We’ve been putting off writing about price. Its a tricky subject because there is so much to write about. In this “How to…” blog, we’ll try to simplify the process of pricing and suggest a few strategies you can apply when pricing your product.
Pricing is complex. Both internal (organisational) and external (market) factors affect the price of a product. Economists talk about market conditions (pure competition, monopolistic competition, pure monopoly and oligopoly) affecting price. Product Managers are concerned about understanding gross margin and balancing the concept of value when setting price. Marketers talk in terms of pricing gimmicks such as “free” or “$0.00”.
Although saying that Chris Anderson argues that with the technological onslaught, free has emerged as a valid pricing model
So how do we go about pricing a product?
Step 1: Evaluate the pricing environment
This includes the state of the economy, the product’s existing competitors, new entrants to the market place and consumer trends.
External factors will influence your pricing objectives. If your market is saturated with existing stalwarts, you may decide to fight for market share through price .
Step 2: Define your pricing objectives
Pricing objectives describe what an organisation wants to achieve through the price of its products. Pricing objectives should therefore be influenced by the organisation’s view on market share, sales, competition, customer satisfaction, profit and its image within the market place.
Your organisation may be sales driven and may be prepared to offer the product at a price that will generate large sales volumes. Depending on the price set, a sales driven pricing strategy may lead to a price war.
Alternatively, your organisation may strive to uphold its image as a producer of luxury, quality products. Status conscious customers will delight in paying a high price for the product and will shy away from the product if the price drops.
Before you price your product, think through the pricing objectives.
Step 3: Choose a pricing strategy
You should choose a pricing strategy that ultimately meets your pricing objectives.
Here are a couple of common pricing strategies.
- Cost Based Pricing – Uses cost as its primary decision factor. The objective of this strategy is to ensure that the cost of developing the product is covered. A percentage or the desired profitability is added to the cost of the product which determines its sale price.
- Market Value Pricing – Pricing is based on the perceived value of the product by customers. It requires research effort to determine customer needs, preferences and expectations before price can be set.
Step 4: Formulate pricing tactics
Pricing tactics are a set of actions that effect the price strategy. Pricing tactics must be considered in relation to the product’s lifecycle.
Gabriel Steinhardt of Blackblot says various tactics such as “price skimming” for new innovative product entrants can be used when applying Market Value Pricing strategy. Companies such as Apple set a high price for a new product such as the iPhone to earn maximum revenues from a small segment of the market that is willing to pay for the first release of the product.
Products in the growth stage of their lifecyle may deploy tactics such as “diversification” to capture a larger portion of the target market and a bigger share of the revenue pie. Price diversification enables companies to charge a smaller price for the basic product and a high price for the premium product.
Bundling as a pricing tactic is used when a product is mature and possibly in decline. Telstra and Optus bundle fixed line telephony with newer, more relevant products such as Subscription TV and or Wireless Broadband Internet access to maintain some level of product penetration.
Step 5: Assemble a pricing mix
Step 5 is the nuts and bolts of pricing. At the final stage, you should consider discounts (if any), other variables such as shipment costs, tax, terms and conditions, payment methods, payment terms, licence fees and so forth.