Pricing refers to the process of setting a price for a product or service and more than any other element of your marketing mix, will have the biggest impact on the amount of profit you make.
Developing an effective pricing strategy is a critical element of marketing because pricing is the only element of the marketing mix that creates sales revenue; the other elements create costs and sales volume.
An effective pricing strategy will help you:
- meet your profit objectives
- meet or beat your competitors’ prices
- retain or increase your market share
- match the image or reputation of your business, product or service
- match your offer to market demand
To arrive at a price for your product or service you’ll need to:
- Establish what it costs to offer and deliver your products. Without this knowledge, you’ll have no idea whether your prices are sufficient to not only cover all your costs, but to return a profit. Few businesses have failed because their prices are too high, however, many have folded because their prices weren’t high enough to cover costs or generate a profit.
- Conduct market research to establish what price your competitors are charging and what is the optimum price customers would be willing to pay for your product.
Your price will inevitably fall somewhere between that which is too low to produce a profit and that which is too high to generate any demand.
The pricing structure
A pricing structure consists of a base (or list) price and a variety of price modifiers which depend on the type of product you are selling and the type of market in which you operate.
The most common price modifiers are outlined below:
- Quantity discount – an incentive to buy more.
- Settlement discount – an incentive to pay quickly.
- Promotional discount – a discount for a specific period of time.
- Seasonal discount – an incentive to clear seasonally sensitive stock.
- Cash rebate – an after-sale incentive linked to a specified target.
- Ranging allowance – paid to a reseller in return for them stocking your product.
- Promotional allowance – for participation in a promotional campaign.
- Delivery fee – an amount you charge for delivering the product.
- Credit card fee – an amount you charge on credit card purchases.
At the end of the day, your objective should be to achieve the best possible price for your products or services taking into account:
- The value they provide for your customers – ie: how they satisfy their needs and wants in terms of features, benefits, utility value and prestige.
- Your cost structure – what is your break-even point and how much profit do you want to make?
- The competitive environment – what do your competitors charge for similar products and services?
- Your competitive advantage – do the products or services provide advantages that warrant a price premium?
- The economic and market environment – what is the level of demand in your industry?