▷ 3 Main Strategies to Set Prices Correctly

  • Aug 08, 2022

For companies, one of the issues that usually causes the greatest tension is the pricing correctly, because the profitability of the business depends on the price, since this is a determining factor for attracting potential customers, and therefore directly affects sales margins.

Companies are often involved in constant dilemmas in how to find a breakeven in the determination of prices that allow them to generate a cost effectiveness, at a competitive price and that in turn generates value contributions to the client.

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This, of course, is not an easy task, since it implies taking into account different internal and external factors that are decisive for decision-making in the price fixing, discerning between what is desired and the reality of the company.

It is there, where marketing becomes the best ally for the development of strategies for setting prices correctly, which suits the needs of customers and the company; Therefore, it cannot be mistakenly thought that the object in setting prices should be solely focused on generating the largest profit margin. possible profit, if that implies sacrificing other factors that are key to the success of a company, also affecting its cost effectiveness.

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To understand what this important topic for companies is about, let's see what those are. Top 3 Strategies for Pricing Correctly and the determining factors.

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pricing strategies

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Pricing is the process implemented to determine the amount of money that the company will charge for a certain product or service, which is made up of the sum of production costs plus the profit margin to be received; said sum being the amount of money that the client will have to disburse to receive as consideration a good or service.

However, pricing must strike an acceptable balance, between a price that is not too low to allow the company generate profitability, and that in turn is not too high to be able to capture market demand and generate sales.

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In this article you will find:

3 Strategies for Correct Pricing

For a company to develop effective strategies, it must know how to establish a balance between a price that is acceptable to the client and to the company, defining a clear approach for setting prices.

In this sense, 3 main pricing strategies can be differentiated, which are:

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1. Pricing strategy focused on generating value for the customer

Generating value contributions to the client must be the fundamental basis of any business, since, only if value is generated, can the consumer's purchase decision be influenced, when a customer makes a purchase, he does so because the product or The service offered generates a value to satisfy your tastes and needs, and therefore you are willing to part with your money, if the price is acceptable to you. the.

For this reason, companies must first learn to identify what is the perception of value that your customers have or target audience, since it is the most accurate way to know, in advance, if the price will be acceptable in the market.

Once the perception of value has been determined, the company can plan a cost structure that allows the sale price to be adjusted to a price that is acceptable to the customer.

This does not mean offering at a cheaper price, but that the price to pay is in accordance with the perceived value; With this, basically what is implied is that, for the client, the benefit justifies the price.

However, pricing strategies focused on generating value are further divided into two, good value-based pricing and value-creating pricing aggregate.

Good value-based pricing strategy:

Good value pricing is focused on generating a right balance between quality and price, which can be adapted to changes in the perception that customers have about "value", since what today generates value for them today, may not tomorrow.

Well, the perception can vary according to the environmental conditions, such as economic fluctuations and consumption priorities.

For this reason, more and more companies are opting for this pricing model, expanding their offer to different products and services in price and quality, that adapt to different types of budget and habits of consumption.

Pricing strategy based on added value:

Under this strategy, companies They not only focus on generating acceptable value for the client, but also seek to differentiate themselves from their competition., creating additional value, adding distinctive features to your product or service that justify your prices.

In this way, the company can improve the perception that customers have of the brand, providing them with an experience that the competition is not capable of offering; therefore, even if prices rise, customers are willing to pay more, improving sales margins.

2. Cost-Based Pricing Strategy

Cost-based pricing allows the company to identify what is the minimum price that a company can charge, unlike the customer value-based pricing approach, which identifies the maximum price a customer can expect to pay.

These costs represent disbursements of money that the company has to make in order to produce and market its products or services, to which a profit margin is added.

Costs are a determining factor in setting prices, since a large part of their ability to compete in the market and generate profits depends on them.

A company with a lower cost structure than its competition can offer quality at a lower price, and generate a profit margin; its competition, on the other hand, if they want to remain competitive in the market in terms of price and quality, they will have to reduce your profit margin, but you must strive to increase the volume of sales that allow you to generate a utility.

However, by having a higher cost structure and more limited profit margin, it leaves them at a disadvantage as they are less able to cope with market fluctuations.

Therefore, companies must know how to identify your costs, both fixed and variable, and establish a price that at least covers your total costsOtherwise, it will produce based on losses, which would compromise the continuity of the ongoing business.

