One of the most important tools you have for building and monetizing your customer relationships is thoughtful pricing and packaging - and marketing needs to take an active role in this pricing exercise.
Pricing should be dynamic. And the importance of your pricing strategy in marketing cannot be ignored. When you're selling products, pricing tends to be "cost plus.
Depending on how many products you can sell, your prices may be smaller and margins lower. But business models are changing - and, along with it, so are effective pricing strategies. Were in a new subscription world where customers don't just want to buy products.
Hamilton, Pricing Strategy: how to price a product by Bill McFarlane, Pricing for Profit: how to develop a powerful pricing strategy for your business by Peter Hill, Topics: Strategic Pricing.
Book a Chat. Posted by Moira McCormick on March 29, Find me on: Twitter. The Pricing Pyramid A comprehensive pricing strategy is comprised of many layers creating a foundation for price setting that minimises erosion and maximises profits over time. Significance of Strategic Pricing What customers are willing to pay for a product may be vastly more, or less, than a company would charge if it simply priced based on cost.
Alternatives to Strategic Pricing Traditional pricing is set either based on the cost of production or on the price that competitors are charging.
Example Software companies often use strategic pricing because they cannot price on cost. Tips for Strategic Pricing Strategic pricing is a marketing decision, which means it should be informed by dialogue with your customers. Keeping a close eye on your competitors is important, but remember they are not the ones purchasing your product, and they may be making mistakes in their own pricing. Recognise what your customers value and charge them accordingly rather than going head to head on price with competitors.
How to Measure Value Is it possible to put a price on importance or satisfaction? Price and Value Communication Poor communication of value results in higher price sensitivity and more intense price negotiations. Conclusion One reason companies find pricing challenging is because they lack a systematic process to translate such diverse inputs as customer value, costs, broad strategic objectives and competitor prices into the right price. Hamilton, Pricing Strategy: how to price a product by Bill McFarlane, Pricing for Profit: how to develop a powerful pricing strategy for your business by Peter Hill, Recent posts.
Tracker Customers Pricing. BlackCurve Solutions Limited. For example, the price of petrol or diesel in India is based on the cost of oil in the international markets. Cost-based prices are calculated based on certain accumulation of the accounting data. Variable cost — Consisting of direct materials and direct labour and consumables. These are directly attributable to each unit of product or service.
Fixed costs — Employee costs, marketing costs of advertising, and sales promotion and distribution costs. Financial costs and profits — Consisting of depreciation, interest, and return on investment. The situations under which service prices are based on costs are:. When the service is introduced for the first time and there are no other references for price fixing.
Thus the cost was the main basis of pricing. When the number of competitors in market is limited to one or two. Cost- based pricing allows the competitors to make adequate returns and makes them hopeful of achieving the target returns. The cost-based pricing system continued in the mobile telephone circles when only two operators were present in each circle. In the case of unusual work, or work whose content is difficult to pre-estimate, the service provider and the client may come to a mutual agreement on the basis of the cost of the effort made by the service provider.
This practice is common in the Indian consulting business. However, there are quite a few limitations of this cost-based pricing. Estimation of variable cost of a service is difficult. Without reference to the variable cost, the total cost estimation may be even more difficult. The utility of services incurring the same costs may not be the same for the customer.
For example, changing of the zipper of a trouser and changing of the zipper on a cloth handbag may involve the same amount of effort on the part of the mender. However, if charges are Rs. Thus the service provider may be able to charge even Rs. While the service provider may be aware of the cost structure, the customers may not be aware of it; hence, the customers may be averse to paying the price.
For example, in a city there may be an expensive movie theatre very near the railway station. While it costs Rs. To the customer, it does not make sense to pay five times the amount for the same service, while for the parking lot franchisee, this is the minimum that he can charge in order to pay the rental to the cinema hall. Competition-based pricing is another way in which the prices are set by the service providers. An example of this in the Indian context is the air-travel prices between metropolitan cities.
Thus, competition leads to tremendous benefit for customers. When the American domestic air travel was deregulated, the prices were no longer based on cost but became dependent on the level of competition and led to severe price wars.
The service provider also benefited from higher volumes. Similarly, when mobile telephony was introduced in India, due to lack of competition the customers during paid as much as Rs. By , the rates have been reduced up to Rs.
Going rate pricing is another form of competitive pricing. When there are a large number of service providers, or when a new entrant comes into the market, usually the price cannot be fixed by the new entrant or any single provider. For example, there are a large number of Internet cafes in Indian cities. The competition is intense and there are very few factors to differentiate the service.
