“Pricing Strategies and Competition”
The most important part of the business is to price the products and the services
properly so as to earn a profit and set a building block for the future business. An error in the
pricing policy creates problems the business may never be able to overcome.
“It is the toughest thing to do and is partly an art and partly a science” (Toftoy,
Charles). There are different strategies for pricing and key factor to be considered are market
conditions, product quality, pricing completion and one’s own costs.
We must never assume that price alone determines success in business. Ability to sell
even at a higher price involves the skill of the right kind of sales people. "The first thing you
have to understand is the selling price is a function of your ability to sell and nothing else," (
L. Steinmetz, Lawerence, 2005). He gave an example of a Rolex watch which sells at $
8000.00 in comparison to the Sieko watch which sells at $ 50.00, the Sieko watch being
better and more accurate.
Two main initial factors are under-pricing and over-pricing:
Prices should never be done for low costs. All costs should be considered. Presenting
a low cost product to a customer does not help and he wants his money’s worth and
wouldn’t mind paying a little extra. Giving away a product in the name of low pricing
wouldn’t be in the firms interest.
Overpricing has its own pitfalls. Recovering all costs from a single product may be
counter productive. Competitor pricing strategy will be a deciding factor for
over pricing.
There are three main strategies to price the products of a business:
CUSTOMER BASE IDENTIFICATION AND KNOWLEDGE: Some sort of market
research is must for this. A proper strategy is to hire the services of a reputed market research
firm. They should be capable of categorising the market by demographics, by what they may
buy and by price sensitiveness. Should a business not have the means,, they should definitely
categorise the customers as budget sensitive, convenience oriented and status oriented. Then
the target group should be decided.
KNOW THE COSTS: Cost incurred to manufacture and sell a product needs to be covered.
This exercise is best followed using the computerised tools, such as an excel spread sheet.
Product costs, labour costs, marketing costs, operating expenses, borrowing costs, owner’s
salary, minimum return of the capital to self or other shareholders, provision for capital for
business expansion and depreciation are the factors to be accounted for while pricing a
product.
FIXING THE REVENUE TARGET WHILE UNDERSTANDING COMPETITION: For
single product companies this is a simple process and in case of multiproduct companies, the
revenue target has to be divided by the number of units expected/targeted to sell and this
gives the pricing. The revenue target is again the combination of all factors discussed before.
Competitive pricing is an import headache. Please note that your competitor will also be
analysing your prices. A best way for a new business is to understand and copy the
competitor’s pricing strategies and then offer something extra for your product in return for a
higher price. One should be very conservative and brutally honest during this exercise. One
should have the capability to predict where the market is gong in the near future. If you
cannot do it , hire someone and be prepared in advance. One should consider the price wars
In the end, having all theories and principles for pricing in a business, it is the owner’s
own intuition, product understanding, knowledge of the market and foresight helps him to
rightly price the products. It may not be surprising for an entrepreneur to come up with an
innovative idea never heard of before and it may surprisingly succeed immensely.
Bibliography
Wasserman, Elizabeth. How to Price Your Products.
((http://www.inc.com/guides/price-your-products.html)) ( online ) ( accessed on 01/16/2016)
