Pricing Decisions

Digital Marketing - Study Notes:

Price-setting is the process firms follow to set the price for their products and services. It should be taken seriously, as a product’s price is linked to its success in the market. A sound pricing policy can help a company achieve its business and marketing objectives. 

The pricing framework

To price a product, you carry out these steps in the pricing framework:
1.    Set pricing objectives. Before pricing a product, figure out your pricing objectives. What do you want to accomplish with your pricing? You may want to maximize sales, or your goal might be to increase market share.
2.    Estimate demand. How much demand is there for your product? The interaction between supply and demand is likely to influence the price of your product.
3.    Map out the costs. The price should take your variable and fixed production costs into consideration, so expenses don’t exceed profits.
4.    Map out all influential factors. Ask yourself: What price are your competitors charging? Is the price you can charge controlled by the government?
5.    Select a pricing strategy. You can use various pricing strategies, so choose one that suits your industry and business model.
6.    Select a pricing approach. Again, the one you choose depends on your particular situation.
7.    Set the initial price. This decision is crucial, as customers are unlikely to be happy if you get the initial price wildly wrong and need to increase the price substantially afterwards. Try to ensure the price is competitive and set at the correct level from the outset.
8.    Monitor and adjust. Keep a close eye on sales and make any necessary adjustments to your pricing.

Pricing strategies

Let’s look at three common pricing strategies. 

Price skimming

This approach involves setting a very high price initially, and then lowering it over time when the product becomes less relevant or nears the end of its lifecycle. Many high-tech gadgets and video games follow this model. The goal of price skimming is to skim the top off the market and maximize profits before you reduce the price and reach everyone else. With this approach, you can rapidly recoup your initial investment. However, customers who purchased at the higher price may be unhappy to see the price decline.

Market pricing

With this strategy, you set prices according to current prices in the market for the same or similar products. This model helps you stay competitive and ensures you don’t charge too much more for your products than your competitors. This strategy can be useful when there are a lot of similar products in the market. However, it can lead to price wars and ignores differentiation.

Market penetration

You can use this strategy to set the initial price of a product at a very low point and quickly reach a large proportion of the market. It assumes that most customers will switch to the new product because of its low price. While this strategy can increase your sales volume and market share, it can also result in reduced profit margins. As many people associate price with quality, it can result in a poor company image and may lower industry prices.

Pricing approaches

You can use different pricing approaches to price your products:

•      Cost-based pricing, which is based on the cost of producing, manufacturing, and distributing a product. A percentage markup may be added to the price. This approach is frequently used by retailers.
•      Profit-based pricing, which is based on how much profit you want to make. This approach guarantees you’ll make money on each sale. 
•      Break-even pricing, which sets a price point at which a business will earn zero profits on a sale. With this approach, you just want to cover your costs. An agency might execute an initial project on this basis in hope of getting further work.
•      Psychological pricing, where the price is set slightly above or below a certain point to achieve marketing goals. Products priced at $9.99 or $10.10 are perceived to be cheaper or more expensive than products priced at $10.00. So, $9.99 psychologically signals savings, while $10.20 signals better quality as consumers think that it must be expensive for a reason. 
•      Prestige pricing, where the price is set at a high level to encourage positive perceptions. Luxury products like perfume use this approach to drive aspiration and desire among consumers.
•      Going-rate pricing, which bases the price of a product on the current market rate and on what consumers are prepared to pay. 
•      Demand-based pricing, which relies on customer demand trends to set and adjust a product’s price. Think of airlines and hotels: at peak times when there’s more demand, they charge higher prices for their services.
•      Freemium pricing, where the entry-level price is free, but prices increase as functionality is added. SaaS companies often use this model.