It’s all about (the) pricing strategies

On its own, pricing is a complex subject that requires thorough understanding, yet it is massively important. If you set it right, the sales and profit will flow. Get it wrong and, well, you know, you’re doomed, to put it mildly. Your pricing affects everything, from profit margins and sales to brand positioning and market share. So, what’s the trick? How do you implement a pricing strategy that conveys everything you want to stand for as a company while bringing in profit in the process?

Businesses have the luxury to choose from a variety of pricing strategies, depending on the goals and objectives they set. Of course, none of those matter if they are not based on market research and customer demand. It is vital to understand who is your target audience and competition, only then will you be able to utilize an effective pricing strategy. Not every price you determine needs to produce maximum profit margins.

Without further ado, here are some of the pricing strategies that businesses often employ in order to determine the prices on their products and/or services.

1. Premium pricing

Premium pricing strategy allows business to set their prices higher than the competition. It’s great for a small business whose niche is selling unique goods, as well as for the times when you are first in placing a product on the market that has a specific competitive advantage. Premium pricing strategy can be a good choice for businesses entering a new market and trying to cash in the early days of a product’s life cycle.

In order to justify the premium price, a company must create a perceived value of its product or service. Every aspect needs to support the notion of the premium price, including packaging and marketing efforts in order for the customers to perceive the product as worth its prices.

2. Penetration pricing

In the instance of penetration pricing strategy, a company is looking to establish its presence by entering the market and offering lower prices (sometimes at a steep discount)  than their competitors. The reason why is to attract customers away from the competition, which often results as an initial, albeit calculated income loss.

The point of penetration pricing is to raise brand awareness and brand loyalty in the crowded market and stand out so that in the long run, a company can effectively raise its prices that actually reflect their true market positioning.

3. Price skimming or milking

In the third P of pricing strategies, price skimming acts as a way for a business to leverage their competitive advantage and maximize their sales on new products and services. Contrary to penetration pricing, a company initially sets a higher price, then gradually lowers it as competition begins to catch on and offer similar products or alternatives.

The primary benefit of price skimming is a strategic approach to gain maximum revenue advantage on early adopters until it lowers prices to cater to more price-sensitive groups. It can be highly useful for smaller businesses who can cover the developments cost of their unique product, all the reaping the benefits of perceived exclusivity in the early stages.

4. Psychological pricing

Psychological pricing strategy is more of a technique that plays on the customer’s emotional perception (thus the name) of the price, down to the small details that can make a difference. It’s a widely used strategy that is one of the favorites by many marketers.

As an ever-present example, a product with a $99 price tag is cheaper that a product of $100. That is clear as a sunny day but in the mind of a buyer, $99 is psychologically “less” than $100, possibly due to the fact it has one less digit (as in our example) or that consumers have a tendency to pay more attention to the first number on a price tag than the last. In essence, you are creating an illusion of enhanced value (cheaper price) for the consumer.

5. Economy pricing

Finally, something that doesn’t start with a p. Economy pricing is often used by large companies, especially in the food market, like Wal-Mart and Target, as it aims to attract a particular segment of the market – the price-sensitive buyers. In this case, companies reduce their marketing and production costs to a bare minimum in order to maintain low prices.

This strategy is not suitable for businesses that lack the large sales volumes which are needed to stay profitable with low prices. Instead, they can opt for discounts tailored to most loyal customers to cement their patronage long-term.

price strategies

The balance of price and quality in pricing strategies (image source: SlideShare)

6. Bundle pricing

Bundle pricing is a great way for small businesses to sell multiple products for a slightly lower rate, convincing buyers that they are getting a bargain as compared to purchasing each item individually. The main point of bundle pricing strategy is that it increases the customer perceived value while also providing an effective way of selling unsold items that are stored for far too long.

The strategy is most effective for businesses that sell complementary products, that actually have something to bundle. It makes the entire shopping process a bit easier by bundling similar items together (although, when was shopping ever anything but easy?). However, it’s very important to remember that the profits earned on the higher-value items must cover the losses you take on the lower-value product. Otherwise, it’s all for naught.

Honorable mentions:

  • Optional pricing – offering optional extras together with the initial product to maximize revenue. For instance, an airline company will offer an optional extra such as a window seat or a printer company will offer extra ink cartridges with it.
  • Product line pricing – different products within the same product line have different price points. An example would be a smartphone company offering different models within the same product line but with different features (bigger, thinner, sturdier, etc) or a same room type in a hotel having different rates due to amenities and facilities.

Conclusion

Choosing a right pricing strategy for your goods can be a rough, often intimidating process without the right facts because so much depends on it. Hopefully, this post explained some of the most used strategies today and their effectiveness. The four P’s (premium, penetration, price skimming, and psychological pricing), along with the economy and bundle pricing each have an approach that suits particular companies. Pricing your product follows the overall strategy of your business. Performing market research and competitor analysis will help you find that pricing sweet spot and cater to the psychology of your customers.

Fear? Not If You Use Competitive Intelligence The Right Way!

Holding your ground in today’s business environment can be scary. The competition is huge, the technology is advancing and consumers are becoming more savvy and demanding. This all forms a highly competitive market whereas competitive advantage can be as easily lost as it was gained. Businesses “live” in a world where information is widely available than ever before. Each day, there are massive amounts of data generated that just waits for it to be gathered, analyzed and used for best purposes. However, it often just floats around, which brings us to the word of the day (actually, two words): competitive intelligence.

