What does pricing mean?
By “Pricing” we mean all the measures with which prices are formed. Pricing, as an important component of the marketing mix, is decisive for sales, but also for margin and profit.
These factors determine the price
Pricing includes both internal information on the costs of producing products and information on the prices available from competitors in the market. So you need a realistic picture of variable and fixed costs in order to be able to set prices. You also need an overview of comparable competitive offers in the market. In some cases, it makes sense to go through a further loop in product development in order to make materials and processes more cost-effective. The sales concept can also contain cost potentials.
However, pricing also depends on the situation in question.
If you want to enter a mass market with a commodity product, you have to offer your goods at competitive prices from the first part. You have to “anticipate” the scale still to be implemented in pricing, otherwise you will not gain a foothold in the market.
The same applies to own items that require intermediate inputs, such as the construction of tools. Even in such cases, you have to calculate from the first part with a target quantity and go with the financing in advance. We are not talking about contract manufacturing here.
A financial advance for business development requires sufficient capital strength. If you are able to explain your business plan in an appealing way, you can obtain a debt financing for this upfront payment.
Pricing does not end with the fixing of a product price either. Think of discounted prices, reimbursement systems, surcharges for extras and services, price differentials for variants, for different access times and locations. There are also opportunities for special prices and discounts for market launches, special occasions, in times of low capacity, etc.
In order to be successful in multi-level sales, trade margins must be fairly distributed across the entire sales channel. If resellers or sales agents earn too little, sales success will not be achieved. Setting realistic and fair margins is not trivial. If you want to set discounts on list prices across several trading levels, this application will help you (access to the “Trading Margin Design” application).
In addition to purely objective factors of pricing, psychological factors also play a role which should be taken into account.
Prices do not have to be fixed either. They can also be formed dynamically in the market depending on the situation of supply and demand.
Price versus profitability
Ser capaz de hacer cumplir los precios no significa obtener ganancias. La rentabilidad no se decide únicamente en las ventas; Más bien, considerar los costos es igualmente importante. Aunque los costos también son causados por las ventas, ocurren principalmente en la prestación de servicios, es decir, en la construcción, compras, producción y administración. Para obtener precios competitivos, vale la pena echar un vistazo a las opciones de optimización de costos.
Incluso las organizaciones puramente comerciales, como las empresas comerciales que no tienen producción propia, no están exentas de esta consideración. Los costes aquí residen principalmente en compras, adquisiciones, marketing y ventas. Las empresas comerciales tienen la mayor influencia en los precios y condiciones de adquisición. Las palancas efectivas incluyen la selección de proveedores, la coordinación del tamaño de los lotes de entrega y las habilidades de negociación. Los precios de venta de determinados productos suelen estar determinados en mayor medida por el mercado.
El margen entre los ingresos por ventas y los costos de adquisición determina las opciones que deben tomar las empresas comerciales. Cuanto mayor sea el margen, más ágil podrá ser la empresa comercializadora en el mercado y mayor será el éxito de ventas para los proveedores.
Conclusion: How to set reasonable prices
One way to set a price for an item is to add a profit to the full cost. In order to be able to allocate the overhead costs, you must assume a certain sales volume. If you can sell your item at this price in the estimated quantity, you will definitely have covered all costs and will generate a defined profit. However, this pricing approach carries three risks:
- The market may not accept your price and you may not sell the quantity you need to sell and cover your overhead costs.
- The approach takes product creation for granted. Your organization will not be incentivized to strive for greater cost efficiency.
- Customers may even be willing to pay more than you have estimated in your full cost calculation. You would forego a portion of the price that customers would be willing to pay for the perceived added value. However, it may be that you could instead make significantly more sales for which you have no capacity available. Therefore, you may not be able to gain market share.
It is much better to decouple pricing from cost determination. Of course, this approach does not replace a proper calculation. However, the price should be determined in the market in order to take advantage of customers’ willingness to pay. This approach requires a strategic approach and good observation and ongoing, agile adjustment of the price in the market.
