9.05 – Settling on Your Price
Pricing is a crucial element of the marketing mix, significantly impacting your company’s profitability. It’s essential to keep your pricing strategy under constant review to ensure it aligns with market conditions and business objectives.
Understanding Market Conditions
The overall market conditions play a significant role in determining your pricing policy. In booming markets where products are highly sought after, prices can rise disproportionately. However, conditions can vary greatly depending on location. For instance, a beauty treatment business priced its services based on the high rates in Surrey, only to move to Cornwall where prices were 50% lower due to local economic conditions.
Seasonal factors also affect pricing, such as the higher cost of turkeys at the beginning of Christmas week compared to the lower prices on Christmas Eve.
Working to your capacity
Your ability to produce your product or service affects your pricing strategy. New ventures often have limited capacity, so pricing should be set to match production capabilities without overwhelming the business. For example, an online translation service initially priced at $15.50 per hour adjusted to $18 per hour after demand exceeded available working hours. This allowed the owner to maintain a manageable workload and hire additional help.
Typically, you cannot utilize all 40 hours of a working week for earning, as administrative tasks and sales activities also require time. Therefore, pricing should ensure you achieve your target income within the actual earning hours available, such as 30 hours per week.
Perception of Value
Customer perception of your product or service’s value significantly impacts your pricing. This perception might not align with actual costs and could be influenced by their knowledge of competitors’ prices. For new products or services, customers may not have a reference point, making their perception even more critical.
Skimming versus penetrating
The image you wish to portray in the market influences your pricing strategy. A high-quality image justifies higher prices. Within this framework, you have two main options:
- Skimming Pricing: Set a high price to skim the market, targeting wealthier customers willing to pay more to be trend-setters. This approach is common for innovative products with little competition. Once the market’s upper echelon is captured, prices can be lowered to attract broader demand. However, high prices may attract competitors, especially if the product is easy to replicate and lacks patent protection.
- Penetration Pricing: Set a low price to penetrate the market and attract a large customer base quickly. This strategy can deter competitors by making the market less attractive due to lower profit margins.
The most common mistake businesses make when setting prices for the first time is underpricing. This often results from not fully understanding the costs associated with production and marketing or from the temptation to undercut competitors. Setting prices too low can jeopardize your business’s financial health.
Additional Considerations
- Competitive Analysis: Regularly analyze competitors’ pricing to ensure your prices remain competitive while reflecting the value you provide.
- Cost-Plus Pricing: Calculate all costs involved in producing and delivering your product or service, then add a margin to ensure profitability.
- Value-Based Pricing: Set prices based on the perceived value to the customer rather than solely on costs or competitors’ prices.
- Dynamic Pricing: Consider flexible pricing strategies that can adjust based on demand, competition, and other market factors.
- By carefully considering these factors and continuously reviewing your pricing strategy, you can find the optimal price point that balances profitability with customer satisfaction.
