1. The level Of Competition
Most entrepreneurs fancy the concept of selling their products with a very high margin. This idea can only be realistic when you have a monopolistic hold on the market. But if not, you can’t sell with your desired profit margin without getting a sting from competition.
“In business, the competition will bite you if you keep running. If you stand still, they will swallow you.” – Victor Kiam
When trying to adopt a product pricing strategy or determine the right price for your product, the issue of competition is a factor that must be trashed out effectively. The more intense the competition in your industry is, the more flexible your product pricing strategy and policy will have to be.
“Defeat your opponent by strategy and flexibility.” – Sun Tzu
The point I am trying to stress here is this; if your competitor sells the same product you are selling but at a lower price, it may affect your business negatively. That is why a feasibility study or business plan always includes an opposition or competition analysis section.
Never implement your product pricing strategy without first putting your competition into consideration. Pricing your product without giving a heck to your competitor’s product pricing strategy is a sure way to business failure; so don’t do it.
“The ultimate goal of the Dangote Group is to dominate every niche in which it operates. In order to achieve this goal; we acquired over 3000 new trucks, developed a strong distribution network and increased production capacity. Our strategy is to sell our products faster than our competitors and at uniform price.” – Aliko Dangote; the richest black man in the world
2. Perceived value of your product
This is another factor you must take into consideration before setting a price for your product. Your first step is to ask this question “what is the perceived value of my product in the heart of the customer? You must strive to find a good and definite answer to this question before fixing a price for your product.
The reason perceived value is a critical factor to consider in a product pricing strategy is because customers often associate low price with low quality. Meaning, if your product is priced too low, the customers tend to feel the materials used in producing the goods is inferior and so therefore, the product is of low quality. So before fixing a price for your product, make sure you strike a balance between the price of your product and its perceived value.
3. Product development cost
This is definitely a factor you cannot turn a blind eye to. With respect to normal business and market economics, you should never price your product below its actual cost price. Your actual product cost price is determined by the total cost of production including tax, divided by the total number of products produced.
But in this case, I am not talking about production cost. I am talking about product development cost; a cost incurred from research and experimentation, a cost that’s usually incurred when bringing an innovative product to the market. If you are a business owner, you should know that newly introduced products usually command a high price. This high introductory price is based on two reasons:
a. The first reason for the high product price is due to lack of competition. Since the product is the first of its kind in the market place, there will be less or no competition thereby giving room for the company to fix price.
b. The second reason is this; a high price will enable the manufacturer recover the heavy investments channeled into the research and development of the product.
However, I have seen some company successfully use the product pricing strategy of losing on the front end by pricing below cost price only to recoup you losses and pick up some profits from the back end. So whatever product pricing strategy you choose; just make sure it positively adds to your bottom line.
4. Economic trend
This is another unavoidable factor that can influence the pricing of your product. I don’t even need to stress much on this. As an entrepreneur, you should know that economic factors such as taxation rate, labor cost, inflation rate, currency exchange rate, government’s fiscal and monetary policy will definitely influence your adopted product pricing strategy either positively or negatively.
5. Level of market demand
This is the fifth factor that can greatly affect your product pricing strategy. Just like economic factor, I feel this point is self explanatory. In business economics, if demand exceeds supply, there tends to be a mad rush for the few available products, thus inflating the price of the product and vice versa. Some companies even go as far as creating artificial scarcity in order to gain a stronger hold on the industrial price level.
The demographics of the targeted customers will indisputably influence the pricing of your product. Demographic factors to consider before taking a stand on your product price include:
The age bracket of the customers you are targeting
Your business location and customer’s location
Educational status of your targeted market
To cut it short, demographics is all about who your targeted customer is. Let me share an illustration with you. Assuming your product is a portable bag specifically designed for students. If the region you are targeting has a population of maybe 100,000 out of which 90% are students. The result is that your product price will be affected positively. But if the case is reversed and you have a population where only 10% are students; you know what to expect.
7. Class of targeted customers
The class of customers you are targeting will greatly influence the pricing of your product. In the society, there are three classes of people. The rich, the middle class and the poor or more preferably “low income earners,” who are always the majority in terms of population.
A product targeted at the rich will surely command a higher price than those targeted at the middle class. If products targeted at the rich commands a low price, it will be tagged valueless by the rich.
So when devising your product pricing strategy; consider the societal class of your targeted customers first. It’s very important. For instance, there are cars for the rich and cars for the middle class; both can’t be can’t be sold in the market place with the same product pricing strategy.
Example of an entrepreneur that adhered to the “class of targeted customer” factor while devising a product pricing strategy and became extremely successful was Henry Ford, founder of Ford Motor Company. His company’s mission statement was “Democratize the automobile.”
Before the coming of Henry Ford, cars were exclusively for the rich. Another entrepreneur that won at the product price level was Sam Walton, founder of Wal-Mart. His adopted product pricing strategy was summed up in the company’s slogan “Always low price.”
As a final note, I think it’s worthwhile you know that price is a double edge sword that can either make or break your business. So when devising a product pricing strategy; do it with utmost caution.
To be on the safe side, don’t do it alone. It would be wise to avoid meeting head-on with your competition while implementing your tactics; so try and work your way around into areas that are less competitive. Devise a product pricing strategy together with your business team, professionals or external advisors.
Agility and fast thinking really helps in this case. Start somewhere else comfortable so you can initiate changing the rules of the game to your favor. Learning how to create a competitive product pricing strategy will lead you to understand how to stay one-step ahead of the competition and working your way from there. Who knows, your product price; if unique, can give you a competitive edge.
“You don’t have to be the biggest to beat the biggest.” – Henry Ross Perot
1. The level Of Competition