Optimize your pricing by developing a good pricing policy
Price plays a key role in the purchasing decision of most consumers. For example, lowering prices may attract many potential customers because of its affordability, but this pricing strategy may also turn off others. The same is true for a price increase, which may attract customers who are interested in high-end offerings, but on the other hand will discourage those who are looking for affordable prices.
Setting the price of a product or service is therefore an important decision. Such a decision is even more complex as it must take into account many factors and different approaches. So how do you approach pricing a product? Where to start?
We will see that the first step in price optimization is to develop a good pricing strategy. We will also see how lowering or raising your prices can optimize your pricing, and why "Price" is a major component of the marketing mix.
"Price", one of the 4 major P's of the marketing mix
Pricing policy, or pricing strategy, is part of the 4Ps, four major components that define the marketing mix. As a reminder, the 4Ps are the following:
- the product policy (Product);
- the price policy (Price);
- the communication policy (Promotion);
- the distribution policy (Place).
The 4Ps are the pillars of any company's marketing strategy and summarize the company's positioning in the market, in other words, the way it is perceived in relation to its competitors.
Like the other three major elements of the 4Ps (Product, Communication and Distribution), "Price" influences the profitability of the product, the volume of sales and the company's market share. This is why companies seek to optimize the price of their products and services by defining a good pricing policy.
Developing a pricing policy: objectives and constraints
The development of an appropriate pricing policy requires the identification of the objectives and constraints associated with it.
The main objectives of a pricing strategy
The objectives of a company's pricing policy can be classified into 6 categories:
- profitability objective;
- volume objective (by maximizing the quantities sold);
- price stability objective (via a strategy of alignment with the competition);
- market share objective;
- range objective (aiming at price consistency for all the products in the range);
- image objective (to boost the product's brand image).
The company must inform each of these objectives, and define those that contribute to the achievement of its priority strategic objectives. A pricing policy that is truly adapted to the company must serve its strategic objectives.
Internal and external constraints on pricing
The company must identify the internal and external constraints that it may face when developing its pricing policy. These constraints have various origins and are either internal or external to the company.
- Internal constraints relate to the product itself, in particular its nature, production cost, positioning of the offer, the phase of the life cycle in which it is located, the amount of the distributor's margin;
- External constraints depend on regulations, the consumer (his buying behavior, purchasing power and price sensitivity) and the prices charged by competitors.
The setting of the price is therefore not completely free, but must take into account many parameters.
The company must above all ensure the profitability of its product or service, and not sell at a loss, in other words not sell at a rate lower than the cost of purchase or production. Selling at a loss is strictly forbidden by law, as it is considered unfair by the competition authorities. Note that selling at a loss is regulated by articles L 420-5 and L 442-2 of the French Commercial Code.
Optimize your pricing: should you lower or raise your prices?
Lowering prices: when, how and why?
In addition to promotional campaigns, a price reduction strategy can be considered during the launch period of a new product or service. This is called a market penetration strategy. This strategy consists of charging a sufficiently low introductory price (or offering free products) to attract a significant portion of the target clientele, in order to quickly penetrate a market. To be successful, a penetration policy must lead to a strong increase in sales volumes, otherwise it will fail.
However, it is important to know that a strong price reduction does not necessarily mean an increase in market share, and can even be dangerous. Indeed, if the company wishes to differentiate itself from the competition by lowering its prices, even though its products are of exceptional quality, prices that are too low would imply poor quality products. This would drive customers away, and produce the opposite of the desired effect. Lowering prices too much could also attract fickle customers who will go elsewhere at the first opportunity.
Finally, it should be noted that a strategy of lowering prices should not, except under certain conditions, lead to a price war with the competition. Such a strategy is potentially dangerous, especially for the profitability and credibility of the company that engages in this practice.
Raising prices: when to do it? what are the risks?
Higher prices are not without danger either. Indeed, prices that are too high could discourage BtoB customers and consumers, and make them switch to the competition.
On the other hand, an increase in your prices is justified:
- if your product or service has strong competitive advantages;
- if the target clientele favors the image associated with your offer, more than the price;
- if you have positioned yourself in a niche market where you have a monopoly.
Another good reason to charge high prices is that in order to reach a specific segment of customers with high purchasing power, your company may adopt what is called a "skimming" policy. This pricing strategy consists of charging high prices, often above the competition's prices. This of course allows you to benefit from a comfortable margin. Provided you have a high competitive advantage, the product or service in question is then categorized as "premium" or "top of the range".
On the other hand, if your products and/or services are not up to par, i.e. if they do not tend towards the middle/top of the range, it is not advisable to increase your prices, otherwise your sales and turnover will drop sharply.
The main pricing strategies
To conclude, here is a non-exhaustive list of the main pricing strategies used by companies in France today:
- the cost-plus strategy;
- the skimming strategy;
- the penetration strategy;
- the alignment strategy;
- the single price strategy;
- the differentiated pricing strategy;
- the free-of-charge strategy;
- the promotional pricing strategy;
- the dynamic pricing strategy.
Whatever pricing strategy you choose to adopt, make sure it is in line with the other 3 elements of the marketing mix, namely the product policy, the promotion policy and the distribution policy.
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