The process of finding the right pricing strategy is often referred to as a choice of price level and the signals the price are intended to send. However, a pricing strategy should involve several other considerations and choices.
First of all, the objective of the pricing strategy has to be determined. In this regard, it is advised to look closer at volume versus product revenue targets, and how the pricing strategy can support other strategic goals such as growth ambitions, positioning an etc. In this way, the pricing strategy involves a balancing of the various goals and ideally price analyses in order to cover the price elasticity in the market and to support the various decisions. Internal workshops of expert judgments could be an alternative if the budget is too tight to conduct price analyses.
Value based pricing strategy
The next step in finding the right strategy concerns the principle for the pricing, whether it should be based on Cost+, the competitors or the value of the product? The answer is simple: Value based! Simply due to the fact that it is the only pricing principle that maximizes the recovery from investments in product development. In value based pricing you will learn how your product differentiates itself positively and negatively from competitive products, and how your target group perceives the value of these differences. The characteristics of the given product determine how to best conduct these viewpoints, but normally it involves customer interviews. It also worth noting, that the product’s value proposition will be sharpened, which is a significant advantage of a value based pricing strategy.
Models of pricing – find the right one for your pricing strategy
After having clarified the objective and covered the customer’s perceived value of the product, the next element to discuss for your pricing strategy is which model of pricing that is best suited for capitalizing on the customer’s perceived value; whether it is based on the use of the product, flat rate or bundling etc. In several markets the model is often given but it is always worth considering whether to follow the market’s traditional model or to go in a new direction. The use-based model will often generate the biggest return over time, but it is not necessarily the best model. For instance, if a company is trying to market capital equipment the use-based pricing model can prove difficult for a newly started company without significant capital.
It also very important to notice that customers can perceive the product’s value differently, which the right pricing strategy obviously reflects. The use-based model can sometimes solve this challenge, but other times it is best to integrate different models to the various customer groups or to base the pricing strategy on a separation of the product where the main product is reduced and the customers get more options to choose from.
Determine the specific price in your pricing strategy
At this point, you know the balance between the overall objective of the strategy, the customers’ perceived value of your product compared to competitive alternatives, and finally the pricing model best able to capitalize on the perceived value. The last part to include in finding the right pricing strategy is to determine the specific price. If you haven’t yet analyzed the relationship between price and volume now is the time. This will give you valuable insight into the price elasticity and whether there exist psychological boundaries that, if exceeded, could lead to a huge drop in volume.
By using the recommended elements and price analyses above you will find a pricing strategy that will help your company to achieve its goals. In addition, you will avoid long term internal discussions.