In simple terms, pricing is the process of determining what a business will receive in exchange for its goods and/or services. Pricing decisions should be based, not only on what is necessary to recover business costs or match competitors but also on the customer’s perception of what the good or service is really worth!
So how can you make appropriate first-time pricing decisions?
1. Establish a strategic pricing objective, that reflects what you hope to accomplish with the product in its target market, and which is congruent with your business and marketing strategies.
2. Estimate demand by carefully examining the factors affecting customers’ price sensitivity: perceptions and preferences, awareness of and attitude towards alternative brands and substitute products, as well as ability to pay for a good or service.
3. Pinpoint the perceived value a potential customer will associate with a given product-market entry, and the price he/she is willing to pay!
4. Determine costs and their relationship to volume, while taking the following volume-cost relationships into consideration: economies of scale and the experience curve.
5. Track and analyze your competitors’ prices, costs, and relative quality of offers. Pick the most appropriate pricing method(s): cost-oriented, competition-oriented, and demand/customer-oriented. Then, adapt price structure to meet variations in demand and cost across geographic territories, market segments, and sales channels.
The pricing of your product is a key element in determining the profitability of your business!