Little Known Ways To Decide Your Pricing Objectives

Pricing objective is a goal that a company sets in order to determine the cost of its product or service. Objectives are usually related to four major groups:

  • profitability
  • sales volume
  • market shares
  • competition

Pricing objectives follow the overall pricing process that reflects the marketing strategy, the attributes of the product or service, as well as customer expectations in terms of price, availability, and quality. Each pricing objective has different incorporated pricing strategies that aim at achieving set business goals.

There are many factors that can ultimately affect the shape of your pricing objectives. For this post, we’ll highlight the ones we feel are more on the sidelines in today’s business game. These are:

  • positioning
  • marketing
  • customer demand

1. Positioning

On its own, positioning is a form of strategy that aims at placing your business in the mind of your customers. The end goal of positioning is to create a special (unique, if you will) impression in the minds of your customers so that they associate something distinct and desirable with your image that differs from rest of the marketplace.

pricing methods graphic

The anatomy of brand positioning

With that retrospect, positioning can help a business establish products or services in the market. For example, your business might try to compete on price or sell high-end products or get into the budget level market. In either case, the price can indicate a level of quality which is why it’s so important that the price you set for your products or services compliments your overall brand.

Another important reason why positioning is important is rather simple. It occurs unrelated to company’s streamlined efforts (a proactive approach) in developing a position. Do little or nothing and your company will still be positioned on the market, albeit unfavorably. Still, if a company takes a forward-looking approach, it can positively influence its brand positioning in the eyes of its target customers and achieve its pricing objective.

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2. Marketing

We have already established that the price you assign must be in line with your other marketing strategies and the product attributes. From the marketing standpoint, it doesn’t really matter if you have an existing marketing agenda or formally plan to do so because you need the facts to base it on and the facts say – research. Performing at least some part of the research is simply necessary for a marketing plan that will be used to determine the pricing strategies you plan to implement at the end. The knowledge attained from the research will help you identify the key marketing trends among your target audience.

So, whether you use your marketing to determine:

  • the amount of expected income based on your promotional strategy;  
  • how much of the market you wish to gain;
  • the desired level of product or service awareness;

or something else, setting appropriate prices (those that best reflect the quality and attributes of your goods) to your products or services is key. Both your marketing goals and knowledge and expertise of the industry, competition, and the market are crucial.  

3. Customer demand

If there is one thing that a business needs to understand in a blink of an eye, it’s the impact of its pricing on sales. That is the fine line between success and failure. Of course, it stands to reason there is very little margin for error which is why a business should evaluate how customer demand might fluctuate with price changes. And how to do this? If your answer was research, you’re on the right track.

For existing products or services, a business is free to experiment with prices both above and below the current price so it could determine the impact of pricing on customer demand. If the demand for your offerings does not significantly decrease with raising the price, this is a good indication that taking price increase is realistic. Let’s see how Nike managed that particular situation.

In 2014, the footwear and apparel giant went with a new pricing strategy. The company gathered from a market analysis (smart people) that its customers first and foremost appreciated the value that the brand was providing. This, in turn, meant that Nike could charge a higher price for its products and began to do so by raising its prices four to five percent a year. In the end, the company’s understanding of customer demand and value enabled it to increase U.S. athletic footwear sales by $168 million in one year alone.

The bottom line is when there are high levels of demand, there is more flexibility in choosing pricing objectives and strategies because customers are less likely to be concerned with the price tag since they really want your goods.

Additional tips

Because we are so super, here are two additional tips.

First, check if there are entities such as the government that might dictate the price range for your goods. There are some products like milk and services like electricity that have government-imposed regulations limiting the price that can be charged. This principle is known as price control and is not a common occurrence, but still, can happen so it’s best to check for any pricing regulations that apply to your industry or goods.

Secondly, the antitrust laws, especially in the US, require that each company establishes prices and other terms (shipping fees, warranties, discount programs, etc.) on its own, without any agreement with a competitor. This type of collaboration is called price fixing and all you need to know further is that it is illegal and subject to criminal prosecution. Move along, nothing to see here.

Conclusion

When it comes to choosing a pricing objective and related pricing strategies, a careful consideration of business and financial goals is in order, as well as the state of the market and your competition. You want to select pricing objectives that will place your offering and business for success. With that in mind, hopefully this post showed you three little known ways that can help you decide your pricing objectives. Each have their role – from placing your brand into consumer consciousness to effectively marketing it to addressing customer demand. From there on, you can choose pricing objectives and strategies that are appropriate for

your business at the current time. Just remember you are not limited to these three ways nor should they prevent you from changing objectives or using different strategies as your business evolves or changes.

If you found this useful and you’d like to learn how to take your pricing strategy to the next level, we invite you to download our free 20 secrets to designing the best pricing strategy eBook. Click below to take advantage of this opportunity.

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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.

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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.

If you found this useful and you’d like to learn how to take your pricing strategy to the next level, we invite you to download our free 20 secrets to designing the best pricing strategy eBook. Click below to take advantage of this opportunity.

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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.

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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.

