Pricing and Profitability
Aug 05, 2019
If you have known the foundational principles of integrated marketing and branding. You have uncovered your competitive differentiators and can segment a market. You can select target audiences and channels that will deliver the business results you need. You also know whats needed to draft a strategic marketing plan.
Let's take this example; When loaded with maps, a satellite-guided global positioning system (GPS) can tell you exactly where you stand relative to your destination while you are traveling. But without data on road and weather conditions, you might find that your trip takes longer than planned. When driving a car, you need to be able to stay the course or change course quickly. When it comes to pricing, you need a type of GPS, too, along with real-time data to assist in course correction. Consider this post your GPS, otherwise known as your guided pricing system.
Pricing, however, is not as cut and dried as it might appear.
Although price is largely based on mathematical calculations, a simple formula may not tell all you need to know about how your decision will affect your bottom line. Formulas are only as good as the data and research assumptions are.
First, when calculating prices, you must factor in the cost of product development and purchases, infrastructure and operating overhead, and advertising and sales expenses. You also need to consider what it will cost to address branding issues and influence customer perspectives. You may have financing costs to add, and must estimate the impact of time to value from sales, as well as the financial impact of accounts receivablespayments outstanding (sometimes known as DSOs or days-of-sales outstanding).
Second, your price must align with your overall business strategy. For that, you really must understand what drives your own business as well as whats happening in your market. You will want to consider industry maturity, product cycle and longevity, and the percentage of market share you expect to capture. You will need to research how the economic climate and regulatory environment may impinge on product and pricing expectations. Youll need to assess market characteristics, competition and competitive pressure, prospect criteria, investor requirements, and management demands, as well. Finally, you must consider current and projected market supply and the availability of comparable, substitute products.
Third, remember that price makes a psychological as well as mathematical impression. Regardless of your marketindividual consumers, businesses, not-for-profit organizations, and/or government entitiesyour price must reflect your understanding of market needs, buyer awareness, buying habits, and the varied psychographic factors influencing buyer demands. And you need to assess your cash availability and projected cash flow. Armed with that information, you will gain a better handle on your pricing thresholds based on estimated time to sales and profitability. But pricing is not just about outside forces. Pricing strategies depend on where you are in your business life cycle and whether you are introducing a new product or managing a product youve been marketing for a while. Choosing the right price requires the right information.
Remember that information trumps instinct. Pricing requires attention to detail and facts as well comprehensive knowledge of your product and your market.
Integrating Cost, Pricing, and Marketing Strategies
To set your GPS, you must input your cost structure, pricing strategy, pricing method, and pricing option. To choose what will work best for you, consider how the price you set will interact with other elements of the marketing mix and create the desired perception and demand for your product or service. Heres a quick overview of my four-part guided pricing system (GPS):
1. Align pricing decisions with your overall business and branding strategies.
Determine how your product fits with overall business objectives.
Decide what your chosen price will communicate about your products.
Make sure your pricing strategy aligns with your brand strategy.
Build your required return on investment into your price.
Consider the ways in which company departments will be impacted by price and sales.
2. Identify what information you need to make the right decision.
Gather information on competitive products. Identify current market pricing for competitive or similar products.
Gather market intelligence, including relevant demographic information, available sales outlets and their associated costs, and buyer preferences.
Consider what factors will influence product perceptions. markup needed to turn a profit.
Calculate your costs to manufacture or purchase stock, introduce and advertise your product, manage inventory, and ship, track, and control for profit.
Consider how pricing options will influence short-term and long-term profitability. For example, a special introductory rate or coupon may cost you profit in the short term, but it can develop customer connections for long-term relationships and profitability.
Estimate the number of products you expect to sell in the first quarter and first year; then track your results and adjust accordingly.
Decide what numbers you need to be profitable at the end of those periods.
Review and assess the validity of assumptions supporting your decision. If you offer discounts, prepare to assess costs against sales gained.
Check your confidence in your decisions, based on your expectations. Assess your finances, and decide how much risk you can handle.
3. Test the market.
Choose a representative target market.
Estimate the cost of product runs in test markets.
Establish a budget for test marketing across the product cycle, from inventory through shipping.
Also consider the costs of not running tests in a target market. What might it save you in upfront expenses? What might that cost you in profit avoided?
Outline your test process and goals. Decide how many customers you want to reach and at what price in which markets.
Implement testing. Vary your pricing in test outlets, and collect data for analysis.
4. Evaluate the results.
Did sales meet expectations? How much did you sell, when, and where?
How did sales vary from outlet to outlet?
How did sales vary with special promotions?
How did sales vary day to day, month to month, and year over year?
What factors influenced those variations?
What can you learn from the new data about your pricing decisions?
What might you need to change?
If everything went as you had hoped, what will you do to hold the gain?
Assessing Your Cost Structure
Regardless of business strategy, at some point pricing comes down to a calculation of the following factors:
The cost of bringing your product to market
The cost of protecting or shifting your market position
Assessment of perceived value in the minds of customers
The cost of creating value in the minds of customers
While pricing is generally calculated based on a combination of fixed costs and variable costs, it must closely match perceived value and perceived need in the minds of customers who can afford it. In its simplest form: value equals perception of quality divided by cost.
Estimating perceived value requires an understanding of the people who make up your target markets. Marketing research will give you clues about perceived value based on product attributes and what youve learned about buyer behavior. Your goal as a marketer is to maximize perceived value in the minds of your suspects (potential buyers who have not yet been qualfied), prospects (potential buyers with an interest in your product), and customers (people who already buy from you.). With reliable data to fuel understanding, you can vary elements of the marketing mix to create the emotional and perceptual shifts that will match your business needs. This is the point where ethics and pricing meet. Socially responsible marketers will ensure that profit is the likely result of understanding the people who make up a market and serving consumer interests rather than manipulating them.
Now, lets concentrate on costs.
Fixed costs typically reflect infrastructure costs, such as mortgage or rental rates, lease arrangements, inventory and inventory management control, fixtures and furniture, license and permit fees, compensation programs, loan repayments, technology costs, and salaries. Variable costs may include office supplies, telephones, expense reimbursements for gas mileage and cell phones, insurance, taxes, equipment purchases, advertising and promotion, and training and development. These costs may vary with production, seasonal variations, and the caliber of employee and sales teams.
Listing all anticipated expenses will help you determine your product launch budget. Budget-based planning will help keep your business on track. Be sure to include all potential expenses, fixed and variable.
I hope you find this article helpful.