S7 E18 Which pricing strategy is right for your business? with Jeremy Gray

In this episode we get more tactical we will look at some of the many pricing strategies that are available to you and help you understand which strategies are appropriate for your business. You will likely use a combination of strategies to maximize your profitability Competition-Based Pricing Strategy Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate or going rate for a company’s product or service. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers. There are several problems with this strategy. It is reactive, you are following your competitor’s lead. If they reduce prices you may also have to reduce your price. It does not take into account your cost to produce the product or service. Matching the competition can lead to very thin profit margins that may not be sustainable. Finally, if your product or service has a benefit beyond your competitors which you do not recognize, you maybe be leaving money on the table Cost-Plus Pricing Strategy A cost-plus pricing strategy is based on the cost of your product or service to which you apply a mark up to achieve a targeted profit or margin. This is the fall-back strategy of many companies because it does guarantee a gross profit on every unit sold. Unfortunately, it is not the ideal pricing strategy for most industries except maybe retail where it is used to set a base line. The advantage of cost-plus strategy is in its simplicity. The disadvantages include that it does not take into account the other overheads of the business – Factory overhead, selling expense, R&D, General Administration. A useful tool is to look at how many units you need to sell to breakeven. If the product you sell for $100, yields a gross profit or gross margin of $40. If your Factory Selling R&D and G&A expenses total $400,000 you will need to sell 10,000 units to break even. But the biggest failure of cost-plus pricing is that it does not take into account the price the consumer is willing to pay for your product. In our example maybe the customer would be willing to pay $120 or $140. In which case you are leaving money on the table. Or maybe they only value your product at $90 in which case your sales maybe zero. Sadly, many organizations, even those that claim to use value pricing default to cost plus pricing. Business managers when setting pricing still revert to cost plus pricing. Part of the reasoning is that business are generally measured by external parties like business analysts by three key metrics. The size of the business, its earnings and the quality of the business or its gross margin or profit percentage. So, a product that might deliver excellent sales and profit fails because it is overpriced to protect the businesses gross margin %. Freemium Pricing A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product for free hoping that users will eventually pay to upgrade or access more features. Unlike cost-plus, freemium is a pricing strategy commonly Apps such as Runkeeper. They choose this strategy because free memberships offer a “peek” into a software’s full functionality — and more importantly also build trust with a potential customer With freemium, a company’s prices must be a function of the perceived value of their products to enough customers to make the business viable Prices must present a low barrier to entry, preferably free, and grow incrementally as customers are offered more features and benefits. Note a relatively small price for premium service can be a solid pricing strategy. For example, I mentioned RunKeeper early.