Over the last four weeks, we have discussed the concepts of value, cost and price and how understanding each by the entrepreneur is critical to the successful running of a business enterprise. We discussed a few costing methods and introduced one pricing objective. We will conclude this series today by taking up one more pricing objective, two pricing strategies and one pricing method.
Competition-related Pricing: This is a pricing objective in which the price of a product is set in some tandem with the price of competing product(s). Competition-based pricing focusses entirely on the publicly available information about the price of similar product offered by competitor(s). This pricing objective might seem simple and low risk, but because it doesn’t compare actual value delivered by each competitor, you either run the risk of missing out on opportunities or entirely killing opportunities for yourself. You risk missing opportunities where your products deliver more value but you price yourself at the same level with your competitors’. You kill your opportunities entirely by overpricing yourself when your products actually offer less value than the competitors’ products you benchmark against. Competition-related pricing will only be profitable and successful if you offer the same value as your competitors and your cost is lower than the price.
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Market-oriented pricing strategy is the pragmatic way of pricing your product if you have a competition-related pricing objective. But rather than blindly offering your product at the same price as your competitors’ regardless of value differences, you, instead, segment your competitors according to their value offers and prices. You then asses your value proposition and based on that decide whether to offer your product at, below or above the price of your competition.
Where you position your product pricing should be consequent upon some clear market objective. For instance, if you want to penetrate the market, you could decide to introduce your product at a price lower than equivalent/competing products. In doing this however, you must be alert and ready to the prospects of a price war. On the other hand, if you don’t want to trigger a price war, you could price like your competitors. Yet, another possibility is to differentiate your product by offering it at a higher price than the competition’s if you are able to offer some additional perceptible value.
Dynamic pricing, ‘demand’, or ‘time-based pricing’, is a pricing strategy that involves setting product prices based on real-time demand. Here, the business is flexible in its pricing depending on consumer purchasing habits or current market demands. Factors to take into consideration in this pricing strategy include supply and demand dynamics as well as competitor pricing.
Dynamic pricing has been seen at the beginning of COVID-19 pandemic in 2020 when prices of facemasks and hand sanitisers shot up not necessarily because the costs of input had increased but because of exponential increase in demand. Other than such exceptions though, dynamic pricing is not for all industries but best suited for hospitality, travel, entertainment, etc. So, we see how the same hotel rooms in temperate regions are sold in the summer at a multifold of their winter rates. Even in the winter though, the rates can shoot up if some conference is taking place in a local area. We also see how airlines use highly sophisticated algorithms to determine their fares depending on several factors. Generally speaking, dynamic pricing tends to apply to wealthier consumers of goods and services as they have the capacity and are willing to absorb the differential shocks.
‘Cost plus’ is a typical pricing method that needs special mention in our environment. Ideally, all pricing is actually ‘cost plus’ in some way, shape of form. Here, the business determines the cost of its product and then adds a mark-up to set a price. A business can, almost arbitrarily, decide to mark-up the cost by, say, thirty per cent. Now this can be simple but it is exactly the simplicity than can cause strategic pricing errors if other factors are not taken into consideration. For instance, at the thirty percent mark-up mentioned as an example, you could either lose opportunities or kill opportunities for yourself. You lose opportunities if at that mark-up your product is priced below or at the same rate as a competitor’s whose product don’t offer as much recognised value. On the other hand, you could kill opportunities for yourself because you have overpriced your products in relation to similar and alternative products. The point is, for cost plus pricing method to work well, it has to take other factors into consideration over and beyond your cost and some desired margin.
Every entrepreneur must be clear about the exact value they are providing. Value is not about our personal sentiments and opinions. Rather, it is about what the customer accepts as solving some problem or providing some convenience. Even when we think ahead of the customer and offer some otherwise ‘futuristic’ solutions or conveniences, the customer has to ultimately see value in the product and accept same at a price that is profitable to us. But providing value to a customer comes at a cost to a business. And since an objective of a business is to deliver the value at a profit, the entrepreneur must not only be meticulous and detailed but also fair in costing their goods and services. Similarly, the entrepreneur should be wise and strategic in pricing their products. If our pricing is above what the market is willing and able to afford, we risk not getting any or only little patronage. On the other hand, if our pricing is below our cost, we may make a lot of sales but would ultimately lose money and perhaps go bankrupt unless we inject fresh funds into the business and/or reprice our products.
This brings up to the end of this series. Next week, we will take up yet another crucial business issue: Supply Chain Management.