How To Determine Right Pricing Strategy For Your Business ?
One of the significant factors affecting the decisions being made by the consumers in their buyer’s journey is that of the ‘Price’ associated with a particular product. Hence, it becomes imperative for the companies to set the right amount of price which gets them more customers and at the same time ensures that they don’t compromise on the profits. “Price is the (usually not negative) amount that one pays or compensation is given by one party to another in return for a unit of goods or services received.” Ever thought about how companies price their various products? What factors affect those prices? Is there a standardized way to price a product? If you have such a question hovering around your mind, then my friends, you have come across the perfect article. So, let’s explore the pricing world. One of the significant factors affecting the decisions being made by the consumers in their buyer’s journey is that of the ‘Price’ associated with a particular product. Hence, it becomes imperative for the companies to set the right amount of price which gets them more customers and at the same time ensures that they don’t compromise on the profits. “Price is the (usually not negative) amount that one pays or compensation is given by one party to another in return for a unit of goods or services received.” Ever thought about how companies price their various products? What factors affect those prices? Is there a standardized way to price a product? If you have such a question hovering around your mind, then my friends, you have come across the perfect article. So, let’s explore the pricing world.
Price determination and different markets
The first thing that might come to your mind when you hear how the prices are determined for a product or service is that of demand and supply. The economic concept of demand and supply holds significant value when it comes to pricing. The concept states that the price depends on the interaction between the demand and supply of a product in the market. Demand and supply represent the willingness of the buyer and seller to engage in a business transaction. When both the parties agree, the transaction is done at that agreed price. Usually, the higher the demand, the higher the price and the lower the demand, considering scarce resources.
Well, if you think a bit deeper, you would realize this does not hold true in real-life markets. For instance, you would have come across a product whose demand isn’t high, but its price is high. This brings us to the concept of different market situations, which play a vital role in determining price along with the concept of demand and supply. There are four types of markets; Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly. All of these markets have one or the other unique characteristics that affect the way they price their products somehow.
In the case of perfect competition, many sellers are competing against each other; hence no player can affect the price in the market. It is the demand and supply which monitor and decide the prices. The best example of perfect competition is the agricultural market. Every player in this market has homogenous products (vegetables) to sell; hence, anyone cannot influence the price. The factors of demand and supply dictate the markets.
On the other hand, in the Monopolistic market, there are many sellers but with highly differentiated products that give them an upper hand to influence the price based on the offerings. So the on top of the demand and supply concept, the individual player can influence the price and charge a higher rate from the customers. The best example of a monopolistic market is the hospitality sector. When you visit a hotel, you essentially receive the same services; however, your experience with them makes it a differentiated offering. This is what lets them charge differently.
When we look at the Oligopoly market, there are a limited number of players; hence, the limited competition gives them an incentive to easily influence the price and set a higher price. Players in this market also tend to collaborate to form a cartel to influence the prices in their favor. The best example of an oligopoly market in the aviation industry. There are only a limited number of players, which lets them have more influence on the pricing. The player in this market stands chance to collaborate and form cartels to change the pricing.
On the flip side of the coin, in the Monopoly market, a single player controls the whole market, thereby eliminating the competition from the roots. This gives the player to control, own and monitor the prices all by himself. Hence setting the prices depends on the player’s wish and not on the demand and supply concept. The best example of a monopoly market is Google and Microsoft. Both of them are the biggest players in their respective areas. In terms of search engines, Google dominated the market, and for windows software, it’s Microsoft. This makes them leaders of the market where others follow them so they can do as they wish when it comes to setting the prices.
Factors affecting the price
There are various factors that directly or indirectly affect the price you set for a product or service. Some of such factors are as follows:
- Cost of the product — The cost of production is a critical factor, and no one can set a price below it. Firms have to set a price equivalent to the cost of the product in order to reach the break-even point.
- Demand of the product — depending upon the demand of your product, you will have to adjust the prices so that you can cater to the right amount of audience. If there’s high demand, then an increase in the price will ensure that the demand comes down to the level of the supply and vice versa.
- Price of the competing firms — You have to consider the prices set by your competitors in order to be in the market. If you set a higher price than them, you might lose your customers, and if you set a lower price, then you lose your profits.
- Purchasing power of the buyers — It is very important to keep in mind the purchasing power of your target audience. You can’t sell at a higher price if your audience cannot afford that.
- Objective — The price does not only resemble the exchange value. It is much more than that. It also depicts your brand value; hence the price should showcase what your brand stands for.
- Government regulations — There are certain rules set by the government regarding the prices so that everyone has access to fulfill their needs. This ensures that prices set by the firms are not fictitious.
- Marketing method used — Firms spend a lot on promoting their products, and it indirectly affects the prices of the products. If the firm uses a middle man, then it adds the cost of commission to the product.
All of these are accompanied by other factors that impact the demand and supply of the products, directly and indirectly, affect the product’s price. For instance, if a natural calamity disrupts the supply of a product, then it creates a shortage of supply, leading to an increase in the price of the product.
