Imagine that you are in a store and you want to buy a drink. The first drink is very cheap, you do not buy it because you think it is a strange price and may not be of good quality. The second drink belongs to a large and trusted company that you are sure of its quality, but its price is very high. Such a price does not seem reasonable at all, even if it is of good quality. Your eye falls on the third drink . You have already bought another product, it has good quality and you have good experience. The price is reasonable in your opinion. You buy it. You have always dealt with the price of goods and made such analyzes in your mind; But have you ever thought about this, where does the price you see on goods in stores come from? That is, how does the producer reach a certain price for his product? If we have a product ourselves, how do we price it so that the customer feels that the product is worth buying?
Increase your sales by knowing the pricing methods
In this article, we have 2 interesting sections for you: first, what we should determine the price according to, and then we will go to different pricing models and see how and when these methods should be used to make the most profit for you. To be.
If you agree, let's start with the reasons why pricing is so important!
Why is it important to know pricing strategies?
The four areas of marketing, known as 4p, include Product, Price, Place, and Promotion, all of which are called marketing mixes . Price is the only marketing mix that generates revenue, which is why it is such an attractive part of the story. We have explained the price in detail in the marketing mix article ; I suggest you visit this article if you are not familiar with 4P.
The importance of pricing becomes clear when we look at the price of two similar products first. You know that everything starts at first glance, and if your product is not selected, you may not be able to show your superiority to the same product.
Therefore, pricing has its own sensitivity. The moment you make a mistake in pricing is the moment when you either destroy your profit or the credibility of your business.
Important concepts in pricing
To determine the price of a product, we must first be familiar with the following three concepts:
Price : It is the cost that the customer pays to use our goods and services.
Cost: Fixed and variable costs incurred to produce a product.
Value: The value of a commodity means that the customer knows that he has received more benefits than the money he paid for. Value for the customer is not just the product he buys . It depends on many variables: for example, the brand image in the mind of the customer (Brand Image), after-sales service or even items such as company reputation and ....
Pricing strategies
We have three general pricing strategies:
Cost-Based Pricing
Perceived-Value Pricing
Market-based pricing
Cost-Based Pricing
In this approach, add the production costs and determine the amount of profit you want; As a result, the price equals the cost plus the profit you want (Cost-Plus) .
Sometimes sellers receive a certain amount of profit for each product. Wholesalers or marketers usually have such pricing. For their purchase price, for example,
Be sure to read: What is STP Strategy? The key to marketing success !!!The producer prices according to the return on investment he wants. To determine the rate of return on investment, they usually look at the average profit of the industry. For example, if in the leather bag and shoe industry the return on investment is 20%, the manufacturer adds 20% to the cost of production and sets the price. (Target-Return Pricing)
Value-based Pricing
"Pricing is very simple. "You can be sure that customers will not pay even a penny more than the real value of the goods."
Ron Johnson, CEO of GC Penny
In this strategy, the price is determined based on all the value that is created for the customer; what does it mean?
Companies sell you more than one product. They sell you good attitude, after-sales service, or even a sense of brand trust. All of these are values that the audience pays for . If you want to understand this issue well, see if you have ever bought from a certain place because of the trust of the seller? Or go shopping because you like the feeling of being in that store?
The great master said not to say that Apple (other brands) takes its brand money! The feeling you get from having an Apple phone is one of the values that Apple has created for you !
This example makes the point clearer:
Caterpillar, a manufacturer of heavy machinery and construction, etc., is more expensive than other competitors. For example, if the tractor made by other companies is $ 90,000, the tractor made by Caterpillar is $ 100,000 and has its own happy customers. Cutter Pillar marketers say we receive this extra amount from the customer for the durability of our product, customer service, and the trust we build.
Pricing based on market conditions
Sometimes pricing is based on market conditions. For example, to see what is the price of this product in the market? Or at what price do competitors sell? Or how much people are willing to pay for this product, given the market and the economy. This is the simplest way possible; But the story does not end there.
In fact, we have a comprehensive course for internet sales and marketing training in which we have said from zero to one hundred everything you need. Understanding the market is also part of this course, which we suggest you see. Of course, it is much easier to watch the video below and hear from the course instructor.
How to price?
Here are three key pointers in moving your product forward. What you need to know is that with the conditions of these days, it is no longer possible to calculate the cost of our product and add our desired profit to it and determine the final price.