If you found this useful and you’d like to learn how to take your pricing strategy to the next level, we invite you to download our free 20 secrets to designing the best pricing strategy eBook. Click below to take advantage of this opportunity.

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How to Succeed with Your Skimming Pricing Strategy

Let’s assume you have a product you’re ready to launch. You’ve weighed all the possible pricing strategies that are out there, and you’ve opted to go with a skimming pricing strategy where your price is set high based on the value to maximize profits, and then lowered over time to attract your the more frugal shoppers.

Great, but now what? What are your best methods for success? If you are asking yourself these same questions, you’re in luck because below you’ll find some ideas on how to succeed with your skimming pricing strategy. Continue reading “How to Succeed with Your Skimming Pricing Strategy”

Competitive Pricing Strategy – See How Products Are Priced

Effective pricing is essential for a business. That’s the only way they’d know at what price they should offer a product, while maintaining a good profit margin and keeping up with the competition. A business can pick from a variety of pricing strategies and the selection depends on different factors.

A business can set a price to maximise profitability on each unit sold or on the overall market share. It can set a price to stop competitors from entering the market, or to increase its market share, or simply to stay in the market.

Pricing is one of the most important components when it comes to creating marketing strategies. The price is one of the first things that a consumer notices about a product and is one of the deciding factors when it comes to their decision to buy it or not.

Needless to say, the competition in the market is on a constant rise, especially with the ever growing popularity of online shopping. This means that businesses need to keep an eye on their competitors’ behaviour while setting prices in order to get the much needed competitive edge in the market. Comparing prices online is easy and customers are well aware about the monetary value of a product. These factors are also important considerations while setting the price for a product or service.

Among the various models of pricing, competitive pricing is one that has caught the fancy of many businesses. Having a monopoly is one thing—you can set the price the way you want (of course there are few government norms) but setting pricing strategies based on competitors’ behaviour isn’t an easy task.

Here’s an insight to competitive pricing theory, used by most companies around the world.

What Is Competitive Pricing Strategy?

When a product is priced in accordance with what the competition is charging, it’s known as competitive pricing. It is one of the four major pricing strategies adopted by most companies. The other three include, cost-plus strategy, where a prefixed profit margin is added over the total cost of the product, demand pricing, under which the price is set by establishing the optimal relationship between volume and price, and markup pricing, where a percentage is added (as profit) over the wholesale price of the product.

When it comes to competition based pricing strategy, the purchasing behaviour of customers is an important criteria. Some of the factors that companies take into account are costs, competition, and price sensitivity. In order to ensure profitable sustenance of the business, managers have to set the price such that it covers the production cost, company overheads costs, and also offers suitable profits.

In order to establish the right competitive price for your product, you need to take into account the product life cycle and the stage your product is in. Competition is one factor that you can ignore if your product is in the developmental stage. However, if it’s a part of the market, and fighting with a relatively high number of substitutes and competitors, then considering the actions of your competitors might be one factor driving your profit. You have three choices—price your product lower, higher, or same as your competitor. The most common tactic is to set the price according to the competitors, also known as competitive pricing strategy.

As already mentioned, there are three things that you can do in order to set the right price for your products:

1. If you’re planning to set the price above the price of your competitor, then you’d need to bring in new features and improvements in your product that would justify the increased price.
2. Pricing below your competitor’s price depends on your resources. If you can increase the volume without affecting the production cost to a great extent, then this might be a good strategy for you. However, there’s the risk of diminishing profit margin and you might not be able to recover your sunk cost and even face bankruptcy. So, it’s really important that you evaluate each step of your competitor while establishing the price for your product.
3. When you set a price equivalent to your competitor, then the differentiating factors cease to exist. The focus shifts to the product itself, and if you can offer more (and better) features at the same time, it’s a win-win for you, and your competitors will fall behind.

So, competitive pricing is a game to play. Competitive pricing intelligence demands that you have in-depth knowledge of your market and target audience.

A lot of effort goes into the process of establishing the price based on competition. According to a recent survey, minor variations in prices can lower or raise profit margins by more than 20-25%. Competitive price analysis is essential to competitive pricing strategies. Let’s look at some competitive pricing examples, to get a better understanding of this process.

Competitive Pricing Examples

The concept of competitive pricing is best understood when there are only two competing parties. Suppose, two companies manufacture detergent for washing clothes. Both will charge the same price and if one company wants to compete with the other, will advertise saying why it’s product is better.

Even big corporate giants sometimes resort to competitive pricing strategy when they want to enter a new market. They have to set the price almost equivalent to their competitor, even if the production cost is high. In case the production cost is higher, they’d have to play around and adjust prices of packaging, advertising, and distribution.

Some companies have to use competitor based pricing, as often price is the only factor customers consider while buying a product and the switching cost for buying a product from two different stores is very low. However, in many cases like software, competitor’s behaviour or data shouldn’t be the central factor for determining prices. There are numerous other variables that need to be considered in this case.

While keeping the competition factor is important while setting prices, it shouldn’t be made the central pillar.

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