“Price is what you pay. Value is what you get” – Warren Buffet
Pricing is about positioning your product or brand; it needs to be competitive but also make a profit. The price sends a signal to customers about the product quality and exclusiveness. There are powerful psychological and behavioural aspects to pricing. A product is only worth what a customer is prepared to pay for it. But this does not necessarily mean it needs to be the cheapest. A small business may be able to compete with its rivals by adding extra services and details that will offer their customers better value for their money.
Key influencers on pricing can be summarised by the 4 C’s: Costs, Customer, Competitors and Corporate strategy. The following are important policies when pricing a product or service.
Price skimming is generally used where there are few or no competitors, high barriers to entry, inelastic demand and or no substantial economies such as luxury goods, perfumes and new electronic gadgets. Penetration pricing is used to gain rapid market share, in competitive sectors with few barriers to entry. Examples are commodity goods such as sugar or cinema tickets.
When calculating price, it is important to take the total cost of the product and add a percentage mark to arrive at the price. This is your margin and is usually based on a required level of profitability or ROI and the variable costs.
Break even pricing is based on the equilibrium between revenue and fixed costs. Most cost based pricing policies are inflexible, do not reflect market demand and can result in missed opportunities. Therefore it’s worth considering demand based pricing.
Psychological pricing is a pricing and marketing strategy based on the theory that certain prices have a bigger psychological impact on consumers than others. Charm pricing is the idea that something ending in ‘9’ or ‘99’ is better value than if it ended in ‘0’. Prestige pricing is the opposite and promotes the idea that a whole amount price, such as £100, encourages payment as the customer processes the number easier and it promotes a prestigious feeling. Similarly, BOGOF and Sale pricing encourage the idea that the consumer is saving X amount of money and as such the purchase is good value.
Competitive pricing is where one company is the price leader and the others follow. It is often better for all competitors in a particular market to follow a similar pricing strategy to avoid a price war that can lead to a vicious downward spiral in price. Customers are influenced by perceived quality, their previous experience, perceived quality, brand image, purpose, anticipated usage and overall appeal.
Discretionary pricing exists when the supplier of a product offers different prices to different market segments. Examples of this can be seen frequently in the service industry. Entrance fees to the cinema are different for adults, children and senior citizens, it also may relate to levels of service i.e. first class travel or different times of the day such as off peak etc. pricing can also be different for new customers compared to those paid by existing customers, to encourage switching for example Sky TV or mortgage rates or car insurance renewals.
The ultimate goal of developing a strongly differentiated brand is to create a virtual monopoly, where consumers will not choose any other product, no matter the price, even if their preferred brand were not available.
Frances Day heads In The Company of Leaders and specialised in Mindset and Marketing. She believes that there is a smarter way that entrepreneurs can create a steady income so that they can make money and enjoy building their business. When entrepreneurs work in the service sector they usually trade hours for pounds. By helping them to package their service offer in an online 4 step process, they become much clearer on who they are, and who they serve.@coofleaders