To answer this question, consider the following situations:
Situation 1: The market is full of magic similar to my product at the same price or even lower price. Some of them are big and well-known companies whose quality and reputation have been proven and people trust them, and for this reason, they buy their expensive magic with all their heart. Small companies offer lower prices for their product and have acceptable sales.
Now given these price conditions is my pricing correct?
Situation 2: The demand for magic is high and few companies produce it. They are more expensive than my product, although my product has more beautiful colors and is more durable.
With this example, I wanted to tell you that these three pricing strategies alone may not work well. We have to choose the right price for our product based on market conditions , competitors' prices , the value we create for the customer, and the cost of production to supply . With these three general methods, you can determine the price to some extent, but to determine the exact price, follow the steps below:
First: Define your pricing goal
There are basically 5 main purposes for pricing:
Survival (Survival)
When the economic conditions of the society are not good, the competition is very intense or the demands of the customer are changing, the company's goal is just to stay in the competition. In this situation, companies benefit from the good and are satisfied even with a small loss! Do not forget that this goal is effective only for the short term.
The maximum benefit at the moment (Maximum Current Profit)
Some companies aim to make the most profit now. This goal is used when the market is predictable and somewhat stable.
The maximum contribution from the market (Maximum Current Share)
Some companies want to gain more market share; Because more sales will reduce the cost of production per unit of product will result in more profit.
Introducing a unique product with special technology (Skimming)
The company's goal is to introduce unrivaled products that have a special and new technology. In fact, the company wants to reap the benefits of the market so that no competitor can be found.
Product-quality leadership (Product-Quality leadership)
Some brands aim for product-quality leadership. These companies offer their product in the highest quality and declare themselves a competitive advantage.
Second: Check the demand
After defining the goal, see how much is the demand for the product? Is the product new to the market or is the product ending? Do customers still use this product or are they attracted to newer products?
Third: Do not forget the cost of the product
Calculate the cost of producing the product: fixed cost + variable costs
Fourth: Know your audience
Know your customers so you can get the right pricing! That is, do the STP first.
What is STP ?
Simply put, it means knowing what group of people you want to sell your product to. Know the behavior and characteristics of that group well. Know what they need and what your product is supposed to meet; And how do you want to get your product to them? Finally, determine what your company is with other competitors from a customer perspective.
Fifth: Choose the right price model
Choose your pricing model based on the above points. All models are presented in the next section.
And after these steps ...
Set the final price.
Familiarize yourself with pricing models
After recognizing the values that your product creates for the customer and considering the market conditions and your position in relation to competitors, you can use any of the following models for pricing and determine the final price.
Be sure to read: What is SMART Targeting Technique? Penetration's pricing / loss-leader-pricing
In this method, they set the price of their product lower than usual (with the lowest profit) to attract customers' attention to themselves. Once they penetrate the market and reach their goal, they raise prices. This method is effective if customers are price sensitive. In effect, it removes the customer's mental barriers to your product and gives people the opportunity to experience your product and be your customer.
For example, Snap Internet Taxi announced at the beginning of its work to penetrate the market that its prices were very low and even free. After the people accepted it and gained market share, they returned the prices to normal.
Economy pricing
In economic pricing, they use low-cost methods to produce and sell a product in order to produce a cheap product. In this way, they can add a low-income segment of the community to their customers and expand their market.
Note that economic pricing is very efficient for large companies, because people trust them and the lower the price, the more they sell. But for small companies, it seems dangerous, because they have a small sales volume and may not be able to make the profit they want at this low price. Also, because they are less well known to people, people may think that their product does not have the necessary quality and durability.
Freemium Pricing
In this method, you are first given the product for free, but then you have to pay to activate additional features and characteristics. This pricing strategy is widely used in the digital world. You must have experienced this in many games and software! You download it for free, but you can only go one step further and pay for the rest. The good thing about this is that the audience gets to know the product first. Uses it and pays for additional features if the product suffers. Of course, unfortunately in Iran we use the cracked version of most software and therefore we have access to all its features from the first day without paying. (How ethical do you think this is? That we do not give money to the manufacturer for the product and use it. Of course, in many cases we have no other choice.
Psychological Pricing
Strange History of pricing odd numbers !
The ancients used to price this way to prevent the theft of cash registers. If the price was rand, the cashier could take the money from the customer and put it in his pocket; But if it were not for the rand price, the cashier would have to open his cash register and record the purchase to pay the rest of the money to the customer so that he could withdraw from the fund. The cashier could no longer withdraw the money by registering a purchase.
