The Art of Pricing

In the article getting customers ninja style, I mentioned price as being of paramount importance. You remember, right? Okay, so we are going to zoom in on pricing today and make sure we are doing pricing right. Do you ever wonder how those people in sales and marketing just come up with figures and confidently say, “Yeah, our product will be going for $5.99 retail price”?  I mean what kind of guesswork and gambling with flagship products is that? Funny enough, it’s neither guesswork nor gambling. There is actually a lot of thought that goes into price determination. With the right pricing strategy, a company has guarantee of continuous sales. A wrong pricing strategy, however, could be the end of a product. To simplify the art of pricing I have taken a scenario based approach below:

Scenario 1: We need to make money and fast!

In this scenario, a company is setting its eyes on profitability as the objective. Price is maximized for long-term profitability. It is important to note that the pricing component has both a direct and indirect effect on profits. The direct effect is whether a recovery on the cost of production of the product is possible with the set price. The indirect effect is how many units can be taken up at the set price. If a large number of product units are taken up, the company can then realize profits through economies of scale (the benefit of selling more product units).

Scenario 2: The Customers should know we have arrived.

The objective here is to penetrate the market and get the maximum numbers of customers possible. A lowering of prices helps with customer acquisition especially the price sensitive clients. This strategy of lowering prices to capture the market is risky from a revenue and profit standpoint. However, the risk can be averted by maximizing on the future value the customers will bring to the business and upselling. Lowering of prices can also be a move done to create barriers to entry for other players. To benefit from the price reduction technique, make sure you acquire a huge market.

Scenario 3: As of now, we are what’s hot in town.

So let’s say your tech startup has come up with a revolutionary product. No other player in the industry has anything close to what you got. There is an overflowing demand from a customer niche of early adopters and they are willing to pay any amount for it. This is where you employ the skimming technique: charging a higher price because the customer is willing to pay and consequently getting maximum profit from each customer level afterwards.

Scenario 4: What can we do about our piece of the pie?

In this scenario, we are looking at ways to boost sales volume.  When a company’s sales volume is compared with the total volume in the industry it operates in, it’s defined as the market share. To tweak the market share of a company, playing around with the product price is a good idea. Appropriate pricing can raise a once low market share.

Scenario 5: Let us take care of the competition.

Due to stiff competition, a company may set its prices in response to a competitor. In order to stay in business, prices may be matched with that of competitors and other factors such as product quality used by the consumer to decide whether to buy the product from company A or company B. Pricing may also be set to minimize profits for the company but discourage any new player from entering. Companies may also set higher prices in order to create a perception in the consumer that a higher priced product means greater quality. 

Scenario 6: Hold it steady boys…right there.

In this scenario, a company wants to be at par with other industry players in order to avoid a pricing war where no one wins in the end or to generate a steady profit from a product. A stable price is good for the business as fluctuations may create doubts in the customer about your products and company as a whole.

Scenario 7: We need to sail through the storm.

In emergencies such as COVID, a company may set its price just enough to break-even allowing it to survive and fight another day. In this scenario, short-term losses are acceptable in exchange for long-term business viability. Survival is assigned top priority and profitability set aside.