Navigating the Intricacies of Costing and Pricing Strategies: Part 2
?Linda Rossouw May 2025

Navigating the Intricacies of Costing and Pricing Strategies: Part 2

Following last month’s article exploring the definitions and key principles of costing and pricing strategies, we continue to explore these two business principles that are both are crucial for the financial health and strategic positioning of a company but operate at different stages of the business process and addresses different aspects of the business model.

Costing strategies

Managing costs is crucial for businesses to succeed, influencing everything from profitability to sustainability. Understanding and implementing effective cost management strategies is more crucial than ever in today’s dynamic and competitive business environment. According to Statista, businesses that implement effective cost management strategies, can within the first year, achieve an average cost reduction of between 15% to 20%.

Businesses can navigate the complexities of cost management to achieve long-term financial health and growth by applying one or more of the following cost strategies.

Cost Leadership: This strategy is an integrated set of actions taken to becoming the lowest-cost producer in the industry. It requires economies of scale, stringent cost control, and operational efficiency to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors.

Outsourcing: Outsourcing helps businesses focus on what they do best. By outsourcing non-core activities to third parties, like IT support or customer service, that can be delivered to them at lower costs, businesses can focus on their core competencies to improve and grow faster, while reducing their overhead costs.

Process Improvement: Process improvement in a business can be both formal and informally applied. It is about finding ways to make existing processes faster, more accurate, more efficient, and more reliable. It is a practice that should be considered on an on-going basis rather than a one-time exercise, for example implementing lean manufacturing principles or adopting Six Sigma methodologies that can streamline operations, reduce waste, and minimize costs.

Supply Chain Optimization: Negotiating supplier contracts is pivotal for effective cost management as securing better terms, leveraging volume discounts, extending payment terms, and exploring alternative pricing models can significantly reduce procurement costs and boost profitability.

Optimizing Inventory Management: Inventory management plays a critical role in cost management strategies for businesses. Adopting just-in-time inventory management, and optimizing logistics, businesses can reduce carrying costs, minimize stockouts, and improve overall operational efficiency.

Technology Integration: The benefits of using technology in cost management are manifold as investing in technology can lead to long-term savings through automation, improved efficiency, and reduced labour costs.

Energy Efficiency: Implementing energy-saving measures and investing in renewable energy sources like solar panels or wind turbines to cut down on how much traditional energy you use and reduce utility costs over time.

Reducing Overhead Expenses: Analyse historical data and conduct a comprehensive audit of all overhead expenses, establishing current spending patterns to identify areas of potential cost reductions. Prioritize expenses based on their necessity and impact on business operations, by continuously monitoring and reviewing overhead expenses to ensure ongoing cost management and optimization.

Implementing Cost-Effective Marketing Strategies: Define key performance indicators (KPIs) and metrics to track the effectiveness of marketing campaigns, such as website traffic, lead generation and conversion rates, by applying “less is more” to optimize the marketing strategies to achieve the greatest results while spending the least.

Train employees on cost awareness: Develop training modules or workshops to educate employees on the importance of cost management and its impact on business sustainability by creating an understanding of cost structures, how to identify cost drivers, and how to adopt cost-effective practices in daily operations.

Pricing Strategies

Pricing strategies are the methods and formulas that businesses use to determine the selling cost of their products. Customers always prefer low prices, but low prices can drown your business if it does not cover the business expenses. A good pricing strategy finds the sweet spot between what customers are happy to pay and what makes money for your business. Your pricing strategy will directly affect your sales volumes, therefore, choosing the right pricing strategy is the pinnacle of a business strategy than can adapt to changes in the market or the economy.

Businesses can choose from a multitude of pricing strategies, each suited to different market conditions and business goals, by applying one or more of the following pricing strategies:

Cost-Plus Pricing: This straightforward strategy is one of the most common pricing strategies used, by simply adding a fixed margin to the cost of producing a product. It is easy to calculate but might not always consider customers willingness to pay, market conditions, consumer demand and or your competitors.

Value-Based Pricing: In contrast to cost-plus pricing, value-added prices are set based on the perceived value of the product to the customer rather than the cost of production. This strategy can lead to higher profits but requires a deep understanding of the customer's demand, perceived value, and their ability to pay.

Competitive Pricing: Pricing products and or services are set based on competitors' prices, rather than cost or profit, which is a common strategy in markets with little differentiation between products and where price is a major competitive factor, usually cheaper than the competitor.

Penetration Pricing: Initially setting a lower market price, to catch the attention of consumers and enter a competitive market. This strategy is helpful for small businesses entering the market, when giant players dominate the market, and a lower price will help your products stand out as being more competitive than the rest of the market. Once a market presence is established, the prices might be raised.

Skimming Pricing: Setting high prices initially for a new or innovative product, assuming that the market will value the product at a high price during the launch of a product, targeting early adopters, and then gradually lowering the price to attract a broader customer base.

Dynamic Pricing: Setting different prices for the same product by adjusting prices in real-time based on demand, competition, and other external factors. There are two types of dynamic pricing: The first one is often determined based on groups of customers and is mostly used in the service industry for instance airlines and or hospitality. The second one is set based on time, such as at the end of a quarter, a year, the beginning, or at the end of a season.

Psychological Pricing: Pricing products just below a round number (e.g., R9.99 instead of R10) to make the price seem lower than it is. Artificial time constraints, which create a sense of urgency (1 day only, or 1 hour only), will effectively encourage the buyers to act in order not to mis out, whilst innumeracy, is a pricing strategy using double discounting rather than maths, for example, buy 1, get 1, rather than saying 50% off.

Bundle Pricing: It is a pricing method in which lots of single products are bundled into a comprehensive package deal (often referred to as a combo) and sold at an all-inclusive reduced price instead of selling them separately.

Freemium Pricing: Offering a basic product or service for free while charging for additional features, for example software products and services.

Conclusion

There is no one-size-fits-all approach towards costing and pricing strategies. As the market changes, you should regularly adjust and re-evaluate your business costing and pricing strategies. Don't shy away from different pricing strategy methodologies, combine them or pivot to a new approach when the current one doesn't deliver the required results. A test-and-learn approach is necessary to find and adopt well-rounded costing and pricing strategies by being adaptable to market changes and prioritizing these strategies to assist your business to thrive in today’s competitive environment for long-term success.


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