Setting the right price for a product is a challenge for most companies. Of course, you can calculate a price based on production costs and the targeted profit margin - but whether you can also sell the product is questionable. Because other factors and the general market situation also play a role here: How generous are the customers? How high is the demand? And what is the competition doing? This article explains how you can take these factors into account using various pricing strategies.

Price strategies are considered to be pricing considerations that not only include production costs. Instead, the general market situation, customers' purchasing power and the desired image of the product are also taken into account.

The price is therefore not a coincidental consequence of the product properties, but a strategic means of achieving the company's goals.

Analyze the market situation before setting prices

A good pricing strategy must be tailored to the market, your own company and the product in question. In order to be able to include internal and external factors equally in the decision, a SWOT analysis is useful. By closely examining the strengths, weaknesses, opportunities and threats, an informative overall picture can be drawn: What is potential customers' willingness to pay? Who are the main competitors and what pricing strategies are they pursuing? Which customer benefits does your own offer convey in contrast to the competition?

Keeping an eye on corporate and positioning goals: Examples of pricing strategies

In addition, the pricing is also dependent on the primary corporate goals. For example, a different pricing strategy may be appropriate if an increase in sales is targeted than if the brand image is to be influenced.

In addition, the pricing strategy is closely linked to the positioning of your product in the market. Accordingly, you should ask yourself beforehand how exactly you want to position yourself. Possible positions are shown in the following graphic.

As a rule of thumb, it can be said that an indecisive middle position should be avoided. Roughly summarized, you have two options: Either you build up an image as a high-priced premium provider or you position yourself in the low-priced segment.

The most important pricing strategies at a glance

 

Fixed price strategies

Follow a fixed price strategy , set a one-off price that is largely independent of the specific group of buyers or the pricing policy of the competition.

Promotion strategy / low price strategy

With the promotion or low price strategy, set your price well below your competition. This is particularly useful for a large, price-oriented target group with no great ties to individual providers: You can therefore assume that customers will be enticed away as soon as you offer a comparable product at a lower price.

The problem with this strategy, however, is that customers only stay with you because of the low price. Without other factors of customer loyalty, you will quickly lose them as soon as an even cheaper provider comes on the scene.

 

Premium strategy / high price strategy

 

In this case, you set a higher price than your competitors in order to establish yourself as a premium provider. However, this only works with accompanying marketing measures that help build an appropriate image.

In addition, this strategy requires the highest product quality , which justifies a corresponding price. Porsche and Apple are examples of this approach.

Price Sequence Strategies / Dynamic Price Strategies

Dynamic pricing strategies are designed from the outset to ensure that prices change over time. This is possible in both directions:

Skimming strategy / skimming strategy

In this case, a high starting price is set when entering the market. Then this price will  be reduced step by step . However, this only makes sense for products that lose their value quickly because they become obsolete and new innovations come onto the market. This primarily affects technology, especially smartphones and other entertainment electronics.

Penetration strategy

With the penetration strategy, you proceed in exactly the opposite way. They attract customers with a particularly low price, which is later increased. For this to work, however, the target group must be price-sensitive and large - otherwise you won't bring the production costs back in at the beginning. For example, the baker who offers a new type of bread at half price in the first month could do this.

 

The advantage: You can conquer a higher market share particularly quickly and take advantage of scaling effects, but the corresponding production capacities must also be available for this. If so, this strategy can also help deter the competition.

Price competition strategy

With this perspective, prices are based in particular on the pricing policy of competitors and their own positioning in comparison to them.

Price fighters

Price fighters always offer the cheapest price. If competing products are offered at a lower price, follow suit immediately and undercut it. However, this also requires an excellent cost structure.

Price leader

In contrast, price leaders have the highest price on the market. This is mostly justified by their market leadership, which is made possible by marketing and image campaigns. The price leaders are primarily larger companies that manufacture well-known branded products.

Price follower

Price followers always adjust their prices to the price leader, but stay below its price. In most cases, these are small and medium-sized companies.

Price differentiation

The price differentiation is characterized by the fact that different prices  apply depending on the buyer or purchase circumstances  .

Individual differentiation

Different prices are set here for different groups of people. The best-known case is admission prices, which are lower for schoolchildren or pensioners.

Regional differentiation

The regional differentiation offers different prices for different locations depending on regional purchasing power and local competition . The lower competitive pressure in rural areas could justify higher prices, while the lower average purchasing power would rather speak against it.

