How did Wal-Mart become the world largest retail chain? Why is Apple the most valuable technology company despite having highly priced products? Do you know that having a good product pricing strategy can give your business a competitive advantage?
Regardless of whether you intend to offer your products at a low-price or high price, you must first understand your market and strategize according to its demand and income level. Learning how to create a competitive product pricing strategy in business is crucial, especially if the goal of your marketing plan is to increase market share and survive in a very competitive environment.
Table of Content
- 7 Factors That Will Influence Your Product Pricing Strategy
- 1. The level Of Competition
- 2. Perceived value of your product
- 3. Product development cost
- 4. Economic trend
- 5. Level of market demand
- 6. Demographics
- 7. Class of targeted customers
- Why You Must Take Product Pricing Serious
- What are your Pricing Objectives?
- 3 Types of Pricing Methods and Tactics
7 Factors That Will Influence Your Product Pricing Strategy
1. The level Of Competition
Most entrepreneurs fancy the concept of selling their products with a very high margin. This idea can only be realistic when you have a monopolistic hold on the market. But if not, you can’t sell with your desired profit margin without getting a sting from competition.
“In business, the competition will bite you if you keep running. If you stand still, they will swallow you.” – Victor Kiam
When trying to adopt a product pricing strategy or determine the right price for your product, the issue of competition is a factor that must be trashed out effectively. The more intense the competition in your industry is, the more flexible your product pricing strategy and policy will have to be.
“Defeat your opponent by strategy and flexibility.” – Sun Tzu
The point I am trying to stress here is this; if your competitor sells the same product you are selling but at a lower price, it may affect your business negatively. That is why a feasibility study or business plan always includes an opposition or competition analysis section.
Never implement your product pricing strategy without first putting your competition into consideration. Pricing your product without giving a heck to your competitor’s product pricing strategy is a sure way to business failure; so don’t do it.
“The ultimate goal of the Dangote Group is to dominate every niche in which it operates. In order to achieve this goal; we acquired over 3000 new trucks, developed a strong distribution network and increased production capacity. Our strategy is to sell our products faster than our competitors and at uniform price.” – Aliko Dangote; the richest black man in the world
2. Perceived value of your product
This is another factor you must take into consideration before setting a price for your product. Your first step is to ask this question “what is the perceived value of my product in the heart of the customer? You must strive to find a good and definite answer to this question before fixing a price for your product.
The reason perceived value is a critical factor to consider in a product pricing strategy is because customers often associate low price with low quality. Meaning, if your product is priced too low, the customers tend to feel the materials used in producing the goods is inferior and so therefore, the product is of low quality. So before fixing a price for your product, make sure you strike a balance between the price of your product and its perceived value.
3. Product development cost
This is definitely a factor you cannot turn a blind eye to. With respect to normal business and market economics, you should never price your product below its actual cost price. Your actual product cost price is determined by the total cost of production including tax, divided by the total number of products produced.
But in this case, I am not talking about production cost. I am talking about product development cost; a cost incurred from research and experimentation, a cost that’s usually incurred when bringing an innovative product to the market. If you are a business owner, you should know that newly introduced products usually command a high price. This high introductory price is based on two reasons:
- The first reason for the high product price is due to lack of competition. Since the product is the first of its kind in the market place, there will be less or no competition thereby giving room for the company to fix price.
- The second reason is this; a high price will enable the manufacturer recover the heavy investments channeled into the research and development of the product.
However, I have seen some company successfully use the product pricing strategy of losing on the front end by pricing below cost price only to recoup you losses and pick up some profits from the back end. So whatever product pricing strategy you choose; just make sure it positively adds to your bottom line.
4. Economic trend
This is another unavoidable factor that can influence the pricing of your product. I don’t even need to stress much on this. As an entrepreneur, you should know that economic factors such as taxation rate, labor cost, inflation rate, currency exchange rate, government’s fiscal and monetary policy will definitely influence your adopted product pricing strategy either positively or negatively.
5. Level of market demand
This is the fifth factor that can greatly affect your product pricing strategy. Just like economic factor, I feel this point is self explanatory. In business economics, if demand exceeds supply, there tends to be a mad rush for the few available products, thus inflating the price of the product and vice versa. Some companies even go as far as creating artificial scarcity in order to gain a stronger hold on the industrial price level.
The demographics of the targeted customers will indisputably influence the pricing of your product. Demographic factors to consider before taking a stand on your product price include:
- The age bracket of the customers you are targeting
- Your business location and customer’s location
- Educational status of your targeted market
To cut it short, demographics is all about who your targeted customer is. Let me share an illustration with you. Assuming your product is a portable bag specifically designed for students.
If the region you are targeting has a population of maybe 100,000 out of which 90% are students. The result is that your product price will be affected positively. But if the case is reversed and you have a population where only 10% are students; you know what to expect.
7. Class of targeted customers
The class of customers you are targeting will greatly influence the pricing of your product. In the society, there are three classes of people. The rich, the middle class and the poor or more preferably “low income earners,” who are always the majority in terms of population.
A product targeted at the rich will surely command a higher price than those targeted at the middle class. If products targeted at the rich commands a low price, it will be tagged valueless by the rich.
