Write a short note on Pricing models.
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Pricing Models
Pricing your products or services accurately is one of the greatest challenges you are going to face as a business owner or manager. The importance of pricing is obvious, as it has a direct correlation to the amount of money you bring into your company. If you price your products and services too high, you are going to risk driving customers into the arms of your competitors. On the other hand, prices that are too low will leave you with small margins, even if you are able to make plenty of sales. In the end, only companies who are able to find the ‘sweet spot’ for pricing will be able to thrive well into the future.
For that reason, it is a good idea to use advanced pricing models to settle on a price point that makes sense for your market and your products. It doesn’t really matter what you would like to sell your products for – it only matters what customers are willing to pay.
Finding that number is a complicated task in many cases, which is why we have compiled the list of pricing models below. Review these options and use the ones that are going to help you find the perfect number to attach to everything you sell.
Cost-based Pricing
This is perhaps the most-common way to price the products that you take to market. With this model, you are going to use the cost of production as the basis for the final price that consumers see when they make a purchase. The multiple that you use to price your goods is going to depend on the industry in which you are working. Some industries see multiples around 2-3 times the cost of production, while other industries are around 5 times or higher.
For example, imagine you are in an industry which tends to sell products for around 3 times the cost of production. If you have determined that your average cost on one unit is $10, you will naturally look to sell the item for around $30 (if using a cost-based model). Multiplying your cost by three is a great way to get in the right ‘neighborhood’ for your pricing, but you can then tweak the final number until you hit a spot that you feel is a winner. For instance, if you see that many of your competitors already sell for $30, you may decide to move down to $27 or $28 just to have a slight edge on price. Or, if you think your product is of a superior quality to the competition, you could set your price at $35.
Market Pricing
As the name would indicate, this pricing model is all about the market conditions that you find around you. Fortunately, in the internet age, it is relatively easy to determine market pricing for just about any product or service. A quick internet search should lead you to the prices of your competitors, and you can then react appropriately. Trying to sell a product that falls well outside the market norms for pricing is always going to be an uphill battle, so the market pricing model is a smart one to use.
It is worth noting that using a market pricing model doesn’t mean you always have to be the lowest priced product available. In fact, you might intentionally decide that you want to be the most expensive version of a specific type of good. The price that you choose relative to the rest of the market should match up with the marketing strategy you are using to reach your customers. If you are marketing your product as high-quality, it would make sense to have a higher price. On the other hand, if you talk about great value and affordability in your adverts, you better come in on the low end of the spectrum.
Portfolio Pricing
This is a great model to use if you are offering a service – or, more specifically, a selection of services. In the portfolio pricing model you are going to set up a pricing structure that makes sense throughout your product or service line. For instance, if you run an accounting agency, you may offer basic tax preparation services for a certain rate. Then from there, your more advanced accounting services move up the pricing scale. It makes sense to price out all of your serv