Pricing is one of the most important aspects of your offer to get right. Andrew Gerrard, managing director of Intouch Marketing, looks at what you need to take into account before putting a price tag on your product or service
How much is something worth? What is a fair price for a product or service?
Pricing is a highly complex area: get it right and sales and profit flow; get it wrong one way and sales flow but profit is poor; the other way and sales are poor but profit per transaction is good.
So how do you get it right and what are the methods that can be deployed to help increase the likelihood of success?
It's important to begin at the beginning. The age-old saying, "Poor planning leads to poor performance" is really true in setting a pricing strategy. Once you have declared your hand it is very difficult to adjust price. Price sends a lot of messages and is used by consumers and buyers to assist them in positioning a brand in their minds.
Just think about a new perfume. You are standing at the perfume counter and have decided to buy a gift for a loved one. If like me, as a man, you don't really keep up to date with perfume brands, price helps you determine whether the perfumes you are considering are high quality brands or everyday slap-on water.
Yes, packaging and merchandising helps, but price is very important.
I have an ex-client who launched a brand into the canned dog food market. He didn't have the money to establish brand positioning via traditional advertising and communication techniques. He wanted consumers, when they were considering the brand, to view it in the same consideration pool as the brand leader. So he priced it at a 1p premium over the brand leader - and 39p played 38p. His brand quickly became established as a leading brand and, in fact, went on to take the number one position in the canned dog food market.
But he planned his pricing carefully, spent time understanding the consumer, studying the competition and realising that a significant proportion of consumers see pets as surrogate children and want to give them the best. Pricing at a premium gave them clues that Butcher's was the best.
So when considering price planning, it's important to think more broadly than simply price. Let's for a moment consider the questions which in my view are important to consider before you decide on the right pricing strategy.
By answering these questions, it is possible to get a better understanding of where a product or service fits into the market. These questions should be viewed as part of broader strategic review of the brand, product range or business.
Two models of market structure are useful tools to consider when developing strategy and considering pricing strategy as part of the review.
1. The Boston Matrix was created by the Boston Consulting Group in 1970. It considers a product portfolio against market share and market growth axis. By plotting products on the matrix it allows a business to assess where its products and services fall. Thus, strategies can be developed to either increase share, maintain share, maximise returns or stimulate a market segment.
The actions we take will depend on whether the market is growing or not and what share we have. So if we have a strong share of a slow growing market, this would suggest that the pricing strategy should be set to maximise profits in other words, premium pricing to take advantage of the position may be worthwhile.
Alternatively, a low share in a fast growing market suggests the need is to generate share and thus penetrate the market. Setting price lower than competitors may encourage trial and switching. Once share is established, price can be adjusted upwards to maximise profits.
2. The second model, which is really a business development model, is the Ansoff Matrix. Mathematician and business manager Igor Ansoff devised this as a way of looking at a company's opportunity from both a market perspective and from a product or service perspective.
As the grid shows, developing a strategy for each of the four quadrants is a very different task and would require a different pricing strategy each time.
All businesses can draw from a number of alternative pricing strategies:
Between the Boston and Ansoff matrices and the eight alternative pricing strategies provide a framework for considering price. But the key is to understand who you are targeting, with what and why. Only then can you begin to develop an effective pricing strategy.