Many businesses prioritize the quality or novelty of their products, the marketing they use or the target consumers they retail to when trying to push sales, leaving pricing as an afterthought. Doing so, however, ignores the ways that pricing affects market performance and consumer decisions. The truth is that prices matter for more than just margins and price analysis involves more than just “cost-plus” pricing.
The Problems With Cost-Plus Pricing
A quick way to handle pricing goods is to simply add a markup to the total production cost. This method, called cost-plus pricing, does ensure profit margins on sales, but it fails to address other aspects of the market. There’s no consideration of whether customers see the price as reasonable or what competitors in the market are selling at. Also, production costs aren’t static, meaning you either have to keep changing prices or accept unstable profit margins.
Responding to the Market
More proactive pricing strategies can be chosen based on where your product stands in the market. A change in price can draw attention to a product, tap into a different portion of the market or boost sales to clear out inventory. Some examples of such pricing strategies include:
- Price skimming: new, innovative or luxury products are set at higher prices to get extra profit from early adopters;
- Penetration pricing: a new good or service is introduced to a market at a low price, in order to push for high sales and a large market share early on;
- Economy pricing: budget products are sold at a low price, often with minimal marketing expenses, to cater to downmarket customers;
- Promotional pricing: products are listed at lower prices for a limited time, sometimes used to free up inventory;
- Bundle pricing: multiple products, some of which may be less popular normally, get ‘bundled’ with a price lower than they normally cost in total.
Customers don’t always gravitate to the lowest prices. Instead, they often are willing to pay what they think is an appropriate value for the product in question. Value-based pricing uses this, rather than costs or the state of the market, to determine what a product should be sold for. “Value” is often subjective—it can come from unique features or high quality, but customers sometimes also assign extra value to a brand’s image or a product endorsed by someone famous. A company must stand out with what it offers, though, and make assessments on what it is that customers value. Often, companies use surveys or customer feedback to decide what is considered valuable.
Sensible pricing doesn’t happen in a vacuum. Rather, prices influence and are influenced by consumer demand and market performance. The right pricing strategy can be used to maximize profit, guarantee higher sales, promote a new product or recoup costs from poorly-received items.