Your business won’t make much of an economic sense if you are not making profit. If you can find simple ways to improve your pricing strategy, you can increase profits.
Price is often considered to be the sum of money which must be expended to fulfil a wish or need to acquire a product or service.
Price from a buyer’s point of view, is strongly linked to demand of what you are selling. Demand in its simplest form is the willingness and ability of an individual to buyer your goods or services. This is why you need to understand how to improve your pricing strategy, while also factoring the difference between price and cost.
Ways to improve your pricing strategy
Here are some of the ways you can improve your pricing strategy and increase your profits in the long run.
Analyze the value placed on the service or product by a potential customer.
People generally pay for things because they believe that losing money in exchange for what they are paying for makes sense. You should be finding answer to questions like, is the product or service viewed as better than similar products on the market? If not, should the price be reduced?
Find out if there are any variations in the way customers value the service or product.
You can choose to stick to a given price but before you do so, you need to find out if customising prices for a particular segment of the customer base makes sense (In the software industry, for example, dis-counts on new products are often offered to customers who already have a previous version.) Similarly, is there a variation in intensity of use by segments of the customer base? Heavy users will often value a product more than light users.
What is the customers’ price sensitivity?
If an increase or decrease of, say, 2% is made, what will be the effect on customer behaviour?
Is there an optimal pricing structure?
For example, Disney charges admission to its theme parks, after which all rides are free. Is this better, and does it attract more custom than charging for each individual ride? Supposing that choice doesn’t work for you, there are two other issues to consider: should bundled pricing be offered and would quantity discounts be advantageous? An example of bundling is the camera retailer who supplies film with the camera the customer is interested in, at a reduced price to what it would cost to buy them separately. The strategy here is to forego some of the initial profit potential on the hardware with a view to increasing sales volume, and also to increase the potential demand for the software i.e., the film if the customer likes it. The quantity discount strategy involves offering discounts on subsequent purchases of the item or service at the same time, to increase turnover. For example, if a seller will not budge from a particular price, then buyers will probably restrict their purchases to the absolute minimum.
On large contracts, it is often the case that a prime supplier will undertake to supply a complete package of peripherals as well as its prime product. By bundling. The customer might go elsewhere if this service is not offered, and the supplier will lose out on sales of its equipment to those who are prepared to accept the responsibility of sourcing the complete package.
On the other hand, a seller offering discounts will, human nature being what it is, sell more. In the case where one costs £100, a second costs £80, a third £60, and so on, turnover is likely to be higher than if every item purchased costs £100.
How will competitors and the general market react to price change?
What will the reaction of the competition be? Is a price war a possibility? Is your pricing policy flexible enough to deal with such a situation? Consider what you would do if a competitor suddenly entered “your” market with a similar product at a competitive price. Could you respond?
Constant monitoring and response
Continually monitor the prices realised at the sales level and be prepared to adjust them if required. Are warranty demands too high? Are sales increasing or decreasing? Is the anticipated return on the product being achieved, or do you have a set of inflexible price lists which are out of date?
Look at how customers are responding to the change
Feedback is key when it comes to customers and prices. What is the customers’ emotional response to your product/service and price? What are the customers saying about your company and product? Are they selling for you by word of mouth? Are they increasing their demand for the product at current prices? If so then your prices are probably about right, but do not be complacent.
Regularly analyze the cost of a product or service against the bottom line.
If costs are in-creasing and profits are static, should you continue selling that product or service? Will the product or service stand a price increase? Will a variation in quality increase your sales or revenue? There may also be an opportunity to reduce process costs, which contribute to the bottom line.
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