Pricing

Pricing is an often overlooked marketing strategy(in our company it is not a marketing task which is supposed to be done by marketing in coordination with the market feedback form the sales staff , as many tend to focus on promotions or advertising. Pricing strategies, however, can have a large impact on sales and (more importantly) profit.

For clarification purposes, I am defining price as what our customer pays and/or what the end consumer pays for a product or service. In the case of products not sold directly to the end user, pricing is often described as “wholesale” and “retail.” When the distribution channel is long (such as when there is a manufacturer, broker/distributor, retailer, and end consumer), multiple mark-ups can occur between the wholesale and the retail price.

Our  optimal pricing strategy will depend on more than our costs. Forces within our business environment such as our competitors, our suppliers, the availability of substitute products, and our customers come into play as well. Positioning (how we want to be perceived by our target audience) is also a consideration. 

Pricing Strategies

There are a variety of pricing strategies in existence. Each strategy is used in a different set of circumstances. Some of the things to consider when choosing the best strategy for your situation are your costs; both short term and long term sales and profit goals; competitors’ activities; and customer lifetime value. While there are others, a few of the more popular pricing strategies to consider are:

Cost plus mark-up. Here, you decide the profit you need to make before setting the price. Figure out your costs and your selling price is simply your costs plus your pre-determined profit number. This approach helps keep your profitability top-of-mind, but may also result in prices that are out-of-line with customer expectations and worth of your product or service.

Competitive pricing. When competitive pricing, you look at the prices different competitors are charging and use those prices as a benchmark when pricing your own products. You and your competitors’ positioning strategies will determine whether you price at par, slightly below, or slightly above the competition.

Price skimming. This technique is used when you offer a unique or scarce product with few or no substitutes. The price is set high, resulting in high margins for the seller. Buyers are those that are willing to pay the price because of the product’s prestige and/or uniqueness. In the case of a scarce but necessary product, customers pay the price because they have no choice. Often, price skimming is a short-term strategy as competitors enter with their own products, bringing prices down. In the case of scarce products, either the need passes (salt during an ice storm, for example) or the shortage is temporary. Before considering this technique, be aware that if your customers feel you have taken advantage of them, you will be building “bad will” for your business and undermining the trust customers have in your products or services.

Penetration pricing. This is the opposite of price skimming. Prices are set low in an effort to gain large market share. Because the penetration price does not cover costs, this is also a temporary strategy. For this strategy to be profitable, customers must be willing to pay your normal, higher price later on.

Loss leader. Here, you price one or more products below cost to attract customers. You hope that those customers will purchase other profitable products from you. This strategy is often implemented as part of a short-term promotion.

Close out. This is a tactical move to clear slow-moving or excess products out of inventory. You sell the inventory at a steep discount to avoid storing or discarding the product. End-of season merchandise, perishables that are about to expire, and prior software versions or book printings are examples of eligible closeout items.

Multiple unit pricing. Also called quantity discount. The customer gets a lower price for purchasing multiple units or large quantities.

Membership or trade discounting. Here, some customers (those that you know are heavy or frequent purchasers) are given an elite status, which gives them the privilege of a price discount on their purchases. This elite status can be based on occupation, membership in an organization, subscription status, or some other criteria.

Variable pricing. With a variable pricing strategy, different customers pay different prices. Often, this strategy is used for project work. Each project has unique characteristics so is priced by the job.

Versioning. This is offering similar products with different levels of functionality. Each level is priced differently and includes a different bundle of attributes.  Software and Web hosting companies often use this pricing strategy. A trial or very basic version may be offered at low or no cost. Upgraded versions are available at higher costs.

Bundling. Here, several items are sold together at a price less than if they were purchased alone. By bundling a popular item with lesser-known products, you can increase your sales. Additionally, in the case of inventoried items, you may be able to avoid a closeout.

Impact of Internet on Pricing Strategies

Aside from making some pricing strategies more prevalent, the Web has also affected the importance of choosing correct pricing strategies by allowing customers to be better informed and more vocal. In the case of consumer products, the purchaser can go to www.albdullatif-sa.com or another price comparison service and in seconds look at a side-by-side price comparison from several online retailers.

There are also numerous forums and discussion boards where members discuss their experience with providers. For example, your customer in Paris can complain or spread praise about you to a potential customer in St. Louis . This means the customer can not only make a better decision before purchasing, but can also better spread the word (both praise and complaints) after the purchase. For these reasons, the Web has made it more important that you remain competitively priced with your competition and maintain sensible pricing practices.

