Deciding a price for a product or service is not a simple matter. Instead, you need to consider all aspects that may influence the product pricing. They include internal costs, expected profits, and many more. In other words, the pricing strategy must consider every thing to make your business profitable.

Furthermore, the price you set for a service or product must be competitive enough. Over-pricing will make your products and services more expensive than any other similar products on the market. On the other hand, under-pricing can make your product cheap feeling.

Pricing Strategy: Best Approach for Reasonable Decision

In general, there are three pricing approaches, which every business can use. Of course, there is no single approach to fit every business. You need to consider them based on the nature of your business.

Cost-Based Pricing

This is actually the oldest and the most common pricing approach. For finance department, this is also the most defensible one, since the pricing strategy ensures marginal profits. Product pricing begins with calculating the price based on the costs incurred to produce the products or the services. This strategy is popular in manufacturing sectors, in which the company needs to calculate the production and operational costs.

However, this strategy is also associated with certain disadvantages. The most notable drawback is that it does not consider the market at all. It does not consider the customers’ demands and buying trends. In other words, cost-based pricing does not differentiate the price based on the customer segments.

Market-Based Pricing

On the other hand, this pricing strategy is purely based upon the market condition. Market-based pricing is also called competition based pricing.  The strategy is popular in commodity market and effective for low-cost supplier that is planning to enter a new market. The main advantage of this strategy is that it is based upon the market dynamics. You can give lower prices for low-demand products and higher prices for high-demand items.

However, it also has some drawbacks, particularly since the pricing decision is not fully at your hands. You must follow the rules made up by competitors. Furthermore, market-based pricing can become a pressure for new comers. They need to choose the most competitive margins. As a result, the profit margin can be very thin.

Value-Based Pricing

This pricing strategy is based upon how the customers value a product or service. In this case, value is above everything else. This strategy is ideal for goods that are about to launch into the market. The company can emphasize the values of the product for the customers and decide the prices based on the customers’ perceived value on it.

Furthermore, value-based pricing strategy is suitable for collectible products, antique collections, or ethnic-related stuffs. These products are available in limited number and the customers are willing to pay high for them because of the perceived value.

Again, there is no single pricing strategy for all. Every business has unique conditions, which may determine how it prices the products or services. So, how should you price your products. Keep reading for detailed discussion on the next post.