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Pricing strategies

At Rus­sell & Rus­sell we can pro­vide busi­ness­es in the Lanark­shire area with assis­tance and advice on a wide range of busi­ness issues. Here are some of the key points to con­sid­er when set­ting prices…

One of the most impor­tant deci­sions to be made when launch­ing a prod­uct or ser­vice is set­ting the price. Some­times, this is also one of the most dif­fi­cult deci­sions.

Ulti­mate­ly, you will want to make as much prof­it as you can from each sale, with prices set at the high­est point pos­si­ble before demand starts to decline. But numer­ous fac­tors will influ­ence your pric­ing struc­ture. For a start, you must con­sid­er your busi­ness objec­tives: for exam­ple, if your aim is just to max­imise prof­its, you may set a high­er price than if your objec­tive is to increase mar­ket share or grow sales.

Here are some of the issues you need to con­sid­er:

Covering your costs

A pop­u­lar and sim­ple method of pric­ing a prod­uct or ser­vice is to cal­cu­late the costs of pro­duc­ing it and add a prof­it mar­gin. For exam­ple, if it costs £10 to make a prod­uct and you decide on a mark-up of 50%, the sale price will be £15 (and the gross prof­it will be 33.3%).

How­ev­er, when using this method, it is impor­tant to take into account all costs. Some ‘direct’ costs will be obvi­ous, such as stock, mate­ri­als, employ­ee wages, stor­age, pack­ag­ing and deliv­ery. But you must also be aware of ‘indi­rect’ costs, such as rent, util­i­ty bills, insur­ance and depre­ci­a­tion of equip­ment. You may need our advice when analysing your total costs.

In addi­tion, using this ‘cost-plus-prof­it’ method alone fails to take into account such fac­tors as com­pe­ti­tion, mar­ket trends and the needs of the cus­tomer.

Competition and customers

Cus­tomers buy­ing stan­dard prod­ucts avail­able from numer­ous sources will gen­er­al­ly look for the sup­pli­er with the low­est prices. This makes it dif­fi­cult for the small busi­ness to com­pete with large cor­po­ra­tions, who can mass-pro­duce and pur­chase in bulk.

Con­se­quent­ly, many suc­cess­ful small busi­ness­es do not even attempt to com­pete by low­er­ing price, but instead focus on oth­er areas such as per­ceived qual­i­ty, cus­tomer ser­vice or unique­ness of brand. Indeed, if you are mar­ket­ing your prod­uct or ser­vice as high-qual­i­ty or ‘lux­u­ry’, cus­tomers will expect to pay more and a cheap price will actu­al­ly harm sales.

Different approaches to pricing

Tar­get cost­ing
It can be dif­fi­cult to com­pete on price if pro­duc­tion costs are rel­a­tive­ly fixed. Tar­get cost­ing is a solu­tion to this prob­lem, and is almost the oppo­site of the cost-plus-prof­it method. When launch­ing a new prod­uct you decide upon an opti­mum sell­ing price from the out­set, and then detract your desired prof­it. The result is your tar­get cost, and all involved in design, devel­op­ment and pro­duc­tion are tasked with meet­ing this cost. How­ev­er, set­ting the ini­tial opti­mum sell­ing price does require exten­sive mar­ket research.
Mar­ket skim­ming
This strat­e­gy is most often used when launch­ing a new prod­uct which is unique to the mar­ket. The idea is to take advan­tage of being first to mar­ket by set­ting a high price with a greater prof­it mar­gin than nor­mal, thus mak­ing as much prof­it as pos­si­ble before com­peti­tors are able to bring out sim­i­lar prod­ucts.
Pen­e­tra­tion pric­ing
The oppo­site of mar­ket skim­ming, this is com­mon­ly used when try­ing to launch new prod­ucts in an already pop­u­lar mar­ket, or when sell­ing an exist­ing prod­uct to a new mar­ket. The strat­e­gy is to offer an ini­tial low price, in an attempt to gain mar­ket share before rais­ing prices. Mag­a­zines fre­quent­ly take this approach, offer­ing ear­ly issues at very low prices in an attempt to attract loy­al read­ers, who will be will­ing to pay more for sub­se­quent issues.
Price match­ing
Prices are set by mir­ror­ing com­peti­tors rates, with­out attempt­ing to under­cut the ‘going rate’. If your busi­ness is dom­i­nant in a mar­ket­place, you may be able to dic­tate this rate.
Destroy­er pric­ing
This is an aggres­sive high-risk strat­e­gy designed to elim­i­nate com­pe­ti­tion. Quite sim­ply, prices are low­ered to the point where com­peti­tors are unable to match them, and con­se­quent­ly go out of busi­ness. A great deal of con­fi­dence in your knowl­edge of your own and your com­peti­tors’ capa­bil­i­ties is required before attempt­ing this, and it is not gen­er­al­ly rec­om­mend­ed.

Discriminatory pricing

Some­times, you might want to set dif­fer­ent prices for what is essen­tial­ly the same prod­uct. This may be done in a num­ber of ways, such as:

  • By cus­tomer group — for exam­ple, exist­ing cus­tomers might get dis­count prices on new prod­ucts; or enter­tain­ment venues might charge low­er prices for stu­dents
  • By time — prices can be var­ied by sea­son or time. For exam­ple, off-peak and on-peak tele­phone charges, or off-sea­son hol­i­day deals
  • By geo­graph­ic loca­tion — you might be able to charge high­er prices for the same prod­uct in more afflu­ent areas, or in places where there is less com­pe­ti­tion
  • By image/form — with dif­fer­ent pack­ag­ing and image, the same prod­uct might be sold at dif­fer­ent prices to dif­fer­ent mar­kets.

As you can see, there are many dif­fer­ent issues to con­sid­er when set­ting a price. It always pays keep an eye on your pric­ing in rela­tion to the com­pe­ti­tion, and hope­ful­ly be one step ahead.

If you are in the Lanark­shire area and are look­ing for sup­port and help from expe­ri­enced accoun­tants and busi­ness advis­ers, con­tact Rus­sell & Rus­sell.