Pricing. It’s that enigmatic element of any business that’s sure to keep executives up at night and constantly second-guessing themselves. Fire up a Google search or read any business advice book, and you’re bound to come across a bazillion different pricing strategies, all of which are purported to be an instant shot in the arm to your profitability.
But where does the truth lie? Which approach to pricing really works, and is it best considered an art or a science? The truth is that your business is best served when pricing is a bit of both. Let’s delve into what we mean in a bit more detail.
When it comes to crucial decisions like pricing, it’s natural to want to identify some all-purpose algorithm that will solve all of your problems. However, pricing is far more complex than that. There’s a ton of subtlety and nuance that goes into determining what price point is best suited for your business strategy.
Your company and its products don’t exist in a bubble. So you need to take into account what your competition is up to and devise sharp ways to both emulate and counteract their strategy, seeing as you’re all targeting (presumably) the same demographic. Also, don’t forget that how you market your business — and, yes, pricing is a huge part of that — is a contributing factor in the value you assign your product in the eyes of consumers.
Dynamic pricing is perhaps one of the best illustrations of how pricing has increasingly become embraced as an art. This concept operates under the assumption that price is a living, ever-changing organism that not only takes into account certain metrics but also acts and reacts with the behavior of your customers in mind. Rather than simply relying on a predetermined scientific approach to pricing, dynamic pricing allows you the freedom to change your price point to suite the environment in which your product exists, thereby taking advantage of the niceties that inevitably accompany pricing.
Whereas pricing as an art is becoming more readily accepted, it by no means supplants a more scientific view. Numbers don’t lie, and your business shouldn’t disregard data either. Many of the most widespread and effective pricing structures rely on number-crunching to reach a solid price point.
Moreover, you still need to ensure that your business turns a tidy profit and that expenses are justified in quantifiable rewards after an investment is over and done with. Discount pricing and other, more creative ways of drawing in consumers will only work if the groundwork has been laid down by a scientifically grounded look at pricing.
One of the most useful examples of pricing as science is in market price. Based largely on economic theory, this perspective on pricing relies on a broad calculation involving various expenses and associated costs to determine the current price a product or service may be purchased at.
Though it does take customer perception and competition into account, the priority is put on what makes sense from a financial, break-even standpoint. This is no less useful than more abstract thinking on price, but it does inevitably hinge more on concrete data.
Though the measures you put in place may vary from other industries or even your own competitors, the fact remains that the one-size-fits-all mindset is the absolute worst way to tackle the eternal question of pricing. The specifics of your company will dictate which pricing strategy will work best for you, but remember that the inherent mutability of pricing means that you may need to periodically re-evaluate whether you’re achieving the best results you can.
The existence of pricing as both art and science means that you’ll need to base creative new approaches to connecting to your customers based on facts, figures and key performance indicators. By being ever-vigilant and consistently attuned to what works, you’ll be able to keep that elusive “sweet spot” of pricing from ever escaping your sight.