Therefore, the rates for the access fell to as low as Rs. The same uniform rates are applicable wherever you go. In order to be able to charge a rate that is higher than the going rate, it would be necessary to offer higher speed access, better surroundings with restaurant facilities, or newer computers to create the differentiation in the service. Improved benefit would be necessary to justify higher prices.
In economics, the demand curve shows the relationship between the price and the quantity demanded. We are familiar with the general axiom that higher prices reduce the quantity demanded and vice versa. Due to the perishable nature of services, whenever the demand exceeds the supply, due to lack of inventory, it cannot be met.
Time Differential Pricing :. Telephone networks, Internet servers, etc. Business callers tend to call typically during the working hours. Therefore, the network capacity, while sufficient for the daytime load, remains idle during the evening and night. Thus, there was a full daytime rate 7 am to 7 pm , an evening rate 7 pm to 11 pm at half to one-third of daytime rate, and a night calling rate 11 pm to 7 am at one-fourth of the daytime calling rate.
Similarly, a number of business hotels offer very attractive low rates during the weekends. At business hotels, rooms remain vacant from Friday night until Monday mornings. The hotels try to offer rooms at special low rates, introducing special tariffs for couples, families, etc. As out-of-town customers are unlikely to make use of such tariff, it is mainly aimed at local residents.
Quantity Differential Pricing :. In line with the principle that the loyal high volume customers should enjoy greater pricing advantage, a number of service providers have quantity differential prices. For local commuter services, Indian Railway offers a monthly pass that allows unlimited travel on local trains. The price of the monthly offer is equivalent to about eight to ten return journeys between points of origin and destination. Similar tariff is offered on long-distance trains up to a distance of about kilometres.
Place Differential Pricing :. The customers feel they are more intimately involved in the action. Consequently, the organizers try to make use of this demand factor to secure hefty premium. Thus, the front row seats for a Lata Mangeshkar concert could be as high as Rs.
Seasonal Differential Pricing :. The beach resorts and other hotels in Goa experience a slump during the monsoon season from June until the end of September. Therefore, to make best use of the capacity, a number of hotels offer very low off-season rates to attract different type of clientele.
We will deal with this topic in depth under supply and demand balancing. In addition, this pricing strategy is based on marginal cost.
Marginal cost is the additional cost of serving the additional customer. Marginal cost is the direct material and labour cost. Value is defined as perceived benefits for the total cost of acquisition. Higher value perception due to lower price for the service. Higher value due to higher perceived benefit, which may accrue due to high quality of the service or other value perceptions.
Price Discounting :. To a number of customers, if the same service is offered at a lower price, the value perception of the service goes up. Odd Pricing :. The prices of the services are set at a price just below the rounded sum. Thus a large sized pizza may be priced at Rs. Psychologically, the customers feel that they have paid much less than Rs. Penetration Pricing :.
This is the type of pricing used to build large volumes. Take nose or ear piercing as the latest fashion. In order to get larger number of customers to do a trial, the initial introductory offer is based on low price.
Once the service becomes well known, the prices are set back to the normal level. Bundled Pricing :. The Pizza Hut chain may separately offer medium-sized pizza for Rs.
However, in order to get customers to buy all, the three may be offered as a combined meal for Rs. This bundled price lets the customers focus on the benefit of a total meal, instead of making them nervous about spending well over Rs.
The customers are not able to price the individual components of this offer, and thus it does not let customers dwell on the price but lets them concentrate on the benefits of such offers. Prestige Pricing :. To some customers, part of the value perception is being different from others. Those who want to make a statement about their status, wealth, leadership, innovativeness, etc. Thus, the customers would be prepared to pay high fee for a new health club or dance class started by a celebrity, or to have a personal trainer and pay for it, etc.
This type of demand usually does not obey the law of price and demand. Usually, in this case, the higher the price, the higher the demand.
However, the total size of such a market is usually limited. Segment-Wise Pricing :. In addition, the companies may consider purchase of multiple licences or a server version of the software, or even the professional version. Therefore, they are offered a student version of the software at very attractive prices. Loss Leadership Pricing :. In this type of pricing, the basic or fundamental services are priced at quite a low level. The home cable industry is likely to undergo a number of changes in the near future.
The pay channels want to charge a fee from the operators while the government wants to ensure the availability of these channels at low cost to the consumers. Amongst the competing cable connection suppliers, the dominant supplier may agree to exhibit the free channels package at very low prices.
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