In essence, competitive intelligence (CI) is understanding and learning about your products, customers, and competition, as well as every other facet of business in order to make strategic decisions based on knowledgeable insights. It a learning curve about everything that affects one business, from the tiniest details to global-like situations so it stands to reason there may be instances where CI is not used to the best of its abilities.

Theoretically, that’s all fine and dandy, but as we favor a direct and practical approach, here’s what competitive intelligence can do for your business.

1. Focus on what you want to know

Finding out everything about every competitor in the marketplace is a good idea, but not particularly effective if you want quick results in today’s fast-paced business environment. A better choice is to focus on a few specific business segments or problems whose understanding and addressing is key to company’s success. That way, the aim of your intelligence operation will be to collect information to help resolve the matter that matters to you the most. If that requires monitoring large companies for openings in the market, so be it, but try not to dilute your efforts too much. Collecting information for key strategic decisions and identifying new competitive threats is usually an ongoing, day-to-day operation in which you always need to have your goal in sight.

2. It’s not solely about your competition

We know what you are going to say – it’s precisely called competitive intelligence, not business intelligence or market intelligence or whatever adjective you want, therefore, it must be all about competition. Still, CI is a multi-layered business discipline that branches out like a tree from the earth. The focus of competitive intelligence in not on your rivals alone, it’s on the market as a whole and everything that makes it a highly competitive battleground.

 

demand for information

Source: B2B International

Failing to recognize the full value of competitive intelligence leads away from greater strategic flexibility. Using CI, a business can quickly adapt to market fluctuations and, if necessary, change its business strategy. For an example, we’ll use Pratt and Whitney, an aerospace manufacturer whose commercial engine division utilized CI by looking at all market aspects in an effort to stay competitive against its rivals, especially GE and Rolls Royce. As a result, the company deployed a highly successful breakthrough agenda for their new Geared Turbofan (GTF) engine, which wouldn’t be possible it P&W looked at each competitor separately.

Let’s get into specific details about what CI enables:

3. Perform win/loss analysis

A win/loss analysis requires surveying two groups of people

  • new customers
  • prospects attracted by competition

Why? You want to unfold and understand the reasons for their actions. During these interviews, it would be highly beneficial to ask your customers the motives for looking for your product and the reasons why they chose (or didn’t choose) your company, if they went with a competitor’s offering. Gaining insight from these simple, yet valuable questions will provide you with an understanding of your product among customers, competition’s selling points over your product, as well as what features are necessary to change or implement.

In 2015, Nestlé’s popular Maggi noodles had to be recalled from India due to containing a whopping seven times more lead (no big deal) that allowed. Up to that point, Maggi’s sales accounted for a quarter of Nestlé’s $1.6 billion sales in India, with the food giant having a 63 percent market share. The subsequent five-month ban of Maggi cost Nestle $277 million in sales with a half a billion dollars of damages to the brand name. However, Baba Ramdev, a famous local yoga guru and an owner of the growing local consumer goods company in India, launched a competing product (Patanjali noodles) to a great success. The key was catering to what people wanted to the product was marketed as a healthier option than Nestlé’s, while also having a lower price to incentivize sales.

4. Use competitive intelligence tools

CI presents a vast field of data that takes a considerable amount of time to sort out into actionable insights if you do it manually. Time matters greatly in today’s business operations which is why there are competitive intelligence tools that automate the process and provide real-time results. Therefore, a company should opt for a software solution that provides data about both your competitors and market, all the while keeping your budget in place and minimizing risk. What these tools offer are

 

  • Competitive market and competitor data (product tracking, industry trends, etc.);
  • Real-time intelligence;
  • Market gap minimization;
  • Predictive “what if” scenarios;
  • Time-saving through minimal human intervention;
  • Recommendations and more.

CI could also present you with potential problems regarding your sales approach, which you should discuss and coordinate with your sales team to correct.

Conclusion

Competitive intelligence, at its core, means learning as much and as quickly as possible about one’s industry in general, competition and market in order to be able to anticipate and face numerous challenges head on. In order to use competitive intelligence the right way, businesses must use it for insight management, not as a tool to search and distribute information. It allows a direct access to input into company’s strategic plans, smartly tapping a vast amount of external data to remain competitive.

CI has the power to be a facilitator of strategic advancement and change. Optimally, it will breed an organizational culture that relies on modern tools that provide real-time intelligence to deal with real-time challenges of ambiguity and prevailing competitors. It’s not enough to gather data and employ it, but rather to use it the right way as shown in this post.

What you should have asked your teachers about pricing policies in marketing

Pricing is considered one of the four basic elements of the marketing mix, together with product, place, and promotion. It is probably the least attractive element of the four in terms of marketing. The bulk of the marketing efforts goes to product and promotion before turning to pricing. However, the price is a rather flexible element of the mix and this post will show how.

We have already established that pricing policy is very important for a business that aims to gain success by finding the somewhat mythical price point where sales and profits enjoy maximum levels. A business might employ a variety of pricing policies and strategies, depending on its vision of marketing objectives and goals. It often seems like marketers have a nasty habit of underestimating the strategic importance of pricing. Those are probably the ones who missed the point (or a whole class) about pricing so they don’t perform revenue potential optimization. No worries, we are here to remedy that oversight. Here are some of the question you should have asked your teacher:

1. What pricing policy is best for marketing?

There is a no clear cut answer here as every business is unique. A pricing policy is set to reflect a part of a larger business strategy, accounting the principal market indicators like customer demand, supply, the profitability of products and so on. Pricing policy serves as a beacon for setting prices your customers can afford, not marketing it to them as something set in stone from the get-go.

