3 Approaches for Pricing Strategies

date: 2021-06-13 21:32:24

 

Prior to trying to come up with your pricing, it is vital to understand what feature or component of your service / product are considered the most valuable and your variable expenses, and then tweaking your price accordingly. On an overall basis, usually, for innovative companies, value-based pricing is more suited than the normal old-fashioned cost-based pricing.

 

Common pitfalls

Companies usually fall into common pitfalls when setting their price for their service or product. The following are the most common mistakes:

  1. Assuming price is static (i.e. does not change), 
  2. Setting prices lower than the market average to gain market share, 
  3. Not understanding that pricing is sometimes used as a method of branding and communication with their potential users / customers;
  4. Complex pricing for normal customers to understand, which results in losing potential customers.

Assuming is price static (i.e. does not change): Usually companies do not revisit their prices (only a simple annual increase due to inflation) or just adopt a price fits all strategy. To overcome this, companies should collect feedback from their users / customers, follow competitor pricing and understand your “edge” and price accordingly or adapting a dynamic pricing, meaning that price decreases/increases based on demand, much like Airbnb’s pricing model.

Setting prices lower than the market average to gain market share: At first, it could be tempting to believe that a lower price can attract a large customer base, however, various experts have stated otherwise, and believe that actually starting with an atleast higher than average market price is much better. This can be of course analysed afterwards, and you can start experimenting with your prices until you understand what is your best price to volume mix that would achieve the maximum gross profit for your company. 

Not understanding that pricing is sometimes used as a method of branding and communication with their potential users / customers: In order to better illustrate this point, let us take Starbucks as an example, Starbucks has itself positioned as a premium brand compared to other somehow similar competitors like Dunkin Donuts. This results in price sensitive customers not purchasing from Starbucks, however, the customers that do purchase are attracted to their quality and image of a premium product. This results in prices being somewhat price inelastic, meaning that if Starbucks had a small price increase, this would not affect their demand.

Complex pricing for normal customers to understand, which results in losing potential customers: Having confusing and complicated pricing options can discourage consumers and harm your brand. A great example for this is mobile phone providers, who provide various types of bundles and pricing tiers, which eventually requires a user to study and analyse various bundles in order to truly understand which type is the most suited to their needs and pricing range. This results in a lot of discontent among customers.

 

Pricing strategies

Understanding all the above, on an overall basis, there are three main methods in setting your pricing strategy:

  • Market Penetration: Low pricing to gain market share
  • Price Maximization: Maximizing the price the customer will pay
  • Price Skimming: Charging high prices for initial customers and decreasing prices over time in order to gain market share.

In general, it is recommended to always begin with a relatively high price, and then start experimenting on your prices in order to understand what is the best price volume mix based on the change of your price, which will generate the highest gross profit (not revenue, as high revenue could be achieved with low prices which could eventually result in a low gross profit due to the cost of the product/service being sold).

 

Summary

In summary, the ultimate objective of any company is to generate cash, while, making products / services consumers want. In order to understand this, you must first understand very well, your variable and fixed expenses of your company which in turn would be the most vital point in choosing your pricing.

 

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