Efficacy Of Pricing Strategies On Products & Businesses
As Warren Buffet once said on Pricing "The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business." That is the efficacy of Pricing.
Vision, Business strategy, Business goals, Execution are usually entitled as key areas, but lever of Pricing Strategy can't be undermined as it can significantly change the profitability of a Business.
Building Products, Starting and then sustaining a Business is challenging, but exciting too. Entrepreneurs, Executives & Product Leaders continuously need to keep up with the changing market dynamics and stay well-informed of the Industry Trends, Product positioning, and Competitive landscape for Top and Bottom Line growth of their Business.
Do you ever wonder what impact pricing strategies may have on Products & Businesses?
If your price is too high, you may lose your customers & sales. If your price is too low, you may lose your profits and revenue.
A pricing strategy is a model or a method used to establish the best price for a product.
With the optimal pricing strategy, businesses can generate profits, achieve revenue goals, counter competitors, and delight customers.
Establishing a Price of a Product is not just about Cost Price + Profit = Selling Price of the Product. There are several aspects like Customer Value, Economics, Competition, and Market that need consideration.
Customer Value is the value perceived by the Customers and their willingness to pay. How much the Customers think the product is worth. Customer Insights are critical in determining value. Various factors influence their purchase decisions. Also, there could be different Customer segments that a product would cater to, and price may need to be set differently for them.
Economics entail Costs of building the Product, Supply & Demand, Margin Goals, Revenue, Sales Volume, Tangible benefits, Incentives, discounts, etc.
Competition & Market encompasses the competitor prices, price moves, competitive landscape, market share, market prices, and trends, industry and market dynamics, and the influencing factors.
Most products go through a natural life cycle of Introduction, Growth, Maturity, and Decline. Pricing may change as a product moves through the stages and pricing strategy plays a pivotal role at each stage. There are different types of pricing strategies and no one size fits all. Businesses need to strategize, establish, and execute their optimal pricing strategy and game plan for sustenance & growth.
Let's look at pricing strategies that are generally considered for Products at each stage:
In Introduction Stage,
A product is entering the market. It may be launched in an established market with demand, or a new market where demand needs to be developed. Usually, Businesses may go for Price Skimming, Penetration pricing, or Premium Pricing strategies.
The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business
With price skimming, the product is launched at a high price point, businesses attract customers and try to establish a brand. High Prices suggest the high value of the Product and attract Innovators & Early adopters. This strategy gains more profit margins early on, and as sales grow the prices are gradually lowered over time with a sustained revenue stream.
- Businesses selling electronic gadgets commonly follow this strategy.
· With Penetration pricing, the launch is with low prices, and prices are gradually increased as more Customers are on boarded. This strategy is to interest the Customers. There could be limited profit margins in the beginning, but as the Customer base and sales grow, the Margins can be huge.
- Promotions like a free sample or $1 for a more valuable product
· Premium Pricing is for products where businesses want customers to get a sense of exclusivity. Customers value products and are ready to pay a higher price. This results in high-profit margins and a reputable brand image for the business
As products enter the Growth Stage, Demand increases, and sales as well. There can be many players in the market. Customers are aware of alternatives. The product should have differentiation from competitors' offerings. Understanding the problems of growing customer base and building product features fast to solve them is an apt step to grow market share.
- Businesses consider Competitive Pricing by lowering prices to respond to the price moves by lowering or raising the prices, or not respond based on competitive dynamics.
An announcement by a competitor can fluctuate the market in minutes, the business should be able to respond, adapt & adjust to defend the market share
- Consumers benefit from a price war between competitors. After Reliance Jio's strategy of ultra-low prices, Bharti Airtel also cut their prices.
· Bundle Pricing is where businesses sell products as a single combined unit, a bundle. Businesses get higher margins while providing customers an overall discount.
In the Maturity stage, Demand is reaching a steady level, and there is increased Customer price sensitivity & an increase in Price Elasticity at this stage. Customers understand the value of competing products, can compare and choose.
· Businesses may unbundle the products or expand the product line to attract. May also enter new segments
· Businesses consider Competitive Pricing strategy, May respond to any fluctuations in pricing by competitors
In the Decline Stage, Demand is almost diminishing. Some Businesses plan for product extension, but if there is very low demand, they may choose
· Harvest strategy, make as much profit from the product and minimize expenses
· Sell through Bundle pricing
· Discount pricing to stay competitive
Some choose to withdraw the product and invest in new products that go through the Product Lifecycle and suitable pricing strategies to generate and sustain revenue for the business.
Optimal Pricing Strategy at every stage and a systematic approach to establish the price of a Product has a positive impact on profitability. Businesses should grab the opportunities and use the power of pricing to shape their future.