Types of pricing to reach your goals
If pricing is the topic, then in the minds of many people, only price competition can come into play. However, the topic has many more possibilities.
A well-chosen pricing strategy will help you achieve your goals in the long run. To actually serve you, you don’t have to look at pricing on its own. Always look at it in a system, after all, it is the basis of your income, the effect of which is also reflected in your financial indicators.
To plan you need to
- have a good business plan, know where you are and where you want to go, what tools you need to do this
know who you are and what you offer to the client, SWOT analysis helps a lot in this
accurate knowledge of your own costs, without which you will jeopardize your liquidity (all without knowing it)
What goals does pricing help you with?
Before you start rethinking your pricing, the first question is, what do you consider to be your primary goal?
How do you define profit? Is profit per 1 product important, is long-term profit important, or is it simply the profit that is important? Based on this, you can choose from several solutions.
- increase in turnover: you can take this to the limit as long as your capacity allows, i.e. it doesn’t cost more soup than meat.
- market “skimming”: you can use it when introducing a new product or service, provided you are not yourself that new product or service
- maximize sales: then make sure you know your break-even point properly, otherwise it will backfire.
- maximizing profit: as you can see in the picture, mainly due to the cost structure, this usually does not coincide with the maximum of sales, as the maximum of sales can be
- later than the minimum of average costs
- maximizing revenue-proportionate profits
Pricing based on market position
It is most often for this purpose that you enter into price competition. There’s nothing wrong with this part as long as you know what you’re doing. Here you can basically have the following goals:
- survival of market competition
- position maintenance
- increase market share
- discouraging entrants
Pricing used for brand building
You also communicate with your prices, not just produce your costs.
- building customer loyalty: pricing is a component of a process, when building a brand, think about the fact that in addition to your pricing, you can help customer retention without price competition.
- maintaining leading product quality: this definitely requires you to have adequate profitability
- strengthening corporate reputation
Let’s take a closer look at what pricing options you can choose from once you’ve set your goals.
Pricing to help increase profits
The company distinguishes the product in some way, so it can sell it at a higher price (eg homemade, GMO-free). This distinction must be true in any case, but it is not necessarily necessary to be expensive. There was a beer ad anno, where the product was defined as a product “made of crystal clear water”. Yes, you guessed it, all beers are made from pure water, but they also emphasized (and priced) that.
It does not necessarily counts with the increase in market share, but instead seeks the maximum quantity that can be sold at a price that is still affordable by the market. This way, you may be selling less unit, but at a higher price.
If you choose this path, you need to know the needs of your target group as accurately as possible and serve it with your product.
It sells the same product to different customer groups at different prices (e.g. gives a student discount). It can be used as long as it serves the interests of the customers. If you are abusing of your market dominance position, you can count on the special attention of the Economic Competition Authority.
The question may be legitimate about how giving a discount to a group will help you increase your profits.
You can already see in the picture above that variable costs are far from increasing proportionately. If a particular group couldn’t pay for your product or service, but you help them with a discount, your sales will increase. Accordingly, in terms of aggregation, this will help you decrease your average costs.
Retail price / Wholesale price
Manufacturers set a separate minimum price for retail. The discount is tied to a certain number of pieces.
Setting an artificially high price from which you can give a discount later. This ensures that even high pricing seems favorable. Applying this requires, on the one hand, knowledge of the target group and proper marketing.
Price levy / price “skimming”
Apply a higher introductory price when introducing a new product so that you can take advantage of the charm of the novelty to achieve higher profits. This price decreases later with the spread of the product. The basic condition is that your customers already know you, have a base on which to rely.
The downside is that it may not be applicable in all cases, and if used excessively, the payer of the initial price may feel “plucked”.
Laying down optional options
You can earn extra revenue by offering an optional plus in addition to the base product for a surcharge. (e.g. extended warranty, other cross-selling or up-selling items). Immediately after the buyer has already decided to purchase, he will not necessarily be as price sensitive as he was before.
You can update your prices regularly in response to current market needs.
Those who use this method raise the price of the best-selling product, thus maximizing profits and helping to sell other products. Most often, the load of aircraft flights is usually reduced by this method.
Pricing to help increase sales volume
Then you are the new entrant. Either you are completely new or the direction is just new. You can apply a lower “discount” price than logging in to have new customers. You can raise over time, but the basic condition is that you know your costs and be strong enough to take action as a beginner.
Maximize sales volume.
It strives for the maximum quantity that can be sold while making a normal profit. This typically entails selling the product at an average cost. You can also see in the picture above, which shows profit maximization, that the increase in sales volume also brings with it an increase in costs.
If you decide to maximize your sales volume, you should still keep an eye on the increase in your costs. Used well, this can mean an increase in market share for you.
Gaining market share
Similar concept to maximize quantity. You then give as cheaply as you can to crowd out your competitors with the amount sold. It leads to a price war.
It immediately follows a competitor’s price cut. This is practically the price competition itself that is most commonly used.
You can’t necessarily entice buyers with this, making the price war pointless. You can show competitiveness to the customer, but only if you apply it properly.
Paying 2 can take 3.
Pricing at the psychological level. Such may be the price ending in 999, which emphasizes cheapness, but also works the other way around, which sets a round amount highlighting quality.
Premium bait pricing.
Demand for everyday products can be stimulated by artificially raising the price of a premium product. It is not necessarily a goal to make a profit on the sale of a premium product, but average products seem to be distinctly cheap compared to a premium. This makes it easier for the buyer to say yes to an offer that looks particularly favorable.
Different pricing options than usual
A company who strong enough in capital keeps prices very low to discourage future competition from entering.
It sells a given product below its own expense to crowd out competitors. Usually, the gain on one product is used to finance the loss of that product.
Don’t be fooled if a multi is able to go below your prices. For their costs are also below yours, and they can do so without engaging in unfair market behavior. Dumping falls into this category.
Donation, honorary fund
There is no pre-determined price, the buyer pays as much as he thinks the product or service is worth.
- How do you set your prices?
- Do you use either seasonal or target group variation in your pricing?
- To what extent are you influenced by the strategy used by your competitors (if any)?
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