Determining the best pricing strategy: what you need to know
Pricing policy is a vital element for any company, and is one of the 4Ps of the marketing mix: product policy (Product), price policy (Price), communication policy (Promotion) and finally distribution policy (Place). Indeed, maintaining a correct profitability, while remaining competitive, is one of the greatest challenges that any company, throughout its life cycle, must face.
As a reminder, the sales price influences the sales volume. And these two variables (price and quantity sold), in turn, allow us to know the sales forecast, in other words the estimated value of future sales. The forecasts are then used to estimate the forecasted turnover of the department concerned or of the entire company.
Thus, in order to increase the turnover, it is necessary to either optimize the sales prices or to increase the sales volume, i.e. the number of products or services sold.
So how do you develop a good pricing strategy, taking into account, on the one hand, the constraints related to the cost of production, and on the other hand, the requirements of a market that is constantly under pressure from competition?
Here is the essential to know about what is the pricing strategy, the different pricing policies most practiced nowadays, as well as the best way to elaborate your pricing strategy.
What is a pricing strategy?
Pricing strategy, also known as pricing policy, refers to a set of decisions and actions related to setting the price of a product or service.
The goal of a pricing strategy is to find the "right price", the one that the target consumer will accept to pay for a given product or service. But for a sale to be successful, the offer must be perceived by the customer as having value for him, and the benefits he will get from it must be higher than the price paid.
Finding the right price is therefore a delicate operation, involving the consideration of many parameters such as:
- the cost of production;
- the cost of distribution;
- the cost of advertising promotion;
- the value perceived by the customer;
- competitors' prices;
- the type of customers targeted;
- regulations governing the company's line of business.
These are just a few of the different internal and external constraints that a company must consider when determining a fair price for its product or service. Along with the company's objectives in terms of commercial policy, these different constraints must also be taken into consideration when developing a pricing strategy (see below).
It is important to know that there is not only one, but several types of pricing strategies, which we invite you to discover without further delay.
Overview of the different pricing strategies
A pricing strategy is never fixed, but is bound to evolve throughout the product life cycle. There are thus:
- pricing strategies used primarily to launch a product;
- and pricing strategies to be applied once the product is established in the market.
Pricing strategies used to launch a product
The pricing policies traditionally used when launching a new product or service are the following:
- cost-plus strategy - the most common pricing policy, it simply consists of adding the desired margin level to the cost (of purchase, production or realization);
- the skimming strategy - applied to high-tech, rare or high-end products, the skimming strategy consists in setting a higher price than the competition;
penetration strategy - this consists of offering an initial price that is low enough to quickly penetrate and conquer a large part of the market;
- the alignment strategy - this involves offering a price close to that of competitors, in order to avoid a price war and not lose market share in a highly competitive market.
Pricing strategies during the life of a product
In terms of pricing strategies applied over the life of the product, some of the best known include:
- the single price strategy - a single price is offered for a given good or service, regardless of the quality of the consumer (individual or professional) and the time of purchase (although discounts, promotions or price increases also exist from time to time);
- differentiated pricing strategy - this pricing policy varies prices according to several criteria, such as the quantity ordered, the quality of the customer, the sales region, the time or period of consumption, the distribution channel, the degree of customer loyalty;
- the bundle pricing strategy - this grouped sales technique consists of marketing an offer in the form of a pack, at a price that is most often advantageous for the customer, and this on a permanent or temporary basis (on the occasion of a product launch or a promotional offer);
- the free offer strategy - this pricing policy, which consists in applying free pricing to either a main offer or a secondary offer (two purchased = one free), is very popular in applications, social networks and other online tools (the free offer is then financed by advertising, data collection or freemium);
- the promotional pricing strategy - promotional pricing, which is practiced on a temporary basis, can be used to penetrate a market, counteract a seasonal effect or reactivate customers (most promotional scenarios operate in a "W" pattern, with different waves, in order to convince a maximum number of buyers, including the few reluctant ones);
- the low-cost strategy - this very aggressive strategy of selling at low prices while producing at low cost relies on massive amounts of sales and production to succeed;
- Dynamic pricing strategy - this strategy consists of a policy of dynamic pricing, based on multiple parameters, with the aim of "selling the right product to the right customer at the right time and at the right price", while ensuring the best possible profitability for the company.
The most relevant pricing strategy will be the one that is in line with the company's commercial objectives and the type of market in which it is positioned.
It is important to remember that a pricing policy is designed to help the company stand out from the competition. It should not be chosen lightly, because it conditions the success of the company.
Apart from the efficient elaboration of a good pricing strategy, to help you in the setting of your prices, you can also use an adapted software, which can help you to manage your margins and your revenues.
How to develop a good pricing strategy?
Before going further in the presentation of the use of predictive analysis and machine learning in sales forecasting, let's first see what are the benefits of this for the company. Finding the right price for a given product or service means juggling profitability and an attractive price for the consumer, under pressure from the competition. In this case, how to determine this famous "right price"?
Factors that influence a pricing strategy
As a reminder, the factors, which come into play in any pricing strategy and in setting prices, are of four kinds:
- the company's strategic objectives;
- internal factors relating to the product itself (its nature, production cost, degree of novelty and market positioning, etc.);
- external factors, such as the type of market, the type of customer and their buying process, competition, regulations and the company's macro-environment;
- the perceived value of the product or service, i.e. the value of the offer in the mind of the consumer, due to its characteristics and the benefits he/she wishes to obtain.
This last notion is particularly important. Because the stronger the perception of quality, even luxury, of a product, the more the customer is ready to pay for it.
Determine the best pricing strategy with machine learning
In the era of Big Data and Artificial Intelligence, it is now possible to optimize prices with specific software. The latter allow companies to save time in the management and optimization of their prices, thanks to an automated calculation of the optimal price according to the chosen pricing strategy.
As for the choice of the best pricing strategy, in order to succeed in your sales or promotions, you can use a tool that uses machine learning and Big Data analysis.
Able to process millions of data, machine learning algorithms will allow you to understand the consumption habits of your customers, and thus to offer them the products and promotional prices best suited to their shopping cart.
Note that machine learning algorithms can also reveal consumer trends (among other uses), and optimize sales forecasts.
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