In this article, we will talk about pricing strategies and show you three main pricing strategies.
Pricing is a very important part of the Marketing Mix. When a sale is to be made; It requires decisions that should be carefully evaluated for both short-term goals and long-term positioning. We will talk about the main strategies companies use for pricing.
We mentioned that pricing has long-term and short-term consequences. If we consider the long term, the pricing of the offered product or service will be very important in terms of where the company wants to position itself in the market. On the other hand, we can say that it is one of the most important factors affecting the potential profit; and thus connecting to the short-term goals.
Customers make a quick and automatic calculation of value before each purchase decision. Depending on the perceived value of the product or service they are considering purchasing, their decision changes. If the perceived value is higher than the price of the product, the purchase takes place. If the opposite is true and the price is higher than the perceived value, the purchase does not take place. Therefore, it is necessary to be very careful when pricing. Incorrect pricing can result in serious damages. But also, a correct pricing strategy can provide you with competitive advantages.
There are 3 main pricing strategies we will talk about: Value-Based Pricing, Cost-Based Pricing, and Competition-Based Pricing.
Let’s examine them one by one.
Customer Value-Based Pricing Strategy
With this pricing strategy, the price is determined according to the value perception of potential customers. The value created by the sale is taken into consideration. For example, the high price you set can be thanks to the value that is created by a good experience you offer during the sale.
There are two types of Value-Based Pricing that I will mention.
Selling acceptable quality at a low price. When you offer the customer a quality that they can find suitable, for a price lower than the average product; it becomes an offer that many potential customers will love. Here, it is very important to evaluate the customer’s perception of value while keeping the price affordable.
This time, you add value to the product, and determine the pricing according to the values you added. This added value can be any additional value that you can offer to the customer. “If you make coffee and sell it in areas where it’s very cold, it potentially has more value than if you sell in a location where it’s extremely hot. The difference is the value.”
A lower pricing may be appropriate as the value added in a warm place may not be perceived as high. But, customers will be willing to pay more for the added value in the cold place. The difference really does create value!
Cost-Based Pricing Strategy
For a cost-based pricing strategy, the net profit to be earned after the sale is the main consideration, as opposed to the value created for the customer. Unlike value-based pricing, it doesn’t need to be done after the value of the sale has been calculated.
We can talk about two different pricing types based on cost.
-Cost Plus Pricing
In this pricing strategy, we need to calculate the cost of the product or service sold and create the price by adding a certain amount on it. Rather simple, isn’t it? Today, many companies use this pricing.
-Target Return Pricing
For this, we need to create a break-even chart. The chart should include the demands according to the possible prices. Then, we will analyze the demand levels on different pricings and see how much profit will be at what level. The demand will increase as the price decreases, but the unit profit will decrease. It is important to look for a balance between demand and profit per unit. Another important factor that changes the balance is the costs that are supposed to be balanced with sales. Therefore, increasing the profit per unit as much as possible and decreasing the demand can mean less profitability as there are fewer units to cover the fixed costs.
At the end, the price with the highest potential profit can be selected.
Competition-Based Pricing Strategy
Competition-based pricing is the pricing based on competitors’ market positions, pricing strategies and offers. For example; as a larger company, you might want to set a low price and attract customers to drive away your smaller competitors. Or, by putting added value to yourself, you can differentiate yourself from your competitors. This could be superior customer service or warranty terms. Or maybe, you can afford high pricing thanks to your material quality. The important thing is that, you make this decision based on competitive considerations.
We hope this article was helpful for you. We’ll be waiting for your questions and comments, stay healthy!