Pricing approaches
August 19, 2010, 12:00 am
Copyright © 2010 Integrated Profitability TM
Here are a few methodologies used to price products and services:
● Cost-plus
Definition: using your expenses as the basis of your price
How to do: add up all your costs and tack on a profit margin
Pro: all products and services will be profitable (assuming they sell)
Con: neither sales nor profits will be maximized. If the resulting price is too high, sales will not happen. If too low, your profit will be lower than it could have been.
● Competition-related
Definition: using information from your competition as the basis of your price (e.g., their prices, pricing, product & service offerings)
How to do: gather competitor information and mimic their prices
Pro: prices will be competitive
Con: your products and services will not be able to reap the benefit of any differentiating advantages or counter adverse impacts of any differentiating disadvantage
● What the market will bear
Definition: using the current “realized-prices” in the market as the basis of your price
How to do: keep raising prices until sales stop
Pro: prices will be maximized
Con: sales and profits will probably not be maximized; customer loyalty may be damaged
● Marketing-based
Definition: using your marketing objectives as the basis of your price
How to do: within the context of your marketing goals, ensure that every price supports them (e.g., growing market share might mean lower prices; protecting a premium brand might mean higher prices)
Pro: strong and consistent branding
Con: may ignore financial realities
● Strategy-based
Definition: using your company’s strategy as the basis of your price
How to do: within the context of your strategic goals, ensure that every price supports them (e.g., sun-setting an older product might mean milking prices for as long as possible; use prices to differentiate between two products or features so that consumers naturally tend to purchase the one most strategically aligned)
Pro: coherent and integrated pricing will help meeting strategic objectives
Con: short-term opportunities may be forsaken
● Combination of all above
Definition: using a combination of all the above methodologies to decide your price
How to do: integrate information and approaches from all methodologies
Pro: tends to result in the best short- and long-term profitability results
Con: resource intensive
Assuming you have the time and the skills, having a pricing methodology that directly supports all business aspects (e.g., costs, competition, marketing, branding) to the maximization of the company’s long-term profitability is best.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 76
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
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