When you launch a product in a market, you have to set its price. There are many different ways of arriving at a price of a product. Pricing cannot be done on a whim as it has a huge impact on the sales and the profits of the company. Three most common approaches to pricing are competition based, value based, and cost based. No matter what pricing strategy you choose, the price of the product should not be so high that it fails to generate demand for the product among the customers. It should not be too low either to be unable to cover the cost of production. The price of the product should fall between the price ceiling and the floor price. Let us discuss the three pricing strategies and how to pick one of these in the case of your product.
Price ceiling is the upper limit of the price that you can set for your product. This ceiling tells the highest price beyond which there will be no demand for the product among the end consumers. If you set the price higher than this price ceiling, the product will not sell at all. On the other extreme is the floor price which is just above the cost price of the product. If you set the price below this floor price, you will receive no profits by the sale of the product in the market. There are many price levels between ceiling price and floor price. You need to look at not just internal but also external factors before arriving at the right price of your product. These factors include the pricing of the competitors, the quality of your product and the type of marketing that you choose for taking your product in front of the customers.
Value based pricing
This is a pricing technique that is based upon the perceptions of the customers about the value of the product. There are some products in the eyes of the customer that are run of the mill and hold no perceived value for them. It is obvious that customers would not be ready to pay a high price to buy such products. However, if they believe that a product brings certain benefits to them or holds intrinsic value for them, they would readily agree to pay more for it even if it is more expensive than similar products made by your competitors.
Thus, you must analyze and find out this perceived value in your product for the customers if you are desirous of using this pricing strategy to set the price of your product. It becomes clear that customer value based pricing takes into account the perceived value of the product in the minds of customers and not the cost of production. This price is also independent of the pricing structure of the products made by your competitors.
Cost based pricing
This is the most obvious and also the most common of the pricing strategies. You make a product. You know how much cost you have incurred for this products, packaging, and marketing. You add your profit to this cost and introduce it in front of your customers. Cost based pricing appears to be logical and one that is also loved by the category of customers that are price sensitive. Cost based pricing is the easiest to understand and to arrive at the price of a product.
Cost based pricing strategy is not able to deliver high profits to a company. It is mostly used by companies that aim at higher sales rather than higher profits.
Competition based pricing
Unless you have invented a new product with unique features, you are selling a product that is already being manufactured and sold by many other players in the market. You can easily arrive at the price of your product by looking at the pricing structure of the products of your competitors. If you make mosquito repellant liquid, you have to keep in mind the price of the similar products being sold in the market. This is because your product is serving a very common purpose that does not make it stand out from the rest.
In conclusion, it can be said that the pricing strategy you choose for your product should be such that it increases your sales and maximizes profits. You can go for premium pricing which is based upon customer value based pricing if you feel your customers perceive your product as special and highly useful for them (such as an iPhone form Apple). But if your product is common like gasoline, you have to depend upon competition based pricing. Cost based pricing is the best option when customer can easily make out the cost of the ingredients required to make the product.