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Successful product pricing requires understanding the 5C of product pricing: company, customers, competitors, collaborators and climate of the business.
The three base pricing models: cost plus mark-up, the value the product renders to the customers, and the relative price of competing products base itself on the first three Cs respectively. Government regulations such as taxes and duties, and the impact of collaborators such as in supply chain management or the distribution network can also impact product pricing in a big way.
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The Product Life
One of the best practices for pricing is relating to the product's life. Most companies price new and innovative products, especially the latest gizmos and gadgets high, as early adopters are rarely price sensitive and purchase such a product only to do so first. Over time, as product awareness spreads, competitors catch up, and interest in the product wanes. The company then reduces the price to reflect factors such as forces of demand and supply, the actual cost to manufacture the product, the value it adds to the customers, and other changing factors, to make it appealing for price sensitive customers and bargain hunters.
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One innovative best practice for pricing, relevant for complex products with many features such as computers and cars, is variant pricing. Variant pricing entails a fixed price for a core component and separate pricing for each component, with the user having the option to choose the required components. This pricing strategy allows customers to pay only for what they want. Dell introduced this concept for its personal computers with a good effect.
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Willingness to Pay
The elusive holy grail of pricing is the “customer’s willingness to pay.” Regardless of the production cost or other market conditions, pricing a product above what the customer is willing to pay leads to decreased sales. The value added by a product is usually a function of the utility or the need fulfilled by the product and the cost. Customers who perceive that satisfying the need comes at too high a price may opt to leave the need unfulfilled.
Businesses now use automated tools to mine historical data and determine a "willingness to pay" price for their products.
The willingness to pay closely relates to segment specific pricing, or pricing the same product differently for specific groups of customers, based on the willingness to pay levels of each specific group.
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The pricing of a product invariably depends on local conditions such as the level of taxes, rentals, salaries, and other factors. Companies operating in different countries traditionally have different approaches to pricing. Best practices for pricing however mandate a global pricing strategy. This does not mean ensuring a standardized pricing across the globe, but following the same methodology in determining pricing.
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Price optimization is a good pricing best practice in highly competitive and price sensitive markets. Price optimization entails maintaining margins by identifying less price-sensitive items and recovering margin on these items, when forced to reduce margins on other items either due to inflation, lower prices for competing products, or increased production costs.
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Discount pricing and price reductions are a natural part of a product pricing strategy, especially in retail. Companies usually resort to such practices to dispose of products that have reached the end of their life cycle, or which have not met expectations.
Best practices in discount pricing include offering promotional coupons, announcing seasonal prices and clearance sales, and or selling more than one product for a price as combo offers.
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A new and innovative product pricing strategy, especially relevant for IT related services is offering the product or service for free, with the business hoping to make money from advertisements that come from the critical mass generated owing to the free service. The best example of such a model is Facebook.
Best practices for pricing in such competitive situations include:
- offering the product as such for free, but charging customers for premium add-ons, installation, customization, training. or other services.
- selling the main unit at a very low cost, and recovering the lost revenue from sales of spares and supplies needed to operate the unit. The best example is cheap printers with expensive ink cartridges.
The pricing strategy and best practices for pricing adopted not only accounts for sales but also determines the brand image and reputation of the company.
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- Caycon Consulting. “Top 10 Product Pricing Models for Start-Ups.” http://www.caycon.com/blog/2011/02/ten-top-product-pricing-models-for-startups/ . Retrieved 28 February 211.
- Revonics. “How Can Price Optimization Help?” http://www.priceoptimization-blog.com/. Retrieved 28 February 2011.
- Pricing Leadership. http://www.pricingleadership.com/?tag=pricing-best-practices. Retrieved 28 February 2011.
Image Credit: Wikimedia Commons