Optimizing your pricing strategy

Your pricing strategy is a key part of your marketing plan because price influences how customers perceive your products and services and their quality. It also helps determine your company's market share and profits. Price is the only marketing mix variable that generates income without a financial investment.

To determine the right price for your products and services, you need to consider a number of things.

• What are your financial needs and objectives?
• What price is your customer willing to pay for your product or service?
• How can you have a competitive price and turn a profit?
• How can you be consistent with your other marketing mix variables (product, place and promotion)?

You've probably already gotten good information about your target audience and competition by collecting data (surveys, interviews, social media and observation). A price may be right for one market segment, but not for another. That is why it's important to carefully analyze your target audience so you can devise effective strategies to reach them and meet their needs. High prices are usually synonymous with quality. With low prices, you have to sell large quantities and have a high production capacity.

It is imperative that you establish a detailed pricing method and price schedule for all your products and services. Your pricing strategy must clearly outline how these prices are set and if and when you will offer promotional prices to break into the market.

The goal of your pricing strategy should obviously be to turn a profit, but it should also be to ensure the long-term success of your business. The right price must therefore both attract customers and confirm your market positioning. You must take into account the subjective value of prices. For many consumers, a price that is higher than the market average is proof of the product's quality.

Here are the most common pricing methods:

Cost-plus pricing

For a cost-plus pricing strategy to make money for your business, you must know the business's fixed costs and production variables and add a reasonable profit margin for the business and its customers. You have to compare your business with businesses of the same size in your industry to determine the average profit margin in your industry.

Cost-plus price = fixed costs + variable costs + profit margin

Competitive pricing

Competitive pricing basically takes into account the competition's price. There are 3 possible scenarios:

• A higher price than the competition: This strategy works with products and services that have a distinct competitive advantage that positions them as high-end for a highly targeted market segment. It is what is called a skimming strategy.
• The same price as the competition: This is the typical approach when the market is competitive. It assumes that the market will not bear a higher price than the competition's and that you cannot offer lower prices than the competition given your cost structure. This is what is called a matching strategy.
• A lower price than the competition: This is an option if your cost structure is compatible with your business's market positioning. It is most often used to gain a large market share in the short term, so it is called a penetration strategy. In some cases, prices are adjusted once the target been reached.

Psychological pricing

The psychological price is the price the customer is willing to pay, often because the product has added value. This type of price is most often used with products with a strong brand that are likely to create a sense of belonging. A comprehensive—often very costly—advertising and promotional plan must be in place to support a psychological pricing strategy.

Promotional pricing

Promotional pricing strategies are generally used to penetrate a market, offset low seasonal demand or bring back customers. When a season ends, for example, some businesses clear their stock to make room for new products. These are special, limited-time offers.

Dynamic pricing

With a dynamic pricing strategy, price varies by season according to supply and demand for your product or service. This pricing strategy is used by commodities companies (timber, food, etc.). It's the most difficult strategy to manage.

Remember that your pricing strategy is a key part of your marketing plan. It will help you generate income without making a financial investment, but you'll need to invest time and do a great deal of strategic thinking to reap the potential benefits!

Need a hand putting together your marketing plan? For a detailed explanation of each step of the business start-up process, see the Desjardins interactive marketing plan.