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How Companies Decide to Price their Products

Pricing is one of the most important factors of marketing that appears to be easily understandable, but is more than likely one of the hardest things to understand. Most people think it is easy because we use prices every single day of our lives whenever we purchase a product or service, and they probably think that in order to make a profit, all you need to do is sell a product for more than it costs. The real way to create an effective pricing strategy is by maintaining a brand image of a product that is almost impossible to copy.

What the market will bear

If you happen to be in a market where there is close to no competition, companies are able to implement a pricing strategy that raises their profits. Many people choose to call this the What The Market Will Bear Price. This means that the price is set to withhold the maximum amount that consumers will pay for the product without getting to the point where people stop buying it. The company, obviously, wants to earn as much money as possible in the shortest amount of time, this is a given, similar to people who choose to invest in stock and shares or funds, they will need to do their fund research, but they will want to make sure that they are earning as much as they possibly can in the smallest amount of time possible.

Although, it doesn’t want to make its profits to be so good that other companies want a slice of the action and decide to entice cutthroat competition to enter the market and try to establish a leadership position. This strategy is statistically quite likely to work as the innovators and early adopters that buy these items are not likely to be price sensitive. If your product is unique, use a WTMWB strategy, if not, consider the effective pricing strategies.

Know Your Customer

It is imperative that you do some market research as it is important to get to know your customer base. Research can take the form of informal surveys of your existing customers sent out via e-mail or more expensive research done by third party consulting firms. Market research firms can explore you market and segment your possible consumers granularly. If you don’t have the budget to pay for market research firms, you may just look at a few distinct groups then figure out which segment you’re targeting and price accordingly.

Know Where the Market Is Headed

Obviously you are not a fortune-teller, but you are able to discover outside factors that will influence the demand for your product or service in the near future. These issues can span from something as simple as long-term weather patterns to laws that could impact future sales of your products. You can use tools such as retail price tracker to make sure your prices are where they should be. Also remember take into account your competitors and their activities. Will a competitor respond to your introduction of a new product on the market by engaging your business in a price war?

If you end up asking people to pay way too much for your product or service, they will stop buying; ask for too small an amount for your product or service and your profit margin weakens or customers assume your product is poor quality. An optimum price factors in all your costs and maximises your margins while remaining attractive to customers.

Elliot Preece

Elliot is the Editor at ABCMoney. He manages a team that writes and contributes to many leading publications across a number of industries.

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