Small and midsize businesses dedicate large resources to developing stellar products and customer service, but a suboptimal pricing strategy can hurt even the best product. Competitive businesses must employ insightful pricing analysis that incorporates meaningful data, including competitor pricing, market research and consumer price sensitivity.
Whether you’re experiencing a change in customer demand, or you suspect that you’re missing out on potential profits, optimizing your strategy will help you better understand the value that you deliver. How do you know if it’s time to reevaluate your prices?
7 reasons to revisit your pricing strategy
A closer look at pricing should be a priority on every business’s list, especially if your pricing has remained the same throughout the entirety of your business. Pricing strategy should be evaluated on a regular cadence that makes sense for your business. However, there are other common signs that your pricing strategy needs further evaluation:
- The demand for your product is dramatically increasing or decreasing due to changing economic conditions. Companies may provide discounts to customers in times of low demand. Or, they may increase prices to capitalize on growing demand. Your pricing strategy should be more than a short-term solution or opportunity. These decisions can affect brand reputation and steer your team away from its long-term goals. It’s important to first understand how these decisions can impact price sensitivity and value perception.
- The competitor’s prices are falling within a range that your business does not consider possible to match. When you don’t have the tools or resources to create a product at a lower cost than your competitors, then you may need to reevaluate how you position your product to justify its price point.
- Customers are having a hard time understanding your pricing model. Complex pricing models and overcomplicated tiers can lead to frustration and decreased demand. Your business may be focusing too much on features and less on overall value.
- Customers are providing feedback that the price of your product doesn’t match their value perception or overall satisfaction from the product. A price that’s too low can make customers perceive your product as lower quality. Conversely, a price that’s too high can be perceived as gouging. And with more data, you may find that different customer segments require different price points.
- You believe that every product or service should have the same margins. While you want each product to deliver the same value to your business, not all products deliver the same level of value to your customers.
- Your pricing strategy doesn’t take into account your company’s overall business goals. Are you pricing for short-term gains or for long-term growth and sustainability? Smart pricing analysis takes your strategic goals into account.
- Your strategy is chosen for ease (e.g., based solely on the cost to produce) and lacks comprehensive data insights. If you don’t have the time, resources or experience to conduct a thorough pricing analysis, it can be easy to choose a default strategy. But this strategy may not be the right fit for your business. Consider tapping into fractional support to better align your strategy with expert insights.
Is your strategy based on the right information?
Each business uses a slightly different pricing strategy based on the cost to produce a product, customer base, competitor pricing and overall objectives. Does your strategy look at the whole story?
Cost-plus/markup pricing
This is a traditional pricing strategy and one of the easiest to implement. The business determines its retail price by adding a fixed percentage on top of the cost to produce the product. This percentage ideally returns a desired profit. However, this strategy can oversimplify and miss other important factors, including the product or service’s value and customer behavior.
Competitive pricing
Some companies use a competitive pricing strategy, in which they set their price slightly below their competitors. Using these benchmarks can help your business stay competitive in the market, but you may lose out on potential profits gained from pricing your product or service based on quality and value.
Price skimming
Businesses may charge the highest price that customers will pay when first entering the market. Then, once the first wave of customer demand is satisfied and more competitors enter the market, the business lowers its price to become accessible to a wider base. Initially high prices and eventual price decreases can backfire with your customers, so it’s important for price points to accurately reflect the benefits of your product or service, especially in comparison to entering competitors.
Bundle pricing
Instead of selling each product for a different price, a company can group several items together under one price. This strategy works best when a company wants to expose customers to its less popular products or get underperforming products off of the shelves. But customers may not want the full package bundle, and this strategy can negatively affect your most popular products as well.
Value-based pricing
Unlike cost-plus and competitive pricing, value-based strategy sets a price based on a product’s perceived value rather than the cost to make it. In order for value-based pricing to work, a company needs solid branding, a popular product and a good reputation with its customers. For companies that do not have the expertise or resources to determine the true value of their products or services, a fractional professional is a flexible resource that can provide industry-based knowledge about the market and your consumers.
But adopting one of these strategies isn’t enough to determine the optimal price for your business. Regular pricing analysis is necessary to make sure that the current price continues to make sense as internal and external factors change.
The competitive benefits of a data-driven strategy
Pricing analysis helps a business chart consumer demand at different price points, irrespective of internal business factors like cost and profit. Usually conducted by a financial analyst, a price analysis can measure historical price sensitivity, price elasticity and consumer survey responses to hypothetical price scenarios. For example, a pricing survey may ask consumers if they would be willing to purchase a product at X, Y or Z price points and aggregate their responses to get a range of feasible product prices.
What is consumer price sensitivity?
Consumer price sensitivity is a measure of how much consumer demand changes as the price of a product changes. It can be interpreted as the degree of importance a business’s target buyer places on price. Unlike a scenario analysis, which forecasts consumer demand and business performance based on a myriad of potential business decisions, price sensitivity analysis forecasts the effect of just one decision: price.
Consumer price sensitivity can change over time based on many factors, such as available income, customer mood and wider economic conditions. Thus, it’s wise to perform sensitivity analyses continuously, so your business can proactively adjust with changing circumstances.
Data can help you perform better pricing analysis
An accurate analysis is fueled by the right data. Many businesses will invest in data on consumer behavior and market trends in order to get a full picture of consumer price sensitivity. A financial analyst can also evaluate historical data or create new experiments to help your business determine the best price points.
Data will help you determine the following:
- How your business can effectively use discounts and price incentives to increase sales while maintaining profits.
- How much your business can change its product price before consumer demand is affected.
- The price that will help you maximize profits and achieve your business goals.
Optimize your pricing with expert guidance
Just one percent improvement in your pricing strategy can increase profits exponentially. By investing in data-driven pricing analysis, companies can understand the full impact of pricing decisions before they happen and, most importantly, increase their profits.
Want to adopt the best pricing strategy for your business? Find a flexible pricing solution and match with a best-fit expert from our elite community of fractional cfo professionals. Help your business forecast consumer price demand and make the right decisions to stay competitive in the market.
