Price it Right- 1 : Factors that Determine the Right Pricing Strategy
Getting more customers on board and retaining them is the primary goal behind most business plans of fast growing customers. New customer acquisition and customer retention are primary indicators of how much relevance a product has in the market. But finally, it is the consumer willingness to pay, i.e. your pricing strategy that can have a very big impact on your customer acquisition success.
Product/ communication / distribution are all often well understood and executed. And indeed pricing as well. But among all the elements of the marketing mix, the most dynamic element is pricing. The product/ distribution / proposition or communication are largely stable. But pricing? It can change. Very quickly. In some industries, almost every day. And therein lies the challenge of having a very clear pricing strategy and execution.
Badly done, not only does the wrong pricing attract the wrong customer, it also becomes a leaky bucket at the early stage as companies look to grow top and bottom lines. As you set up a business, we suggest you pay special attention to your pricing plans focusing on the following questions:
How dynamic is pricing in your industry?
How well do you understand consumer/ customer willingness to pay in your category?
How should you build a pricing strategy closely aligned to your overall business strategy?
Understand the Consumer
Pricing must start with the consumer. What is the customer pain point your product or service is solving for? What is the willingness to pay for your product? Does the consumer see this as a differentiated offering? Or a me-to product?
Once you have a pricing set by the customer, you have no choice to make entire economics of your business work to that price.
Over time, as she becomes more comfortable and trust your product, how elastic is demand? How much price increase will she accept? Eg: Uber/ Ola both started with very low pricing to build habit, but over time were able to segment their consumers and begin increasing prices differentially for each consumer segment.
Know Your Competition
If you are one among the many in a market, it is imperative that you understand the pricing strategy of your competition. If they are popular, you may have to resort to lowering your costs in order to penetrate the market, build a loyal consumer base and then make up for the missed profits. But be prepared, this takes time. However, if you are the sole or an early player in a segment, you may set a high price at first and offer reductions later. Price Skimming is a great way to establish yourself as a valuable or exclusive brand.
How often does your industry change prices? What drives this?
What is your competitor’s profit and margin structure? Estimating this piece of information has many implications. Is he more efficient? Can he sustain a price war if you start one? Or will he support a price increase if you make one.
Are raw material costs very high? Be it labor or parts and components/ licenses. Are these prices dynamic? What’s the strategy in place to anticipate raw material cost changes and how do you incorporate these in your pricing.
Business Goals and Pricing Strategy
Perhaps you have a great product, a market that might be hungry for it and competition that you can easily tackle, but without a clear business goal, your brand may never be able to reach its full potential. What’s more, without this basic clarity, you may also price yourself wrong and not be able to earn as per your standards.
A business plan needs to outline how you think the year ahead or the next five years might look like. Will you be expanding to other locations? Do you intend to expand your inventory? Are you planning on diversifying? Unless these basic questions are asked and answered, not only will you be functioning aimlessly, but you also run the risk of monetary loss.
Understanding pricing strategies can go a long way in figuring out how they may fit into your business plan. For instance,
- Penetration Pricing
If you’re a first time entrant in a market with established competitors, then your primary aim is to attract customers away from the other players and choose you instead. And considering that they are unaware of your product, the only playing card in your hand is the price point. Penetration pricing strategy, or pricing your products lower than the existing market rate, can give you the boost you need to make consumers aware of your brand. The lower prices work well to pull customers towards you. However, the method definitely calls for review after the initial few days since it doesn’t churn out the profits you ultimately aim to achieve.
- Price Skimming
If you seek to launch a fresh product in the market, you have the competitive edge to price it as you deem fit. In fact, pricing yourself higher categorizes you as an exclusive, quality brand and despite the cost, you find consumers flocking towards you.
Naturally, at some point, you will have other players entering the segment. But by this time, you have probably managed to gain a revenue edge and reducing the prices to match the competition (who in all likelihood, have adopted the penetration pricing system) will now draw the price conscious consumers to you as well. Quality and cost tied together is a proposition no customer would refuse and that’s how you’ve made a winner out of your brand.
- Geographical Pricing
If your business goal for the year involves expanding to a new city, you will need to revisit your pricing strategy to include external factors that may impact the cost. Since conditions like taxes, rent, rates etc. differ from place-to-place it is always advisable to rework the price to ensure that your profit margins do not suffer. Demand for goods also vary from one area to the next so you may want to take advantage of it by pricing the in-demand items higher than the rest.
At Benddit, we observe changing trends and are aware of how deeply a solid business plan can help you identify opportunities and pitfalls and, affect your revenue. We strategize so as to maximize and help your brand get what it truly deserves.
Do your basic math to ensure that your business helps you break even instead of turning into a liability. The right pricing strategy can either pull you up the ladder of growth or keep you stagnant in the crowd. At Benddit, revenue growth is our area of expertise. Which is why you can be sure that our branding strategy is geared towards ensuring that you have a solid bottom line.