Figuring out what to charge your products or services is on the toughest decisions to make as a business. If customers believe your product is priced higher than its value, they will not buy it. If the product’s price is lower than its costs, the company will lose money.
A pricing strategy is a set of rules or methods that a business uses to price their products or services. There are three different methods: cost-based pricing, competition-based pricing, and value-based pricing- and today we’re going to dive deeper into them to help you figure out which one to follow.
Cost-based pricing involves setting prices based on the costs for producing, distributing and selling the product. It entails adding the cost of your products (including shipping costs) and the margin you want to make. Because marketing is ultimately how you will make sales, you will need to factor in marketing costs into the price too.
A cost-based pricing strategy is implemented so a company can make a certain percentage more than the total cost of production and manufacturing. Cost-based pricing is a popular pricing choice among manufacturing organizations.
Companies need to be aware of the overall costs to sell a product. If competitors are producing the same product for less, but sell it for the same price, those competitors will make more profits. So, to keep up, other companies would need to keep costs low or charge a higher price.
The only disadvantage with this pricing strategy is that it isn’t customer focused; it’s business focused. It ignores consumer demand and competitor prices.
In this pricing strategy, you base your pricing off competitors and their strategies, costs, prices, and market offerings. It doesn’t take into account the cost of your products or consumer demand.
With competition-based pricing, you can price your products slightly below your competition, the same as your competition, or slightly above your competition.
One industry that uses this pricing strategy is the gasoline industry.
When using this pricing strategy, you should research high end competitors and budget-friendly competitors. In highly competitive markets where companies charge similar for the same product, consumers will make a purchase off of the product’s value.
Questions to ask yourself when applying competition-based pricing are: How do my products compare with my competitors? If consumers perceive a product provides greater value, the company can charge a higher price.
How strong are current competitors, and what are their pricing strategies? If the market is dominated by low-price companies, you may want to target unserved niche markets.
The only disadvantage with this pricing model is many brands position themselves as the lowest price point. When other brands also do this, this can slash your profit margins.
Value-based pricing is part cost-based pricing part competition-based pricing. It is essentially customer-based pricing. It’s basing a product or service based on how much the target audience believes it is worth. One brand that uses value-based pricing is Apple.
The first thing you need to figure out with this pricing strategy is what your “baseline” is. That’s the cost to source the product, how much shipping costs, and how much your projected marketing costs will be to sell your product. Next, you’ll need to lean into competition-based pricing tactics and do some market research. What’s the median price of your competitors?
The only disadvantage with this price model is it can be hard to put a price on value.