Pricing in business is one of the most topical business issues. Pricing has a significant bearing on both the business and the customers. The thrust is to strike a balance between those two groupings in what would be a win-win situation. As noble as that would be most businesses tend to over-price to make a quick buck. This common in Zimbabwe – why is it so? Well, it could be fear of the unknown that emanates from the mercurial nature of the operating environment. Thus most businesses think that putting huge mark-ups is the way to go. In this article, I want to explore an approach that most entrepreneurs might have never thought of.
Pricing Strategies – A Brief Walkthrough
How does one strategically determine prices? The most basic way has to do with factoring in cost (it could be the cost of production, procurement and so on). A mark-up is then placed on that cost to come up with a price. Then we have another approach that considers market-determined pricing from competitors.
For one to understand what I shall be dealing with herein, knowing pricing strategies might help. There are different pricing strategies that an entrepreneur can adopt. Some of the strategies are penetration pricing, bundle pricing, price skimming, premium pricing, economy pricing, promotional pricing, and psychology pricing. Penetration pricing is for when you want to penetrate the market. Bundle pricing entails selling several products bundled together as one package.
Price skimming involves initially setting prices very high and then systematically reducing them gradually as the market shifts. Premium pricing is meant for unique high-end products e.g. Porsche uses premium pricing. Economy pricing is all about setting prices very low in a bid to realize tiny profits. Promotional pricing employs various approaches e.g. buy-two-and-get-one-free. Psychology pricing entails pricing in such a way that psychologically makes customers pay without paying much attention to the price.
Knowing these dynamics will help you know how best to implement what I am advocating for here. That is to say, I am encouraging entrepreneurs to price reasonably to push volumes.
What Is The Objective Behind Pushing Volumes?
Pushing volumes is bent on spiking the production or operational capacity of a business. It is directed at realizing more profit from multiple repeat purchases as opposed to once-off or periodic purchases. By reasonably pricing a stock order can be sold out sooner thus paving way for more orders. Yet when the prices are super high the stock is cleared after a much longer time. For example (in a month), by the time entrepreneur A clears just one stock order, entrepreneur B would have cleared say, 4 stock orders.
Why Is It Hard For People To Reasonably Price To Push Volumes?
There are many things we can attribute this to but it is at most a psychological issue. I believe it also emanates from people’s inclination to follow the crowd. Thirdly it also comes from most people’s general indifference towards questioning the status quo. Let me expand these 3 talking points.
This imprisonment is either self-inflicted or is brought upon people by external pressures. What am I dealing with here really? There are certain psychological strongholds in most entrepreneurs’ heads. They just think more profit can only be realised by setting very steep prices. Their mind tells them that if they set reasonable prices they will not realize good profits. It is just a psychological stronghold that tells them “more is more” – their minds are just transfixed on that. Funnily, the adage “less is more” is akin to what I am talking about i.e. pricing reasonably to push volumes.
I know that most people struggle with delayed gratification – they want instant results. Here is what is funny, charging high prices delays gratification. Yet in light of all that people still charge very high prices. On the other hand, pricing reasonably makes gratification instant – yet most people’s minds tell them that it is better to charge high prices. You see, that is why I am calling it psychological imprisonment. Lowering prices or charging lower prices seems like delayed gratification in the mind yet it is not.
Inclination To Follow The Crowd
This is simply because people want to operate in a safety net. If something is widespread then it presupposes that the following suit is best – that is how most entrepreneurs reason in their minds. The funny thing about such thinking is that it makes you ordinary in that you are doing what everyone else is doing. Everyone else is just setting high prices and you think the following suit is the real deal. Again you realize the psychological aspect I discussed earlier because a competitive advantage stems from moving away from the crowd. That will be as good as going against the tide.
Not Questioning The Status Quo
The previous 2 talking points culminate into this fundamental question; why not question the status quo? Of course, everyone else is charging high prices but would it not be more profitable to charge lower prices and still profit? As an entrepreneur, you must move away from accepting the status quo and begin to question it. It has been proven that lowering prices to push volumes is more profitable – China is a common example of that.
My advice to you as an entrepreneur is that it is high time you review your pricing structures. Figure out how you can tweak your prices in such a way that makes them low enough to push more volumes yet maintaining business sustainability and profitability. Consider applying the break-even analysis. You will be amazed at how just lowering a price by just some few cents can push volumes. Take advantage of the widespread conduct of consumers comparing prices before purchasing.