Understanding Common Pricing Strategies
Why is my business making losses despite having a lot of sales? Maybe your prices are too low (article focus) or your business has a lot of indirect expenses.
It's your lucky day, this post will address the three common types of pricing methods or strategies. In this short writing, I will break down the pricing methods to help you get a better understanding of how to price your products to earn a favorable profit.
Grab a cup of some green tea and relax as you read the basics of setting prices for your products and services.
In my previous post, I explained what revenue and revenue models are and how organizations use this to earn profits. You can find the post here; https://www.dhirubhai.net/posts/john-lukwesa-27lj_finance-business-revenuemodels-activity-7052368834229411841-m3mk?utm_source=share&utm_medium=member_desktop
The post will explain what price is and then move to the methods for pricing.
What is price?
In my definition, I will say price is the amount of money a business is willing to sell its product or service at. Simply put the cost at which something is obtained. To a customer, it is the expense incurred to obtain a good or service.
What are the three major pricing strategies?
Price setting is part of a business' marketing process and requires in-depth market research (answering some questions and gathering facts about the market). The difference between the right and wrong price determines the profitability of your business venture.
So then how can you set a beneficial price?
The most common pricing strategies are;
1. Cost-based Pricing
2. Value-based Pricing
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3. Competition-based Pricing
Let me break this down into soft consumable pieces of bread to complement your green tea.
The Cost-based Pricing Method
This pricing strategy uses the understanding of how much you spent on acquiring or producing your stock (production costs). After determining how much was or has been spent, the business then should decide how much should be decided as profit (markup). This simply means a business or an entrepreneur should have an understanding of how much each unit of a product costs to become market-ready for them to add a favorable profit to come up with the selling price. This pricing method is simple and ensures maximum profits, but can injure a business as other concerns are not addressed like customer demand, competition, and also the fact that price setting cannot only be based on costs.
The Value-based Pricing Method
This is another interesting pricing method businesses use. Here, what you are trying to look for as a business is the value that your product or service offers to your customers. In other words, this is the price that your customers are willing to pay. Sounds interesting right? Yes, it is actually the reason why businesses are always innovative, they want the customer to pay more. This can be evidenced in the tech industry.
In this pricing method, you need to understand the benefits of your product to customers - is it convenience, or might be some level of self-confidence. The price that is set using this method illustrates the image of the product, increases sales, and attracts new customers. The challenge with this method is that it requires good selling tactics, and may ignore existing customers and product costs.
The Competition-based Pricing Method
This pricing method is set considering the prices of other businesses selling the same product, an example is the price of tomatoes at Kamuchanga market in Mufulira. If you have the same product with 20 other businesses in the same market, what will determine who gets the most sales is the price. Each business will try to come up with the most competitive price. Do not overdo this, you will find yourself making losses (low prices) or even not selling (high prices).
You need to always be up-to-date with current prices for your products on the market.
This article has explained how your business can set prices, but you may still make losses if your product is not what the market is demanding. Your goal should be to produce or sell what the market is demanding not what you can sell. This can be achieved through effective marketing. The next article will differentiate Sales & Marketing.