By: Bianca and Mimi
While it can be tricky for some businesses to determine what kind of pricing strategy will work best for them, there are plenty of options to choose from. Pricing strategies normally fall into three groups, which are based on cost, competition, and value. It is important for a firm to evaluate the pros and cons of each option before deciding which is the best option for them.
Cost-based pricing is based on the cost of goods or services plus a markup. This method is usually thought of as the most basic, as it usually involves simply creating something, selling it at a price higher than what it cost to create, and then benefitting from the difference. A perk of this strategy is that there is not much research involved, besides calculating the cost of production and desired profit margin. While this seems like an intriguing option, cost-based pricing does have some cons. For example, this strategy does not consider consumer preferences or strategies of their competitors. By not taking these factors into account, a firm can run the risk of being regarded as lower quality or being beat by a competitor.
Competition based pricing refers to basing your pricing off that of your competitors. This strategy works best when a firm knows they can provide something that their competitors cannot. This option can seem attractive to many who are new to entering a new industry and have competitors who have spent an extended amount of time developing their strategy and understand the market. Companies that are new to a specific industry have a second mover advantage, as they able to learn from a first mover competitor and analyze whether they would benefit from pricing a bit lower or higher in comparison. However, a disadvantage to this strategy is that it limits the ability of a firm to connect price to their true value, as they are mostly comparing themselves to others, potentially leading to missed opportunities. They also run the risk of engaging in a price war with a competitor, which could lead to several firms losing revenue.
Value based pricing is based on the consumer’s perceived value of a product or service. While this strategy might be the hardest to master, it does have the potential to great the best results. A big advantage to this option is that a firm tends to charge the highest price possible from the start, which makes them more likely to earn more with time, while also getting a better sense of the consumer’s preferences. By adding more valuable products and or services, a company has an even more opportunities to maximize their profit. While there are plenty of pros to this strategy, it also comes with a few drawbacks. One being that it requires much more extensive research compared to the other pricing strategies. The company would need to create buyer personas to truly get inside their heads and understand what their needs are. Value based pricing also involves a bit more risk, as it can take some trial and error while determining what the right price is, since there normally isn’t a definitive benchmark to go off.
While all three pricing strategies have their pros and cons, it is important to recognize that there is not one specific option that will work best for any company. It is crucial for a firm to do a bit of research before picking a strategy to determine which will produce the best results for them.