Pricing a product is as important as manufacturing or its distribution. During our early years in to a business, we deliberately try to offer products and services at comparatively lower prices. Somewhere down the line, these are termed as penetration prices. But one always forgets that price is not the only consideration which can scale up your business. There are other important factors like quality, timely delivery etc which if not more than, are equally important, compared to prices being offered. Initial strategy to have a price which beats the market level can definitely help you in getting into the market. But overall perception of a product or service carries more weightage. The overall perception is an important factor when it comes to deciding about the orders. Some of the business, I know have been offering dirt cheap prices for their services paying little attention to the quality and delivery attributes.
After initially penetrating the market and booking large orders, organization comes to a stage where planning and operations become important. At this stage in an organization's life focus shifts to nitty gritty of handling day to day operations. It is at this stage that the organization starts evaluating the prices being offered at different stages. Cost of inputs and operations, starts weighing on the management's mind. This is probably the first stage in realization that prices being offered are not comfortable. After the initial hiccups and once the firm has successfully executed some orders the process of brand building sets in. This is a very long drawn out process and may take years, even decades. From here the focus of organization shifts from survival to improving profitability. The earlier years spent in positioning and placing the organization on firm pedestal, are really tough. Even now, the road is not so smooth but still once some sort of brand image is created the focus shifts to optimization of resources and improving of efficiency. Brand building is a gradual process. But once the operations have stabilized, focus has to shift growth and improving profitability. Many organizations who have been there in the market fail to notice the opportunities and keep on progressing at the same price levels. A matured organization has to be always on its toes, sniffing for opportunities to increase their profitability. The initial penetration pricing can only help in breaking the ice. Once the ice has been broken there are so many things to be kept in mind to assess the situation and decide about the future strategies.
Pricing considerations:
Sizing and analyzing composition of markets: This is virtually the first step in building strategies for product pricing. Considerations should be given to targeted groups and their profile mapping. This may includes spending pattern, preferences, age groups etc. Asses the size of existing market. How much of the available market you are going to target? How you can uniquely position your product and services? A learned British scholar once said if you do not have the potential to reach to the top in your domain doesn't run your business. So the important thing is to assess how much market share you can target in the specified period and later on.
Position your product and services uniquely: your efforts need to figure how much additional value you can offer over the existing products and services. Always try to position your product uniquely.
Cost analysis. The most important factor in pricing a product is its cost. You need to work out your costs and overheads at different levels of operations. Costing can always be tricky proposition. Work out your estimates threadbare.
Consider product life cycle: every product goes through a life cycle and needs to be dealt in a different way altogether at each stage of product life cycle.
How to find out whether you are under pricing your product?
You may have entered the market at the penetration price and you have raised the levels step by step on uniform incremental basis. But you still feel that you are not getting the right price for your product or services. Pricing is normally done on cost plus basis initially it is only after you have established yourself in the market that you start assessing yourself with Value based pricing. Value based pricing is normally done for products or services which have been there in the market for quite sometime and have established themselves. One you have established brand, customer is willing to pay the price more than the cost plus price levels that you may have contemplated, in past. A customer is willing to pay you more for your product provided they are saving money at some other place. One of the examples which come to my mind is that a customer would prefer to visit local service provider for repairing of air conditioner than spending time going to a far away centralized place which may waste his time and other resources. In such a situation the local service provider can definitely go for increasing prices over and above the actual cost plus estimates. Customer will not get offended if organization starts charging more here.
Warning triggers:
Beware of these triggers. You may have underpriced your product or service. Be on lookout for these signs.
Your periodic financial performance starts showing a dip. These could be because of so many factors like overall slowdown in the economy, increased competition etc but one need to have their antennas in position for sensing any of the warning signs.
Sudden spurt in number of enquiries being received at your end. It may so happen that although you because of you pricing lower than the value it is offering, customers are flocking to your counters. It is here only that you take a call whether you can start charging more or would like to scale up your facilities. Handling such situation is always a tricky proposition.
Always be on alert. Increase in prices needs to be well timed.
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