Pricing Your Product, Service or Membership
For example, a quick search for a pair of sneakers shows a price range from $6.99 to $2,395. Clearly, there are vastly different strategies between these two ends of the pricing spectrum.
So how does one go about building a pricing strategy? Here are five basic approaches to pricing.
1. Cost-Plus Pricing: A price established to cover costs plus a margin added for profit. This method is not unlike that used in regulated industries like utilities.
2. Market-Oriented Pricing: A price based on the levels charged for similar products in the marketplace. Automobile companies are keenly aware of the price for completive vehicles. Perhaps in part because of this competition, car prices have risen at a much slower rate than inflation over time.
3. Market-Penetration Pricing: A low price to position a product to gain market share. An example of this might be the deals offered by telecommunication and cable companies seeking new customers. The price starts low and then goes up after a year or two.
4. Premium Pricing: A luxury price is designed to convey extreme value and exclusivity. Some people only want to buy the very best and are willing, for example, to pay $47,500 for a Rolex watch.
5. Value-Based Pricing: A price established based on the actual or perceived value a customer places on the product. This method requires a lot more work to set a price, but done properly it can also lead to better profits.
A book that does a good job explaining the value-based pricing strategy is The 1% Windfall: How Successful Companies Use Price to Profit and Grow. The book makes the point that successfully adding just a 1 percent price increase can produce a ten-fold increase in profits.
How does your organization set prices? Do you have a strategy or make it up as you go along? Feel free to share your thoughts.
Posted by Tony Rossell