Pricing Strategy: Choosing The Right Pricing Strategy
Posted 17 Dec, 2019
Author - Aderonke Adekunle
PRICING STRATEGY: CHOOSING THE RIGHT PRICING STRATEGY
From the previous article; Pricing Strategy, we discussed how to price your product the right way and highlighted ways to go about pricing your product. The last of this was choosing the right pricing strategy. In doing this, you must be aware and use the right strategy in order to get it right. Pricing strategy is simply the method companies use to price their products or services. It is the tactic companies use to increase sales and maximize profits by selling their goods and services for appropriate price. Almost all businesses, large and small, base the price of their products and services on production, labour, and advertising expenses and then add on a certain percentage so they can make a profit. You should choose a pricing strategy that ultimately meets your pricing objectives. The price can be set to maximize profitability for each product sold or it can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market.
Pricing strategies include the following five strategies: Absorption Pricing This is a method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs. Cost-Plus Pricing Under this approach, the direct material cost, direct labour cost, and overhead costs for a product are added up and added to a mark-up percentage (to create a profit margin) in order to derive the price of the product. Freemium Pricing Freemium pricing is the practice of offering a basic set of services for free, while charging a premium for advanced or enhanced features, functionality, or related products and services. Competitive Pricing Competitive pricing consists of setting the price at the same level as one’s competitors. It could also be a price lower than that offered by the competitors, or a price made more attractive because of added incentives, such as longer payment terms. Premium Pricing Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favourable perceptions among buyers, based solely on the price. Companies use a premium pricing strategy when they want to charge higher prices than their competitors for their products. The goal is to create the perception that the products must have a higher value than competing products because the prices are higher.
Having a good pricing strategy helps you determine the price point at which you can maximize profits on sales of your products or services. Pricing your product integrates the economics of your business and the psychology of your customers. Employing simple market research and competitor analysis will help you find your pricing sweet spot. You must be attentive to your competitor’s actions in order to have the comparative advantage in the market.