2. What about my product?

Setting an adequate pricing policy requires serious market research and evaluation. Also, it must go in line with your overall business strategy and reflect the supply and demand relationship. Having a too low or too high price can hurt your business and your product equally. Here’s how:

  • If you set a price too low, potential customers might perceive it as an inferior quality, cheap product. This is fine if you are aiming to cover your costs and get a minimal profit margin. In that case, a cost-based pricing policy can do the trick as it will cover all production and delivery costs while attaining a certain level of profit. However, you lose any perceived value with your customers and potentially lose money in the long run.
  • If you set your prices too high, you might give off a feel of a high-end, prestige brand. This is a risky ploy as it should be guided by a demand-based policy, meaning there is a demand for your product at the price you are selling. Utilizing this pricing policy requires a comprehensive market research, best provided by intelligence tools with real-time insights. Otherwise, your product will be labeled as expensive and won’t sell.

The middle ground here is to evaluate the unique aspects of your offering and the consumer’s bond with it. That way, you are creating a perceived value for your customers and increasing their satisfaction. Once more, a company opting for value-based pricing needs to perform an extensive market research (really, it’s an essential part of modern business undertaking) to underline the value of your offering and thus motivate your customers to pay what you want as you’ve modeled your goods on what they want. An example would be car dealers who charge different customers and in a different situation.

Alternatively, you can opt for competition-based pricing whereas you assess your own goods, compare it your competition and then price it lower, higher or equal. It’s quick and relatively easy to implement with less market research, but it’s not quite accurate in terms of demand and your value.

3. Is there more than one market segment?

Of course and it’d be foolish not to use it to your advantage. Determining both primary and secondary market segments allows you to better understand how customers perceive your product’s value. Not every customer is the same and will not pay the same. Market segments are important for your company’s positioning and merchandising your goods to provide maximum sales at the established price points. Once again, this is where research about demand kicks in as you can fully use it to uncover where your potential customers are ready to pay more than usual.

4. Why does the pricing of my competition matter?

It’s perfectly fine that you want to be your own self, irrelevant of others. Nevertheless, what your competition charges matters in multiple ways:

  • You can base your whole pricing policy on the competition;
  • It affects your customers as the competition might define your price range;
  • It opens new opportunities for you.

Let’s say you are entering a market with a new product or a new market in general. One of the ways to price your product is to employ penetration pricing. This allows you to present prices with a steep discount, maybe even with a loss, all in hope to create brand loyalty and increase the willingness of your customers to spend more in the future. But how do you know if you can compete, you are not losing money right from the start by lowering prices too much?

It is tempting to price higher than your competition and certainly justified if there is a demand for it or if your product or brand is perceived significantly better. However, it a tough feat to accomplish. Let’s not forget that Apple spent almost all of the 90’s decade soul searching before it established itself as one of the tech leaders it is today, delivering high prices on quality-perceived products.

You can also price on parity if your offering product has better features or price lower if it has almost the same features to competing products. The key to competitive pricing is attaining insight from this detailed analyses that show how customers perceive and interact with your product so you can understand how they relate to it. This also includes analyzing thousands of competing products and how your competition reacts to you in order to package and promote your goods based on effective pricing.

Conclusion

As seen, pricing is an equally important part of the marketing mix as the rest of the elements. It can be rather tricky, but whatever you do in your marketing efforts, make sure you base your decisions on knowledgeable insights. It’s critical to know and monitor the market and your competition (especially their pricing) at all times in order to reassess pricing if necessary and stay ahead. There are tools that can help you optimize your prices. Market fluctuations and new products have the power to influence and change consumer demands and needs. Be the one that influences them.

Is your pricing enabling a healthy profit margin?

When a business sets its pricing policy, it looks to both make and save money while ideally increasing profit margins. This is an ongoing process that demands constant commitment through regular evaluation. Getting the pricing wrong can hurt a business and diminish its profit margins. And we all know that a solid profit margin is an essential part of financial health in the long run.

Profit margin is perhaps the most analyzed number during the company’s lifetime. It is a rather useful pointer that can help a company provide insight about a number of aspects regarding its financial performance, with profit margin fluctuations the ever-present subject of numerous analyses. In broad terms, low profit margins could suggest various problems. For this post, we are sticking with pricing, a very important factor in determining whether a low or high profit margin indicates a profitable business. We will mention different ways how pricing affects your profit margin and is it healthy enough or sustainable.

1. Have a long-term plan

Setting pricing for your goods should be a part of a larger plan, a group of multiple strategies to maximize your profits. A business needs to develop a plan that covers all the little ways of how products get sourced, distributed and sold, all the while monitoring the prices. The main focus is on the level of profitability of every product you sell. Make your items more valuable and competitive but also pay attention to those that may be losing money and turn them around quickly.

2. Avoid same profit margins for different products

What some companies fail to grasp is that price optimization leads to optimized profit. All customers have different perceptions of your goods and they assign different values to those same goods. Every product needs a price that shows the customer’s willingness to purchase it. This is a display of the customer’s perception of the value of your product that ultimately has nothing to do with the profit margin of other product lines.

