Driving Business Growth With Pricing: Part One

Have you ever been to a supermarket and wondered why they sometimes have this odd way of pricing the products on shelves? By odd, I mean having an item priced like N74.50 (Seventy-four Naira, Fifty kobo) or N89.90 (Eighty-nine Naira, Ninety kobo) when we all know that getting the right change would be a major challenge.

Well, rest assured that it is not just a random decision by the brand owners or the supermarket but a well thought out strategy designed to drive more sales by using what is known in the business and marketing world as psychological pricing.

Before I go into the whys and how of psychological pricing which is a type of pricing strategy, today I would first like to focus on what pricing really is and the two basic approaches to pricing that one can adopt as a business or brand owner.

Patrick Campbell of http://www.priceintelligently.com defines pricing as “the exchange rate you put on all the tangible and intangible aspects of your business” and there is no doubt that it is one of the key levers that have the highest and quickest impact on maximising profit for any business.

So if like most organisation you have “driving business growth” as one of the key performance indicators for your business, you may want to consider the different pricing approaches and strategies to help you achieve your objective.

Cost-based Pricing Approach
This is when the business owner uses the cost of manufacture as well as the cost of getting the product to the market and eventually to the final consumer (distribution, warehousing, etc) as a guide to determine price. A mark-up is then added to the cost of production and distribution to come up with an ideal price in order to make a reasonable profit. This approach is more suitable for tangible and fast moving products. Laundry detergents, candy, soft drinks, toothpaste, etc. are some examples of product categories which can be classified as such. This strategic approach relies on large volume of sales to mitigate lower profit margins in a very competitive environment.
Patrick Campbell ofhttp://www.priceintelligently.com defines pricing as “the exchange rate you put on all the tangible and intangible aspects of your business” and there is no doubt that it is one of the key levers that have the highest and quickest impact on maximising profit for any business.

The first approach to pricing is known as the “cost based” approach. This is when the business owner uses the cost of manufacture as well as the cost of getting the product to the market and eventually to the final consumer (distribution, warehousing, etc) as a guide to determine how much mark-up in terms of price can be put on top in order to make a profit. This approach is more suitable for tangible and fast moving products. Laundry detergents, candy, soft drinks, toothpaste, etc. are some examples of product categories which can be classified as such. This strategic approach relies on large volume of sales to mitigate lower profit margins in a very competitive environment.

Differences between both approaches

Image courtesy of http://www.mbaskool.com

Value-based Pricing Approach
Unlike the cost-based approach, this is focused on pricing based on the ‘perceived’ or ‘real’ value of the product or service to the customer. This value perception is usually driven by the target consumers’ willingness to pay based on intangible or emotional factors that they consider important like increased convenience, happiness, etc.

A good example of this is the automobile industry where you find different brands of cars that perform the same function of moving from point A to Point B priced and perceived differently by customers who want different things. Some just want mobility and convenience in which case any low or mid-priced car will do. Other buyers may want respect from, and influence among their peers and may feel that the best way to get this would be through being associated with expensive brands.

This is also the pricing approach that is used for intangible products within the service or creative industry where it’s difficult to put down actual production costs on intangibles. With the value-based approach, making a successful sale takes a lot more effort but gives much higher profit margins.

Conclusion

As a business or brand owner, you must first understand the industry you play in, the target market, industry standards, consumers’ motivations and willingness to pay and the strength of your brand equity. Only then will you be able to make the right decision for your business and in doing this, face the primary task of driving business growth.

In part two of this series, I shall take a look at some pricing strategies including psychological pricing which I mentioned at the start of this article.

Until my next marketing master class, stay focused.

Ihaza is a marketing and communications expert and the founder of ForLoveOfMarketing. She can be reached on www.vivianihaza.com and www.forloveofmarketing.com.

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