How your price your products reflects a great deal on your business and your product.  In a study of 2,463 companies, Michael Marn and Robert Rosiello found that a 1% price improvement results in an 11.1% increase in operating profit. How your price shouldn’t be an afterthought. Here are some questions to help you do a quick mental check on the state of your pricing strategy.

First, do you have a strategy for setting your prices?  If so,  do you have a framework for establishing the initial price of your product/service and the intended direction for price movements over the solution’s life cycle?

Second,  does your approach yield the maximum value for your products and/or services? Or are the prices you have established for your products/services just based on what you’ve been doing for years?

Many organizations make significant investments in developing, marketing and selling new products only to price these products in an ad-hoc manner. Yet your pricing strategy is probably one of the most important decisions for an organization. Good pricing requires having critical information and using this information to make smart decisions.

3 Elements You Need Before You Establish Prices

You will need these three elements to create your pricing strategy:

1. Your pricing objectives
2. Data related to the demand, costs and profits associated with solutions and category
3. Information about the pricing practices in your industry

Once you have this information you can choose a pricing strategy.  Then you can focus on fine tune your pricing tactics.

Purchase Your Assessment

Pick a Pricing Strategy

There are three basic strategies for setting prices:

• price skimming
• penetration pricing
• status quo pricing

Here’s a quick explanation of each.

1. Make the money now. Price skimming is when a company sets a relatively high price for a product or service at first, then lowers the price over time. Price skimming is effective when there is inelastic demand, you have a superior product or a product based on a technological breakthrough, there is legal protection for the product, and/or limited production.
2. Take market share. Penetration pricing is where you charge a low initial price in order to achieve rapid market share.
3. Don’t rock the market. The status quo pricing strategy is used when an organization uses price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.

Select Your Pricing Approach

Once you determine your pricing strategy you can select your pricing approach. Common approaches to pricing include:

• cost-plus pricing (basing price on the cost to produce the product and some amount of margin)
• competition-based pricing (setting a price based on what competitors’ pricing)
• value-based pricing (based on value received by the customer).

All three of these approaches are relatively accepted approaches to pricing. Want to be more creative? Variable, reserve and promotion pricing are creative approaches.  One word of caution, be wary of a pricing strategy that will alienate customers.  Pricing is one of the fastest ways to lose customers who were already on the fence. One final word, keep in mind that pricing is the reflection of everything you do as a business. We’d love to hear your thoughts on pricing. Leave a comment or send us a note.

FAQ:

• Price Skimming: Set a high initial price, then lower it over time—ideal for inelastic demand or breakthrough products.
• Penetration Pricing: Set a low initial price to quickly gain market share.
• Status Quo Pricing: Stabilize prices to avoid price wars and maintain steady profits.

• Cost-Plus Pricing: Base price on production cost plus a margin.
• Competition-Based Pricing: Set price relative to competitors.
• Value-Based Pricing: Price based on the value delivered to the customer.
  Creative approaches include variable, reserve, and promotional pricing.

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