Business outsider
Tunji Adegbite
An effective pricing strategy is the not-so-obvious but crucial part of any business’s success. It is not enough to simply make a great product; business managers must pay attention to one of the vital pieces of the puzzle – determining what the product is worth to their customers and how to communicate this best. Several important factors must be considered while determining a suitable pricing strategy in an increasingly competitive marketplace, such as customer’s willingness to pay, product positioning, competitors’ prices, production direct and indirect costs.
Pricing strategies reflect a business’s understanding of its customers’ demographics and psychographics, without which the company is missing the opportunity to grow and expand its reach and revenue exponentially. In the hierarchy of importance to business growth – pricing (monetisation) has the most significant impact on revenue, followed by customer retention and acquisition.
The first step to developing a pricing strategy is to conduct a pricing analysis. It is also advisable for every business to create a consistent price review process, to evaluate its pricing against competitors and consumer expectations. A price analysis involves:
· Evaluating the cost of the product or service (and breakdown into fixed and variable elements)
· Understanding your positioning, market structure, customer segments and how they respond to different price structures
· Analysing competitor’s price
· Reviewing any external influences and/or constraints to cost and price;
Developing a pricing strategy is not a one-time event. Even established businesses must continue to evaluate the performance of their products and deploy new pricing strategies in response to market conditions or to drive customer acquisition. Data has shown that pricing is four times and twice more efficient for business growth than improving acquisition and retention, respectively. There are several ways to price products depending on the market.
Common pricing strategies include:
Competition-based Pricing Strategy
Usually utilised by new entrants into a highly saturated market, this pricing strategy focuses on the existing market rate for a product or service category irrespective of consumer demand. This strategy is helpful because slight price differences may be the sole differentiating factor in those market situations. An example of this is seen with bottled water companies. Most will price their products around the going market rate of 50 – 60 Naira for a 75cl bottle.
Price Skimming Strategy
Price skimming is a strategy that sets the highest possible prices at a product’s introduction and then gradually lowers the price as the market category gets saturated. This type of pricing helps recover sunk costs and continue to sell the products beyond their initial fad. Price skimming is ideal for products creating a new market or entering an emerging market. It allows a business to capitalize on early adopters and reduce prices to get an edge on future competitors. An example of this was when Telco, MTN and Airtel (then Econet), introduced SIM cards into the market; SIM cards were sold for more than 400 times the price today.
Penetration Pricing Strategy
The opposite of price skimming; Penetration pricing is when a business introduces products to the market at an extremely low price. This strategy is used by enterprises introducing products into an existing competitive market to attempt to lure customers away from higher-priced competitors. A temporarily disruptive approach, businesses must evaluate their ability to deal with potential revenue loss when using this strategy. An example of this was the price and size wars of carbonated drinks in Nigeria. The new market entrant, Bigi Cola, sold a 60cl bottle for 100 Naira compared to its major competitors, who priced their 50cl products at 100 Naira. Another example is Green Africa Airways that recently launched with a pricing of NGN 16,500 for a one-way ticket for the Lagos – Abuja route.
Premium Pricing
A prestige strategy that appeals to luxury-seeking customers by presenting an image of exclusivity through price. Building on a brand’s perceived value, premium pricing is used by businesses known to create high value or status products. This form of pricing allows products or services to be priced many times over their production cost.
A commonly used pricing strategy by fashion and technology brands; an example is House of Deola Sagoe’s Komole Kandids, a luxury fashion outfit targeted at the modern bride. Internationally, fashion brands like Supreme have created a cult following around its products with customers willing to stand in line for hours just for an opportunity to purchase a product.
Economy Pricing
The opposite of premium pricing, an economy pricing strategy appeals to customers seeking bargains. Based on volume, the economy pricing strategy sells the product for a low price and makes its revenue from the number of customers. This strategy works best with generic or bargain brand businesses. It is a commonly used strategy in the pharmaceutical industry where generic medications are priced lower than their name brand counterparts.
Businesses must evaluate their operating and production costs before choosing this type of pricing strategy. Another disadvantage of this strategy is that it may condition the customer to associate the brand with low value cheapening the brand value. Companies can circumvent this by creating bargain products under a different brand name.
Bundle Pricing
Bundle pricing involves pairing two or more complementary products or services and selling the bundled unit for less money than their total individual price. A successful bundle pricing strategy involves profits on low-value items outweighing losses on high-value items included in a bundle. This strategy helps sell non-performing products or services, introduce a new complementary product, or get customers hooked on one of the products faster.
It can also be used as a temporary value-added strategy for customers willing to pay upfront for unreleased products.
The key to the continued success of any business is a well thought out pricing strategy that matches a product with the target audience. Even the best products will struggle if not correctly and effectively priced. The market is not always about having the best product but the optimally priced product.
•Tunji Adegbite is a thought leader in strategy and supply chain, who has worked with leading organisations like PwC and an IOC. He also founded Naspire, a business research platform using African business insights to help entrepreneurs and professionals succeed. He can be reached via tunji@naspire.com.
