Basic pricing strategies and caveats for online and offline sales
When considering pricing structures for your business, one option does not fit all. Pricing is a complex subject and pricing methods can be subjective. Effective pricing strategies for small businesses in particular can ensure profit and longevity. When deciding upon your B2B pricing methods, it's important to consider price, perceived value, and quantity. Of these, pricing has the largest effect on profits.
This article provides the basics on a few topics related to product pricing:
- pricing origination and discounting methods with some tips on using them
- example price configuration scenarios
- things to be careful about when making a pricing strategy
Other things to know when updating a pricing strategy are pricing management software considerations and price research and analytics methods.
To start, let's first look at some of the most common pricing and discount strategies, why you might choose to use them for your business, and information to consider when making your decisions if pricing is new to you.
Common pricing and discount strategies
Cost-based pricing (Markup pricing)
In determining price, ensure that you have covered your costs by accounting for manufacturing, distributing, sales, marketing, and any other applicable costs, then add a markup that matches your target profit.
This approach can work for established businesses with stable production costs; however, it considers supply but not demand, so your prices may not be competitive.
To counter this, it's important to conduct market research. Whether you do this research on your own or hire a consultant, it will be important to consider:
- Details about your target customers (buyer personas)
- What your customers value most
- Your main competitors
Competitive Pricing (Strategic Pricing)
This strategy involves an analysis of competitors' pricing with some adjustment for criteria specific to your business.
Use pricing research and value metrics to provide some clarity. Identify what improvements or services your target customers would find valuable and pay more for. Similarly, identify any needs that are not being met by your business. By taking steps to reduce or eliminate those gaps and effectively communicate what sets your business apart from the competition to your target buyers, you'll attract more customers based upon the specific value you can provide.
Consider these tips:
- It's important not to set prices and leave them stagnant. Customers' needs and perceptions of value change over time, and by reevaluating your pricing structure on a regular basis, you'll be able to identify problems quickly and take appropriate action.
- Test out different strategies before deciding on a final pricing structure. Paying attention to what works well allows you to understand the best product and pricing combination that will appeal to your customers. For testing, setup your systems so you can gather data on how often you win or lose orders at specific price levels with specific client types. This way you can analyze information and make data-driven decisions, instead of basing pricing on a hunch.
You may choose to use different price levels for customer groups or for wholesale, trade, and reseller pricing, for example.
To do this, particularly in B2B sales, it is important to understand how different buyer groups value your product. Group A may be willing to pay more than Group B based on their own business needs and perception of the value of your products and services.
Again, market research and knowing your customers can help you make these decisions. If you haven't conducted price analysis and market research before, you may be surprised how much insight you can get even with small efforts, as long as you have a smart approach.
Amortization and Clearance
In some cases, it is beneficial to sell with low or no profit to free up cash kept in stock or for volume and amortizing overhead. For example, if production facilities and staff reduce output due to decreased demand, you will have to amortize their "overhead cost" over a smaller number of products. This way, the less you produce with the same team and equipment, the higher your final "cost" per item. If you use standard cost-markup-style prices, then increasing per-item cost leads to price increases, which result in further sales reduction, and so on, resulting in a downward spiral in sales and profit.
However, in pursuit of stability in sales, ensure that you don't get into a place where too many of your goods are consistently unprofitable.
A coupon strategy should match the scale of your business, that is, your current abilities as well as your long-term goals. Keep in mind that blanket coupons can easily put certain sales into loss territory, whereas keeping track of coupon exclusions can quickly become overwhelming without advanced management tools.
Additional Pricing Strategy Considerations
Maintaining a diverse set of special discounts and manually setting prices requires significant expertise and time; however, it does make sense to create complex pricing campaigns if you know that such price changes result in sales increases and increased profits. You need to decide for simplicity or sophistication. Many times the "in-between" is only possible in the short term - it will likely gravitate towards one or the other (often towards an unplanned complex setup that quickly becomes hard to keep updated).
Discounts mean significantly lower profit per item sold. Small companies in particular can easily become inefficient when trying to manage discounts - all the scheduling, specials, different % off depending on existing margins. Ongoing discounts may attract clients who will not purchase from you again. If that is the type of client you are seeking, this is fine, but if you need repeat business, price discounts may not be an effective strategy; you may end up with the wrong type of clients.
Example Pricing Methods for Specific Scenarios
Let's take a look at how you might use different pricing methods in specific scenarios.
Wholesaler simple pricing: In this scenario, you would use cost-based pricing for all customers, competitive pricing for products that attract new clients, clearance for getting rid of inventory, and coupons for short promotions to attract new clients looking for good deals.
Wholesaler smart pricing: This strategy is a mix of competitive pricing and cost-based pricing with varying margins depending on the customer group. To implement this structure, you might use three pricing levels: normal, small corporate, and high volume.
Manufacturer simple pricing: Use cost-based pricing including the direct cost of raw materials and amortizing overhead over entire production, with pricing levels depending on customer size.
Manufacturer smart pricing: In this scenario, use multiple pricing levels with competitive pricing analysis for all goods across all client types. However, some products may be sold with minimal or no margins, or even at a loss - these would be products that bring valuable new clients or ensure on-going business that includes a larger range of products. Such products are your "qualification" products and "order getters" - items clients use to compare prices and to make purchasing decisions.
What else to know?
Read a quick list of common problems when working with price management software to see what to look for when choosing a software solution to help your sales.
Steersman price management systems
If you're frustrated with managing pricing or are simply thinking about reevaluating your B2C or B2B pricing strategy, consider what an intelligent pricing management system can do for your business. Explore Steersman pricing management features.— by Lorna Rogahn and Andrey Kolesnikov, business development manager at Steersman