Combined, smart use of both the Internet and available pricing strategies can help boost your company’s bottom line.

Price, one of the Marketing Mix’s “Four Ps”, is an often-misunderstood weapon in the marketer’s arsenal. Too often, small- and medium-sized enterprises rely on Price to carry the weight for its “little brothers” - Product, Place, and Promotion - in the firm’s marketing battles. This is because of many firm’s misconception that they have little choice but to make sure their prices are comparable to those of the competition.

Of course, a price that is way too high may simply make the product unaffordable. On the other hand, a low price provides little opportunity for new product development, expanded product placement, or creative promotional initiatives. As a result, once they start down the price spiral, firms often perceive the necessity to compete on price alone. This couldn’t be further from the truth.

The truth is that Product, Place, and Promotion are marketing weapons at least as valuable as Price. The trick is to learn how to use them well.

Customer Delivered Value

Contrary to the conventional wisdom, customers buy a product because of its value proposition, not it’s low price. The value proposition is the net benefit consumers realize when they complete an exchange: some amount of their money in return for some package of products and services that we provide when and where they want them.

Marketing guru Philip Kotler explains it this way:

“Total Customer Value is the bundle of benefits customers expect from a given product or service. Total Customer Cost is the bundle of costs customers expect to incur in evaluating, obtaining, and using the product or service. Customer Delivered Value is the difference between Total Customer Value and Total Customer Cost.”

The key, therefore, is to maximize Customer Delivered Value. Clearly, this can be achieved by offering greater Total Customer Value as well as by making products available at a lower Total Customer Cost. There’s simply no reason to get hung up on the cost side of the equation.

This is precisely why we see limitless variations of some of the products we buy. Each variation is an attempt to avoid price competition by offering something unavailable from other retailers or service providers. You can get a briefcase at Wal-Mart for less than $50, but if you want a genuine Samsonite? hard-sided case with special hinges to prevent it from opening while it’s upside-down, you’re going to have to ante up and pay the price. Those features cost a little more.

Similarly, customers will pay more for a product that’s available where they need it. Camera film retailers are aware that we will pay more for film at points of interest such as Niagara Falls , the Grand Canyon , or the Eiffel Tower . While we might complain as we pull out our wallets, we must admit that the value added by not having to drive 20 miles back into town or walk 10 blocks into a residential district is well worth the extra dollar or two we pay for the film.

Promotional efforts also enhance the value proposition. Through the Promotion Mix, firms can subtly or not so subtly introduce customers to the idea that the product is of higher quality, or provides greater value. Is a shirt made by Ralph Lauren really better than one made by someone else? Many people think so, but others have their doubts. Somehow much of the shirt-buying public has been convinced that there is additional value there, but only textile professionals and clothing connoisseurs know for sure. In any event, Ralph Lauren can, and does, charge more.

There are other pricing considerations. Should you vary your prices for different geographic markets, at different times of the day or week, or for different customer groups? Will you give a cash discount to promote prompt payment? What about a quantity discount for high-volume buyers? Will seasonal discounts help clear out hard-to-sell seasonal merchandise?

These questions, and scores of others, must be carefully considered when adopting a pricing strategy.

When You’ve Made The Decision To Lower Your Prices

In general, there are three situations when you should consider a price decrease. These are when you have excess plant capacity, when you are experiencing declining market share, and when you wish to make a drive to dominate the market through a low-cost strategy.

The low-cost strategy carries risks, however.

First of these is the low-quality trap. We often associate price with quality. After a substantial price decrease, it is quite possible that consumers will assume that the quality of your products is below that of the higher-priced competitors and, consequently, choose not to buy your products.

A second risk is the fragile-market-share trap. This is common in highly competitive industries where aggressive competitors have gone through successive rounds of discounting in an effort to win share. The result is that the low prices buy market share, but not customer loyalty. Customers become conditioned to switch to the next low-price firm that comes along.

Finally, there is the danger of falling into the shallow-pockets trap. In response to your discounting strategy, higher-priced competitors may cut their prices and may have longer staying power because of deeper cash reserves. In essence, they’ll just match your discount, and wait you out.

While the pricing decision is a big one, it is important not to forget the power of Product, Place and Promotion. Maximize Total Customer Value and you are equipping yourself to become your industry’s market share leader.