Take Parker, the motion and control technologies company, as an example. In 2002, a new CEO determined to change the company’s uniform price policy across the entire range of 800,000 products. Understandably, the company was in a profit margin standstill until the change was made to switch to the new pricing scheme. As a result, the company gained over $800 million in profits during the course of seven years by solely focusing on its pricing.

3. Create perceived value with your pricing

A business should always set its pricing so it creates a perceived value for its customers. Perceived value is what essentially delivers purchases by attracting customers. You can see it all the time – people favor some shops because they believe they are getting the best deal around. This may be true most of the time, but even if it is false in reality, the perceived value is what makes them come back.

Naturally, this is all easier said than done, which is why mastering perceived value demands a thorough analysis of large volumes of data to recognize which option is best. Do you lower your prices to appeal to those looking for bargains or do you cater to those willing to pay premium prices because they believe they are getting a product with better quality? As there is plenty of market research involved, creating perceived value is complex, which is why your best bet might be utilizing some form of pricing intelligence software that significantly automates the process.

4. Don’t use cost-driven pricing

Among businesses, one of the basic calculations of setting the prices for goods is by following a simple formula:

  • the cost of the product + profit margin = price

It makes sense as you want your pricing to take into consideration the overall cost. However, even if you account the cost correctly and set a healthy profit margin, your pricing might still hurt you. Why? Because of the all-important customer perceived value. Understanding the cost part of the equation is important as there are various costs to account for (materials, time, manufacturing and distributing costs, marketing costs and so on) in order to achieve a reliable profit margin.

Still, basing your pricing on costs rather than customer’s perception of value takes away the customer’s willingness to pay as it might not believe the product is worth the price you set. The price is not the only factor that is important to a buyer. Recognizing and understanding how and why customers value your products will allow you to set a price that truly reflects that value and attain a healthy profit margin.

5. Segment your customers

As we mentioned earlier, customers have different requirements so you need to differentiate them into segments. Chances are, your company attracts a wide array of customers with particular demands and reasons. The value proposition for any of your products (or a variation of it) is different in different market segments. Hence, your pricing must reflect that difference. It should include tailoring the product and pricing strategies to specific customer segments if you want to attain the additional value created by these segments.

Conclusion

Pricing is a vital part of doing business, providing a competitive advantage and higher levels of profitability if done right out of the gate. To do that requires diligent work and keeping in mind the five point above. It all starts with a well-rounded agenda that follows the way of maximizing your profits. This includes having different profit margins for different products that have prices that best reflect the customer’s willingness to pay. Creating perceived value ensures you will attract customers and possibly retain them for multiple purchases. It’s not easy to master but with the right tools, it can be done. Avoid pricing your products based solely on costs – it does not reflect the true value of your product and it will turn your customers away. Finally, don’t treat all your customers the same as they ascribe different values to your products. Instead, align your prices with their value perceptions and enjoy increased profits.

3 Competitive Pricing Secrets You Never Knew

As pricing goes, competitive pricing is one of four major ways (the other three being cost-based, value-based and demand-based) how businesses set and develop their pricing policy. Basically, with respect to competitors, a company sets its pricing based on either lower, higher or roughly the same as it’s competition. Competition can be either direct or indirect. Direct competition happens when a company produces similar products that cater to the same group of consumers. Indirect competition exists when different companies make or sell items which, although not in head-to-head competition, still compete for the same share of the customers’ pockets.

A competitive pricing method is quick to implement as it doesn’t require as much in-depth market research as some other pricing methods like demand-based or value-based pricing. Instead, its foundation lies in the prices companies that sell similar products set. This way, a company can rapidly attract and influence customers because there is already a potential pre-established customer base. However, a competitive pricing policy has its own advantages and disadvantages that companies looking to implement should be aware of. In this post, we’ll show you three competitive pricing secrets that can help you boost your business.

1. Underpricing can harm you in the long run

A common occurrence in the e-commerce world is that companies often turn to underpricing their goods believing lower prices or being the least expensive solution will drive sales volume. While the theoretical basis is sound, the practical part carries two big downsides.

  • Pricing your products lower than your competition takes a toll on your bottom line. Sure, lower income is better than no income but you are needlessly leaving money on the table and seriously thinning and decreasing your profit margins.
  • You lose any form of brand recognition, at least the good one. Being too cheap might signal customers your product is shady and possibly of questionable quality, ultimately steering them away to your competition.

Underpricing is typically a result of lack of knowledgeable insights. It’s essential to avoid crossing the line between providing competitive pricing and underpricing. Pricing intelligence tools assert themselves as the logical solution in this case, as they will provide data driven insights to help a business stay competitive without underpricing.

2. Lower your prices the right way

Continuing the subject of lower prices, here is another thing that you might not know. Chances are, there is a group within your target audience that perceives your pricing a bit expensive. This might pose a dilemma – to cater to them by lowering your prices or not?

Consider resorting to alternative measures such as offering buyer benefits in order to be more appealing. For instance, you can offer brand club membership with exclusive coupons and discounts. The essence of this method is that you are not lowering your price in general but offering special prices to specifically targeted customers at specific times.

Lower your prices

Source: Harvard Business Review

Another way to achieve this is by offering less product or service for the same price. Taking into account your customers, product proportions and sizes and order sizes can effectively reduce your costs and produce a desired result without reducing the value to your customer base.

