Pricing of products is important not only from a profitability point of view but also works as a valuable marketing tool, so getting your pricing right could pay dividends for your company.
There are lots of ways to set your prices and in this article we look at how you can choose what to charge and also what this might be saying to your customers.
The first method of pricing is to set a market rate. Going out and looking at what your competitors are charging means that you won’t be massively out of step with the market but may leave you in the position of having a product that is actually losing you money. If you under price your goods or services then every time you sell an item it will actually cost you cash.
Cost plus is a method of avoiding this. Put simply you add up all of the costs then add on a percentage profit. The benefit of this is that you can never end up losing money on your sales however you could find yourself pricing above market rate.
The third method, Target Pricing as the name implies allows you to set a target price for your goods or services based on the market rate, then ensure that your costs of production fall within that value. Again this avoids under pricing but also ensures that your offering remains competitive. The downside to this is that it can encourage firms and employees to cut corners and quality in an attempt to meet the target price.
Price to Win or Loss Leader pricing acknowledges the fact that the sale may be made at a loss but is used as a method of encouraging further purchases. This is particularly useful when combined with other goods where the company makes a healthy margin. A good example of this would be a supermarket selling milk at below break even price to entice shoppers in who will then buy more profitable goods. The disadvantage of this strategy ois that customers may cherry pick only the good value products leaving an overall loss or that the company becomes reliant on a loss leader strategy to make any sales at all with customers holding off purchasing until there are bargains on offer.
What do your prices say about you?
It’s easy to forget that the price of a product carries hidden information about the product and the company selling them. Firms that ignore this fact risk significant damage both to their firms reputation and to the desirability of their goods.
Pricing goods at a low value may seem like a good thing to do and indeed there are companies that make this a central part of their marketing strategy. Think Ryanair, Aldi and Lidl and you can see that there is a good marketplace for low cost, no frills service. Whilst it is true that these firms have put low price at the centre of their sales offering it also defines how the firm work in the background. Heavy discounters have to have an exceptionally efficient logistics and operations set up to allow them to compete at this level. The low price tells the consumer that this is a company where quality and service may be low and where the customer will be expected to pay for everything (think carrier bags in Lidl or baggage at Ryanair). Whilst these companies could introduce a higher level offering if it is too far away from their cheaper goods then the consumer will tend to be suspicious and ask whether it is simply overpricing of the same poor quality.
At the other end of the market, luxury goods retailers find that they cannot discount prices. Again consumers who expect to pay premium prices become suspicious of lower priced items, seeing them as somehow inferior. The high cost of goods such as perfumes and designer clothing ensures exclusivity that customers value. Lowering prices removes this sense of exclusivity as the perception is that anyone will be able to afford what had been until then available to only a few. Similarly cutting prices also gives the impression that quality has been compromised whether this is true or not. In the luxury goods market perception is all.
The middle ground perhaps provides the most challenging scenario for the price setter. There is more scope of discounting selected products to encourage buying and promotions such as buy one get one free don’t give rise to so much suspicion and tend to have greater effect. Raising prices by using premium branding such as the Tesco finest also works well but needs to be done alongside a standard range to enforce the premium message. Firms will do need to be careful though as constantly changing prices has the effect of confusing the customer and sending a message that the company doesn’t understand what it actually wants to be. Consumers like to know what type of company they are buying from before they buy and not knowing whether the offering is premium or discount may send mixed messages.
Pricing is an important area for company strategists and concentrating the marketing message by ensuring that the consumer understands where the firm sits in the value landscape can help to reinforce the other aspects of the marketing mix.