Startups and entrepreneurs launching new products often find it difficult getting the right pricing strategy for their products or service. Pricing varies not only based on the quality of the product or service but also on the market’s competition.
Deciding the best pricing strategies is one of the most crucial choices when introducing your new product to the market. With the right pricing, you’ll be able to increase customer demand, generate revenue, and grow your business. And if you set the wrong price, your product might not even last the first six months.
This blog post will help you determine the right pricing strategy for your product. We will also look at strategies like dynamic pricing, bundling, and promotions that can help you set the best prices for your products.
Without further ado, let’s dive in.
Importance of your Pricing Strategy
One thing you have to remember is that pricing can make or mar your product. It determines a company’s profitability, the demand for its products and services, and how customers perceive its value.
Pricing also directly impacts a business’s competitiveness, as it affects how other companies price their products and services.
Setting a price too high can be detrimental, resulting in lost customers, while setting it too low can result in missed profits. Therefore, it’s important to get the pricing right.
The goal of pricing is to maximize profits by optimizing the price point. This means setting the highest price you can charge for your product or service without pricing yourself out of the market.
It is challenging for business owners to find that sweet spot and get the best price possible for their product or service.
For an effective pricing strategy for your product, there are a number of factors startups, and business owners need to consider, including but not limited to customer demand, market trends, competitive pressures, and cost of production.
Factors to Consider When Setting Prices (Pricing Strategy)
Here are some factors to consider when deciding your pricing strategy, whether you are a startup or business owner. As long as you are launching a new product or service, it is important for your success.
1. Cost of Production: The first factor you need to consider is your cost of production. Calculate the cost of production and add an appropriate markup to make a profit. When setting prices, you should consider the cost of labor, materials, shipping, and other expenses related to producing your product.
2. Competitor Prices: The next thing you want to do is examine what your competitor pricing is. Check out what your competitors are charging for similar products or services. You can use this information to set competitive prices without undercutting yourself.
3. Customer Value: Customer value is another factor to consider before pricing. Think about what value your customers get from buying your product or service. Doing this will help you decide whether to charge more or less based on the perceived value of your offering.
4. Demographics: You also want to research who your target customers are and how much they are willing to pay for your product or service. Consider age, income level, location, etc., to determine an appropriate price.
5. Market Conditions: Keep an eye on market trends and adjust your pricing accordingly. For example, if there’s an increase in demand for a product, you may want to raise prices to capitalize on the opportunity.
How to Set The Best Pricing strategy
1. Selecting the pricing objectives:
To set a reasonable price for a product, the marketer needs to consider the company’s objectives. If the company is more transparent about what it is trying to accomplish, then setting the price will be easier. Here are the pricing objectives available to you:
- product quality leadership,
- maximum market skimming.
- maximum current profit,
- and top market share,
Price considerations involve different things depending on several factors You might pick the high-price or low-price strategy depending on your needs, the price-susceptible potential clientele, the number of competing firms, and the cost per unit.
The price level also varies depending on the marketing strategy that has been selected for the product. The following are some marketing strategies available
Rapid Skimming: sometimes, when a company launches a new product at a high price and advertises it a lot, they may think they are better off as opposed to gauging public interest first and then pricing it lower.
It is a product of high quality but unknown to buyers As soon as it becomes known to the buyers, they will purchase it even at a higher price. It can also refer to the competitive field with many adversaries.
Rapid Penetration: Rapid penetration involves introducing a relatively new product to the market at a low cost with a great advertising budget through brand awareness. In other words, the company starts by selling its new product at a lower price to drive sales.
Slow Skimming: It refers to launching a new product at a high price with a low level of promotion. It also refers to the situation where the company’s brand is known to the buyers, who are willing to purchase them even at a higher price. It may also refer to the market where there are few competitors.
Slow Penetration: Slow penetration is a situation whereby a business launches a new product at a low price and a low level of promotion, relying on its brand recognition and few competitors In this case, the brand is well known, and there are few competitors.
2. Determining the consumer’s demand:
As a result, marketers go over all possible demand levels at various prices and then deduce the level of demand consumers are looking for.
That will lead to studying the law of demand, demand elasticity, and the demand curve. Normally, the price and the demand are inversely related.
In other words, the higher the price, the less demand for it. And vice versa. However, there are goods for which the demand is elastic (elastic demand) or inelastic (inelastic demand).
For example, demand for certain goods, like automobiles and perfumes, is elastic. So the demand for these products is unresponsive to changes in price.
3. Cost estimation:
Demand sets the price ceiling, and costs set the price floor. The business wants to charge a fair price that will cover the costs of production, marketing, and administration.
Costs are divided into two categories, namely fixed costs and variable costs. Although they remain fixed per production unit, variable costs change in direct proportion to changes in production.
However, the fixed cost does not change as the number of production units changes, but it does not stay fixed per unit either.
In other words, the fixed cost remains constant overall, and either decreases in rupees per unit as production units rise or increases in rupees per unit as production units fall.
Examining the costs, prices, and offers of the competition
The next step in pricing a product for a marketer is to research the costs and prices of the product, after-sales services, and other services provided by the company’s rivals.
A thorough analysis may help a marketer identify the strengths and weaknesses of the competition as well as consumer preferences or trends.
Choosing a pricing strategy:
The business must pick an appropriate strategy for pricing its goods. The recommended pricing strategies are as follows:
Cost plus a percentage markup on cost equals the price under markup pricing.
For instance, if a builder or developer spends ₦ 500,000 on building a single residential apartment and charges 25% above cost, the selling price of that apartment will be ₦625,000, or [500,000 + (500,000 25%)].
For pricing job orders, customized products, etc., manufacturers, lawyers, chartered accountants, practitioners, and contractors frequently use this pricing methodology.
Target Return Pricing:
A product’s price is equal to its cost plus the required rate of return on investment under target return pricing.
For instance, if the shareholders or owners of a company that sells products anticipate a 20% return on net assets, or, let’s say, ₦200,000, the marketer would choose a price that would yield a net profit of ₦200,000.
Large-scale manufacturing firms, public investment firms, and other organizations use this kind of pricing methodology.
Perceived Value Pricing:
Based on how people perceive a product, the market price of that thing is determined. In businesses that produce non-durable consumer goods, it is often used.
Non-durable or soft goods can be categorized as items with a lifespan of fewer than three years or those that are exhausted after one use.
Cosmetics, food, cleaning supplies, fuel, office supplies, packaging and containers, paper and paper products, personal items, rubber, plastics, textiles, clothing, and footwear are a few examples of non-durable goods.
Value pricing is the practice of fairly level pricing for goods of superior quality. This pricing strategy is widely utilized in manufacturing personal computers and other electronic items, among other things.
Going Rate Pricing:
In the going rate pricing strategy, the cost of a product is determined by the costs of comparable goods already on the market. The price of paper, cement, fertilizers, steel, gasoline, and chemicals all employ the going rate technique.
Pricing for Sealed Bids:
Pricing for sealed bids or price-oriented competition is a situation whereby scaled bids from businesses for jobs or contracts are quite prevalent. For instance, the cost of scraps, industry waste, etc.
Choosing a final price:
The last and most important phase in setting prices is choosing a final price from a range of alternative prices that would align with the company’s short- and long-term goals.
Recommended reading: Consumer Service: Definition, Examples, Benefits, Differences