive perceived value.
Discounted price
This is a strategy in which the product has different prices by consumer segment, product version, location, period, image, or some other variable. It is a delicate situation, because there must be a very clear segmentation by price in order for it to work.
Whatever the pricing strategy adopted by your company, it is always worth periodically reconsidering if that strategy or the variables on which you based it still make sense. Adjustments should be made to seize opportunities in the market. Don’t stagnate by continually using the same methods and processes, when the market is dynamic and the whole world is intertwined.
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