Fairly recently, the maker of Toblerone, popular Swiss chocolate, changed the overall look of it and reduced the overall amount of chocolate from the 170-gram and 400-gram milk chocolate bars (about six ounces and 14 ounces) to 150 grams and 360 grams in order to reduce cost because the necessary ingredients achieved higher prices. The company said the effect of the changes was less noticeable, thus continuing the established practice of companies trying to avoid price increases by reducing the contents of their product. Most consumers are not aware of the alteration because the product usually looks the same and has the same price, the only difference there is a tad less of it.

The same can be done with other aspects of your product like shipping. Instead of offering a two-day delivery, a business can switch to three-day deliveries, saving enough money to keep the existing price without decreasing its margins.

3. Reframe your product

This is an effective method that provides lots of breathing space for experimenting what works and attracts customers and what repels them. You will often find the term “psychological pricing” (also known as odd-even pricing) accompanied with the example of charging $9.99 for your product instead of $10.00. This way customers feel they are getting a fair, lowest or best possible price.

Simply switching up the product description can play a large role in selling your product. For instance:

  • Selling something that costs “$10 per month” rolls better of the customer’s tongue than “$120 per year”, even if those price points are exactly the same in the end.
  • Changing a $4 shipping fee to “only a $4 shipping fee” or “a small $4 shipping fee” could increase the response rate among those hesitant to commit to a purchase.
  • Another way to reframe your product is to provide a “free shipping” benefit with the actual shipping costs included in the product cost.

Conclusion

Balancing competitive pricing with profit margins can be a difficult task without proper tools (and secrets) of the trade. It’s important to understand what can propel you in the business environment, as well as hurt you in the long run. The most valuable pricing methods consist of constant planning and management, as well as competitive price intelligence, which ultimately points to pricing software. It joins big data with historical information to help retailers set the prices of their products in accurate and timely fashion.

Having in-depth knowledge of your market and target audience is vital. Lowering your pricing can certainly be a tempting proposal, but it can also cost you money if you lower it too much. Also important is knowing how you can appeal to customer’s price consciousness by reframing your price to appeal even to those hardened buyers. Keeping the competition factor provides a fast way of scoping the market and setting prices accordingly. By utilizing these little secrets, you will avoid the pitfalls of competitive pricing and turn them to your advantage.

Lies and damn lies about pricing data

It’s one thing for a lie to be a simple inaccuracy regarding a specific set of information. It’s a whole another story and a real problem when those lies become common practices. There are some instances where lies and myths about pricing data become a part of company’s culture, so deeply integrated with their business strategy that it hampers any kind of progress regarding optimal pricing.

Given the overall complexity and volume of pricing data, there are many things that constitute a successful evaluation of price optimization. In this post, we’ll explore the top lies and misconceptions that are more often than not associated with pricing data. Hopefully, this will give you a better understanding and help you make more informed decisions, as well as what you can expect in terms of optimized pricing and improved profitability.

The lie: “The market alone dictates the prices”

The truth: While it is true that the market has a direct influence on price ranges, it’s a lie that it alone sets the final price. Pricing managers, accompanying the business’ pricing policy and strategy, have the means and the opportunity to differentiate their products and services and create value for them. Market price doesn’t necessarily mean you have to accommodate to it, rather you need to accommodate your price to your customers. MIT Sloan performed a research a couple of years ago and stated that “pricing power is not destiny, but a learned behavior”, meaning pricing is almost always based on knowledgeable insights, even though competition, costs and price sensitivity within a market have a significant effect.

The lie: “We are in a commodity business”

As a prime example of when a lie or misconception takes a wrong turn, having a firm belief that a company is a commodity business leads to unconditional acceptance of the prevailing prices in the market. Companies needlessly label themselves as price takers, believing higher prices will cause customers to flee. This unnecessary pigeonholing clouds the range of factors that customers actually care about and that justify having premium prices.

The truth: This lie, often named “commodity mindset”, manifests in a shifting strategy that uses competitive price cuts to retain profitability as the prevailing thought is it’s better to sell at discount prices than not at all. Yet, this behavior is slowly lowering profit margin to a minimum and actually harming the business by lowering prices too much or too often. It also means trouble in the long run as your customers expect lower prices each time, all the while the issue of a price increase is practically inconceivable. Instead, focus on the unique selling points of your product, together with the complete service that goes into the process (customer service, delivery, durability, ease of use, etc.) and build your price on that. This ultimately provides incremental value to your product and avoids potential restrictions.

The lie: “Price changes are too difficult to measure accurately”

The truth: Tracking all the changes in prices, customer behavior, production cost, and sales volume can be an intimidating task, but far from being too difficult or impossible. It’s a part of the process to stay up to date with all the changes in the business environment and all its facets. It takes some time to reach a level of analytical awareness that can produce accurate calculations in order to set optimal pricing. It’s a time-consuming process that can also be very expensive. A possible way to overcome this and optimize profit margins at a product level is to use a pricing software with analytical tools.

The lie: “Every customer is price sensitive”

The truth: The majority of markets have customers whose primary and only concern is the price, but they are not the only type nor the prevailing one in some cases. There are customers who look beyond the price tag and value additional service attributes that, as a whole, form a selling package. This is roughly the same set of parameters we discussed just a few lines before – customer support, delivery options, ease of use and so on. The key here is to recognize through market segmentation which customers, under which situations (also an important factor), care for the overall package and not just the price. That way, you can build your business around that focus group and price them accordingly. This brings us to the next popular lie…

The lie:“Customers deflect with increased pricing”

The truth: As evidenced above, this is not necessarily true. Of course, we are not talking about mindless spiking of prices in order to boost profit margin. That won’t go. When a business adds new features or enhances existing characteristics to your product, it has every right to set higher prices and ask for more money from its customers because its product now has more value.