Ideally, companies learn to identify and optimize their costs without reducing quality, setting an acceptable price for both the company and the customer.

In this sense, two pricing strategies based on production costs can be established: The first is margin pricing and the second is point of sale pricing. Balance.

Margin Pricing Strategy:

By using this pricing strategy, the company adds over to the value of your costs, a standard profit margin, this way it is easier to set prices and calculate your profits.

This method is currently widely used, especially by retailers, due to its easy implementation; however, it is not the most efficient method as it completely ignores the market price generated by supply and demand.

Consequently, companies end up ignoring the market compartment, and how it can influence their sales.

However, in regulated markets whose setting of minimum or maximum sales prices establishes this methodology, companies end up reducing the differences between the offer prices.

Break-Even Pricing Strategy:

With this pricing strategy, seeks to establish a point of balance that allows the company to determine how many units you need to sell to generate the revenue margin needed to cover your production costs, without generating any profit, and from there determine how many you have to sell to reach your profitability goal.

This is established by a graphical representation, displaying the relationship between income, costs and sales volume, which allows determining how any variation in these factors influences profitability.

In the graphical representation, the vertical axis represents the revenue margins and the horizontal axis the sales volume (units), joining the points between the two variables, the equilibrium point can be determined, this equilibrium point corresponds to the intersection in which the income reaches to cover just the total of the costs (fixed costs plus variable costs), when reaching a certain volume of sales.

From that point of balance, the company can determine its profit or loss based on the volume of sales, a curve with a Sloping to the left of the break-even point represents loss, and a curve sloping to the right represents utility.

Although this method allows the company to determine how many units it has to sell as a minimum to cover its costs, and how many units above that margin it needs to sell to generate the desired profitability, this is a method that does not take into account other factors such as the behavior of demand in the market and the value that is generated for the client, through the relationship price-demand.

3. Competition-Based Pricing Strategy

As a pricing strategy, many companies rely on competition, taking into account the strategies of competitors, in this way the company can analyze the contribution of value that the competition generates to the client for a certain price.

This allows you to get an idea from a broader perspective of how compare and differentiate your offer with that of your competition In terms of value contributions to the customer, if the company can manage to generate a higher value contribution, and customers perceive it as such, the company will be able to charge a higher price.

But if, on the contrary, you cannot offer greater value than your competition, you will have to reconsider, reduce the price, or look for the way to improve the perception of value that customers have with the product or service offered, in relation to the competition.

Factors Affecting Pricing

Pricing is a determining factor for the profitability and operational capacity of a business in an continuous, but the determination of the adopted strategy is also affected by both internal and external factors. external; any pricing strategy that does not take these factors into account may prove ineffective.

In this sense, the following factors are distinguished:

internal factors

The internal factors in companies that influence pricing are related to the internal reality of the entity, some of these factors are:

  • marketing objectives, they influence the pricing strategy to be implemented, whether the objectives are defensive or aggressive, and whether they are quantifiable or qualitative.
  • marketing mix, Pricing decisions must be defined taking into account the relationship of the other "P" such as Product, Place, People, Promotion, among others; that are planned in coherence with the price.
  • The cost structure, costs are the basis for setting prices, since the utility or loss to be generated depends on these; For example, a company at a given moment may choose to produce based on a loss, subsidizing part of the price of the product, in order to displace the competition, used as a defensive strategy or aggressive.
  • Company objectives and policies, pricing is often affected by the objectives and internal policies of organizations, these being the ones that define prices, far above any pricing strategy, rejecting any strategy that is inconsistent with its institutional principles.

External factors

External factors represent all those variables that revolve around a company, which affect pricing, such as:

  • Current legislation, some markets are subject to regulations, such as the regulation of minimum or maximum prices as a protectionist measure for consumers or producers, which directly affect the setting of prices.
  • competition, this is a key factor used as a reference point for pricing, as it helps establish a criterion of the market price, for similar products or services, in characteristics and contributions of worth.
  • The client, this is who establishes the perception of the value of the product or service offered, and based on said perception, establishes how much he is willing to pay; the company can negotiate with the client through the behavior of supply and demand the final price, but as a supplier it is important to know the relationship between price and demand, according to the conditions of market.
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