How to Develop Pricing Strategy? Complete Guide

Do you know what is Pricing strategy and how pricing strategy could take you ahead of competition?
If no, you’re right place in this blog we will learn what is pricing strategy and how to create an effective pricing strategy and much more.

So let’s start a detailed guide on what is pricing strategy and how to create a pricing strategy

1. What is Price?

Price is the only revenue source for every business, which will help to make a profitable business, which includes the overall production cost of a product (like – Raw Material Cost, Manufacturing Cost, Labour Cost etc)

The Businessman must have to analyze the market before setting the price of a product. The owner must have to consider these major point before setting the final price:

• Organizational Goal.
• Market Research.
• Competitor Pricing Level.
• Production, Distribution & Manufacturing Cost.
• Customer Purchasing Power.
• Margins Level (How much Profit we earn) Etc.

And Businessman also has to consider the 7 p’s of Marketing Mix. 

2. Why pricing is so important?

Pricing plays a very important role in how successful the company is. Because of the selling of any products or services most affected by their pricing. so, pricing is very important

The importance of pricing is a high price-sensitive market like India. In the price-sensitive market, the buying decision of customers mainly determined by the price of product or services.

Pricing has a direct impact on a company’s profit and revenue so the correct price of product or services is very important. 

If the pricing of product and service increasing then the customer stops buying. If it is too less then you get less profit margin or maybe some time in loose and your customers think your product is poor in quality. 

3. What is the price of a product?

Basically the price of a product or services is the sum of the total cost to make the product and the profit margin.

A lot of people determine the price based on your cost For an example it makes me 50$ then I sell this into 100$ and I make this amount of money but this is a wrong approach to determine the price

First, you have to think about value because a customer care about what value they get from your product or service

If you try to sell them something they don’t care if it cost 50$ but they think what the product brings value to them.

So your cost does not matter here for your pricing should look at the value you provide to your customer through your product or services.

4. What is the Price of a Product?

Basically the price of a product or service is the sum of the total cost to make the product and the profit margin.

A lot of people determine the price based on your cost. For example, it takes me 50$ then I sell this into 100$ and I make this amount of money but this is a wrong approach to determine the price.

First, you have to think about value because a customer cares about what value they get from your product or service.

If you try to sell them something they don’t care if it cost 50$ but they think what the product brings value to them.

So your cost does not matter here for your pricing should look at the value you provide to your customer through your product or services.

5. How to set the price of a product?

For setting your product price you have to know about these 3 things. These are your product, market and your customers.

To determine the cost of your product first you have to determine the cost of running your startup. your service or product price must include costs both direct and indirect costs.

 

Price is mostly established cost-plus pricing 

• Cost-plus pricing

Many companies are using cost-plus pricing to determine the price of a product or services.

In this process, first, you have to determine the total cost of making the product, cost should be included both direct costs and indirect costs, and then add to it a markup percentage to determine the price of a product.

• Example of cost-plus pricing

As an example, Xyz company has made a product that contains the following cost.

Raw material costs = 4000

Labor cost = 500

Allocated overhead = 1000

This company add 20% as there standard markup to all their products .so the price of the product is, 

The total cost of the product + 30% markup. So the final price should be 5500+1650=7150.

The price of the product is 7150

6. How to Create a Pricing Strategy?

Before knowing about pricing strategy and program, did you know about the price? not sure let’s jump and find?

An amount of money is decided by the product manufacturer or price charges by the service provider to give you service is the price.

 

There are 6 types of pricing methods generally used in the market but its changes as marketing strategy change so always updated with us.  

1. – High End.
2. – Competitive Pricing
3. – Consumer Friendly Pricing.
4. – Value Pricing.
5. – Scheme Pricing.
6. – Comparison Pricing.

• HIGH END  – High price products and services are coming under high end these also come under the luxury segment in this type of pricing. generally, Companies have some USP(unique selling point) that differentiate them from a market that allows them to set their price high.

 Example:    

• APPLE
• NIKE
• COMPETITIVE PRICING – To gain more consumers sometimes you have to lower your prices and then you have more Consumers and they like your product or services then you can increase your pricing. This whole chain is competitive marketing.