It is true that you may lose a few customers here and there, it’s the nature of the business. However, apart from that niche group of customers that care about more than just the price, there are also customers who will listen and understand your reasoning if you present it up-front.  Robert Cialdini, author of the book Influence, demonstrates the importance of explaining your actions. Without an explanation for your price increase, your customers will create their own and pull away from the brand. However, if you put an effort to explain why, they will accept the increase easier and will ultimately become the loyal customers who truly understand and value what you offer. For instance, Procter & Gamble was re-launching the Olay brand by testing three prices:

  • $12.99 – sales were good, affordable product to the mass market);
  • $15.99 – sales tanked, not expensive enough to be considered a premium cosmetic for the mass market, too cheap for the prestige shopper to consider it a quality product);
  • $18.99 – sales were great, good value (credible and not too cheap or expensive for both categories

In the end, the company picked the third price of $18.99 and it became a $2.4 billion dollar business with double digit growth and great margins.

The lie: “Having the highest-priced products in the market won’t sell”

The truth: This lie often comes from the buyers themselves who, naturally, look out for their best interest by trying to score the best bargain. They have a good reason to complain about your prices but you should also have a good reason for those prices. Justify your prices by rationalizing how your products and services contrast from the rest and place accent on how your goods deliver value. Once you do that and the customers realize it, you’ll start to create a base of loyal customers who will repeatedly come back.

people don't buy what you do

Image source

People don’t buy what you do, they buy why you do it”. Take Apple as an example. The company has had a rough history in the 90’s but has managed to become one of the tech leaders today. How? 1. by delivering a top-notch product and 2. By creating an entire culture around their brand. They sell some of the most expensive devices but people still buy them, even if it would be more cost-effective to hold onto the older model. The focus should be on selling on value, not on price in order for customers to pay more here than less elsewhere.

Conclusion

As most managers know, it takes a number of factors to accurately gauge correct pricing. In doing so, it helps to strive for product and service differentiation by accounting value all-around for your customers, be it through price alone, on-time delivery, better customer service or something else.

However, there’s a number of misleading assumptions and outright lies that can affect entire pricing structure. This is where your research comes into play. A business should always make decisions based on actionable insights within its own sales data, as well as the competition’s. Proper business analysis can quickly pinpoint the areas where you can improve your profit margin and eliminate the uncertainty and unproven principles that many take for granted. As evidenced in the examples we’ve mentioned above, strategic thinking directly impacts the company’s bottom line. Once you form a pricing policy and strategy, it doesn’t take much to update the data and stay on top of it.  Put your margins in the first place and create value for your products without succumbing to the lies, myths a, d misconceptions.

How your pricing policy affects your sales

Price optimization is one of the key factors in every business operation as it can raise prices whilst improving sales volumes at the same time. Savvy pricing managers will implement it and focus on building their business to cater to the most profitable customer. However, that sounds easier in theory than it is in practice as numerous companies utilize simple pricing policies without identifying important market indicators like the products that are most profitable and customer demands, among others.

Therefore, the decision-making processes are based on the lack of knowledgeable information which leads, in most cases, to bad pricing policies that don’t perform nearly as well as they ideally could and should. Pricing policy has a direct impact on total business revenue and as such, must be carefully thought out. There are best practices companies use to determine and develop their pricing policy. In this article, we’ll show you some of those practices and how they affect sales.

Cost-based pricing policy

Cost-based pricing is determined by adding a fixed profit percentage to the overall cost of a product or service. The end results is a selling price that aims to cover all the costs during production or delivery stage and attain a certain level of profit.

The policy is simple and fast to implement as it doesn’t require much market and competition research. That is why cost-oriented pricing is also extremely popular because it uses information managers can obtain very easy. In addition, the company can easily present a case for defending its prices as they cover the costs for the most part.

Nevertheless, the main drawback of a cost-based pricing policy is its ineffectiveness. Determining costs before pricing is not suited for today’s markets as costs vary depending on volume. In turn, as the price forming is driven solely by costs, this significantly reduces profitability because these prices don’t reflect the true value of the market. In fact, they are closer to being completely opposite to strategic prices as there is no consideration of market conditions.

Joel Dean, professor of business economics at Columbia University, says that “cost is usually the crucial estimate in appraising competitors’ capabilities”, which is what a cost-based pricing policy completely ignores. It also ignores the role of customers, which are two main reason why it usually affects sales in a bad way as it doesn’t take into account these vital factors in order to determine what specific products it wants to manufacture, as well as the quantity of it.

Value-based pricing policy

In this case, the optimal price is a combination of customer’s perception of the value of offered goods and production costs. Companies that use this approach from their prices based on market research such as customer demands, expectations and preferences, financial resources and competition.

Value-based pricing increases profitability by creating customer satisfaction through product’s value attributes. This approach emphasizes the value of your goods and presents the motivation for customers to pay more as they are modeled on what customers want. Also, managers must perform extensive market research and compare what their company is offering with those of their competitors, in order to pinpoint their value, advantages, and disadvantages. That way, they can get a clear picture of what sells on the market and what doesn’t.

