Saturday, August 4, 2012

Establishing the Right Pricing Strategy For Your Small Business

In today's tough economy, your pricing strategy can be everything. It can be the difference between striving and falling flat, between soaring and completely crashing, between being the next big thing or next big flop. Price too high, and no one will buy. Price to low, and well, you will loose money with each go. With all rhyming aside, your pricing strategy can have a major impact not only on the profitability of your business, but also on how people perceive your goods or services. While pricing alone doesn't drive sales, it certainly plays a key role in the process. There are many things to consider when crafting your pricing strategy. "The first question to ask is not, What should the price be?" as Professor of Business Administration at Harvard Robert Dolan writes, "But rather have we addressed all the considerations that will determine the correct price? Pricing is not a matter of getting one thing right. Proper pricing comes from carefully and consistently managing a myriad of issues." Be prepared to consider MANY things when determining the perfect pricing strategy for your goods or services.

Establishing the Right Pricing Strategy For Your Small Business

Be Consistent

If a customer saw just your price and nothing else, what would they think? How would they perceive the type of good or service you are selling by just the dollar amount? Price should hence be the first line of your message to the consumer, and thus needs to be consistent with your overall brand image. Both Swatch and Saturn use a low affordable price to give their products an air of approachability. At the same time, Mercedes' price marks it as both luxurious and high-class, (something they wouldn't necessarily achieve with a moderate price tag). For this reason, before pricing you need to determine what exactly you wish to portray about your product. If you want it to be perceived by its quality, maybe a high premium price tag would be the best play. But, on the other hand, if you want to highlight a product for its functionality, a lower, more moderate price tag might better do the trick. Your pricing strategy, like all other elements of the marketing mix, must work in collaboration with the overarching strategy and not against it.

Put Yourself in the Customer's Shoes

When attempting to determine a pricing strategy, sometimes the best bet is to take a step back and see the product with your customers' eyes. As Dolan notes, it is a common pricing pitfall to simply factor how much a product costs to make, add your desired profit margin and then like magic, establish a price. The fundamental problem with this method is that it completely ignores one of the most important pieces of the whole pricing puzzle: the customer and how much he or she would be willing to pay for the product or service's perceived value. We must remember that regardless of the product, it will be perceived by different people, in very different ways, at very different values. Furthermore, different people will have not only different uses for the product, but also very different levels of price sensitivity-all of which must be considered when constructing a pricing strategy.

Don't Forget About the Competition

Always attempt to understand the motivation of your competitors when developing your pricing strategy. The price you set will have major implications not just for you, but for your competition as well. Before you put a plan in action it would be wise to try to understand how your competing organizations will react. What will they think of your price? How will they respond? How would you in turn effectively react to their response? These are all crucial questions to consider, before making a play. After all, the last thing you want is to start a price war.

Make it Official

Once you have sought to understand both your customers and competition, you must debate the optimal roll out plan for your pricing strategy. Look at the value of your product, not just in the short term, but over the long haul as well. What will the value be over time? Will it increase or decrease? Look into demand and the various segments you see your product filling into. Furthermore, if this is not your only product or service, you must also establish how this particular product is meant to function within your overall business. Is it meant to be your main profit source, or is it simply to aid in building customer relationships? These are extremely pertinent questions you must consider when deciding your pricing strategy. Consider how you can customize your pricing for different customer segments, which gives you a chance to achieve a greater potential profit than it could with simply a single price policy. Take a look at a few of these strategies:

1. Price skimming- Used often when introducing a new product to market, this strategy is meant to spread profits over a period of time and capitalize on those not so price-sensitive customers who would pay a premium to have the product now. As most clearly evident in Apple's illustrious iPhone releases, price skimming involves introducing products at an initially high price and then gradually decreasing it over time, as means to fully capture a consumer surplus. It's a thin line to walk, but if done strategically, it can increase the overall profits of the product by exploiting people's various levels of demand and perceived value.

2. Penetration Pricing- Used in an attempt to quickly capture market share, it involves setting an initially lower price point, so as to generate a lot of early traffic and entice people to try the brand. It is usually used in cases of high price elasticity and potential economies of scale. While this strategy is a great way to incite word of mouth, just remember to tread carefully, as it could possibly lead to customer dissatisfaction or false loyalty over time-especially if you raise the prices later on.

3. Freebie Marketing/Razor and Blades Model- Used to increase the sale of a complex two-part good, this technique involves selling the main product very cheap, while then making all the profits on refills or complementary good. Most notably used with printers and ink cartridges or, as the name implies, razors with disposable blades, this method is best meant to hook a customer on the product through the initially cheap sale and keep them buying refills.

While we would love to get it right the first time around, you must be agile and be willing to change courses if need be. To do this, you have to monitor how your pricing strategy is functioning within the current environment and adjust if needed. We must remember that price alone does not dictate sales. As Wasserman points out, "Your ability to sell is what drives sales and that means hiring the right sales people and adopting the right sales strategy." Price though nevertheless is an important piece of the puzzle, and something that should not be taken lightly. It should be a continuation of your overall strategy, not a contradiction of it.

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