How to set pricing for a competitive marketing strategy
To decide on a pricing strategy in marketing or how much to charge for your product, you need to think a little more than just calculating your costs and adding a profit margin. The price the customer is willing to pay for the product has very little to do with cost and a lot to do with the value they place on the product or service they buy. Finding out how much the customer appreciates your product or service in order to price it accordingly is a technique called pricing based on value. This is the one that more entrepreneurs should use.
Five common pricing strategies
Pricing a product is one of the most important aspects of your marketing strategy. Generally, you should rely on the following five strategies:
- Cost-increased pricing – simply calculate your costs and add a profit margin
- Pricing through free competition – establishing a price based on that of competitors
- Pricing based on value – pricing based on what your product is worth to customers
- Skim pricing – setting a high price and then lowering it as the market evolves
- Pricing for market penetration – establish a lower price to enter a competitive market and then increase it later
How do you determine the price according to the value
- Choose a product comparable to yours and see what customers pay to buy it.
- Find all the features that differentiate your product from the comparable product.
- Assign a financial value to all these differences, add all that is positive in your product and subtract the negative aspects in order to arrive at a potential price.
- Make sure the value to the customer is greater than your costs.
- Show customers why the price is right, including talking to them.
- If there is an established market, the current price range will help you to know the price expectations of customers.
You still need to make sure that the value in the eyes of the customer is greater than your costs. Otherwise, you will lose money every time you sell a product.
Pricing based on value: better suited to companies whose products stand out
Entrepreneurs often set prices based on costs because it is easier. They can also copy prices from their competitors, which is a slightly better strategy, but not ideal. In a perfect world, all entrepreneurs should set prices based on value. But entrepreneurs who sell a basic product or service, such as a storage service or all-white t-shirts, are more likely to outperform their competitors at low costs and prices. But for entrepreneurs who offer something that stands out in the market – for example, a craft product, a high-tech product, or unique services – determining the price according to the value will precisely help to convey the idea of the value of the product.
Three reasons why pricing based on value may be advantageous
When we talk about determining the price according to value, the value perceived by the customer is mainly based on the adequacy of the product to the needs and wishes of each customer. Business can gain an advantage over its competitors in the following three ways:
- The price better matches the perspective of the customer.
- Setting the price based on value allows you to increase your profitability, which means you can acquire more resources and grow your business.
- When a price does not work, the answer is not to lower it, but to determine how it could better match the value perceived by the customer. This means adapting the product to better meet market demands.
The price must match your target market
In summary, pricing is one of the most important aspects of your marketing strategy, which also includes promotion, placement (or distribution), and people. When you’re considering your price it’s important to realize that it’s not for you, but for your target customers. All pricing strategies are a double-edged sword. What attracts some customers repels others. We can’t please everyone. But remember, you want the customer to buy your product. This is the reason why you should use a strategy that is suitable for your target market.