In business or entrepreneurship, pricing is a vast knowledge area with so much to discuss. Pricing is usually dependent on the associated costs but that is not all. It is also dependent on customers’ perceived value of your product or service versus their perception of the value of your competitors. Today our discussion is on pricing strategy, an area you must eat and breathe. Pricing strategy refers to activities that are aimed at finding a product’s optimum price, typically including overall marketing objectives, consumer demand, product attributes, competitors’ pricing, market, and economic trends.
Cost Implications
I am starting with this one because it is the most common aspect of pricing strategy. As common as it might be, many still miss it. In business financial management, there are two types of costs – fixed and variable costs. That is why it is imperative to put together a business plan before starting any business venture. That exercise will help you appreciate the implications of fixed and variable costs more. Some people make the mistake of not factoring in the variable nature of some costs. Others also make the mistake of overlooking certain seemingly subtle or negligible costs. If you inaccurately capture your costs, you will obviously price wrongly. That is, you should be as thorough as possible in determining your costs before determining prices.
Your Intended Good Or Service Position
I mean how you intend to position your good or service in the market. This will vary from brand to brand, given how you want to appeal to people uniquely. For example, you might start a business where you want to target middle to low-income families. This means you will have to price in such a way that they can afford it. The other dynamic is that that demographic is quite huge. Thus, you essentially want to push volumes. To do that is why pricing somewhat low will appeal to those families. Then you can have a scenario where you start a business targeting affluent people. This would entail having premium pricing, typically much higher than other brands. Despite all these possible scenarios and more, your pricing would still have to appeal to the target market and still guarantee profitability.
Revenues And Profit Implications
Realizing lots of revenue is good and so is realizing lots of profits. However, these things must be achieved properly, striking the right balance. You must appreciate that immediately making huge profits is not as good as you think. In the long run, it will not be healthy for your business. To achieve huge profits almost immediately usually follows that you are pricing exorbitantly. In that short span, it might seem like it is working, but not for long. You will make it much easier for new players or your competitors to differentiate themselves. They can simply adjust their prices and your sales will tumble just like that.
When it comes to revenue, your goal must be to capture as much of the market as possible. You do this by pricing in such a way that draws people to you. In order to achieve you have to figure out ways to ensure your costs are as minimum as possible. Sure enough, you might start off with paltry to zero profits but so long revenue is good, that is sustainable. The aim is to keep your revenues ever-coming in and significant enough consistently. If you keep at it, you will gradually reach your breakeven point and start realizing profit.
The overall point here is that you should not be myopic when determining your prices. Have a long-term outlook and make the right decisions now.
Have Flexible A Pricing Regime
This is because market dynamics are never cast in stone. For example, a new player or new player can come in and disrupt your sales performance. Your pricing should already be flexible enough to withstand that disruption. Economic issues can lead to, say, raw materials becoming scarce or costlier to the source. It could be that your target market’s income levels can be affected by some policy change. These are examples of variables commonly at play in Zimbabwe. Is your pricing flexible enough to be adjusted without hurting your viability? You really have to take time to assess whether or not your pricing is too close to extremities. Try to have pricing that would only need marginal adjustments in the event of some incidental. This is because if continued viability would need a sharp upward review of prices, sales dips can occur. Ensure your pricing is flexible but competitive as well.
Implications On Demand
Your pricing has a huge bearing on demand dynamics and this, in turn, affects sales. Either increasing or decreasing prices has implications on demand. These are things you should not just guess or assume. It is wise to do some empirical study into how pricing affects demand in your context. You can also support that with other pre-existing data from prior studies. It is not always the case but there usually is publicly available on these matters. In conducting these studies or going through data, your thrust will be to draw insights. These will be insights that indicate relationships between pricing scenarios and demand dynamics. This will help you know how best to price for optimum demand to ensure you realize good sales.
These are some of the important things to bear in mind about pricing strategy. Often time, the best approaches are informed by contextual strategies. Do not just copy and paste what someone else is doing. Nothing wrong with considering other players’ strategies but do not blindly copy. Take time to study and understand your context and address its actual issues, not assumed ones. Never settle; always strive to be ahead of all there is to know about pricing regarding your business.
