The right price

PaymentsHow do you determine the right price?

The “right price” is determined by your consumers. Consumers are willing to pay for value and you must make sure your company is offering value, without under pricing its offering. The company has an obligation to itself, its shareholders and its consumers to determine the optimal price that results in sustained availability and results. Many companies are guilty of thinking that the lowest price is best. Remember that the price itself can create a value perception. Some companies deliberately increase their prices above parity competitor offerings and by so doing create an elitist niche type market. Not all categories allow for this, however.

Does price define a product or service?

Price on its own doesn’t define a product or service; rather it helps establish a value perception in the mind of the consumer. Additional factors, such as benefits,quality, branding, etc., aid comparison with other offerings in the particular category. Most categories are highly competitive and cater to specific market segments. As consumers become more knowledgeable of the choices available to them and increasingly sophisticated in their buying decisions, they expect greater benefits at lower prices. Price and value are at the top of consumers’buying criteria. Price is not so much about the amount on the tag, as it is about the perceived value of the item.

Once the products’ benefits, quality, branding, distribution channels etc. have been determined, the price tag will dictate where it is positioned in a category. Price decisions should be driven by a clear understanding of market dynamics, the target segment and its value perception of the offering. From this point on, supply and demand forces will determine the sales success of the offering.

Setting the right price from the outset is vital. It’s a crucial mechanism to ensure the business derives value; a profit in most instances. And for customers to derive a value; a benefit perception commensurate with the price charged.

What are the risks if it’s wrong?

Once an offering goes to market at a particular price it is extremely difficult to alter course, particularly if that price is too low. When the price for a product is set lower than the optimal level, volume demand may be inflated. This will place strain on the company to deliver on a product that may not be providing acceptable margins. Because resources are being used to ensure service levels on this product are maintained other, potentially more profitable, opportunities are forgone. If the product is withdrawn from the market, the company stands the risk of long-term damage to its reputation and will also place additional pressure on the remaining products to carry the increased fixed costs. This is far from an ideal position to be in from a cash flow perspective.

On the other hand, going to market with the price set too high can result in poor demand and will leave the company thinking that the product has failed because nobody wants it. The risk here is that the company may prematurely withdraw a potentially successful product.

Costs are incurred when developing or acquiring a product and inventories have been built in preparation for going to market. All this can be lost due to incorrect pricing.

What can you do if you got it wrong?

As the old adage goes: Prevention is better than cure. Nowhere is this more true than when applied to pricing. Take the time to carefully plan your pricing and base it on the best information you can lay your hands on. It is simpler to deal with over-priced than with under-priced products. There are many tactics that can be employed to increase demand for highly-priced items. These same tactics can be used to refine price levels over the longer term.Although several cautions should be raised when doing so as many of these activities do result in sales spikes.
Furthermore, before tampering with prices one must be satisfied that the other elements of the marketing mix are in place, particularly communications.

Tactics for correcting over-priced products include various forms of promotions. These may range from pure price discounts to buy-three-get-one-free promotions. Other promotional tactics exist but may not be suitable for determining optimal price levels. They may help increase sell through rates, however. These include competitions, co-promotions, bundled offerings etc.

When a product is under priced it may be necessary to simply increase the price and factor in the volume decrease that will come with it. The downside may be that the product suffers a bruised reputation in the short term. A better strategy may be to reposition the product. This would involve aiming the product at a specific market segment that appreciates the offering’s value and relaunching it. This can be a costly exercise.