What advantage is there for a company to offer products at prices below actual market value?

Product pricing can help your company achieve profitability, support product positioning, and complement your marketing mix.

Once your startup is ready to commercialize its product, you must determine how much to charge customers to purchase the product. In other words, it is time to establish the pricing structure.

Pricing is one of the four main elements of the marketing mix. Pricing is the only revenue-generating element in the marketing mix (the other three elements are cost centres—that is, they add to a company’s cost). Pricing is strongly linked to the business model.

The business model is a conceptual representation of the company’s revenue streams. Any significant changes in the price will affect the viability of a particular business model.

A well-chosen price should accomplish three goals:

• achieve the company’s financial goals (profitability)
• fit within the realities of the marketplace (customers are willing and able to pay the set price)
• support a product’s positioning and be consistent with the other variables in the marketing mix (product quality, distribution issues, promotion challenges)

Pricing models and positioning for high-tech products

There are different methods of determining the price for high-tech products.

1. Cost + profit margin: Add a profit margin percentage to the costs associated with producing and distributing the product.
2. Rate of return and break-even point: Calculate the unit price: price = unit cost + [(rate of return× investment)÷ quantity sold]. Then determine the break-even point: the level at which sales figures cover related fixed and variable costs.
3. Market price: Set the price according to the main competitor’s price.
4. Bidding price: Set the price according to available information about competitor bids and the customers’ opinion of the product’s advantages.
5. Comparison with substitute products: Set the price relative to products for which it will substitute.
6. Value-based pricing: Set the price based on how the customer values the product. (See below for further details.)

Value-based pricing

Value-based pricing attempts to establish the return generated by the product’s use from the customer’s point of view. How a customer perceives product value, and the actual value the customer receives, can be estimated by identifying:

• the target customer (their budget, ability to purchase)—specifically, the value can be estimated by developing an application scenario
• buyer motivation (willingness to buy, the risk involved)
• the product and its complexity (its ability to meet customer’s objectives)
• distribution (delivery, support)

Value-based pricing and the technology adoption lifecycle (TALC)

Setting a price in the Early Market involves some guesswork as the product’s value is unproven at this stage. To guide your pricing decisions, determine the:

• customer’s expected return on investment from buying the product
• amount your customer may be willing to pay
• referential price for the new product (this is the price compared to the cost of the total project)

Pricing your tech product as your market develops

To cross the Chasm and enter the Bowling Alley, pricing must be based on value. To guide your pricing decisions, determine the:

• amount of money your customer is currently losing (see application scenario)
• expected return on investment with the new product strategy, and when the returns will be realized
• return on investment derived from using the product to solve the problem

Finally, keep your pricing model simple to communicate and ensure it makes sense to the customer. If it does not, your sales staff will struggle in the face of other competition.

An effective pricing strategy is essential to help a business set an offer price which is in line with competition, and will maximize revenue and deliver a good profit.

A business can pick from a variety of pricing strategies based upon a variety of different factors. A business can set a price to maximize 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.

In fact, 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.

With the rise in e-commerce sales, and the friction-less comparison shopping digital commerce enables, competition in the market has gotten much more aggressive and real-time. Businesses need to keep an eye on their competitor’s pricing strategy while setting prices to get the much needed competitive edge in the market. Comparing prices online is easy and customers are well aware of the monetary value of a product. These factors are also important considerations while setting the right price in e-commerce.

Some of the factors that companies consider when setting prices are costs, competition, and price sensitivity. In order to ensure sustained profitability, firms have to set a price  that: covers the production cost, contributes to company overheads costs, and delivers suitable profits.

Many competitors are eschewing the various pricing models and methods in favour of competitive pricing but setting pricing strategies based on competitors’ behavior isn’t an easy task.

This blog post provides a glimpse of four major e-commerce pricing strategies and deep dives into competitive pricing strategy, which is used by most companies around the world.

Cost-plus pricing strategy

Cost-plus pricing strategy is one of the simplest methods of determining a price for your product. In this strategy, a prefixed profit margin is added to the total cost of the product which becomes your selling price. This e-commerce pricing strategy is not always the best way to establish the right price for your product as it is often determined with minimum research and does not consider consumer demand or competitor price strategies.

Demand pricing strategy

Demand pricing strategy is where prices are determined in correlation with demand to maximum sales for during high demand periods. Take the example of an airline company. During high demand periods like holiday season and weekends, prices go up with a rise in demand, and vice versa. A similar strategy is often followed by the hotel segment as well.

Penetration pricing strategy

This strategy is usually used to enter a new competitive market. Sellers enter the market at a lower price point to generate demand and a consumer base and then increase prices once they are established.

With the ever-increasing competition in the retail market, competitive pricing is fast becoming one of the most sought after pricing strategies. When it comes to a competitive pricing strategy, the purchasing behaviour of customers is an important criteria. Once the product is part of a mature market, and fighting with a relatively high number of substitutes and competitors, the pricing actions of your competitors could well be a factor driving your profit. This is where setting prices according to the competitors becomes one of the most popular pricing strategies, also known as competitive pricing strategy.

You have three choices—price your product lower, higher, or same as your competitors::

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.

3. When you set a price equivalent to your competitor’s, 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. For example, if two companies manufacture detergent for washing clothes, both brands will try to keep their prices in line with each other and advertise their product to stand out in quality and features, to compete with the other brand.

Even big corporate giants sometimes resort to competitive pricing strategies when they want to increase market share. 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.

With almost 92% of shoppers comparing prices at some point or the other while shopping online, a lot of companies have to resort to competitive pricing to ensure their consumers do not move to another competitor for their low costs. In most cases, competitor intelligence and benchmarking tools are the key decision-making resources for determining competitive prices. With these intuitive pricing tools, retailers can optimize their prices in near real-time to take advantage of market movements while maintaining profitable margins and get an edge over their competition.

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