Competition, costs, demand and market trends are all examples of issues that affect how we price our products and services. Ultimately, we all set our sights on a price that will maximize our profits, but those products and services that are most successful have often made a loss before they have become profitable.
This was a result of successful pricing strategies at different times and situations in their life cycle. All pricing strategies are debatable and there are no fixed rules: good management is the key.
Successful pricing falls in-between two boundaries: the minimum, which will cover all costs; and the maximum, where demand starts to decline. Recognizing these boundaries requires good product management and extensive market research.
The Influences on Pricing Your Product/Service
Business Objectives
Many businesses price their product or service to achieve an objective. Such objectives can include:
Maximizing profits
Sales growth
Achieving a certain market share
A targeted return for investment
In which case, prices will be set high or low to achieve the proposed objective.
Costs
Small businesses, particularly new start-ups, need to cover all costs in order to survive and encourage future growth. Although most businesses will not recover costs in the short term, it is important that you set a price that will recover the costs in the long term (through continuous sales).
Competition
Perhaps one of the most influential factors, competition can have a significant affect on pricing. Some businesses have the finance and image (branding) to eliminate competition with such pricing, but for those businesses that are trying to be eliminated: they find it very hard to respond using similar strategies and consequently go out of business by doing so.
Customers
We have to appreciate that customers value products themselves and if they feel they are not getting value for money, they simply do not buy. Likewise, if they feel a product is cheap, they do not buy it because they believe that the product has little quality.
The extent to how you market your product can influence customer perceptions: if you market your product/service as quality, luxury, etc, customers will expect they have to pay more.
Customers are directly responsible for setting trends and fluctuating demand. As a result, prices have to be set to compensate for the changes, which can be beneficial if demand goes up, but also disastrous if demand falls.
Legal Concerns
The obvious products that are affected by legal concerns are alcohol, tobacco and petrol as they all include tax. For those businesses that offer services where vehicles are used to a high extent, you may decide to set prices to compensate for road tax and petrol (already taxed).
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