Pricing strategy of your business has a significant impact on the buying behaviour of your customers. Pricing strategy doesn’t only revolve around the price that you will charge your customers for the product/ service you offer but also how that price will shape your marketing strategy. Pricing offers basic overviews of your company, showing that it caters to a certain specific set of audience demographics and ultimately depicting your product value. All of these factors indicate that pricing is the heart of your business and it needs to be flawless. It plays a pivotal role in brand building as well as impacting buying behaviours of your customers. Consider the following example to understand how;
You go to a branded store to buy clothes and you like a shirt. You will instantly check the price. If the price matches your expectation, you are likely to buy the shirt. If the shirt is priced higher than your expectations, you’ll reconsider buying it and if it is priced lower than what you expected, the product loses its branded image since the products are priced very low. You might even doubt the quality of the products and reconsider your buying decision.
It is also vital for your pricing strategy to be sharp for one primary reason; to cover the costs and keep the business running. Hence, price can be the biggest profit lever, but also the riskiest one for your business’s success. Economists talk of supply and demand as key factors behind pricing—successful entrepreneurs manipulate demand by making their products more desirable. These are some of the many reasons that pricing strategy is one of the most important P in the marketing mix and its importance is increasing, be it products or services sector. Here are some reasons justifying the same.
- Your Customers and Competitors are Smart
Pricing strategy needs to be designed keeping two major impact factors in consideration;
Unlike a couple of decades ago, businesses have to deal with a lot of competition today due to one major factor i.e. marketing. Often whole chunks of market areas are dedicated to selling the same kind of goods. Let’s consider an example of a home appliances showroom. You’d often find one showroom right next to another showroom of home appliances and both will be competing to offer better prices. In a highly competitive market like this, it becomes vital that prices are kept within the competition. If you try to jump way up or down from your competition’s price, you might not be able to get more distributors, ultimately, making it difficult for you to exist in the market.
Similarly, if your prices are higher than your competitor but you fail to provide the value in terms of product features, your customers are likely to switch to your competitor who offers similar products of the same value at a lower price. So, it is important that you carefully evaluate your competitor’s price and the value it offers before setting a price for your product and service. There are 3 primary ways to evaluate your competitor’s strengths and weakness and use these to your advantage;
- Understanding The Relative Value – Compare your product/service to your competitor’s and note what adds more value to your product. Also, be prepared that your competitor may copy your value-adding feature and you may not be able to charge more for a long time.
- The Stage of Your Industry – In a developing industry, you can be more flexible with the pricing depending upon the demand and product market as the customers are forming new relationships. While in an already long-existing mature market, where your target customers are already set, as a new business you’d need to find a segment that will switch to your product/service because of a certain feature you offer.
- Competitors Resources And Potential Response – Evaluating your competitor’s resources helps you differentiate yourself such that they can’t simply copy your product value. This is a fruitful tactic especially if you are competing with market giants that are not short of resources.
2) The Increase in Price Transparency
The internet and online selling platforms that come as a saviour for micro and small businesses also tend to cause certain limitations. In the initial days of online selling, the demand was high, but the supply was rather low. This gap between demand and supply enabled small businesses to get high profit margins. However, in recent years, the online market has gotten extremely saturated. This means that people not only tend to check and compare prices online before they come to buy from your store but are also more likely to buy online from seller giants like eBay or Amazon and not enter your store at all. This price transparency has made possible by online price checking makes it even more important for your business to pay close attention to your pricing strategy concerning your customers as well as competition.
This increase in price transparency also means the market is becoming more and more price aggressive. There is always a risk of a “price war” that can affect your business. Price wars may seem like a great tactic that helps you win market shares, but the benefits aren’t usually long-lived. You are likely to compromise a big chunk of profits in the process of price disruption in the market. Usually, a passive approach towards your competitors and an active approach towards your customers is what paves the way towards equilibrium in the market. A few things that may help you in the process are;
- Get control over your rebates and discounts.
- Guide your sales team towards healthy price levels rather than making the deal at any cost.
- Avoid price cuts where possible.
- Know your positioning in the market and try to maintain it.
- Check your digital readiness
Margins, Volume and Cash Flow
A few things can be established from the above discussion about pricing with respect to your competition.
- If your prices are higher than your customers, your products/services must offer added value.
- If your products/services are priced lower than your competition, you’d need to minimise costs at your end.
- If you price your products /services similar to those of your competitor’s, you’d need to have a unique selling point.
Now, you need to understand the link between the prices you charge, the volume you get and your business’ gross margins. Gross margins are subjective to the industry. While these margins are high in tech industries, where innovation is a constant occurrence and the value of products and services is usually high, gross margins shrink considerably in old and established industries because the products have become commodities. This is because when a product becomes commodity businesses lose their differentiation edge and hence can’t really control the pricing anymore.
