Chapter 7

Pricing Strategies

A pricing strategy is an approach businesses use to determine what prices

they should charge for their products and services. It involves analyzing the
market and customer demand, understanding customer needs, evaluating
production costs, and setting competitive prices that maximize profits.

With a well-thought-out pricing strategy, businesses can ensure they are

charging the right amount for their products or services while staying competitive
in the marketplace.

A pricing strategy framework provides a structured approach for businesses

to make informed decisions about pricing, balancing profitability with market
demand and competitive positioning. It’s not a static plan; it evolves based on
market dynamics, consumer behavior, and business objectives and should be
reviewed periodically to maintain relevance.

The Importance of Pricing Strategy

Pricing strategy is one of the most critical components of a business’s

marketing and revenue strategies, as it reflects what customers are willing to pay
for goods and services. As a result, it significantly impacts a company’s
profitability.

Companies use their pricing strategy to increase sales, reduce costs,

compete with competitors, and even make a statement about the value of what
they offer.

How to Set Prices with a Pricing Strategy Framework

A pricing strategy framework is a structured approach that businesses use

to set, adjust, and manage the prices of their products or services. It serves as a
guideline or plan to determine the most effective way to price their offerings in
the market. There are several elements within a pricing strategy framework:

Business Objectives and Strategy: Understanding the broader goals of the business
and how pricing aligns with these objectives. This includes whether the goal is to
maximize profit, gain market share, establish a premium brand, or achieve another
strategic aim.

Setting the Price

a specific phase within the broader pricing strategy process where a

company establishes the actual monetary value that will be assigned to a product
or service.

Six Steps in Setting the Price

1. Selecting the pricing objective –

a. the overall financial, marketing, and strategic objectives of the company;
b. the objectives of your product or brand;
c. consumer price elasticity and price points; and
d. the resources you have available.

2: Determining demand – means a consumer’s desire to buy goods and services

without any hesitation and pay the price for it. demand is the number of goods
that the customers are ready and willing to buy at several prices during a given
time frame.

The Five Determinants of Demand

1. Income – the money you receive in exchange for your labor or products.
2. Price - the amount of money given or set as consideration for the sale of a
specified thing; the quantity of one thing that is exchanged or demanded in barter
or sale for another and the cost at which something is obtained.
3. Taste - the ability to tell the difference between flavors in your mouth. It's your
sense of taste that tells you if what you're eating is salty, sweet, or sour.
4. Preference - alternative, choice, election, option, and selection. While all these
words mean "the act or opportunity of choosing or the thing chosen," preference
suggests a choice guided by one's judgment or predilections.
5. Prices of Related Goods and Services, and Expectations - influences demand
through the principles of substitutes and complements. In economics, the
demand for a product can be significantly influenced by the prices of other related
goods. These related goods can be categorised into two types: substitutes and
complements.
Pricing Strategies - is an approach businesses use to determine what prices they
should charge for their products and services. It involves analyzing the market and
customer demand, understanding customer needs, evaluating production costs,
and setting competitive prices that maximize profits.

There are different pricing strategies to choose from but some of the more
common ones include:

 Value-based Pricing.- is a strategy of setting prices primarily based on a

consumer's perceived value of a product or service. Value-based pricing is
customer-focused, meaning companies base their pricing on how much the
customer believes a product is worth.
 Competitive Pricing - a marketing strategy whereby businesses set prices
based on their competitors' prices. Also known as competitor-based pricing,
this strategy can be used in online and offline markets and is often used to
attract more customers and increase market share.
 Price skimming - also known as skim pricing, is a pricing strategy in which a
firm charges a high initial price and then gradually lowers the price to
attract more price-sensitive customers.
 Cost-plus pricing - is also known as markup pricing. It's a pricing method
where a fixed percentage is added on top of the cost it takes to produce one
unit of a product (unit cost). The resulting number is the selling price of the
product.
 Penetration pricing - is a marketing strategy used by businesses to attract
customers to a new product or service by offering a lower price during its
initial offering.
 Economy pricing is a pricing strategy where products have lower prices due
to low production costs. Economy pricing allows businesses to price
products according to their production value because they don't acquire the
extra costs of advertising or marketing. -
 Dynamic pricing - is product pricing based on various external factors,
including current market demand, the season, supply changes and price
bounding. With dynamic pricing, product prices continuously adjust –
sometimes in minutes – in response to real-time supply and demand.
Pricing Objectives – are the goals that guide a company in setting the price of a
product or service. These objectives are fundamental to a firm’s overall business
and marketing strategy, influencing how products are positioned in the market
and compete with others.

The pricing objectives of a company directly impact its market presence and
profitability. They determine the pricing tactics, influencing the product’s
perceived value and the revenue generated.

Types of Pricing Objectives

1. Improving Retention

Customer retention is the sum of a company's efforts to keep its existing

customers on board. It’s an essential, cost-effective process that any growing
business needs to prioritize. And implementing a strategy to improve yours often
has a lot of layers.

2. Maximizing Profit

Maximizing profit is one of the most popular, conventional pricing objectives. And
that makes sense — it's not revolutionary to point out that businesses that don't
make money rarely survive.

Businesses that price for profit often do so by raising prices and cutting costs
wherever possible. Ideally, they want to see significant improvements in return on
investment (ROI). Pursuing this particular pricing objective often comes at the
expense of sales volume or general revenue.

3. Increasing Sales Volume

Some companies set and change their pricing strategies to maximize conversions.
These businesses set prices specifically to foster immediate, meaningful growth.
In some cases, the endgame is getting a business off the ground — carving out a
piece of a market and settling in.
In other cases, an already-established business might want to claim or maintain a
specific share of its competitive landscape. They strategically adjust their prices to
account for shifts and fluctuations that could alter their place in the market.

And sometimes, companies might adjust their prices to make concentrated

pushes to maximize their market share. In these cases, their pricing objectives are
still set with intention — but are a bit more indiscriminate than they'd be
otherwise

4. Competing With Similar Companies

Sometimes a business needs to make a product or service more competitive

within its broader market. Maybe, the sales volume that the company is raking in
isn’t what they'd like it to be. Their company could also be losing out to lower or
higher-priced options.

Competitor-based pricing is common in saturated or competitive industries. It's

also typical when a product doesn't have many unique features.

Timing is essential with competitor pricing objectives. You'll also want access to
real-time data so that you can adjust your pricing in alignment with your top
competitors.

Competitor-focused pricing objectives can help pull customers away from a

competitor. They can also help a new business get traction with new customers.

5. Shifting Brand Image

Pricing has a significant impact on how consumers perceive a business. Ideally,

higher prices create an air of prestige and luxury, while lower ones signal value.
But public perception doesn't always shake out how companies want it to.

If your pricing objectives center on brand equity, creating a long-term strategy is

important. While some pricing approaches can fluctuate, consistency matters.
Brand-focused pricing needs to appeal to your target audience.

Certain prices or pricing models might leave a business with an image it's not
particularly happy with. In those instances, companies might look to raise or
lower prices to capture and project fresh brand identities. That might mean
changing to branding that your target consumers will be receptive to.