The above-discussed points and concepts clearly give us a clear picture of how prices are determined and what affects the same. However, there are some exceptional cases where the above-mentioned may not hold true and seem different. Every use case is unique in its own way when it comes to deciding the price of a product or service. Let’s see some of the exceptionalities here.
We all have aspired to buy something luxurious in our life — at least once, a luxurious car, watch, pen, or clothes. The luxury industry has defined the traditional concepts of pricing completely. We always thought that the demand and supply concept with some other factors is enough; however, the luxury industry has a different view altogether. The luxury industry has expanded the concept of differentiated products and positioned its brand as a symbol of status and value. This has led to people being ready to pay a huge sum of money for things like watches and pens. People are willing to pay cores for a watch from premium brands like Patek Philippe, Rado, and Rolex.
Let’s talk about auctions.
People are crazy about getting items from an auction; they are ready to spend millions on a painting or an antique. In an auction, the demand to buy a particular item increases with the increase in the bids (prices). This is totally opposite to what the demand and supply concept about prices state. So why does this happen? Essentially if you keenly observe it, the vicious cycle of demand and supply is accompanied by human emotions. Moreover, we have only been looking at the supply of the products and not the consumer’s purchasing power (supply of money). An individual with more money might willingly pay more for a product.
When you offer a painting in an auction with a base price, people start to bid. Since everyone in that room wants to own that painting, the prices rise. There’s only one painting and many buyers; however, that painting gives a sense of social status and being special from the rest. This is what makes people buy things even at high prices. In simpler terms, why do the companies come up with limited edition models of their existing products? They play on the field of human emotions and sell them at a higher price.
Price discrimination — yet another exceptional case that happens almost everywhere. It’s all about how the seller charges different prices for the same product or services depending upon the customer’s ability to pay or due to some other factors. I am sure you would have experienced this at some point in time. When you go to a shop to buy a product, the seller might have charged you differently from someone else — largely, you don’t come to know about this because the seller doesn’t reveal it. Sometimes just because you have a good relationship with the seller, they might charge you less compared to the original price.
Various Pricing Strategies
Various pricing strategies help the companies decide what prices are to be set for a product. Let’s have a look at them here.
- Cost-plus pricing — This is the simplest form of pricing strategy used by businesses where they simply add a percentage-based mark up to the cost.
- Value pricing — This strategy focuses on the value that the product or services offered to the customers. Based on how your customer benefits from the offerings and their willingness to pay on that basis.
- Penetration pricing — Here, companies tend to initially charge low prices to enter the market and then gradually increase the price in the long run.
- Price skimming — This is usually for the influencers and trendsetters who buy the product as soon as it comes to the market. The prices are initially high and tend to lower down as time passes.
- Bundle pricing — Selling two or more products to the customers at a lower price compared to selling them separately. This is to attract the customer to buy more than they actually planned.
- Premium pricing — When the main target audience is affluent class shoppers, the price is usually set to be higher. It’s a way to stand out from your competitors where you provide premium offerings.
- Competitive pricing — Companies also set their prices according to what their competitors have set to remain competitive in the market with many players.
- Psychological pricing — It’s a unique technique to set prices where you focus on how customers end up paying higher while not realizing the same. For instance, a price of $99.99 is almost the same as $100; however, $99.99 is a two-digit price that customers perceive to be less and affordable compared to $100.
How should companies approach pricing?
Pricing is a subjective approach; it is unique for every company, situation, market, and product or service. We have seen various aspects of price determination until now. We might want to develop an approach that can be followed to determine pricing strategy, but how do we create a general framework that gives a fair idea to every company spread across different locations, industries, or markets? Ideally, we cannot develop such a framework since every case is unique; however, we can definitely create a generalized model that guides you towards the best-suited strategy for you and your product or services.
In my opinion, every company should start by understanding their target audience and the offering to the market since companies already know what kind of market they operate in. Evaluate how did the need for such a product arise? What challenge is the product trying to solve? How much value does it add to the customer’s life? What is the demand for such an offering? How does the customer see the product to be? Once you have answers to all such questions, you will be in a better position to see the current market situation and the willingness of your buyers to pay for your offering.
Now that you have a basic idea of the amount you will charge, you can start focusing on your objective of the offering and the psychological aspect, which can help you achieve more. No matter what market you operate in or what product or service you offer, at the end of the day, you deal with humans where you can always leverage the psychological pricing strategy in one way or the other. Price is not just the amount you receive from the customers, but it is much beyond that. It conveys your brand value, brand image, and a lot more about your company.
This should help you decide on an optimum price using the best-suited pricing strategy for your company. Remember the flow, its starts with market determination, target market, understand your customers, the offering, objective of the offering, and then ends with an outcome of best pricing strategy accompanied with psychological strategy.
Happy Pricing, folks!
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