Demand-based pricing policy

Similar to value pricing, there is no immediate concern regarding costs. The focus of demand-based pricing is on customer behavior and the quality and attributes of own goods, thus satisfying the level of demand. The prices are formed by accounting both the cost estimates at different sales levels and projected revenues from sales associated with estimated prices. The vital part of the process is accurately

The vital part of the process is accurately determining demand that is the amount of products or services that the company can sell so that the prices can be formed. Thus, a manager needs the assistance of a market expert, preferably a comprehensive software suite with high levels of automation, to estimate increases or decreases in demand. In turn, this will result in prices that will help a business stay ahead of its competition because they will have a comprehensive summary of the ongoing demand trends and thus, produce adequate quantity and quality of products.

Competition-based pricing policy

Finally, we have a policy that forms prices by looking what others are charging. After identifying competition, a company first assesses its own goods and then prices them lower, higher or equal to the competition.

As is the case with cost-based pricing, this policy can be set up quickly as it doesn’t include thorough market data, meaning it’s not as accurate as demand pricing. Still, it enables a business to select different pricing strategies to achieve its goals. Because it can set a higher, lower or on par price compared to its competition, a company can quickly attract and influence customer perceptions of their products because they already have a pre-established customer base.

As an example, company A can set its prices above those of its competitors, which could suggest to customers that its products feature higher levels of quality. This can be seen on an example of Harley-Davidson, who uses much of the same parts suppliers as other big bike companies like, Kawasaki, Yamaha, and Honda. However, because they set their prices above those of the competition, their above-the-market pricing, along with customer loyalty and a certain sense of mystique, signals quality to customers and makes it easier for them to opt for the premium they pay for.

This can be seen on an example of Harley-Davidson, who uses much of the same parts suppliers as other big bike companies like, Kawasaki, Yamaha, and Honda. However, because they set their prices above those of the competition, their above-the-market pricing, along with customer loyalty and a certain sense of mystique, signals quality to customers and makes it easier for them to opt for the premium they pay for.

Effect on sales

Every pricing analyst and expert knows that profit is optimized for every product when the price reflects the customer’s readiness to pay. As Warren Buffet once said:

“Price is what you pay, value is what you get”

meaning business need to look from the customer’s perspective. Hence, pricing must be constantly evaluated based on the customer return and feedback. That is why cost-based pricing policy is a bad fit as it produces little customer return, hence lower sales. The other three pricing policies all have their advantages with one joint factor – market research. Each policy demands a thorough understanding of market trends, competition, customer demand, and needs, as well as production operations for minimizing costs and increasing profit.

This can be a time-consuming and expensive process, which is why the best option here is to utilize an expert pricing software that can provide valuable insights and help make an informed decision. As this requires a large survey of market conditions, an ideal option would be a highly automated software that offers comprehensive solutions for your pricing needs. It could also provide you with an analysis of how competition reacts to your pricing on a regular basis. The key is to make a customer-appealing pricing policy that will balance competitive pricing with satisfactory profit margins by focusing on the value the company delivers to its customer.

Conclusion

Setting a pricing policy means determining prices customers can afford before deciding what products to produce and the general amount of them. Adding in the fluctuating prices and the overall production costs it can pay for, a business can determine whether it can compete in the low-cost market, where customers are first and foremost concerned with the price, or if it can successfully compete in the premium-price market where customers’ primary concerns are the quality and characteristics of your goods. In either case, it means keeping up with constant changes on the market which can be a tough task without help.

Grocery E-Commerce Set to Surge

Although the overwhelming majority of grocery shopping currently takes place in physical stores, experts suggest this pattern will change in the next decade, as grocery e-commerce is poised to boom in the next decade.

In the U.S., online grocery shopping could grow five-fold to $100 billion by 2025, according to new research by Food Marketing Institute and Nielsen.[i] Online grocery spending could grow from 4% in 2016 of total U.S. food and beverage sales ($20.5 billion) to as much as a 20% share ($100 billion).[ii]

Currently, a quarter of American households buy some groceries online, up from 19% in 2014, and more than 70% will embrace online food shopping within 10 years. Among consumers who say they will buy groceries using e-commerce, 60% expect to spend a quarter of their food dollars online in 10 years.[iii]

The Amazon Effect
Compared to other countries, the U.S. lags in online grocery shopping because Americans’ online shopping expectations have been set by Amazon, according to experts. U.S. consumers see online shopping as a way to buy individual items rather than baskets of goods on a regular basis.[iv]

Amazon’s disruptive approach to grocery includes a click-and-collect offering. Amazon will soon open 4 stores in Seattle and Silicon Valley where customers can pick up online grocery orders within a 15-minute to 2-hour time window. Customers can also order products in-store using electronic tablets, then wait in a “retail room” while their orders are filled.

