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To set the right price, we can refer to the costs of competitors’ products.
When should you seek to align your prices? When the price elasticity of demand is very high, it is common to seek to sell one’s products at the same price as one’s main competitors (sometimes referred to as “market price”).
In other circumstances, one can estimate the optimal distance to establish concerning competitors, depending on the product’s characteristics and position in the market.
It is possible for companies that sell online to automate their strategy with dynamic prices that vary according to competing prices.
To do this, all you have to do is equip yourself with software. Such tools allow you to put “rules” on your prices based on your competition, your product category, and the margin levels you wish to maintain.
One approach to determining the price of its products can be to position itself as the most expensive / the least costly in its market.
Let us examine the two options in turn.
It is a strategy that can be used when the company wishes to:
This strategy requires having a product that justifies its premium price by an innovative patent or if it provides a remarkable consumer benefit.
Having a “lowest on the market” price policy can be a long-term strategy (to reinforce a marketing positioning) or a short-term strategy (guaranteeing the lowest price for a given period, such as during a chestnut tree, for example ).
The objectives pursued by a company that practices the lowest price strategy can be:
This pricing strategy depends on the costs that the company must assume to manufacture a given product. This involves adding a margin that is deemed reasonable to the unit cost price of the product.
Despite its “simplistic” appearance, this strategy can be complex to implement. Indeed, what should be included in the cost price of a product?
For a trader, the price is simply the price at which the goods are bought before being resold. It is then enough to add a certain margin percentage or apply a multiplier coefficient.
On the other hand, if the company manufactures a product, the calculation of its cost price is more complex. Indeed, production costs are broken down into unit variable costs plus a share of fixed costs. However, the number of fixed costs allocated to each unit depends on the number of units sold, which can never be predicted very precisely.
Another limitation of this pricing strategy is that it does not consider the impact of price on sales volume. This forces the company to correctly calculate its breakeven point, i.e., the activity level for which the company balances its operations (the profits generated by sales exactly cover the costs incurred).
A skimming pricing policy involves launching a product by setting a high price and then gradually lowering it over the product’s life cycle.
This strategy allows the company to generate strong margins when the product is in the launch and growth phase and then extend its distribution when the market matures.
The skimming pricing strategy is relevant when the product launched is different from its competitors (through innovation, for example). It is easier to justify a high price to customers in such a situation, such as distributors.
The basic assumption is that the elasticity of demand will be low at product launch since consumers will have no points of comparison. It will only be when the competition begins to copy the product that the price will start to fall gradually to continue penetrating market segments that are more sensitive to the price variable.
The opposite of the skimming pricing policy is the penetration pricing strategy. With this approach, the company attaches more importance to maximising its sales volume than maximising its short-term profitability.
A penetration pricing strategy makes sense if:
The consumer sometimes tends to associate a low-quality image with a low price and a high-quality image with a high price. However, he is not willing to pay an exorbitant price.
Therefore, the optimum psychological price is in a range limited at the top by an income effect and the bottom by a quality impact: this is the zone of acceptability of a fee.
There is a method for determining the acceptable price (or psychological price) for the most significant number of consumers.
A survey should be carried out on a representative sample of potential customers. This survey asks two questions:
The survey results show the percentage of people who consider the price acceptable, i.e., neither too expensive nor too low. This percentage is given by the difference between the cumulative curve of minimum prices and maximum prices. The optimum psychological price corresponds to the most significant difference between the two curves.
Although attractive to the marketer, this pricing strategy has two main limitations:
The price of a product influences its sales and those of the other products in the range.
Sometimes the pricing policy may aim to facilitate the sale of other company products.
However, the different models of a range are sometimes in competition. In this case, the price of a product has an influence not only on its sales but also on those of others.
It is possible to set a meagre call price for an entry-level product (on which the margins earned will be low) to have the same customer discover and sell other more expensive models.
Another variation of this strategy applies when a product requires the purchase of ancillary supplies. This is the case, for example, of printers, which can only be used by purchasing ink cartridges. In this case, a company can promote the equipment of the product by an aggressive pricing policy and catch up on the margins achieved by the “consumables.”
Due to the dual influence that price has on sales volume and profitability, defining the “right price” is a significant marketing challenge. In some cases, it may be wise to start by setting a target price, then deduce the product attributes and the rest of the marketing strategy based on this variable.
Let’s not forget that other factors can also influence your pricing strategy:
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