5 Expert Tips for Choosing the Right Pricing Strategy
date of publication
November 16, 2022
time to read
Every business faces the complex task of setting prices for its products or services. Intelligent pricing decisions are crucial for profitability and success. So, what’s the best way to determine the right pricing strategy for your business?
Here are 5 expert tips to help you get your pricing strategy right:
- Define your goals, business strategy, and pricing objectives
- Outline your value proposition and competitive advantage
- Consider the impact of supply, demand, and costs
- Anticipate customer and competitor reactions to price changes
- Monitor performance and iterate
Let’s dive in!
1. Define your goals, business strategy, and pricing objectives
Goals outline the big picture
When setting your business goals, start with the big picture by defining what success looks like. Then, break it down into smaller, actionable goals you want to achieve in a predetermined period, for example, monthly, quarterly and annual goals, or a 5-year target. It’s important to establish high-level aspirations, such as a mission statement, and to also take into account your desired market share, profit margin, and growth objectives.
Business strategy plots a roadmap toward goals
To achieve these goals in the short, medium, and long term, you need to create a clear roadmap of how to get there. Your business strategy connects goals to work, keeping your teams aligned, and on track. At the heart of your business strategy are your customers. Understanding your customers' needs and pain points, where they are in their buyer journeys, and meeting their changing expectations is essential for success.
Pricing objectives determine the right model
Once you’ve defined your goals and business strategy, you can determine your pricing objectives. Whether you aim to boost sales volume, undercut your competitors, attract early adopters or increase customer perceived value, your pricing objectives will guide your choice of pricing strategy.
Let’s consider a simple pricing strategy example that demonstrates the need to align your business strategy and pricing objectives with your pricing strategy. Imagine if a luxury jewelry company decides to enter the market with a low-price strategy. The result? It will create a perception that does not reflect the company’s intended premium positioning. The right approach for this company will be to set a premium pricing strategy for its high-end product.
2. Outline your value proposition and competitive advantage
Communicating your key differentiators
To start with, what exactly is a value proposition? It is the reason to believe and choose your product over others. In a strong and concise statement, it clearly explains to customers the unique benefits of owning your product or subscribing to your service.
As such, your value proposition should answer the following questions:
- What problem are you trying to solve?
- What makes your product unique?
- What value or utility can customers expect from using it?
- Why is your product better than your competitors’?
The key to crafting a good value proposition is to be specific but simple, answering all these questions in one sentence. But, be careful! A value proposition is not a slogan. They have different objectives because a slogan is a short, general catchphrase used repeatedly to build brand awareness. To illustrate, let’s look at Deliveroo's value proposition:
"The best restaurants in your neighborhood delivered in less than 30 minutes".
It's a clear and precise statement that explains the benefits of their service well.
What sets you apart from the crowd
A critical part of the value proposition is to highlight your competitive advantage. A competitive advantage is an attribute that allows a company to outperform its competitors and stand out.
- Is your product unique to the market?
- Does it offer added value?
- Does it have a significant cost advantage over competitors?
Competitive advantage shouldn’t be easily imitable. Instead, it must be difficult, if not impossible, to copy. A timeless example is Coca-Cola because its "secret" recipe is a famous competitive advantage.
3. Consider the impact of supply, demand, and costs
Market dynamics factor into pricing decisions
Remember those good old market forces? Supply and demand define the relationship between buyers and sellers. As the price rises, sellers want to supply more while customers demand less and vice versa when the price falls. They are, therefore, used as a measure to determine prices when there is an optimal balance between supply and demand for that product or service.
You should monitor potential changes in supply and demand when setting your pricing strategy.
Fixed vs variable capacity
The concept of capacity is relevant for businesses such as hotels, rental companies, or soccer stadiums. The common point they share is the fixed capacity to host customers, whether it’s hotel rooms, cars, or seats in a soccer stadium. Current capacity should influence the price you offer at a given time.
Constant or seasonal demand for your product
Another key consideration related to supply and demand is seasonality. Let's take the example of a hotel: demand is highest during peak periods like school vacations and summer, while the low season extends to the rest of the year. For a hotel, a dynamic pricing strategy would be to lower prices in off-peak periods and raise them in high-demand periods. Lowering rates when not at full capacity can increase the number of guests and boost profits.
The breakdown between fixed and variable costs
What about your costs? Before you can move forward with setting prices, you need to make sure you cover costs to break even and be profitable. These include both direct and indirect costs. Let’s consider what these costs entail.
Direct costs are variable in nature and are tied to the quantity you manufacture or sell. That is, the more you produce or sell, the higher your variable costs. These costs include:
- Raw materials
- Other manufacturing costs
On the other hand, indirect costs are your fixed overheads that do not change. These include:
- General overheads like rent
- Employment costs
- New product development costs.
Directly tied to this is the possibility to spread your costs. In the case where you sell only one product or service, it must cover all fixed and variable costs. However, if you offer multiple products or services, they each contribute to your indirect costs.
4. Anticipate customer and competitor reactions to price changes
Price elasticity shows sensitivity to changes
When creating your pricing strategy, you must anticipate the reactions of both your customers and competitors to your price changes. A good indicator to consider is the price elasticity of your product, which measures how responsive demand is to changes in your product price. For instance, if you raise your price and demand falls considerably, your product is considered elastic. On the contrary, if demand remains stable, it is inelastic and therefore you have more freedom to adjust the price.
Customer perception impacts purchase decisions
Before you raise or lower your price, you need to consider the way customers will interpret such changes. For example, if you cut your prices drastically due to excess capacity, customers may question the quality of the product or range. They may also await further price cuts or the launch of a newer version of your product rather than opting for a quick purchase.
At the same time, the key is to know your market. For starters, customer behavior differs in B2C and B2B markets. Generally, in B2C markets, customer demand increases when a company offers lower prices and decreases when it offers higher prices. On the flip side, B2B markets function differently. If you lower prices for your B2B customers, it does not mean that demand will increase. They may not lower their own prices so their customers' demand will not increase.
Competitors react based on their own strategy
Depending on their business strategy, a competitor could choose different approaches to react to your price changes. If they aim to maintain market share, they could match your price cut. If they, however, want to foster customer loyalty and brand image, they may opt to maintain their price and make product improvements supported by a promotional campaign. If the situation was reversed, you may respond in the same way to a competitor’s price change.
5. Monitor performance and iterate
Price management and optimization is an ongoing process
Now that you’ve considered all of the above, you are ready to choose the most relevant pricing strategy for your company. Of course, you can also incorporate multiple pricing strategies or specific strategies for different product ranges or business lines.
However, the pricing process does not stop there! Prices cannot remain fixed for long. With your costs, customers, competitors, and market conditions changing over time, you need to adjust your prices regularly to keep up.
To stay on top of the competition, you need to monitor your sales, stocks, and prices and adjust your pricing strategy regularly. You should also look out for changes in the market and evaluate your costs.
On top of that, as more buyers shift to digital channels, your pricing strategies must adapt to the ever-changing digital landscape. Data-driven pricing and added personalization can highlight the value you offer across channels and your edge over competitors.
A shift from basic to intelligent pricing
What if you could close your excel sheet, remove the guesswork and make more informed pricing decisions at any time? Implementing a next-generation pricing platform like Pricemoov can make your pricing process more intelligent, agile, and scalable.
Next steps for setting product prices
Want to dig deeper into how to set your prices? Look out for the upcoming Definitive Guide for Setting Product Prices and get to know the 10 common pricing strategies to see which may be the right fit for your business.
Contact Us to discuss what’s the best pricing strategy for your business.