Using your pricing strategy to maximise sales potential
Profit is what's left after costs are deducted from price, so the pricing strategy is something you
must get right.
A well thought-out logical basis for your pricing structure will take into account:
- marketing pricing strategy objectives ( e.g. maximising profits or capturing market share);
- risk factors, such as government legislation, demographic trends
- internal and external price pressures
- the need for the support of management and the sales professionals
Sales potential depends on your prospects' buying history and perceptions, knowledge, budget, level of
affluence and perceived need need for the product.
Typically there are a number of opinion biases which will push a company towards a "status quo"
pricing policy, without the assumptions being tested or proven with hard data. If such biases are not recognised,
the resulting pricing strategy is usually sub-optimal.
For example, a retail pricing strategy commonly assumes that the acceptable price range is
somewhere between the high and low points of competitors in the existing market place. This apprach ignores
the possibilities from differentiating the product or service to attract a premium price, or
to reduce input or distribution costs.
Financial analysis is an essential element of the pricing strategy. Even though maximising profits might
not be the short-term aim ( e.g. if the intention is to grab market share), the longer term viability of a business
depends on bottom line success.
Price and volume calculations can determine an optimum price (for the greatest revenue). Expenses must also be
taken into account, along with channel contribution factors, and competitive pricing issues arising from your
analysis of the competition and market share.
Pricing strategy is interdependent on the other elements of the marketing mix, being product features,
channel decisions and promotion, and reflects the relationship to positioning of your product or service.
PRICING STRATEGY PRINCIPLES CHECKLIST
- Marketing strategy and marketing mix
Analysing the market gives a clear understanding of the targets and intended positioning. The trade-off between
quality and price is taken into account. Pricing must be consistent with product positioning, and its
perception as a luxury item or otherwise. These issues will be impacted by the intended distribution and
promotional tactics.
- Demand Curve
The demand curve is the relationship between pricing and demand. If the price is increased, how much will
demand be affected? Solid evidence is required (e.g. by survey) to determine the optimal pricing range. An
exclusive product with strong demand should have scope for higher prices (and therefore higher profits),
without affecting demand too much. This is described as "inelastic" demand.
- Cost
The cost of the product must be determined, including overhead. The cost normally sets the lower limit of the
price which could be charged, unless of course losses are justified in some other strategy motive (such as
buying market share).
- Determine Environmental Factors
There will always be a variety of of external factors which potentially affect the price which can be charged.
They should be systematically identified, and the price impact quantified. For example:
-
- pricing decisions (high or low) may affect what competitors do, setting off a price war, or
attracting more entrants to the market
- pricing discrimination or collusion, or predatory dumping may invoke legal sanctions
- maximum prices are established in some industries or service areas (eg finance)
- Determine Objectives
This relates to specific (maybe short-term) goals. For example, the objective may be to maximise profits to
boost the market value of the company, or to ease a cash flow situation. Or revenue maximisation may be sought
to gain market share, or to boost sales volumes with the longer term goal of achieving economies of
scale.
Once this information has been collected, it is then assembled to determine an optimum pricing range which meets
the objectives. When put into a financial projection, it ensures the costs from all departments at various sales
levels are taken into account.
The resulting pricing strategy document provides evidence to support the chosen pricing options, and becomes the
basis of enlisting support from sales management, and the front line sales professionals whose job it is to
implement the sales plan.
Consulting services - a special case? Not really.
Pricing consulting services is not much different to any service or product pricing strategy, even though the
perception is that it is more difficult.
Nevertheless, pricing consulting services can be fraught with under-pricing error. The struggle often comes
after it is realised that charging an hourly rate for services is unsatisfactory, and that a fixed price or project
fee basis is preferable. It is of course important that all costs are identified, to ensure the pricing
model at least delivers cost plus a decent return.
Value based pricing
The scope for value based service pricing strategy for consulting services has much more potential than an hourly
rate. When the value of the service being provided can be specified as a small percentage of the expected outcome
for the client, there is a powerful argument for a "win-win" financial relationship, based on performance.
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