You must take into consideration all aspects of your business to understand whether you are on the right track or if your price policies are somehow determined by your sales staff. This is especially a case of concern for micro or small businesses where there are bargain margins. So, make sure to closely observe and monitor cash flow, costs, competitors’ prices, value and overall impact on gross margins. But more importantly, link your pricing strategy to your business goals, available resources, coping ability and endurance:
- Pricing should reflect your business goals – This means that you should be consistent in your business goals. If you want to penetrate in a high-end market, your prices should also be high end. Similarly, if your business goal is bigger sales volume, you must find ways to penetrate and compete in the larger chunk of the Industry. Don’t price low and have high overhead, or price high and have less value to offer.
- Pricing must be reflective of your resources – As a business, you need to understand. Understand the connection between prices, sales and cash flow. If you are hoping for your business to grow no your resources, you need to work towards generating cash flow. However, if you are expanding on capital, your focus needs to be market dominance in your relevant industry so. Set your prices keeping that in mind.
- Learn to analyse numbers or hire someone to do it for you– Majority of small businesses can’t price products at a high end unless they differentiate. If you are a micro or small business, struggling to generate cash flow, you must learn to analyse numbers to control the costs so that you can sell for added value at a higher price, or if you don’t have the time or energy for that kind of analysis simply hire an accountant to do it for you
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4) Customer Buying Behaviours Are Changing
If you compare spending patterns of people today to that of a decade ago, you’d realise how drastically spending and buying behaviours have changed. A decade ago people used to spend on smaller thing costing less, while in today’s day and age, electronic gadgets and clothing remain the hot sellers in the market. Whilst this indicates a positive increase in the buying power of people, everything is now heavily marketed and branded, becoming more expensive with the added cost of marketing. In the past people who used to buy a lot of unbranded clothes at a low price now prefer to buy a couple of branded clothes for the sake of tag and quality it comes with.
So how does this change in spending behaviours impact your pricing strategy? As the prices of products have hiked due to their name tags/brands, people are spending carefully, setting their priorities and then choosing the most needed/ wanted items. Today a TV costs less than a top brand cell phone. So, from a buyer’s standpoint, if a customer buys a phone that costs twice the price of a TV or a refrigerator, he is very less likely to make another expensive purchase in the next few months. This extremely selective buying behaviour- due to high costs- is an indicator that you have to come up with very enticing promotions and discount offer to get people to spend on your product before making another major purchase. For example; if the new iPhone is launching in October, you should consider offering promotional prices or discount bundles on your refrigerators in September. You as a business need to understand that people have limited money and they will spend it on the most convincing offer from their set of needs.
5) Customers Want Value for Their Money
Your pricing power is directly proportional to the value that your product/service adds to your customer’s life, their need for the product and its affordability. However, value has a different meaning for each customer, and everyone now wants value for what they pay. Value for money can be sought in a £3 detergent or a £45 pair of shoes. One customer may think that a fabric softener is reasonable at £10 while someone else might think £10 is a high price to pay for something so basic. The customer power to demand value for money arose because of the variety of choices available in the market. For example; many FMCGs such as soaps and drinks are available in numerous brands. The customer only buys what he likes to buy and wouldn’t pick your product if they think you are charging an unfair price.
In order to understand your target audience segment and their willingness to pay, you should simply analyse the type of customer you’re targeting. For example;
- Corporate customers are less likely to buy from small and less credible businesses even if they offer lower prices than everyone else because corporate customers need vendor stability. But they are likely to buy from unproven businesses if they offer value-adding features and they’ll even pay a fair price.
- Similarly, the high-end customer will be willing to pay higher prices for your products/ services if they can reap high-level benefits from the purchase. So, your main focus should remain adding value and benefit to your customer’s purchase.
Pricing is an ongoing process. From determining the right strategy keeping competition, customer and value in consideration to implementing it and if need be, revising it from scratch to get more fruitful results. Just remember, while getting it right the first time would be ideal, not many businesses do. Sam Walton tested various models of discount stores for 12 years until he got the right mix of price and strategy resulting in Walmart. So, you shouldn’t make too many long-term commitments before you’ve found the mix of price and strategy that works best for you.
Also, remember that even the best pricing strategies will fail without strong leadership and enforcement. Even after you have identified your product’s value, the next task is ensuring that your sales staff can defend this value. So, make pricing a regular boardroom topic and be prepared to make to tackle any pricing challenges that come your way from either your customer’s or your competitor’s end.