Market Pricing -- What Price Should You Charge?

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What is a Pricing Analysis?
Pricing Strategies
Additional Perspectives on Determining What Price You Should Charge

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What is a Pricing Analysis?

© Copyright Carter McNamara, MBA, PhD

Marketing should include pricing analysis to decide how much to charge customers for a product or service and how that charge should be done, for example, as a fixed fee, sliding-fee scale, discounts or monthly payments..

Several major factors influence the pricing for a product or service. Strategic goals greatly influence pricing. For example, if the business really wants to get into a new market, then it might charge lower than usual prices in order to generate more customers who buy the service. The business might consider changing pricing if the demand for its products are very high or low. Competitor pricing also has a great effect. If competitors are charging much less, then the business might do well to lower prices. Similarly, if the competitor is charging much more, then the business might consider increasing its own prices.

In this pricing analysis, consider: Is your business recouping your costs (time, money, materials, etc.) to provide it? Is it affordable to customers? What about volume or other forms of discounts? What should be the new prices, if any? How do you know?

Pricing Strategies

© Copyright Rolfe Larson

Figuring out how to price your products or services is often very challenging, especially for a new venture. Yet you need a pricing strategy for your business plan, to determine your break-even point and profitability, and of course to launch your business. Here are some tips on how to make that decision:

Ultimately, the right price is usually the highest price customers will find attractive — that is to say, that they will find meets or exceeds their value expectations for the product or service you’re offering to them. That’s much easier said than done, so let’s start with some steps for getting there.

First, Determine Your Unit Costs

Generally this should be relatively easy. What will it cost you to purchase, produce and sell your products? You may not know the precise figure, but you should have a pretty good idea by the time you write your business plan. Generally speaking, that represents your price floor; sell below that and you lose money.
Next, determine how customers value your products

This is where market research is needed. The good news is that customers will tell you how much they’ll pay — if you can find the right way to ask. You can’t just ask them directly, for tons of research show that what they say and what they’ll do are two completely different realities. But what you can do is find out what they pay for more or less comparable things, and how they value various attributes of your product or service, particularly those different from your competitors. Be sure to study the pricing strategies of your competitors. Not necessarily to imitate but to recognize that your customers will be comparing what you offer (product, price, service) with what they offer.

Here are several of the most common pricing strategies:

Penetration Pricing

This is the low-cost approach, where you initially offer a price lower than your competitor’s for the purpose of attracting price-sensitive customers quickly. The downside of course is that you squeeze your profits; indeed in many cases new ventures choose to price below cost to bring in those early customers. The logic is that over time you become more efficient and can take advantage of bulk purchasing of raw materials, such that you begin to achieve profitability at that low price. The other downside is that your competitors might just match your price.

Premium Pricing

This kind of pricing is coupled with providing superior benefits or service compared to your competitors, to justify that higher price. Sometimes a premium price will be charged for some products to attract customers who want that premium quality, with other products are priced lower to attract those who are more value-focused. A related pricing strategy is called Complementary Pricing, or Loss Leader Pricing, where you charge and promote a super low price for one product to bring folks “in the door,” but then “upsell” them for something else more expensive at the point of sale.

Price Bundling

This is a common strategy for getting customers to buy more of your products, by offering a deal for buying a package. Purchase internet access along with your phone service for a discounted price. This strategy can be very effective in that the customer perceives value, while the provider increases sales and, ideally, a long term customer who spends more for each purchase.

New Customer Pricing

Sometimes called experience pricing, this involves offering a low initial price for new customers, occasionally below cost, to get customers to “try” your product. It’s a one-time price, offered in hopes that while they’ll come in for the low price, they’ll come back for the high quality. This is sometimes done with special coupons, and, in today’s world, is often facilitated by group purchasing services such as Groupon.

Additional Perspectives on What Price You Should Charge

How Do I Set Price Levels?
Pricing Products and Services Accurately
Selling a Price Increase: 9 Things Not To Do
Market Price (Wikipedia)
Top 10 Pricing Mistakes
Cheaper Prices Don't Help You Build Goodwill
One Big Mistake That Keeps Your Prices Low
3 Reasons You're Not Charging What You're Worth
3 Pricing Mistakes That Cripple Your Sales
Case Study: How to Raise Prices
Selling a Price Increase in a Soft Market
The ABCs of Pricing
Pricing Strategies (Part 1)
Pricing Strategies (Part 2)
Consumer Behavior and Pricing Strategy

Learn More in the Library's Blogs Related to this Topic

In addition to the articles on this current page, also see the following blogs that have posts related to this topic. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog. The blog also links to numerous free related resources.

Library's Marketing Blog
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The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.

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The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



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