GETTING TO THE RIGHT PRICE – PART 2
In ‘Getting to the Right Price – Part 1,’ the article outlines the three product pricing parameters that must be evaluated to come to a successful market price. They are, market value pricing, target margin pricing (cost-plus) and competitive pricing. This article follows up on these concepts with pricing scenarios and general pricing considerations & observations that may be useful to keep in mind when developing pricing strategies
Pricing and the Monopoly:
If you are the only one offering your product or service, congratulations! You have hit the pricing jackpot. And if you are meeting a legitimate market need and the value is readily recognized, you can set your price and the market’s price, knowing you have first mover advantage. However, keep in mind, sole supplier offerings usually don’t remain so for long. This is especially if the offering is doing well in the marketplace and margins are good. Therefore, it is recommended that the product offering be priced in a way that reduces the chances of market share erosion by a flood of entrants. Consider lowering your price if numerous entrants move into the space. However, never drastically reduce your price. It may alarm your customers or dampen your market position. Take full advantage of economies of scope when doing so to maintain healthy margins. Note that a side benefit of lower product pricing, is that the offering may become more accessible to larger parts of the market. In some ways, the lower product price also makes it less attractive to competitors seeking substantial and quick profitability gains upon entry. An alternative tactic is to offer price specials to existing, strategic customers to secure their continued business.
Other Pricing Observations & Considerations:
- If you are offering a new product or service, make sure to get firsthand customer pricing expectations before rolling it out. First impressions on pricing are often lasting. As stated in Part 1, if product pricing is too high the customer may be turned off and will find a better deal. If the price is too low, it may signal a lack of quality, even when this is not the case. To stimulate sales for new products, it would be best to set a fair-market value and offer discounts to entice customers to try it.
- Have a 3rd party agency survey customers on pricing. Customers are often wary of companies inquiring about product pricing because they believe they will then charge them a dollar more or a dollar less what they state they’re willing to pay. Also, survey customers on pricing using price ranges rather than a specific dollar amount for similar reasons.
- Pricing tools such as Zilliant or Vendova are helpful when developing price strategies. These pricing systems examine current customer spend, revenue size of customer, margin trends and customer product mix, along with other spend history with your organization. They combine this with market parameters such as purchase location, competitive pricing and other market factors, to recommend a price for that customer on a product and project basis. This increased price transparency is also quite useful for fine-tuning market strategy.
- The ultimate pricing goal is to find the right price that maximizes revenue by balancing volume and unit profits. There is a definite relationship between volume and price. The higher the price, the less pool of customers that can afford it. At the same time, higher prices lead to greater margin realization with no additional effort on your part.
- To determine what is the best price for your product portfolio, utilize historical data, evaluate the impact of market trends, solicit customer pricing input and engage in trial and error pricing (mitigate risks by sampling various market sub-segments at varying times).
- Keep in mind, net profits are not as relevant to pricing evaluation as gross profits, since Marketing has little control over fixed costs (i.e. factories or machinery). To improve gross margins (Price – Cost of Goods Sold), the product price would need to increase or product manufacturing or selling costs are reduced.
- Strengthen your brand recognition to demand higher pricing. Companies that dominate a market effectively using brand recognition are able to present ‘quasi’ monopolies in the minds of their customers. Brand followers believe that no other product can satisfy them like Brand Y (i.e. Apple electronics and Brooks Brothers clothing).
- Customers find product price increases acceptable when –
- Your competitors are also raising prices
- You have added significant value to the product (in their eyes)
- Commodity (raw materials) have increased sharply and this is widely known
- Demand for product is exceedingly high
- Supply has been drastically reduced
As stated in ‘Getting to the Right Price – Part 1,’ pricing is both an art and a science. Utilizing concrete external and internal pricing data is key. Data should be consistently gathered, analyzed and used to strengthen pricing decisions. Price provides both a financial and messaging tool in the marketplace. Mastering this area of the Marketing Mix is paramount to organizations seeking profitable and sustained growth. In summary, most will agree that optimizing product price is a challenging process that takes commitment and discipline. Yet they will most likely also agree, that the fruits of these efforts are well worth it. Happy hunting!
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I wish you all Happy Holidays. Enjoy the time with family & friends.
See you in the New Year!