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Pricing strategies for products and services

Module 6: Knowledge framework for growth

The way you price your products and services needs to be aligned with your long-term company strategy.

Maybe you’ve positioned your company as a low-cost provider, like Kmart. Or maybe you have a differentiator for which you can charge more, like Tiffany & Co. Perhaps you’re focused on a specific market (such as men aged 20-40 who race fast cars). No matter which describes you most accurately, it’s figuring out the best pricing strategy for your target market that will enable you to sell more – and grow your company.

Make sure your customer understands the value proposition you are providing

When should we price at cost or below cost?

Here are two scenarios when it makes sense to price your product or service at cost, or below cost.

  1. Assume you are trying to get a prospective customer to purchase for the first time. You believe they value what you offer and could be a good long-term customer, but you are having problems closing the sale.
    Consider the lifetime value of that customer (e.g. their monthly revenue/profitability multiplied by the numbers of months you think the customer will buy from you, and whether or not they could buy even more, over time), then adjust the price low enough for a specific period to get them to ‘buy and try’. Make sure they understand that when the trial period is over, the price will need to go up.
  2. Or alternatively, let’s assume a competitor introduces a product or service similar to yours and is trying to get your customers to switch to them­ – to take your market share by pricing their product lower than yours (predatory pricing). Dropping your price could protect your market share if it causes that competitor to retreat from the market. But, it could also start a price war.
    In this case, your first response is to meet with your customers, acknowledge the new competitor, explain the value of your product/service versus theirs, but not lower your price. Maintaining your price and your profits will enable you to have the resources to add more value, if necessary, to keep the customer (e.g. offer expedited processing, or faster shipping). Make sure your customer understands the value proposition you are providing ­ –that is, how much better your product is than the competitor’s, and what the risks are of switching from your product to their product.

Note: if your customer is making a decision strictly on price, you need to ask yourself whether they are the right customer for your business. Don’t get dragged into a price war that ends up being a “race to the bottom”!

When should we price well above cost?

Don’t assume people will only pay the lowest price. If you have a new product or service that people value, if you’re the only game in town, or if people are not ‘price sensitive’, then don’t be shy. Make sure you include a generous profit margin. If there’s a market shortage, e.g., a drought impacting the availability of almonds, people will expect to pay more for almonds. If you have a supply of almonds, you can price them at a premium. On the other hand, when demand is high (e.g. for flights or hotel rooms during football finals), people also expect to pay a lot more. So, pay close attention to market supply and demand, and raise your prices when you can foresee more demand for what you are offering.

Pay close attention to market supply and demand, and raise your prices when you can foresee more demand for what you are offering

When can we have different prices for essentially the same product?

If you sell some of your almonds to a company that retails them under their brand and in premium packaging, that’s called, ‘white labelling’. Even if the almonds you sell in a bag with your brand are exactly the same as the white labelled almonds, customers will be willing to pay more for the better-known brand.

You can also sell the same product at lower price to a specific group (e.g. discounts for seniors), or for a finite time frame, (e.g. ‘early bird discount’). This is known as ‘price discrimination’.

This is known as ‘price discrimination’

When should we use monthly subscription pricing?

Monthly subscription pricing is often used for ongoing services such as phone and internet use, gym memberships and software subscriptions. It is also used for regular product deliveries, such as flower deliveries or wine clubs. Many companies like having monthly subscriptions as their business model, as auto-debiting provides predictable monthly revenue. It also creates ‘stickiness’ with customers, and binds more customers to them.

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