Pricing Your Products for the 21st century Consumer

The price of a new product or service depends on a wide variety of factors. Price-setters must analyze variable and fixed cost structures, the competition, the evolution of the market, the legal framework, product quality and brand image.

Above all, however, there’s demand. Demand must be both understood and, as far as is possible, anticipated. What is the expected value and what do consumers consider a fair price? What’s the maximum they’re willing to pay? Are all consumers the same or would some pay a different price for the same item? How will consumers react to a price change?

The Psychology of Pricing
When we buy things, the decisions we make are more intuitive than rational — something that is worth remembering when we’re the ones setting the prices. Here are some of the effects of the “bounded rationality” consumers experience when shopping:

• They value the alternatives with respect to a reference point or price range they consider reasonable, which is not necessarily grounded in reality.

• They evaluate gains and losses differently, which means a price decrease, could help sales to a lesser extent than an increase would hurt sales.

• They update their pricing references. If a brand repeatedly relies on price cuts as a tool to acquire new customers, they will find that the prices that consumers have in their heads will keep coming down, making each new promotion less effective.

• They are more likely to buy a favored product if a clearly inferior product is added to the mix (the pull effect). When there are two products, and each one is better than the other in some way, and then a third product that is inferior is added to the mix, we see an increase in sales of the product already favored by the consumer. For example, if we have a 100-USD camera with 10 megapixels and a 50-USD camera with 5 megapixels, and then we add a third camera that costs 100 USD and has 8 megapixels, we will see increased sales of the preferred choice.

• They tend to select the middle option (the compromise effect). This has happened to most of us, you go to a retail shop to buy a pair of socks, belt or even a suit. When there are very expensive suits listed, slightly less-expensive suits or whichever item look cheaper by comparison, and people tend to choose one of them over the cheapest options.

• Their sensitivity to price changes is not linear. Therefore, the fact that a 1 percent price increase leads to a 2 percent drop in sales does not necessarily mean that raising prices by 30 percent would translate into a 60 percent drop in sales.

 The Pricing Process

To simplify the complex process of pricing a product, it’s essential to be clear on what the goal is. A brand may aim to increase its market share or to discourage potential competitors from entering a market with varying pricing strategies.

After the objective is set, the following steps should be followed:

• Determine the demand. Take into account the variables that may affect price sensitivity, such as the uniqueness of the product, its quality, the existence of substitute goods or the difficulty of comparison.

• Estimate costs. By knowing the cost structure, you can figure out what the minimum price must be to avoid incurring losses, and establish minimum and maximum prices.

• Study the competition. Pricing is one of the main weapons to separate one product from the competition. Consider the pricing strategies and tactics of others, their positioning and pricing changes.

• Choose your pricing technique. Methods include pricing by margins, by perceived value, aiming for a certain rate of return, comparing competitors’ prices, or by bidding.

• Determine the final pricing. It is important to consider the influence of marketing elements, such as advertising. But when it comes to setting the final price, you must also consider how sellers and distributors will feel, how the competition will react, whether suppliers will increase their prices when they see an increase or even if the government might intervene to regulate prices.

Following these steps will lead us to an ideal price — conjuring up a maxim that bears repeating: a product is worth whatever consumers are willing to pay for it.

This article only gives high level guidance on pricing, If you are need in depth assistance on knowing when to vary pricing for your products or services or how to gauge customer sensitivity to potential price moves and also expert advice on how to avoid price wars and steer clear of any pricing practices that are unethical or illegal get in touch on victor@viffaconsult.co.ke