It often looks simple to finalize the price of a product - from a general mindset. But it is not that easy. Behind it there is a lot of research and analysis that needs to be done, and spent hours and hours to reach the final price of a product.
So, here today I am going to disclose how you can set the price of your product by a different methodology that you can use for your product. What do you think about the price? It is the manufacturing cost with selling and distribution and adding profit margin. No, you are partially right but there are more things that you need to understand.
A. Demand based Pricing - It is a price strategy under which 3 more sub heads are there. It is derived by the market forces by analyzing the demand and supply in the market.
1. Price skimming - To explain this concept I would like to take a simple example of milk. When you boil the milk in a pan, what do you see on the top after half an hour? Stop reading and think for a while.
Yes, you are right it is the cream that floats on the top of milk. In the similar fashion, let's deep dive into the concept, consider the milk as a consumer market and the upper layer of the cream (malai) as the targeted customer for this strategy.
It is a concept, when you initially launch a new product, technology, service, formula, etc. you charge the extra amount or premium for that product at the initial level till no close competitor is available in the market. When competitors are entering into the market you decrease the prices of your product gradually. In this way you acquire the early adopters and innovators of the market. Early adopters are the customers who are ready to pay the extra price for the product because they want the premium services at the early stage and they are the trendsetter for the rest of the community. They are ready to take the risk and reward asap.
Examples - When New smartphone, laptop, car, etc. is launched in the market. At the initial level the prices are high later on gradually the price decreases as the technology gets older.
2. Penetration prices- If you look at the initial words of this strategy, they say that pen and how pen works as we all know. It has a pin pointed nip, in this similar fashion this pricing strategy has also focused on the pinpointed customer by providing a product at low cost initially and gradually increasing the price later on when people are getting addicted and used to it. Might be at the initial stage of your business you may be going into losses or just achieving your breakeven point, but later on it gives you huge rewards in terms of profit when your customer base is so large and consumers are ready to buy your product at any cost.
This strategy is applied through different methods like - lets understand with examples
• Giving huge discount at initial offering
• Provide free sample (jio sim)
• Small sachets pouch to taste (ketchup and pickle, peanut butter, mayonnaise)
• Giving free with another product of same category or that is complimenting to it (Brush with toothpaste, Conditioner with shampoo, comb with hair oil, Bucket with detergent, Shaker bottle with protein shake)
Let us look at an example: A middle class person earning an income of 8-10lcs p.a for him might be BMW or Audi is not creating that value as a Honda city or a normal sedan car that cost him 4-5Lcs. Before setting the prices you need to know your customer pain points, their liking, target consumer’s needs & desires and your brand reputation.
• When you’re at home and feeling thirsty, water will satisfy your needs, But when you’re at a party or pub a cold drink serves the same purpose.
• When you are going for an interview and you’re in a hurry you will most prefer a cab at that time, though it may cost you higher. But when you’re not in a hurry you will simply take the metro or bus to reach your destination at low cost. In this example the cab is creating value for you.
• Might be for a premium customer who prefers to go at TAJ Hotels and a normal customer will go to OYO Rooms.
B. Cost Based Strategy: This strategy consists 2 sub-titles. In this strategy the price of goods or services are being set based on the cost. Its aim is to recover some of the costs that the services offer to the consumer.
1. Mark Up: In this strategy, a certain percentage is added to cost of goods or services to determine the selling price. For applying mark-up prices, companies first need to decide the cost of that product, evaluate the profit earned on that particular product and on this basis the mark-up value can be fixed. Example: The price of onions in the wholesale market is ₹31.15 per kg while the average all India retail price of onions is ₹40.13 per kg keeping the margin of 8.98 bugs.
2. Target Return Pricing: In Target return pricing, the firm decides the price based on the rate of return investment which means what do the firm expect from the investment made.
Example: Suppose the OYO rooms has invested 2 million in their venture and expects to earn 20% as an ROI. Therefore, they will set the price accordingly. The cost and sales expectation are:
Unit cost: 20
Expected sales: 50,000 units The Target-Return Pricing is given by:
Target-Return Pricing = unit cost + (desired return x invested capital) /unit sales
Thus, Target-Return Pricing = 20 + (0.20 x 2,000,000) / 50,000 = Rs 28
C. Competitor based pricing: This strategy involves setting the prices of your products according to the prices set by your competitors. Under this method comes another two sub methods.
1. Going Rate: This is a method in which product values is fixed similar to the competitor’s product value so as to survive in the market for a long run and can sometimes charge more depending on the product.
Example: Samsung launching its series with same or less price as compared to other android phones to sustain in the market.
2. Competitive Bidding: It implies a company’s proposal that offers services or bid for business to another company.
Example: Falguni Nayar proposing about Nyka’s IPO (Initial Public Offerings)
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