In addition, the e-commerce giant offers Amazon Go’s checkout-free grocery shopping and Amazon Prime’s e-commerce membership platform, which includes private label groceries.[v]

Despite consumer behavior shaped by Amazon’s e-commerce dominance, the U.S. market is poised for massive growth. Experts say U.S. online grocery sales jumped 157% in 2016.[vi]

Global E-Grocery Trends
The top market for grocery e-commerce is South Korea, where online sales account for 16.6% of the fast-moving consumer goods (FMCG) market. The top 10 markets and their estimated e-commerce share of the FMCG market are:

  1. South Korea, 16.6%
  2. Japan, 7.2%
  3. United Kingdom, 6.9%
  4. France, 5.3%
  5. Taiwan, 5.2%
  6. China, 4.2%
  7. Czech Republic, 2.1%
  8. Spain, 1.7%
  9. Netherlands, 1.7%
  10. United States, 1.4%[vii]


Shoppers Embrace Grocery E-Commerce

More than any other cohort, millennial shoppers are more willing to buy groceries online. Tech-savvy millennial shoppers seem to appreciate the convenience of retailers’ delivery and click-and-collect – buy online and pick up in store – service.[viii]

A new study by Clavis Insight shows 66% of millennials now shop online weekly for groceries. In addition, 69% of millennials purchase health and wellness products online at least once a month, and 25% make weekly purchases of pet food online.[ix]

Mobile Marketing Matters

To attract millennial shoppers, grocery retailers need to offer a seamless mobile-friendly experience, as more than 40% of millennials primarily use a mobile device for shopping.[x]

In general, 3 in 5 grocery shoppers today are looking for sales or coupons on their mobile devices before entering the store and half will use mobile apps to shop at the store.[xi]

The Business Case for Grocery E-Commerce
Shoppers generally spend more per visit when grocery shopping online than they do during a trip to a physical store. In the U.K., for example, the average online purchase is $59 compared with $15 in-store.[xii]

Consumer loyalty adds to the business case for grocery e-commerce. Kantar Worldpanel data also shows that 55% of online grocery shoppers have entrenched habits. These shoppers repeatedly buy the same brands from the same merchants.[xiii]

To compete effectively, retailers will prepare to offer online shopping. Research predicts that center store product categories, including canned goods, condiments and spices will shift faster to online than perimeter categories, like fresh produce and meats.[xiv] Consider starting small with center store categories and adding more items over time.

How to Prepare for Online Grocery Sales
Use competitive data to better understand consumer trends. For instance, Intelligence Node’s competitive data includes these insights for the UK grocery market comparing November 2016 to December 2016, where:

Competitive insights:

  • Tesco had a 78% decrease in total number of unique brands in the Bakery products category in December compared to November
  • Tesco had the most number of products that were out of stock across the food and grocery sector.
  • ASDA increased their assortment size for the drinks category by 14% in December
  • ASDA had the highest Private Label SKU count for the entire grocery catalogue. Its private label SKU count was twice of Tesco’s private label SKU count
  • 90% of the promoted products were in stock across all categories

Category insights:

  • Frozen food: In December there was an overall decrease of out of stock items by 36% in the frozen food category, and Sainsbury had the least out of stocks
  • Wine: For the wines category there was an average increase of 25% in-stock items in December 2016 compared to November 2016
  • Frozen Food, Bakery and Fresh Food were the top trending products in December

Create a strategy based on the competitive analytics and insights, including how these trends relate to shoppers’ online behavior and willingness to use e-commerce for grocery.

Integrate grocery e-commerce into your value proposition, including the convenience and time savings of click and collect programs and home delivery. Work with your suppliers to uncover ways to keep the supply chain cost-effective and responsive to changing consumer needs. By planning ahead now, your company will be well-positioned to capitalize on the imminent growth in grocery e-commerce.

Intelligence helps brands and retailers make decisions about the right trends of any product across the globe., at the right time. If you’d like to see how we do that, talk to us today.

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[i] Daniels, Jeff. Online grocery sales set to surge, grabbing 20 percent of market by 2025. CNBC. January 30, 2017.
[ii] Ibid.
[iii]Ibid.
[iv]Melton, James. Online grocery sales top $48 billion worldwide. Internet Retailer. October 6, 2016.
[v] Wells, Jeff. Amazon strikes again: E-commerce giant to open click-and-collect groceries. Food Dive. February 24, 2017.
[vi] Melton, James. Online grocery sales top $48 billion worldwide. Internet Retailer. October 6, 2016.
[vii] Ibid.
[viii] Daniels, Jeff. Online grocery sales set to surge, grabbing 20 percent of market by 2025. CNBC. January 30, 2017.
[ix] Loria, Keith. Most millennials grocery shop online. Here’s how to get them into stores. Food Dive. February 24, 2017.
[x]Ibid.
[xi]Daniels, Jeff. Online grocery sales set to surge, grabbing 20 percent of market by 2025. CNBC. January 30, 2017.
[xii]Melton, James. Online grocery sales top $48 billion worldwide. Internet Retailer. October 6, 2016.
[xiii] Ibid.
[xiv] Daniels, Jeff. Online grocery sales set to surge, grabbing 20 percent of market by 2025. CNBC. January 30, 2017.

 

Be Sure To Avoid These 5 Strategic Pricing Mistakes

Pricing strategy is rightfully one of the most heavily debated aspects of any business. No matter what your product is or where you lie within your industry, your price point will inescapably be among the biggest questions you have to consider. Continue reading “Be Sure To Avoid These 5 Strategic Pricing Mistakes”

Under-The-Radar eCommerce Retail Trends for 2017

Retail is already a fiercely competitive game to get caught up in, but the rise of internet culture has made eCommerce perhaps the most aggressive incarnation of the retail landscape. While it’s invaluable to keep tabs on what works and doesn’t in your own business, such an approach can only take you so far. To truly elevate your eCommerce business to that elusive next level, you need to take stock of the industry at large and keep updated on what your competitors are doing. Here’s a peek into the near future and some of the eCommerce retail trends that are likely to shape the industry in 2017. Continue reading “Under-The-Radar eCommerce Retail Trends for 2017”