The Importance Pricing
Within any business the price for which you ultimately sell your products or services will impact on your profit.
Pricing is a very complex issue and whole books have been written on pricing principles in this article I wanted to consider some of the nuances and complexities in a really simple example (that hopefully translates into your more complex business situations)
Stage 1: Price setting
So how do you go about setting your initial pricing. For many it is based on looking at what competitors are pricing at and then offering a lower price. Three key points here
- What is your unit cost ?
- How did your competitors arrive at their price points
- Are your competitors profitable
As our illustration shows all things being equal if I can buy the exact same product for a lower price customers will beat a path to buy my product!
Stage 2: Price competition
So offer your exact same product (or service) at a lower cost. What is the possible reaction of your competitors.
One option available to them is to reduce their price to the customer. Now they may be highly efficient at what they do and have a lower unit price than you.
So they lower their price, and as customers have no loyalty in buying the exact similar product they leave you to buy from the competition
Stage 3: Price reduction response
Now at this stage you still havent considered strategic marketing and as you need customers you decide that the best approach is to lower your prices once more . Even though your margins are wafer thin you are working on the basis that you will sell high volumes at this bargain price.
Stage 4: An alternative approach use marketing as the basis for pricing
At this point your competitor (who doesn’t understand marketing or accounting) reduces their price further.
Thankfully you had been preparing for the cycle of continuous margin reduction and so have been preparing to compete through branding and quality.
So now by clearly differentiating your product, improving the value it provides to the consumers and building a brand experience that customers desire
With a price point that allows you the capability to further develop solutions that meet the needs of your customers.