What To Know About Pricing Strategies
Setting a price for your product or service is tough. You need to quickly interpret, recommend and act on pricing and margin insights. You need to avoid both setting prices too high, causing you to miss out on valuable sales, and setting them too low, causing you to miss out on income.
Dozens of pricing models and strategies exist to help set the right prices, but your biggest concern is considering consumer and market demand in a future that's hazy. Take a step back and view pricing from many different angles. You know that a lot goes into the process:
- Revenue goals.
- Marketing objectives.
- Target audience.
- Brand positioning.
- Product attributes.
But it's even harder for business owners to gauge external factors:
- Consumer demand.
- Competitor pricing.
- Overall market and economic trends.
These external factors are where your crystal-ball-gazing smarts have to be honed. So how can you devise a pricing strategy that maximizes your profit and revenue when so much is uncertain?
The major factor to consider is price elasticity of demand. How will a change in price affect consumer demand? Inelastic demand occurs when demand for a product remains constant despite price fluctuations. For example, a pack-a-day smoker will continue to buy exactly one pack of cigarettes every day even if the price rises. Elastic demand fluctuates based on prices. If your cable bill rises too high, you cancel your subscription and start looking into streaming services. The formula for calculating price elasticity of demand is % Change in Quantity Demanded/% Change in Price = Price Elasticity of Demand.
This concept may help you understand your product's sensitivity to price fluctuations. Take a closer look at these specific strategies and consider them as guidelines:
- Competition-based pricing focuses on the going rate, without accounting for the cost of your product or consumer demand, using competitors' prices as your benchmark. Slight price differences may decide whether a consumer buys your product or a competitor's.
- Cost-plus pricing focuses on the cost of your product or service. It is also known as markup pricing because you mark up the price based on how much you want to profit.
- Dynamic pricing, also known as surge pricing, demand pricing or time-based pricing, is flexible; prices fluctuate based on market and consumer demand. Hotels, airlines, event venues and utility companies use dynamic pricing by applying algorithms that consider competitor pricing, demand and other factors.
- Freemium pricing is a strategy in which you offer a basic version of your product hoping that users will pay to upgrade or to access more features. After they've seen your product or service's functionality with a low barrier to entry, customers see the perceived value of the item and are motivated to want more features.
- High-low pricing is when you lower the price of your product when it drops in novelty or relevance. This includes sales and discounts.
- Hourly pricing is rate-based pricing used for consultants, freelancers and contractors.
- Skimming pricing is when you charge the highest possible price for a new product and then lower it over time.
- Penetration pricing starts low to draw attention. This approach works for new businesses looking for customers.
- Premium pricing is when you price your product high in order to present an image of luxury.
- Project-based pricing is charging a flat fee per project.
- Value-based pricing is what the customer is willing to pay.
Now's the time to sit down and calculate numbers. Can you personalize offers by customer, channel and product in your considerations of sales pipelines and backlogs? How will you price a digital product? Make your prices reflect your brand, industry and the overall value of your product.
Most companies are facing strange economic scenarios due to the COVID-19 crisis, although what that means can vary widely. In some industries, companies are trading off efficiency for redundancy, keeping backups and reserves for the next lockdown or other crisis. Profitability may fall in the short term, but as supply stability rises, your foresight in saving will make your business model more resilient and you will be able to cut prices again.