The Impact of Cost, Value and Competition on Your Pricing Strategy

Price. It may be the single most important element to impacting a customer’s decision to buy; either online or offline.  Add to this the fact that markets are always changing and the need to have the right pricing strategy is more important than ever.

Ask any marketer and they will explain the importance of having a good pricing strategy.  After all, price is one of the “Four P’s of Marketing” along with product, promotion, and placement.

However, this only scratches the surface when it comes to developing the right pricing strategy.  As such, one must look at the impact of cost, value, and the competition to get a full picture of the optimal price points for any product or service.

The “Markup”

In its simplest terms, the relationship between cost and price is linear.  This is called a “markup” and for many companies is how they set their prices.  The advantage to this approach is its simplicity as you take your product costs plus a fraction of your overhead per unit sold to calculate a price.  As such, prices are usually calculated as a multiple of costs – for example, a 3x mark up.

However, this approach is not without its downsides.  These include blind spots in the decision-making process which fail to capture the impact of slow inventory turns, variations in shipping costs, or other factors.  Therefore, relying on a markup by itself can lead to either non-competitive prices or dwindling margins.

Perceived Value

While using a markup is straightforward, determining “value” is more complicated.  This is largely because value is determined by the buyer and not the seller.  Using value to determine price must consider those factors which drive the buyer’s behaviour.  These include the problem the buyer is trying to solve, brand perception, as well as other motivations.

However, this approach does fit all products or markets. In fact, the benefits of perceived value are only fully realised in products with all well-defined brand, a loyal customer base, or in the luxury sector. This means that your product or service needs to be highly sought after to benefit from a pricing strategy which is over-reliant on perceived value.

 

Competition

Let’s face it, you can run but you can’t hide when it comes to competition.  While there are several factors behind this statement, one game changer is the internet itself as it has never been easier to compare prices than ever before.

Just think about all the customers who abandon their shopping carts prior to check out.  Sure, you can win back some of these customers by sending them a promo code (if you’re competitor isn’t running a promo at the same time that you don’t know about) but the reality is that most of them failed to complete their purchase because they were comparing your prices to that of the competition.

However, a little bit of competitive intelligence can go a long way – especially in large retail sectors. While tracking the prices your competition is a critical part of this approach, it is not the only factor as you also want your analysis to consider delivery time and cost.  The combination of this data actually gives you the insights needed to gain the upper hand in a tight market.

 

The Right Pricing Strategy

As you can see, the impact of measuring cost, value, and the competition should not be ignored when determining pricing.  However, the key to formulating the right pricing strategy is knowing how to balance these variables.

This requires a thorough and dynamic approach to pricing – simultaneously assessing cost components, competitive movements, and even your position in the market.  From there you want to implement changes to your pricing strategy on an iterative basis, as this will allow you to make adjustments before the market has a chance to react.

Lastly, the right pricing strategy is never static.  Instead, it relies on continuous pricing intelligence to make informed decisions every step of the way.

In this way, you can gain traction in a competitive marketplace while ensuring that your margins remain intact.  Not only will this give you a leg up but it will help you to react to unexpected changes at a moment’s notice.

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