If you are starting in business you can’t influence what your competitors charge. Nor can you influence what income a consumer has. What you can influence is how likely a consumer is to buy your product. This will depend on two things:
- how you price your product relative to others in the market
- the extent to which your product provides what the consumer wants.
There are five approaches to pricing:
- If your aim is high-volume sales with low production costs you could go for penetration pricing. From day one you charge your long-term good value price in the hope that this will deter potential competitors.
- If you need to attract initial customers you could go for loss leading instead. Here you offer products and services below cost in the hope of building up repeat business.
- If you are trying to move into a second market, you could try marginal pricing. The idea here is that your sales in the first market will cover all your fixed costs. As long as you make more from your extra sales in the second market than the cost of producing those extra goods or services, then your overall profit will increase.
- If you think you have a short-term competitive advantage in a market, you can do the opposite and go for skimming. Here you charge as high a price as you can but recognise it will not last for ever.
- Finally, if you think you have a good idea of what consumers will pay for a product, you can try market-based pricing and charge a price just below where you think you will meet consumer resistance.
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Comments on: "Is The Price Right? "
smartpricing has started a thread discussing Is The Price Right? .
Re: Comments on: "Is The Price Right? "
I didn't save my comment, and it hasn't appeared. So I'll try again...
There are industries for which these comments are largely appropriate, a good example would be energy production and distribution. But I'm afraid that most companies don't operate in stable market structures with stable product lines. And this kind of economics-based thinking is, I'm afraid, of little relevance in this world.
Pricing is not something that exists downstream of product and proposition development, it's integral to it. For an obvious example, look at discount supermarkets. Their proposition isn't delivered as all the same stuff, just cheaper. You will see overlaps but many gaps, unique products, distribution and display strategies that come from a proposition in which value is key. Pricing drives physical product selection.
That example is obvious, but most business will optimise their performance not by the pursuit of that dangerous phantom the optimum price, but by making sure that pricing process is both fully integrated with other propositional processes and directly engaged with executive management.
Why does the illusion persist?
Well, most pricing decisions apply not to new propositions but to old ones. So companies fall into obvious traps, including
* Treating their cost structure as presently understood as normative in the market
* Allowing established management reporting structures to shape what will be acceptable in business lines
and so on. These are potentially dangerous in good times, but in troubled economic waters as we have today they can be lethal.
Most companies have poor pricing process.
Poor pricing process leaves established businesses vulnerable to attack by smart competitors.
And that kills businesses.