So when devising your product pricing strategy; consider the societal class of your targeted customers first. It’s very important. For instance, there are cars for the rich and cars for the middle class; both can’t be can’t be sold in the market place with the same product pricing strategy.
Example of an entrepreneur that adhered to the “class of targeted customer” factor while devising a product pricing strategy and became extremely successful was Henry Ford, founder of Ford Motor Company. His company’s mission statement was “Democratize the automobile.”
Before the coming of Henry Ford, cars were exclusively for the rich. Another entrepreneur that won at the product price level was Sam Walton, founder of Wal-Mart. His adopted product pricing strategy was summed up in the company’s slogan “Always low price.”
Why You Must Take Product Pricing Serious
To pave the way for a solid foundation, so that your business can survive and grow in the long term, you need to focus a good part of your energy on establishing a competitive pricing strategy. In the world of business, product and price are part of the 4Ps of marketing. The strategic pricing of your product is such an important part of a business building process that its importance can never be over emphasized. Why? You might ask.
This is because the price of your product can either break or make your business so it should not be handled with kid gloves. Wal-Mart have gained and retained leadership position in its industry simply because of their unique pricing strategy. They devised a unique pricing strategy that set them apart and gave them competitive edge.
“Anybody can cut prices, but it takes brain to produce a better article.” – Phillip D. Armour
Your adopted product pricing strategy can give your business an unfair advantage just like Wal-Mart’s and that’s why most businesses try to compete at the price level. Now how do you adopt a pricing strategy that sets you apart? What factors need to be in place before implementing or adopting a product pricing strategy? You will find your answers below.
“There is one rule for the industrialist and that is: make the best quality goods possible at the lowest price possible, paying the highest wage possible.” – Henry Ford
Without wasting your time, below are the 7 critical factors that can influence the pricing of your product.
“The best thing to invest in your business is your time. To schedule, plan and use time effectively, know your turf and know your objectives. Assess the obstacles and opportunities, then devise your strategies.” – The Mafia Manager
What are your Pricing Objectives?
What are your pricing objectives? What do you aim to achieve with your pricing strategy and tactics? These are the questions you must answer before planning your business and marketing strategy. Below are some pricing objectives you may want to consider.
- To maximize profit
- To achieve or maintain market share
- To achieve target return on investment
- To meet or prevent competition
- To maintain stable prices
After understanding your own products, and your competitor’s strategy; it’s now time to create your own pricing plan, strategy and tactics.
3 Types of Pricing Methods and Tactics
- Cost Oriented Pricing
- Competition Oriented Pricing
- Demand Oriented Pricing
I will shed more light on the pricing tactics above in subsequent articles. Now while testing your pricing methods, you should also increase your advertising activities whenever possible and introduce new products and services that complement your current offerings to the market. The intended effects will not be complete without providing incentives or rebates just to capture the market’s attention.
How to Create a Competitive Product Pricing Strategy in Business
Pricing strategies are in fact considered to be the main competitive strategy every business must exploit. This is so as most businesses, whether small, medium, or large in scale rely on reducing their prices just to stay competitive in their business niche. It is also the costliest among the strategies that businesses used, and it is very hard to reverse when needed.
In some cases, using the pricing strategy to stay competitive can be very disruptive throughout markets; because once you have lowered the price of your products and services to have things going your way, restoring it can be next to impossible. So how do you go about creating a strong pricing strategy?
a. First Understand your market
Since price is an important component of the “4 Ps” of marketing, and a complex subject itself; then you must work your prices to reflect the value you are providing as opposed to your competitors.
This will require you to consider carefully what your market can afford to pay for your product or services, thereby enabling you to zero in on your target market share objectives; while obtaining revenue at the same time. The best part of it all is having the ability to maximize your profits without necessarily affecting the environment around you.
b. Study the competition
Alternative and effective pricing strategies for starters call for matching (and in many cases exceeding) the strength that the competition displays. A good example would be focusing more on your service and quality advantages, product differentiation using new and existing differentiating features.
It’s always a good idea to know your competition so you can challenge them at their weakest, thus putting yourself in good ground. This is where the need for a SWOT (Strengths, Weaknesses, Oppositions and Threats) analysis comes in. Now that you have already identified their weaknesses, you have something concrete to work on.
This would mean going after their unhappy customers (those who are not satisfied with the products and services that the competition had offered) and moving in to exploit competitors with their low brand awareness. You can also maneuver to focus on certain geographic locations where the competition is relatively weak, and where the opportunities to grab market share fast enough is possible.
As a final note, I think it’s worthwhile you know that price is a double edge sword that can either make or break your business. So when devising a product pricing strategy; do it with utmost caution.
To be on the safe side, don’t do it alone. It would be wise to avoid meeting head-on with your competition while implementing your tactics; so try and work your way around into areas that are less competitive. Devise a product pricing strategy together with your business team, professionals or external advisors.
Agility and fast thinking really helps in this case. Start somewhere else comfortable so you can initiate changing the rules of the game to your favor. Learning how to create a competitive product pricing strategy will lead you to understand how to stay one-step ahead of the competition and working your way from there. Who knows, your product price; if unique, can give you a competitive edge.
“You don’t have to be the biggest to beat the biggest.” – Henry Ross Perot
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