Temporal / seasonal differentiation

Of course, prices can also be adapted to seasonal differences in demand. Early bird discounts and summer sales are classic examples here.

Use-related differentiation

In this case, the purpose of use decides the price. For example, industrial customers pay a different basic electricity price than private households.

Quantitative or quantitative differentiation

This is about the classic volume discount : if you buy a lot, you pay less. Wholesale, among other things, works according to this principle.

Target costing

With this approach, it is not the production costs that determine the price, but the targeted price determines the production costs. From the purchasing power and willingness to pay of the individual target group, it is derived how expensive a product can be in order to be attractive. Product development is adapted to this requirement.

Pricing is a complex matter because it depends on many more factors than just production costs. Of course, the manufacture of a product must be financially worthwhile, but the targeted position in the market, the purchasing power of customers and the prices of competitors also play a decisive role.

Make it clear to yourself that the pricing of your offer is not just an arithmetic game of costs and profits, but a valuable strategic tool that should be used wisely.

Importance of pricing

Many companies primarily look at costs and leave the potential in pricing unused. There is, however, a good reason for this: the sales volume definitely depends on the price, so that the ostensibly simple formula is more complex than it initially appears.

 

Low price sells a lot, high price sells little

Take a look at your own buying and consumption behavior: In most cases, you are likely to buy more of a product when the price is low. Or you shop where the price is particularly cheap. This applies to many products! We do not want to go into more detail at this point about markets that function according to other mechanisms - for example the art market.

The price is an indicator of quality

If you go to the butcher who gets his meat from regional farms, you pay more for it than for meat from the discounter. The discounter advertises with its low prices, the butcher with the origin of his goods. For entrepreneurs, the following applies: If you position yourself as a premium provider, the price must not be your selling point.

There is a nice story that documents this: When there were still many small regional breweries in the Ruhr area in the last millennium, one was positioned as a premium brand. When a second brand came onto the market that claimed Premium, the boss of the first-mentioned brewery decided to raise the prices - not to lower them! In this case, the price quality indicator was used. The price does not say anything about the quality of the beer - and yet the price underlines the premium claim here.

Far too often, companies act reflexively differently: If a competitor comes onto the market, prices are lowered - a wasted potential.

There is not just one price

A product. A price. That's how you imagine it. But there is also potential in differentiated pricing: you know it from the cinema - the less frequented Monday and Tuesday become “cinema day” and admission costs a third less than on the weekend. This means that capacities are used at times when little turnover would otherwise be made.

And: Since the prices for popcorn and cola are not reduced, the actual price reduction is significantly less than the reduction of a third of the price of the admission ticket.

There can only be one price leader

There is room in the market for exactly one company that offers the lowest prices. It often has economies of scale that allow it to take on this role. Usually messing with this company is ruinous.

It is better to look for what your customers are willing to pay for: Your product may then appear more expensive at first glance, but it will become valuable for your customers through additional services (" Value Added Marketing "). The local dealer for white goods (washing machines, dishwashers, etc.) can hold their own in the market, although some of their devices are 20 percent more expensive than in the electrical wholesale market. Its advantage: it delivers and installs free of charge and takes the old devices with you right away. This service solves a real problem for many customers, so that the significant price difference is put into perspective. The retailer is thus operating in a niche market .

So don't lower the prices if a competitor is cheaper! Look for services that are easy for you and attractive to your customers.

The price should be used sparingly

The price is an active design tool for sales. Price reductions work quickly and increase sales figures immediately. If you want to actively use discounts, please use them sparingly!

The DIY chain Praktiker ("20 percent on everything. Except for pet food") is a cautionary example. The discount campaigns were carried out and advertised so often that customers no longer bought at normal prices, but waited for the next discount campaign. Praktiker's advertising slogan is known to this day. The company, however, did not survive this business practice.

Prizes can be creative

If you have ever been to the gym, you know it: The amounts are debited monthly, regardless of whether you train or not. In the end, you are annoyed, blame the studio for the "gag contract" and terminate your membership.

In Denmark, a studio caused a sensation and won industry marketing awards: the studio is free for all members who train at least once a week. If you do not train for a week, the full membership fee for the month is due. In the next month the “bet” starts all over again. It is up to customers to train free of charge - sympathy for the studio is increasing and the loss of income is manageable because very few customers go to train every week.

The world is full of creative and sustainable ideas for good pricing. Let yourself be inspired by it and remember: The lowest price should be better made by others!

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Cordially Yours,

Kishan Barai

www.baraioverseas.com