Method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on the customer's perceived value of the product in comparison to his or her perceived value of the competing products. Different pricing methods place varying degree of emphasis on selection, estimation, and evaluation of costs, comparative analysis, and market situation. See also pricing strategy.
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Six Approaches to Effective Pricing
Pricing is an integral part of the marketing process. The right price can generate more sales; the wrong price can make your potential customers and clients look elsewhere. The following are six of the most common approaches to setting prices.
- Start-up pricing: If anyone just getting started in his/her business, offer customers an introductory rate that's set at a point somewhere between what other, established businesses charge and the amount you would be paid if you were doing the work on salary for an employer.
- The going rate: Set price at the going rate and differentiate business through things other than price, such as better customer service.
- Splitting the difference: If competitors offer a range of prices for the same products or services — some high, some low, and some in between — split the difference between the top and the bottom of the range so you can be sure that your price is neither too high nor too low.
- Percentage of the results: Rather than focusing on price, focus on results by tying your fees to the outcomes that you bring about. For example, if you run a collections business out of your home, you may charge a percentage of the money that you collect, say 40 percent, or 40 cents of every dollar collected.
- Bargain basement: If anybody really want to generate a lot of business quickly, you can dramatically undercut your competitors' prices. Before you try this approach, understand that some potential clients may be wary of buying products and services that are priced substantially below the competition. Understand, too, that you may not be able to keep this approach up for long without doing serious financial damage to your company.
- Premium: Another option is to set the price at a premium, above your competition. This approach works well when the product or service you sell can be differentiated from those offered by your competition, and you can add value that your clients and customers can see and appreciate.
After set prices, keep close tabs on what your competition is doing. Are they raising their prices? Lowering them? When your competition moves, be prepared to adjust your prices accordingly. Many times, you simply want to maintain your prices exactly where they are, and deny requests to lower or discount them. While you may lose potential customers in the process, your business will be healthier.