Asking the right questions and locating the correct objectives of your pricing policy must be a priority
It is vitally important for small businesses to get their pricing strategy right before they can even think about a price war. SMB owners and SME marketers must carefully reflect on the real objectives of a market’s pricing approach. There could be many reasons and objectives for a pricing move. Before we summarize the different profit objectives, it is important for small businesses to consider the trends in the market:
Nine questions you must ask before you decide on pricing
- Is there a flood of new propositions or model introductions in the market?
- Is there an increased availability of bargain and generic brands in the market?
- Are your competitors using price-cutting as a strategy to maintain or regain market share?
- Is there a general decline in consumer confidence (following events such as political upheaval, terrorist attack, the stock market crash etc)?
- What stage is your proposition in the product’s life cycle? Is it mature?
- What is the competitive intensity in your market space?
- What is your distribution strategy? Direct, indirect or hybrid sales approach?
- What is your promotion or communications strategy?
- What is the perceived quality of your proposition relative to your competitors?
Only after truly understanding their industry structure and market trends should small business owners and SME marketers consider and define their profit objectives.
Survival mode – Are you just trying to survive and generate enough cash flow to remain in business?
Maintaining status quo – Are you trying to maintain the status quo in the hope of avoiding a price war?
Cost recovery – Are you seeking only partial cost recovery?
Quality leadership – Is the small business seeking to signal a higher quality of the proposition?
Maximize current profits – Is the SME seeking to maximize current profits?
Maximize current revenues – Are you seeking to maximize current revenues and not the profits?
Maximize quantity – Is your small business seeking to maximize quantity to recover long term costs?
Maximize profit margins – Is the SME seeking to maximize profit margins knowing well the impact it has on the demand for the small business’ products and services?
Now that you have a systematized view of the industry structure, the prevailing trends in the market and a purposeful pricing objective, it is time to reflect on what your strategic pricing approach should be.
Success means never letting the competition define you. Instead, you have to define yourself based on a point of view you care deeply about.”Tom Chappell, businessman extraordinaire
There are many different types of pricing strategy that a small business owner or marketer can follow:
- Penetration pricing
The strategic objective is to quickly increase sales and gain momentum. For example, a small business distributor of consumer electronics goods might use this strategy to pre-empt a competitor launch which is some time away.
- Skimming pricing
The small business owner can set an initial high price and then gradually lower the price to make the proposition available to a wider market. The strategic objective is to skim profits off the market layer by layer. If you are a small software games developer or a distributor of toys or consumer electronics, skimming might be an excellent approach, if the main festive buying season is some time away.
- Competition pricing
The objective is to set a price that compares with the competitors’ rates. In reality, a small business has three options: price lower, price the same or price higher.
- Product line pricing
The strategic objective is to price different products within the same product range at different price points. Example: hotel room rates.
- Bundle pricing
The SME can bundle a group of products at a reduced price. Common methods are to buy one and get one free. Other creative methods could include offering a set menu for restaurants, bundling complementary products like movie tickets and popcorn etc.
- Bucket pricing
In this pricing method, SMEs can offer large volumes or buckets of the same proposition for a fixed period commitment. A small business restaurant owner, hotelier or a transportation company can offer bucket pricing for a fixed fee on a monthly or annual basis.
- Psychological pricing
When pricing their propositions, SMB owners and SME marketers should consider the psychology of price and the positioning of the price within the marketplace. This is why you see a lot of $1.99 or $999 type of pricing.
- Premium pricing
The strategy is to set the price high to reflect the exclusiveness or the premium quality of the product. This is commonly used by retailers and sellers of premium goods and services.
- Optional pricing
In this pricing approach, the SME can sell optional goods or services along with the main proposition.
- Cost-based pricing
In this pricing approach, the SME takes into account the cost of sales and distribution and then applies a markup for the intended profit, before deciding on a final pricing framework.
- Cost-plus pricing
Here, the SME adds a percentage to costs as a profit margin to decide on a market pricing decision.
- Loyalty-based pricing
In this pricing approach, the proposition offered uses all of the above pricing methods, and then prices are discounted to entice commitment, and therefore loyalty, over a period.
I recently met the owner of a company that sells software over the Internet to SMEs. Prior to this endeavor, this gentleman was a very senior manager in a well-known global software giant. What baffled me the most was his pricing strategy.john lincoln, author
In my mind, he truly lacked an understanding of his customer needs and affordability. More importantly, he failed to understand that his potential customers did not have the necessary cash flow for such upfront investments and that his only value proposition, relative to his other competitors in the market, was offering his customers an OPEX model versus a CAPEX model.”
Avoid the pricing pitfall
Most small businesses and SME owners often mistakenly request the good folks from the Finance function to set the pricing for their propositions. This is a grave mistake. The pricing strategy and the tactics have to be set by someone who understands the needs of the customers, customer perceptions, and market conditions and has a well-rounded view of the business.
Of course, as pricing is the purse string of your business, it is important that there be checks and balances. This means that any pricing strategy or tactic will need to be validated and approved by independent functions like Finance or Accounting. However, they should not set the pricing.
If you don’t get noticed, you don’t have anything. You just have to be noticed, but the art is in getting noticed naturally, without screaming or without tricks.”Leo Burnett, advertising pioneer
The importance of perceived value
Small businesses need to know that most customers buy their propositions not for their features (eg a phone) or their specific functionalities (eg camera pixels), but rather for the perceived benefits that the propositions deliver.
Features and functions – which are often the focus of product design specifications – are simply the envelop wrap for delivering the benefits that are desired by customers. Customer perceptions are critically important! A proposition may pass the required functional criteria, but a small business only gets credit if the customers recognize (i.e. “perceive”) that the product delivers the benefits.
Similarly, potential customers make purchase decisions considering a proposition’s perceived price. That is, how much a customer thinks that a product should cost him/ her. These perceptions may or may not accurately reflect reality.
Keep in mind that the perceived value is either the difference between the perceived benefits that a product delivers and its perceived price or the ratio of the perceived benefits and the perceived price.
Comparison of perceived values
SMEs should know that customers often decide that they will not pay above a certain price. They make these choices by comparing across a set of reference propositions, explicitly or implicitly, for unscientific perceptual benchmarking (eg this type of product should cost roughly this amount). For example, the cost of an Apple iPad versus a Blackberry Playbook.
Customers also compare among substitutable products that may be directly or indirectly competitive. For example, Colgate and Close Up toothpaste are directly competitive. Colgate toothpaste and mouthwash are indirectly competitive (since both serve a different purpose and are dental hygiene products – unless someone only uses mouthwash for their dental hygiene!).
JohnLincoln.one –The business growth hacker