How to Choose the Right Pricing Strategy for Your Business
Having the right pricing strategy is crucial for business success. In order to help determine the right pricing strategy, ask yourself these 10 questions:
- How will you stand out in the market amongst your competitors?
- What are your business goals — market share, profit, growth?
- Is this a new product or service that will give companies an advantage in quickly acquiring new customers?
- What is your added value?
- What is your competitive advantage?
- Do you have a significant cost advantage over your competitors?
- What is the breakdown between your fixed and variable costs?
- Is the capacity of the market you are positioned in fixed or variable?
- Is demand for your products constant or does it fluctuate seasonally?
- How are customers and competitors likely to react to any price changes you may make?
Company strategy and business goals
A crucial part of a business’ commercial strategy is knowing how to stand out from the competition.
Understanding your customers' needs and keeping up with changing expectations is another essential part of your strategy.
These factors will determine your marketing strategy, the quality of your product, the distribution methods, the channels of communication, and of course, your pricing.
To take a simple example, if a luxury jewelry company enters the market with a low price strategy, then it will create a perception that does not reflect its premium positioning and will target the wrong audience. The ideal strategy for this company would be to follow a high price strategy, otherwise known as premium pricing.
At the same time, your business objectives must be taken into consideration when choosing your pricing strategy. If your main objective is to earn high margins, you should consider a skimming strategy. Alternatively, if your primary objective is to achieve high sales volumes, look to a penetration strategy.
Value proposition and competitive advantage
According to Mercator, the value proposition is a "strategic choice that determines what customers need to get (key perceived benefits) for what they give (key perceived costs), in order to create an offering with perceived value that is superior to competitors."
To simplify, this is a core value promise that you will deliver to your consumers. In fact, it's a sentence that clearly explains to customers what the benefits are of owning your product or subscribing to your service.
As such, the value proposition should answer the following questions:
- What is the problem you are trying to solve?
- What makes your solution unique?
- What measurable outcome can we expect from your solution?
- Why is your offering better than your competitors?
That's why a good value proposition should be precise but simple because you need to answer all these questions in one sentence. But be careful: the value proposition is not a slogan. They don't have the same objective: a slogan is a generalized, easily memorable phrase used repeatedly to build brand awareness.
To give an example, here is Deliveroo's value proposition: "The best restaurants in your neighborhood delivered in less than 30 minutes". It's a clear and precise sentence that explains the benefits of their offering well.
A competitive advantage is an attribute that allows a company to outperform its competitors and stand out. However, if this advantage is easily imitable, it is not considered a competitive advantage. Indeed, the competitive advantage must be difficult, if not impossible, to replicate. Coca-Cola is a good example: its "secret" recipe is a considerable competitive advantage.
Supply, demand and cost structure
The demand and supply principle states the price of a product or service is the price at which there is an optimal balance between supply and demand for that product or service in a free market.
There is a concept of market capacity that can be either fixed or variable. The concept of capacity is relative to the business of hotels, camping sites, soccer stadiums, etc. The point in common for all these businesses is that they have a fixed capacity to host, and to respond to, customers. To be clearer, we talk about a number of rooms for hotels, a number of bungalows for campsites or a number of seats for soccer stadiums.
This capacity has an influence on the price and this is why we use dynamic pricing. Dynamic pricing is a technique that adjusts prices to demand variations.
Let's take the example of a hotel: hotels have a high demand during school vacations and the Summer, and an off-peak period during the rest of the year. For these hotels, dynamic pricing would consist of lowering prices in off-peak periods and raising them in periods of high demand. As a result, lowering prices on days or periods when the business is not at full capacity can increase the number of customers and boost profits.
How did customers and competitors act to your price change?
In your pricing strategy, it is very important to anticipate the reactions of both your customers and your competitors to your price changes and, in this case, to your dynamic pricing strategy.
In B2C, customer demand tends to increase when the company offers lower prices and decrease when it offers higher prices. But this pattern doesn't work in B2B. Indeed, if you lower prices for your customers, it does not mean that demand will increase because they themselves will not lower their own prices and their customers' demand will not increase.
So remember that a dynamic pricing strategy is not relevant in B2B markets as opposed to B2C markets.
Any pricing strategy you adopt is likely to be copied by your competitors. If you decide to lower your prices, your competitors will then lower theirs to stay competitive, and conversely, if you raise them, they will be happy to see you provide cover to raise theirs.
With this article, you will understand that there are many possible pricing strategies and that it is essential to choose the most relevant strategy for your company.