1. Consider price to be a part of the entire branding process. Keep your target customer segment in mind and set price so that your brand offers better net value than your competitors. Research to establish the key attributes that the customer uses to make a buying decision. Consider elements of money, time and convenience that add up to the total cost customers have to pay for the purchase. The net value a customer gets from your brand should be better than that of competitive brands and generic products. Be objective and even ruthless when you make the competitive analysis, because a bias in favor of your brand could lead to an error in pricing.
2. Presentation matters: it has to be easy for a customer to understand and to remember your price. Most people enjoy negotiation and special treatment and hence you may wish to present your price at a level somewhat higher than you really want, leaving room for deals and offers for loyal customers. Many digital and electronic products have established the utility of entry at a high price with reductions as the product category grows.
3. Use mark-up and cost considerations to plan your finances and to decide whether or not you should remain in the business. However, do not let accountants take pricing decisions, as internal parameters are not likely to be relevant in the market place. Simultaneously, do not allow cowboys in the competition dictate your pricing-aggressive moves on their part to gain share will not be sustainable in the long run. The net value perceived by the customer will prevail.
4. Provide for unplanned losses, risks and liabilities. Natural disasters, political upheaval, claims and product returns have a nasty habit of surfacing when you are least prepared for them. Pricing has to provide overage that serves as a reserve in times of sharp downturn and disruption. This implies an unwavering stonewalling of fixed cost growth. Always try for variable cost options, even if they mean higher costs and lower margins.
5. Use pricing as an entry-barrier weapon against new entrants and substitutes for the product category in which you operate. Consider the incremental expenditure you would need to incur to protect your share from new or additional competition, and keep your margins at a level that makes the business attractive for existing players but inadequate for a company that would need to start from scratch. Firms will be attracted to your industry as bees to honey if you operate at very high profit margins. You could also resort to some marginal costing and reduce effective price for some time through offers and promotions to help competitors sitting on the fence to bite the bullet and exit.
Pricing is an art and calls for strategic insights in to your business. Do not let simple arithmetic cloud your vision. Never forget that pricing is a part of your brand’s personality and that you must not tinker with the long-term image that you have striven to create.
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