THE ART OF PRICING

"Price is what you pay. Value is what you get." - this single statement by Warren Buffet clarifies why it is important to create value in your pricing strategy to generate higher profits which is indispensable to sustain your business. Price and Value are positively correlated, you give higher value, you can charge higher price but you give lower value, you can still charge higher price, spend more on media and trade and enjoy this sugary sweets for a short-term but you will not sustain.

What do you understand with price? Most of us relate to pricing with the MRP which is maximum retail price. However, this is only a partial truth. The effective price i.e., which consumers actually pay will depend on multiple factors. Such as how much you spend on trade either in modern trade or in general trade. What is the retail margin you are providing? What are the trade activities you are running? You can influence the effective pricing by pulling any of these levers.

 What does your price communicate? We keep forgetting that pricing is a communication tool. It communicates brand power, equity, quality, availability or scarcity, demand etc. There is a common perception among consumers that a high priced product will also possess high quality which is not always true. Therefore, if you charge high price for a product, a consumer with a preconceived perception can buy your product for the first time but that's it. You may kiss good-bye to repeat purchases and may also lose potential customers. This is such a deadly mistake that you may lose that consumer forever for his/her lack of trust on any other products you introduce. Therefore, to charge extra you need to add value on your products, not always with the quality, may be with the packaging, with convenience, with occasion or with something else.

 How much you can increase price? Now, that you added value on your products and started charging higher price, there is a limit to it. In an ideal circumstance, you can charge to the extent of perceived price index. If your consumers believe, that your brand value deserves to charge $ 100 but you are charging as high as $99.99, you can only expect your demand to rise further. This is also called worth index. There is also exceptional circumstance, where you can charge higher than $100 and will not lose customers such as, there is crisis in the market or an unique marketing campaign, or a heavier trade support. But, remember this is not sustainable. Soon, competition will fill these gaps unless there is a barrier to entry.

 Pricing Strategy: Your pricing strategy needs to be consistent with your internal strategy. Such as your positioning strategy for your brand is at premium end but you are charging lower price to attract consumers. This is going to raise a question among consumers about the quality of the product. Then, you need to weigh your competition's status. If you charge more than your competition you need to create a differentiated product worth of charging extra. Then the target market. If the target market consists low end demographic and you are charging high that's inconsistent. Finally, commodity driven pricing. The products which are dependent on commodities like crude oil, vegetable oil, sugar, cocoa etc. their price will follow the price of these commodities. It will depend on you ofcourse to what extent you will recover the on cost.

 What is the perfect price? There is nothing called perfect price. It will always change basis the market status. So you have to keep testing at which price point you are gaining market shares. There is no harm changing the price as long as it justifies. Remember there may not be an absolute perfect price but there is a perfect price point which is a range.

 Pricing Models: There are three pricing models. Cost-based pricing, market based pricing and value based pricing. Cost-based pricing is applicable where there is a lot of competition, little differentiation and mostly commodity products e.g., grains, basic clothes, soaps etc. There is a margin range where everybody in the industry operates. Cost plus a certain margin. In the market- based pricing model, pricing is dictated by market players. You remain at some point of the range where your competitors are. Here is opportunity for greater pricing flexibility with more differentiation of products. Then the last but the most important model is value based pricing where you price it on the basis of customer's willingness to pay. This is the most profitable one. It is really difficult to compare since the offering is going to be more unique. May be multiple products will be bundled or packaged nicely to create a new product which is more attractive to consumers.

 Things to know before formulating pricing strategy: We told before that we can change price as many times as it justifies. Therefore, to formulate your strategy, you need to know the answers some questions:

1.    What and how is my competition charging?

2.    What is the cost to produce my product? Is there any other lever to pull without pricing to manage profitability?

3.    Who are my target customer? What is the price customer is willing to pay? Why the customer will pay the price I want? Do I offer my customers something which my competitors do not?

 Watch out: It is very common to overprice or underprice your products which can be a value destroyer. You should always strive to avoid the following mistakes.

1.    Guessing your pricing. You need to choose any of the three- models and price accordingly.

2.    Not researching the target market/consumer and competition

3.    Pricing too low or too high

4.    Not understanding the true value you're delivering

5.    Ignoring customer feedback

Steps of Pricing: There are some basic steps we should follow in pricing. Such as:

1.    Understand your positioning. Whether your brand is playing in mass, mid or premium segments.

2.    Understand the competitive market.

3.    Know your margins.

4.    Create a pricing profile

5.    Pick your pricing model

6.    Set your price

7.    Evaluate your price after a certain period

 Pricing Influencers: In an ideal world where your pricing is not determined by the Government, your pricing got to be most sensitive component. Because, you can either gain market share or you can lose market share through pricing. There are some basic factors which influence your pricing decision:

 a.    Competition: You can follow your competition in pricing or you can lead the pricing. This will depend on your market share and competitive intensity. In case of aggressive competition, you will have less opportunity to take pricing. In such case, you can consider adding value in your products to get a better mileage.

b.    Demand: High demand empowers you to command high prices and vice versa. You need to understand what influences the demand of your product, if there is any volatility, any seasonal impact, any artificial push etc.

c.     Differentiation: The more differentiated your product or service is the more you can charge to the customers. A typical commodity product can be differentiated with beautiful packaging, bundling with a separate product, personalizing, communicating differently.

d.    Scarcity: If the supply of your kind of product is limited, you can charge extra. Now it is not possible to invent something which will be accepted by consumers as soon as you invent. Therefore you need to position your product or service in an area which is more scarce.

e.    Quality: There is a direct correlation between the quality and the price. The higher the quality, the higher the pricing power. Therefore, if possible invest on quality of your products and charge more than your investment to reap out the benefit

f.      Margins: We take prices up to increase margins right? Now, you should always remember that price is last lever to pull margin. You should look at savings opportunities in the formulation without sacrificing quality, renegotiate contracts, drive higher mix, optimize trade investment or marketing investments and then only look at pricing opportunities.

g.    Perceived value: You can charge as much as you want, however, you will never get consumers in a competitive market as soon as you exceed the perceived price index.

 Avoid common mistakes: Even an expert manager is prone to make mistakes while pricing. But that's ok. You are never going to find the sweet price point at the first or second time. Also as soon as there is a new competition or existing competitions change their price, the balance shifts. You need to consistently evaluate the market status to not lag behind. As you are going to implement new pricing try to avoid below mistakes:

a.    Guessing at your pricing

b.    Not understanding pricing components

c.     Not knowing or understanding margins

d.    Pricing too high or too low

e.    Not adding enough value. Not knowing why consumers would pay the price?

So, in conclusion as the title of the article suggests, pricing is an art but dependent on science. You need to scientifically collect information on all the influencing factors, but the recipe will ultimately depend on you. The proportion to mix all the ingredients will determine whether you are the best cook or not.