Pricing your Product Accurately

In few of the previous blogs, I discussed a number of theories around strategy, strategic directions of the company and competitive strategies. Whichever strategy a company adapts, Pricing plays a significant role in adapting a differentiation or a cost leader strategy.  (Porter, M.E., "Competitive Strategy: Techniques for analyzing industries and competitors" New York: The Free Press (1980))

Buying behavioral analysts affirms the point that majority of lower, middle and middle upper class market segments are highly concerned on the price tag, and price plays a significant role in purchase decision making. From a seller’s perspective having the right price on the product will ultimately determine the successful sale or the product

There are three main views on Pricing strategies,

Economist View on pricing

In understanding the economists’ view to pricing, please see the graph which highlights the movement in supply and demand with Price and Quantity as key variables. As it is inevitable when the price is low there will be a significant demand on the product and as the price increase the demand goes down with affordability.

When the price is low, supply will be low and as the price increases there will more suppliers with the possible margin improvements due to price increases. Thus the ultimate price will be defined by the equilibrium of supply and demand.

Marketers View

Pricing plays a significant role in the marketers view towards pricing. As you already may know marketing tactical strategies are built around four main pillars which are knows as the 4P’s in marketing. 4P’s include Product, Price, Place and Promotions.  Pricing is the second most important pillar in marketing and as per marketers view the pricing is defined by the customer. As per the marketers view a product should be priced at an amount which the customer is willing to pay.

This is also in line with the Japanese concept of target pricing. Where the pricing for the product is first defined and then manages the cost structure to have an acceptable margin for the product.

Accountants View

 Accountant’s view to pricing is does not work on a hypothetical framework as the economist or the marketer’s view. Accountants view to pricing considers the total expenditure (Both Variable and Fixed) for the product and adds a standard profit mark up to arrive at the pricing for the product.

Three main pricing views takes into account different dynamics, a company to leverage on pricing as a key market strategy should take into consideration all these three views in deciding the correct price for the product.