Pricing your company’s products or services is one of the most important decisions to be made regarding your business. Price levels may be the deciding factor that determines whether your business survives. The pricing strategy you select does more than just determine, to a great extent, the bottom line profitability of your business. Your pricing strategy is connected to your company’s brand identity. How customers tend to think of your product prices relative to your competitors’ prices and the market as a whole – expensive, cheap, or about the same as everyone else’s – is a major element in the overall view that customers have of your company. For example, consider the Dollar Tree retail store chain. The prices of the store’s products defines the essence of the company’s brand identity. Customers don’t expect the highest quality products; they expect to be able to purchase reasonable, or a bit below-average, quality items, at bargain prices. The retail chain’s pricing strategy and its name are consistent with its desired brand image.
Understanding Pricing Strategies
There are many pricing strategies and variations on those strategies. A company that chooses a cost-oriented pricing strategy may decide to use cost-plus-percentage-of-cost pricing, adding a fixed percentage of an item’s production cost, or cost-plus-fixed-amount pricing, where the retail price equals production cost plus a specific dollar amount. There are four basic focuses of pricing strategies:
- Demand-oriented pricing focuses on the assessment of consumer demand for specific products.
- Cost-oriented pricing determines price by adding some amount to the production cost to ensure profitability.
- Profit-oriented pricing aims to set prices with a specified profit margin. Profit-oriented pricing is sometimes criticized as being arbitrary and not responsive to changes in the marketplace.
- Competition-oriented pricing sets prices in relation to competitors’ prices or the prevailing average market price.
Because there is increasing marketplace competition for nearly all goods sold, competition-oriented pricing has become more popular.
Competition-oriented pricing is designated as either above-market pricing, at-market pricing, or below-market pricing. To use competition-oriented pricing effectively, you need a good grasp of the marketplace and your competitors. Knowing the marketplace includes keeping abreast of probable future trends, such as the likelihood of increased price competitiveness or a rise in consumer demand. Being able to command above-market prices means higher profit margins. The potential disadvantage is that your higher profit margin may not be able to overcome the number of sales lost to lower-priced competitors sufficiently to realize increased total profit. To implement an above-market pricing strategy, your company must have a solid brand image of superior quality and value. The public image of your company and its products, including everything from your company name and logo to your social media presence, must be one of prestige and luxury. Apple has successfully accomplished this with its iPhone, and it can command premium prices compared to other smartphones. An above-market pricing strategy is most appropriate for companies that can demonstrate technological or other superiority, or that are engaged in luxury businesses, such as spas or hotels.
At-market pricing pricing relatively in line with current market conditions and competitor pricing is most appropriate for products sold in a highly competitive and price-sensitive marketplace. Mobile phone service providers typically employ at-market pricing because the competition among providers is so intense and because their consumers are very sensitive to price, making it difficult to command prices significantly above the market average. The advantage of at-market pricing is that it offers a pricing floor and virtually ensures your company will capture at least some of the available market share. The disadvantage is that you can do little to increase profit margins, since it is virtually impossible to move prices significantly higher. You can gain market share by offering products with added value, such as extra convenience features compared to competitors’ products.
Below-market pricing is commonly used by discount retailers, whose unique selling proposition is their discount pricing. Unless you are purposely positioning your company as a discounter, below-market pricing is usually not an advisable path to take. An exception to that guideline might be offering one product at a substantial discount a loss leader designed to attract customers to whom you can then sell other related products with higher profit margins. Companies also sometimes use below-market pricing to gain market share when introducing a new product. In selecting a pricing strategy, keep in mind that consumers hold different expectations for products purchased below, at, or above market prices. For your pricing strategy to be successful, it must match up well with consumer perception of your company and its products.