How to Choose Pricing Strategies

Pricing Strategies

Pricing is not as simple as it may seem. Manufacturing and shipping costs, product quality, consumer interest and the state of the market all influence what the ‘right’ price is. There is no “one-size-fits-all” pricing strategy, and businesses must make good use of price analysis that takes these factors into consideration. When pricing goods or services, there are a few underlying principles to keep in mind.

Know Your Market

Sales don’t happen in a vacuum, and your pricing strategies shouldn’t either. Failing to account for external factors in the market can easily hurt you in the long run when the market changes. An example of this is cost-plus pricing—while it’s simple for accounting and implementation, it’s vulnerable to revenue losses when competitors markdown prices, as well as profit losses if other costs aside from production increase. In a highly competitive market, it’s important to keep an eye on similar goods and services. Some strategies take advantage of a unique position in the market, such as breaking into a new market with initial low prices or price skimming on early sales of a highly-desired product.

Pay Attention to Customers

Enticing customers isn’t solely about undercutting competing products. Despite what common advice may say, low prices aren’t always the first deciding factor for customers. If a product has significant value to a customer—if it’s unique, high-quality, novel, prestigious or even just convenient—a higher price can be justified. Establishing what this value is can be complex, but some key points include:

  • finding distinctions between your product and similar ones from competitors,
  • surveying customers on what appeals to them,
  • determining the target market to sell to, and
  • creating an impression of uniqueness or quality in marketing.

Such value-based prices can help you break away from a highly-competitive market and improve profit margins.

Pricing is a Process

The market is rarely static—consumer opinions and needs change, competitors adjust their own prices and strategies, hidden costs rise or fall and new competing businesses or products come into play. Your pricing strategies will need to change accordingly. Doing so cannot be purely reactive, either. Keep an eye on how current strategies fare as well as market and customer trends and use this information to make projections on the results of price changes. Be ready to respond to shifts in the market, both long-term trends and sudden deviations brought on by unexpected events. How you respond to these, in turn, should inform your future plans when the scenario changes again.