How to Effectively Set Prices on Your Products

The prices for your goods or services will be set depending on a number of factors. For example:

-your market
-your product or service
-your competitors
-where your product/service is on the product lifecycle.

Pricing strategies will change. New entrants may come into your market, the attitudes of your customers can alter, technological breakthroughs will affect your product and therefore the cost of producing it and its positioning in the market place. You will need to constantly monitor your prices and adapt them accordingly.

So how do you set your prices? What pricing strategies are best for you?

Setting Prices

When looking at how you set your prices you need to consider the following:

-Your costs for producing the product or delivering the service.
-The competition. How many competitors do you have? What are they providing and what is their pricing strategy?
-What is the demand for your products/services?
-Do you have a distribution channel mark up? What discounts, if any, are you offering?

When setting your prices you may have a variety of objectives. Here are some of them:

-To earn a target on investment.
-To maximise short or long term profit.
-To keep the business at a planned level of production, or to keep staff employed.
-To achieve a certain amount of growth in a required period.
-You may need to set a price that avoids government investigation and control.
-You set your price to enhance the image of the firm and its products or services.

Pricing Strategies

Price Skimming

Your product or service may be so different that it represents a drastic departure from the accepted ways of filling a demand or performing a service.

For example, when the Dyson Bagless Cleaner came onto the market it was the first of its kind. It could therefore be priced higher than other vacuum cleaners. It could skim or cream off the market before its price became more sensitive as other copycat products entered the market. The higher prices can also help to recoup some of the outlay on research and development.

Market Penetration

This is where low prices are used as an entering wedge to get into mass markets early. Direct Line Insurance used this pricing strategy when entering the market. They were unique in that they were the first to cut out the middle man (the broker) and sold insurance direct to the end user (the customer). They did not charge a premium price but went in cheaper than other competitors in order to gain market share.

Strong potential competition is likely soon after the introduction of a new product or service when no 'elite' market, or no brand loyalty, exists and where people will respond to price.

Competitive Pricing

You will set your prices to meet that of the competition.

Differential Pricing

This is where you can charge different prices for the same product or service. This can be because of the different location of buyers, different types of customers or for large purchasers.