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Factors followed in Pricing a product

August 7, 2009

Evaluate product’s uniqueness:

The closer your product resembles competitive products, the smaller the price differences that buyers will tolerate. And the closer the product differences between brands, the greater the probability is that the category is price-elastic, and that brand-switching will occur when products go on sale.

Product uniqueness does not guarantee a significant price premium over a competitive product, if the product differences aren’t recognizable and meaningful to consumers. And depending upon the category, even recognizable and meaningful product differences may not be enough to get buyers to switch to the new product, even at parity pricing, let alone at a premium price over the competition.

Select channels of distribution:

When the organization has limited resources, it’s often best to select a single distribution channel or a limited number of distribution channels that offer,

* Greatest ease of entry against the competition

* Lowest costs of entry compared to the competition

* Least financial risk and commitment to the trade

* Sufficient volume potential to reach short-term company goals

* Pricing levels to provide acceptable company revenues and profit margins

Consider product life cycles:

Many product categories have significant evolution and life cycles that may affect pricing decisions.

E.g.: with personal computers and software, the trend is toward shorter and shorter product life cycles. In fact, it now takes as little as six to 12 months before new technology and products are introduced in these multibillion dollar categories. As a result, product pricing cycles have also accelerated to match, with introductory pricing decreasing to significantly lower levels only six to eight months later.

These continuously evolving high-tech categories make it difficult for companies to recover development costs, accurately predict sales volume, afford planned marketing support, and price products accurately in relation to a competitor’s products

Analyze costs and overhead:

While pricing a product, the pricier make the following common error,

* Pricing products or services based only on the cost to produce them

* Pricing products based only on competitors’ prices

Several objectives need to be addressed in determining correct product pricing:

* Cover the cost of producing the goods or services.

* Cover marketing and overhead expenses.

* Provide profit objectives.

* Afford distribution margin discounts.

*Afford sales commissions.

* Be competitive.

Estimate sales at different prices:

* First determine how many similar direct competitors you have and their pricing differences..

* Second, determine price elasticity, or “price sensitivity” for the market play.

Consider secondary pricing strategies:

Larger companies may utilize product pricing in a predatory or defensive fashion, to attack or defend against a competitor.

Select final pricing levels:

Final pricing levels for products should have flexibility for both increases and discounts to customers. Price increases may be inevitable because of component, ingredient, and processing cost increases. The market may or may not absorb price increases without decreasing volume effects.

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