To set a price, you must first define what “the product” is. Are you dealing with a physical product or providing access to a virtual service or service? You also need to decide whether the product should be sold, rented or leased. Is each usage unit a transaction or do you offer permanent access (subscription) in return for a flat rate payment?
Now look at the competitive situation in the market. With which existing offers is your offer directly comparable? From this you can get a market-oriented indication of a sensible price level. If your offer has advantages over existing offers and you highlight these advantages in marketing communication, you may be able to enforce higher prices (premium).
Maybe you want to enter an established market or generate your contribution margins through the volume sold and are prepared to set lower prices than the competition. You have to make these decisions.
Now the pricing isn’t enough. The prices must also be communicated. The pricing options are even influenced by the communication of customer benefits. So there is a dependency between Pricing and Price communication. Both pricing and price communication must be thought of together.
In price communication, you have the opportunity to set an “anchor” that makes the price offered appear reasonable.
Examples of pricing
Buyers and buyers want to save. Therefore, they are more inclined to accept an offer where they receive a discount than a basic offer with surcharges, even if the numerical price is the same. Psychology resonates with you.
Clever pizzerias offer some types of pizza, which are priced well above the target price. This makes the other varieties seem reasonably priced and are ordered without feeling bad.
Whether full-service prices or prices for basic services are used in marketing communications has to be decided according to market conditions.
For example, it is necessary to consider whether a furniture retailer that offers its services including delivery and assembly and grants a discount if the delivery and assembly services are not used will be more successful than another retailer that prices the pure pieces of furniture and offers the delivery and assembly services at a surcharge.
Prices do not have to be cost-related; they can be set according to the situation and benefits.
For example, a manufacturer of high-precision plastic parts for mechanical engineering, knowing that its products are special parts on which the reliable operation of its customers’ machines depends significantly, will not define its pricing according to a cost-surcharge calculation, but according to its use. He will test the willingness of his customers to pay.
You are convinced that market prices are given? We agree with you – and yet we will show you that you can influence your own sales prices within the framework of the given market prices.
Example: In a market for commodities, in this case sewer base pipes for the discharge of service water into the public sewer system, the market prices between manufacturers and specialist wholesalers are “given” and are under extreme pressure due to the comparability of the products and the overcapacity of the manufacturers. Manufacturers have to sell basic pipes at a loss; however, many are forced to continue playing the game because they need the capacity utilization. They have become dependent on others and depend on sales. Manufacturers who have only this product in their range have to produce it. Other manufacturers, who mainly offer profitable products, are expected by wholesalers to offer these unprofitable commodities as well.
And when I mentioned “game”, the wording was chosen deliberately. This game is not funny. But you can’t bury your head in the sand and take this game for granted. You can try to creatively change the game. That’s what two manufacturers have done despite the existing competition. How did they implement it? One manufacturer, who depends on the production of this commodity product, announced that it will no longer carry this product. He offers his capacity to the other manufacturer, who needs this product in his assortment, to produce the same commodity product for him with the competitor’s label. The buying competitor can cut back his production of this product and avoid the loss. The producing competitor pays more for the purchased product than can be achieved on the market. The two producers thus share the losses. There is another advantage: one supplier is eliminated from the market. This can stabilize prices. For the producing manufacturer, the purchase guarantee of his now only customer is important. He can now use the avoided losses to develop and launch higher-margin products in other markets. In this case, these were ventilation pipes. With this “new game”, which had to be created with competitive protection, it was possible to shape prices and margins in a commodity market despite “given” purchase prices.
Find “your” game and try to implement it in creative cooperation with third parties. Try out pricing strategies in pilot regions before rolling them out across your entire market.
Customers usually reward sustainable business activities with price premiums. Especially in phases when you are not getting paid enough for your services, it is also worthwhile on the surface thinking about sustainable management. A necessary precondition for pricing is the cost optimization.