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Most founders spend weeks agonizing over pricing models cost-plus, value-based, outcome-based, and competitive pricing. They read books, hire consultants, and build spreadsheets. Yet, they’re solving the wrong problem. Pricing models are important, but they answer only one question: What should I charge? Great businesses operate from something deeper a value system. A value system is the framework that determines how value is created, delivered, priced, and sustained over time.
Source: INC
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A business can choose from a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company’s pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies, tactics and roles vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.
Pricing strategies determine the price companies set for their products. The price can be set to maximize profitability for each unit sold or for the market overall. It can also be used to defend an existing market from new entrants, to increase market share within a market, or to enter a new market. Pricing strategies can bring both competitive advantages and disadvantages to a firm and often dictate the success or failure of a business; thus, it is crucial to choose the right strategy.
Some organizations delegate pricing responsibilities to a range of departmental staff. In other cases, a Chief Pricing Officer plays a strategic role advising on market conditions on competitive opportunities which can be exploited via pricing decision-making. Where prices are set centrally, they need to make sense to sales staff working in the field.
Pricing a product based on the value the product has for the customer and not on its costs of production or any other factor. This pricing strategy is frequently used where the value to the customer is many times the cost of producing the item or service. For instance, the cost of producing a software CD is about the same independent of the software on it, but the prices vary with the perceived value the customers are expected to have.
The perceived value will depend on the alternatives open to the customer. In business these alternatives are using a competitor’s software, using a manual work around, or not doing an activity. In order to employ value-based pricing, one must know its customers’ business, one’s business costs, and one’s perceived alternatives. It is also known as perceived-value pricing.
Value-based pricing have many effects on the business and consumer of the product. Value-based pricing is a fundamental business activity and is the process of developing product strategies and pricing them properly to establish the product within the market. This is a key concept for a relatively new product within the market, because without the correct price, there would be no sale.
Having an overly high price for an average product would have negative effects on the business as the consumer would not buy the product. Having a low price on a luxury product would also have a negative impact on the business as in the long run the business would not be profitable. This can be seen as a positive for the consumer as they are not needing to pay extreme prices for the luxury product.
Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.
Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
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