Example

• JIO   
• CONSUMER FRIENDLY  PRICING – The consumer has a budget in which he wants to take service or product that meets the exact pricing this comes under consumer-friendly.

Example:

• LAPAAS
• VALUE PRICING – Pricing of the product according to the value provided by the companies means a company is providing bring value to the customer as a product or service.

Most companies follow this strategy but most companies are working on their own strategy which leads to failure in the business. They work on sales not providing value to their potential customers.

• SCHEME PRICING – This a method we are using to attract consumers in modern days.

LIKE-  

• ODD PRICING – in this marketers trigger the emotional part of the consumers.

                          like, we use odd prices like- rs99

• DISCOUNT PRICING – In this marketer uses a  gave a discounted offer which triggers them immediately that this cost them much less than as regular so it makes sales.like- 50% off on Zomato.
• COMPARISON PRICING – In this, we make a product or service invariants so we make one of the variants more attractive and it gets more effective than one product.

        Like  – (a) – Small 

                   (b) – medium

                   (c) – Large  

7. Factors That Affect Pricing Decision

After Understanding, How to Develop Pricing Strategies & Programs, Now we have to understand what are the important factors that affect pricing decision, Because there are many factors which we cannot control, but we can act or change according to the situation.

We can easily understand the factors that affect the pricing decision by dividing it into two categories: (a) – Internal Factors.

                         (b) – External factors.

• What are the Internal Factors – The Factor which we can control and change according to the situation ( For e.g, – If the management of a company cannot perform very well, then we can give proper training to them or replace them).
• What is the External Factor – The Factor which we cannot handle or control but act according to the condition ( For e.g, – In the time of recession, the customer have less money and they don’t want to spend it, then it directly affects the economy which will also affect in all businesses. So In this case, the company can give order to the production department to decrease the level of production of products, which also decrease the wastages of a product and cost ).

Internal Factors that Affect Pricing Decision :

• Product Cost.
• Organizational Goal.
• Advertising Cost.
• Goodwill of the company.
• Product Cost – It is very important for a firm to set the price of a product that meets the customer satisfaction point. The final price of a product can be set according to the overall production cost.
• Organizational Goal – Goal can be anything but it has to be realistic like achieving the financial target in a given time, selling product on a given time, give quality products to customers. It also affects the price of the product internally.
• Advertising Cost – If the cost of advertising for a product is increased, then the price of a product will also increase, then it also shows the effect on price due to increasing in advertising cost.
• Goodwill of a company – Maintaining a better image in the market also affects the price of a product. If the image of a company is not good in the market then the customer cannot buy that product from that company.

External Factors That Affect Pricing Decision :

• Competition.
• Demand.
• Government Control.
• Economic Situation.
• Product Life Cycle.
• Competition – Competition level play an important role that affects the pricing decision. If the competition is too high, then we must have to differentiate our product to avoid competition in that market or also we can improve the quality of a product.
• Demand – Demand is an external factor which directly affects the price. If the demand for a product is too high and the supply is limited then the price of a product will also increase. And in the second case, the supply of a product is increases or demand decreases then the price of a product will be decreased.
• Government Control – In some cases, the businessman cannot set the price of a  product because the government can control the price of that product (Like Fuels etc).
• Economic Situation – In Economic Condition, There are some points that affect the price of the products :  (a) – Increasing the inflation rate.

                                     (b) – Interest rate.

                                     (c) – Recession.

                                     (d) – Customer Purchasing power.

• Product life cycle – Price can be changed according to the different stages in the product life cycle:

(a)  Introduction stages – when the product is introduced in the market.

(b) Growth stages –  It is that stage when the market accepted the product and company also company sales increases.

(c)  Maturity Stages – After the Introduction and growth stage, the company can achieve its maturity stage. In this stage, the product reached to all potential customers and finally it going to decline stage.

(d) Decline Stage – In this stage, the product will fall from its highest point and this is also called a death stage of that particular product.

So, these are the major factors that affect the pricing decision of the company.