Price Skimming
This method is the opposite of penetration strategy, that is, when a company introduces a new product that has a special technology to the market, it chooses a very high price for its product. After competitors enter the market due to high prices, it gradually reduces the price in order to increase its market share. Customers are willing to pay more to experience this new product, but that is no longer the case after a while; Therefore, the company also lowers the price in order to attract more customers. The high initial price creates an image of a leading product of your product in the mind of the audience .
Sony uses this pricing strategy a lot. HDTVs were first introduced by Sony in 1990. Priced at $ 43,000 !!!!! (The less I wonder, the less.) Then Sony gradually lowered the price. In 1993, the price reached $ 6,000. In 2010, a Sony 40-inch HD TV was only $ 600!
There are some important points. Be aware that high prices may create competition.
When the Dutch company Philips first introduced the CD player, the price was so high that Japanese competitors entered the market. They produced at a lower price and took over the market, and eventually Philips was destroyed!
Another point to note is that the rapid decline in prices may discourage early buyers. Early buyers protested when Apple raised the price of its iPhones from $ 600 to $ 400 in two months. Eventually, Apple had to recharge their account for $ 100 for future purchases.
Captive Product Pricing
Catchy pricing really captures the customer. In this way, the price of the main product is kept low, but in order to use it, you have to provide other products and services that do not have a low price; But you have to buy real, targeted traffic that actually converts!
You have seen this method a lot. For example, communication service companies sell their SIM cards at very low prices and even include free internet packages, but you have to buy different services to use them again.
Be sure to read: Purple Cow, In the Middle of a Marketing Farm! Dynamic Pricing - Time-Based Pricing
In the dynamic pricing method, companies constantly change prices according to the demand and needs of individuals in order to increase their profits.
For example, travelers know that the price of a hotel room can vary greatly depending on the demand for the day. On busy days the price is higher and on days when demand is low the price for the same rooms is very low.
Market-Based Pricing
In this pricing method, the price is set by the market, not the seller. This method is for products that have many sellers and the customer is willing to pay a certain amount to buy it. Sellers must create added value for their product, such as better customer service, easier ordering, or higher quality, if they want to sell at a higher price than the market price or outperform their competitors.
Pricing Bundle
In the aggregate method, companies sell several related products in a package that the price of this package is lower than their total individual price. This method is used for older products and those that are to be discarded.
Geographical Pricing
In geographical pricing, the product is offered in different regions of the world at different prices. This is a natural price difference because in some places, the product is less expensive or costs more to ship.
High pricing (premium pricing)
In this pricing method, the product is marketed at a higher price than competitors. This method works when:
The number of competitors should be small
The company knows that its product has a special competitive advantage over other products and customers are willing to pay more for it.
Product-Quality leadership pricing Some brands use the same strategy with the goal of product-quality leadership. This method can be a subset of premium pricing in which quality is a competitive advantage. For this reason, these companies can set high prices for these products; But the point is that these companies combine quality and luxury with being affordable; That is, they set the price only high enough that the product must be affordable for the customer. In short, they sell you very high quality at a high price, and you are happy to get the best quality advantage by paying good money. Example : BMW in the automotive industry and Starbucks in coffee have product-quality leadership. In the Iranian market, Mashhad leather and Zarrin porcelain brands are also in this group. All of these models and methods can be useful in certain situations. It depends on how accurate you are and what your goal is. Some do not take it hard at all; They look at other prices and set their own price. Finally, with psychological methods such as the odd number method, they turn the price around a bit to improve their sales. Do not underestimate the psychological methods, this is a controversial part of pricing that may not be visible but is directly related to the feelings and mind of the customer. If you want to know more about psychological methods of pricing, Novin has a full article on sales promotion strategies that discusses techniques that persuade the customer to buy your product. Before the end of the article, we would like to suggest you to visit the " How To Get More Traffic To Your Website For Free" training page and read our free articles , practical tutorials . Conclusion We talked about pricing policies and methods. Now you have to choose the best price according to your purpose and position. I know; The price is very tempting and everyone wants to make a big profit from their products by setting a higher price; But be aware that consumers usually analyze prices in their minds; Compare with previous prices and other commodities ; He thinks about the price of talking to friends, family or the Internet; Basically, consumers have a floor and a price ceiling for each product. If the product has created a lot of value for them and they feel good about it, they will pay for it up to the price limit. As a buyer, what do you think about the price of a product? For what benefits of the product are you willing to pay more? Let us know what you think.