A pricing strategy refers to a set of methodologies, practices, and processes businesses use to determine the best possible prices for their products or services. There are numerous pricing strategies commonly used by organizations, depending on the industries they operate in and the products or services they create. These range from competitive and value-based pricing to dynamic and cost-plus pricing, to name a few.
If picked thoughtfully, the right pricing strategy can help you value your products and services at the appropriate level while also bringing sustainable returns. For this reason, you will have to assess your business goals first — just like with any other business decision — and then examine different pricing strategies to find the one that meets your business’s needs.
It should be a comprehensive process that accounts for a wide array of factors — from your business’s financial stability and brand identity to your competitors’ positions in the market.
Without further ado, here is how to determine the right pricing strategy for your business:
Competitive Analysis
A competitive analysis is a process businesses use to identify and assess their main competitors. It is usually done by analyzing different aspects of your rivals’ companies, such as their products, services, pricing, marketing, and overall strategies.
For instance, product prices and availability tracking allows you to stay on top of all the discounts, crossed-out prices, sale prices, as well as the availability of products in e-commerce channels.
This information can help you understand your position in the market and find ways to improve your business offerings. It can also give you ideas on how to price your products or services in a way that gives you a competitive edge while still being profitable.
After all, a competition-based pricing model is one of the most commonly used pricing strategies in business.
Market Research
You cannot start setting prices without assessing the market situation first. As such, you need to gather accurate and reliable information about your target audience before choosing your pricing strategy.
Your research should answer the following questions:
- Who is your target persona?
- What needs and wants does your target audience have?
- What are your prospective customers’ buying habits?
- What is your target market’s perceived value of your products or services?
- What is your target market’s willingness to pay (WTP) for your products or services?
Your business should be ideally positioned among the competition. You also need a clear understanding of your target audience’s needs, wants, and desires but also expectations. This way, you will be able to find a price point that meets their expectations without undercutting your business’s profits.
Define Your Cost Structure
In order to price your products or services accurately, you need to have a clear understanding of your company’s cost structure. It refers to all the costs associated with creating, manufacturing, and selling your products or services.
Ask yourself the following questions:
- How much does it cost you to produce your products or services?
- Can you somehow lower these costs?
- What are your fixed costs and variable costs?
Fixed costs remain constant regardless of how many products or services you sell. They include things like rent, insurance, and salaries. On the other hand, variable costs change in relation to your sales volume — for example, the cost of raw materials would be considered a variable cost.
Your cost structure will dictate the minimum price you can charge for your products or services and still make a profit. That’s why it’s crucial to clearly understand your costs before setting prices for your products or services.
Financial Stability
Evaluating your business’s financial stability is crucial in determining your profitability and pricing options. If you omit this step, you run the risk of putting your business in danger.
Suppose you are a startup with little to no revenue. In that case, you will want to focus on generating sales and building market share, which means that a competitive or value-based pricing strategy would be more suitable at the product launch stage.
Conversely, you can afford to be pickier about your prices and focus on maximizing profits if your business is already generating a steady stream of revenue. It will most likely imply adopting a premium pricing strategy.
The Bottom Line
Setting the prices for your products or services can be challenging, especially considering that you, as a business owner, are already biased and want to market your products for the highest price possible. This is why you should be mindful of your pricing strategy choice and ensure that your business goals and objectives are always the top priority.
While conducting target market research and competitive analysis will provide you with valuable insights into both your own and your rivals’ positions in the market, they will also give up some hints on how to improve your business offering. Furthermore, evaluating your company’s financial situation and understanding its cost structure will allow you to outline the lowest possible price you can set for your business without losing its competitive advantage or profits.
Knowing all the factors contributing to your product or service’s price will allow you to make an informed and well-calculated decision when choosing a pricing strategy for your company.