By definition, a start-up is a company in its first term of operations. The purpose of the company is to serve customers with a product or a specific service. The company is founded by one or more entrepreneurs, unlike MNC’s (multinational companies) that are managed by a board of directors. Thus, it is up to the founders to direct and execute plans. From the creation of the product and services, deciding the goals of the organization, roles of the individuals, to the hiring of employees, everything falls to the entrepreneurs who founded the start-up to manage it. One thing that most newbie start-ups miss out on is the pricing strategy.
Pricing strategy refers to the various ideas and methods a company implements in order to determine the selling price of the final product or the services being offered. The following are the widely accepted types of pricing strategies for entrepreneurs to choose from.
- Cost-plus pricing
Cost-plus pricing is one of the easiest pricing strategies. It follows the basic formulae of profit and loss. The idea is to calculate the combined capital utilized for the production of the final product, ensuring the selling price is higher than the cost price. It further depends on how much difference there will be between the two. A higher difference signifies more profit; this pricing strategy requires lesser resources. Pricing consultants strongly advocate this strategy for small-scale businesses.
- Competitive-based pricing
Competitive based pricing is also known as strategic pricing and is quite similar to the concept of plagiarism. The company does not do the math on its own and instead keenly follows the pricing of other organizations in the relevant sector. Pricing consulting companies suggest that this strategy is extremely popular in most businesses. In a competitive market, you must set a competitive price whilst maintaining the utmost standards of quality. It is a safe and quick strategy to decide the pricing of the product but also comes with the risk of missed opportunities. The inability of the organization to evaluate the product and procedure may refrain from knowing the value of the product, and possible elevation in the profit margin.
- Value-based pricing
When determining the pricing strategy, pricing consultants tend to focus more on the competitive metrics and internal reasons, and completely forget about the customers. Customers are essential profit-driving determinants and hence must be considered as a variant in the equation. The customers are the least concerned about the internal reason and would opt to buy the product which fits their budget. The strategy keeps this in mind and uses real-time data to set product pricing. The earlier strategies usually fall under the ‘set it and forget it’ category. However, as per the recommendations of the pricing consultants, in order to make the most out of value based pricing, it must be revised over time.
Here is a list of pointers suggested by top pricing consultants that a company should follow while determining a pricing strategy.
Know the value of your product
- A business is always established with the purpose of gaining profit. Pricing consulting companies suggest quantifying all factors, like how much capital you have invested? How much manpower is involved? What is the lifetime of the product computation? Finally, decide on the price. While doing this, take into account the customers to help you with financial planning. It is as essential to extract value through the price as creating value through products.
Up your research game
- Analyze the market thoroughly; make use of available resources at your disposal to determine the cost that will bring you the maximum profit. It is obvious that you cannot hit the bull’s eye, but it is very much possible to escalate profits by studying the market. Pricing consultants advocate that a high impacting strategy is based on two factors- the USP of a product and the willingness of customers to pay for the product. Well-versed research helps the company to understand the two elements and determining the strategy.
Use pricing as a tactical weapon
- It is rarely observed that a company revises its pricing over time. However, the pricing consulting experts suggest that if you have the resources to do so, pricing strategies can serve as a tactical weapon to increase profits of the company.
Align pricing with company goals
- Different organizations set different goals. Pricing determination is a difficult task in itself. Nevertheless, the execution, maintenance and analysis of the strategy is an altogether different game. It is essential for the company to make sure the pricing is purposeful. Team leaders need to understand the purpose of the strategy in order to guide and motivate the rest of the team to achieve said goals.
Build your business through pricing
- Competitive prices increase sales, which further results in the escalation of profits. The profit attained can be used for nurturing and growing the company, and expand the business. It provides financial stability and employees with monetary motivation as well. Pricing consultants suggest pricing and financial objectives are interlinked and hence, determine the financial growth of a company.
Usually, companies do not spare enough time for determining a smart pricing strategy and face the following repercussions:
- Entering the market with an unachievable revenue model, and the sale of the product takes a dip.
- Reduced to limited pricing potential and misses out on possible profits.
- In order to meet the market requirements, there is a slight chance of dilution of the value of the product.
Irrespective of the sector, the market is extremely unpredictable and it is even more complicated when it comes to start-ups trying to survive with little capital. Amidst all the uncertainty, pricing strategy is one factor that lets the business determine its course of action. Most of the time, companies are not willing to spend money to hire pricing consultants to help with price determination in their hour of need.