How we change what others think, feel, believe and do
When you set the price for your products and services, an initial step is to ask 'What am I trying to achieve here'. It is easy to forget this and simply try to set a price that will result in sales and profit, but in doing so you may simply end up in a middle-of-the-road position where you are also middle-of-the-market and unable to achieve strategic goals.
Here are a number of possible overall objective positions from which to start and which you can use to help set prices. These may not be every alternative, though they are all common and cover most of the reasons people and companies price as they do.
A very common objective with pricing is simply to make more money. This is reflected in the common sales targets that are based either directly in revenue or in the number of units sold. By and large, this is a reasonable goal, though the other factors below should always be understood, for example whether a generic goal to increasing revenue is the best approach to achieving a higher profit.
While revenue is good, profit is better. It is in the margins they make that companies succeed more than in the number of items or the price customers will pay or the overall price of the goods. Indeed, selling a lot of cheap goods with 100% markup can be far more profitable than expensive goods with narrow margins. To be able to charge a good margin, you need exclusivity, so customers cannot get the same thing elsewhere for distinctly less money. In practice, brand image can add significant value here, as does product quality.
Price elasticity is also an important concept here. If customers are sensitive to price, even a small increase above a basic norm, then you can end up being less profitable. Note that profit also needs to take account calculations for extra costs beyond that from margin, such as warehousing, delivery, materials and so on.
If you have a high market share, then your brand will probably be recognized and respected. This will allow you to fend off competitors and perhaps also let you charge a higher price. To get there, however, requires competing against other companies, including innovating in new products and aggressive marketing strategies. Pricing can be a part of this. Competitive pricing may mean cutting prices in the short term in the hope of gaining the benefits of a higher market share in the longer term. You may alternatively choose a market where you can ask a higher price, such as in premium pricing.
One of the basic principles of business that some companies forget until it is too late is that you need to stay in business. This means at least covering your costs and hopefully making a profit. If you know your business costs, then you can work out the money needed from sales and consequently the minimum price and volumes you need to achieve.
When times are tough and competition hots up, then you may need to cut your prices just to get sales and free up cash to pay your bills. While you may use other pricing strategies, you always need to keep an eye on that needed to stay in business.
The complex nature of businesses includes the fact that there are a number of assets that may or may not be well-used, depending on what products are selling or not selling. Assets include fixed assets that have been paid for, such as machines, and human assets (ie. people) who must be paid for whether they are working hard or standing idle. If you price products highly, you may make more profit per item, but this may result in so few sales that your machines and people are under-used. It may also mean your warehouses are full of unsold stock. This effect on the realities of the workplace may mean that pricing needs to take account of such factors.
Going for market share and growth is good as long as you can achieve this. Yet sometimes being dynamic is not a good idea, for example if all it does is create competitive price-cutting where the only winners are customers. While price-fixing is often illegal, you can promote market stability by not attacking competitors in the hope that they do not attack you. This may be a good approach when the market is stable, but when the market is growing and innovations are appearing, it may well not be a good choice.