Understanding the possible strategies for your prices
“The value is not determined by those who set the price. The value is determined by those who decide to pay for it.”
The price of your products and services is a critical strategic element that impacts your positioning and brand image. It is not something improvised; it must be consistent with your overall brand, marketing, and sales strategies, and it is something you generally define for the long term. I’m not referring to the price itself but to the strategy upon which you base your price calculation.
Today, I’ll share with you the different strategic options you have to work on the prices of your products and services.
What should you consider when calculating the prices of your products or services?
Your pricing strategy is the framework you decide to use for making decisions about the price of a product or service or the changes you will make to it in the future.
The price you assign to a product or service is closely tied to the value that current or potential customers perceive in it. The correct relationship between the price and the value of the product or service will largely determine demand and sales.
As Simon Sinek’s quote at the beginning of this article indicates, that value is not determined by you but by the customer who purchases it. You can suggest or offer differential benefits in terms of execution, image, results, quality, but ultimately, it is the consumer who, by deciding to pay for your product or service, acknowledges the real existence of those benefits in meeting their needs.
Your pricing strategy also depends on your overall marketing and sales objectives. Are your objectives focused on maximizing your profit? Or are they focused on generating many sales? Or are they aimed at developing a differentiating image? Each of these objectives implies a different pricing strategy.
Finally, your pricing strategy will also depend on your current and potential customer, their purchasing power, their needs (which may or may not be met by your product or service), and their perception of your product or service in relation to the competition.
Possible strategies for your prices
1- Cost-based pricing
With this strategy, prices consider all internal costs required to offer the product or service, adding a margin of profit that you want to obtain. This margin is generally relatively fixed and is determined as part of the company's overall annual strategy.
This type of strategy focuses on considering the company's internal factors, and if applied rigorously, you might stop considering market and competition conditions that can affect them. In general, it is easier to apply to products than to services, though it is also possible to do so.
2- Price Skimming (High Pricing)
Entering the market with a high price relative to the competition and then reducing the prices once the product is established. The goal is to initially capture consumers with interest and purchasing power aligned with the product or service, and once that initial market is exhausted, move on to more price-sensitive segments. This strategy allows you to start with an exclusive market and progressively massify it. High margin, high-quality image, and requires real value to motivate the customer to pay the price. Suitable when the entry barrier for competition is high.
3- Penetration Pricing / Market Entry
Opposite to the previous one. It involves entering the market with lower prices compared to the competition. It is applied when the market is already established, and the goal is to quickly obtain a good portion of it. Low margin, high volume, cost reduction. Suitable when the market is mature, there is a lot of competition, and there is the possibility to keep costs low based on volume.
4- Prestige or Premium Pricing
Setting high prices associated with superior quality relative to the competition. The product or service’s value must adequately support the promise of higher quality and convey a prestige image to the customer. This strategy should allow you to keep the price above the competition regularly.
5- Competitive-based Pricing
Setting and adjusting prices based on what the competition is doing in the market, instead of relying on the company’s actual costs. Whether maintaining prices comparable to the competition, lower prices, or higher prices, the idea is to adjust prices to the market’s pace.
When you match prices to the competition, it is generally when there is little differentiation in the benefits offered by different competitors. This strategy takes external market factors into account more than internal company aspects, which could pose a risk since it places more elements out of your control.
6- Geographic-based Pricing
When it comes to physical products, shipping costs, customs, and taxes vary by location. Your pricing strategy should account for three possible scenarios:
If these additional costs will be absorbed by the price and distributed evenly, equalizing prices for all zones,
If they will be absorbed by the price but setting differential amounts for each zone (which will give you different final prices for each location), or
You decide to pass those costs onto the consumer as an additional cost.
7- Dynamic Pricing
Prices determined by demand, fluctuating up or down based on the demand itself. This type of strategy requires a set of market indicators that continuously monitor demand and competition. Prices can vary depending on market segments, times of the day, or seasons of the year, based on demand movements. It generally requires technological support, as this is a strategy that is very difficult to manage manually.
8- Volume-based Pricing
Prices are adjusted based on the quantity of products or services purchased by the consumer. It is suitable for products or services where significant savings in costs are possible when producing or offering larger quantities.
9- Seasonal Pricing
Prices are adjusted to stimulate demand at times when it is usually lower due to the time of year.
Additional Considerations
The pricing strategy should take into account whether the product or service in question is unique within the range of what you offer in your business or if it is part of a collection, sub-brand, or portfolio of products or services.
If they are part of a group with other products and services, you should apply consistent strategies to the products and services that make up that segment of your offering.
Regardless of your pricing strategy, a basic concept is that prices must cover costs and generate some profit. Otherwise, you are undermining your company’s sustainability in the market since you will be consistently generating losses.
Once again, flexibility is a key part of the success of your task. In my view, the success of any pricing strategy lies in being able to adapt to internal or external changes in the company. You can combine strategies or adjust them as your market matures or changes. Nothing is set in stone. Remember that strategies are vital as a reference framework and guidance, but they become your enemy when you apply them like a straitjacket.
Whatever your strategy is, you must always do your homework. You need to consider all your costs and then, based on your strategy, apply the profit margin and perform benchmarking with the competition.
Generally, the price calculation is a dynamic exercise in which you make adjustments until you find the one that best fits your strategy, your market, covers your costs, and allows you a reasonable profit.