Successful product pricing means understanding your industry – especially your company, customers, competitors, collaborators and overall business climate. Here we look at examples of the 5 C’s of product pricing, on one-by-one.
The base pricing of any product depends on the company that manufactures the product. While the cost of raw materials and labor has a direct bearing on the price of the product, the end-product price depends on a host of company specific factors.
- The product line: Most companies that manufacturing only a few products tend to price the product on a straightforward cost plus mark-up basis. Companies with many products in the portfolio however tend to price products relative to other products in the portfolio. For instance, an automobile manufacturer already producing an entry-level segment car will price a second car in the same category a little higher, to avoid this new car affecting the sales of the incumbent model.
- Technology and Experience: Products manufactured using superior and automated technology might cost lesser to make compared to products manufactured with old and inefficient labor-intensive technologies. Similarly, the company would have ironed out deficiencies in a product manufactured for a long time. In both cases, the company might pass on some of the resultant cost benefits to the customer.
- Goals and Strategies: Product pricing depend on the company goals and strategies to some extent. Companies trying to penetrate the market might reduce their profits to increase sales whereas companies trying to develop a specific niche or create a status symbol product would hike prices.
Image Credit: wikimedia commons/alnatura
While the traditional pricing methods remained company or product oriented, modern pricing strategies follow a customer oriented approach. The major customer related factors affecting pricing include:
- Benefits: Customers buy a product for the benefits it brings. Most customers make a cost benefit analysis and effect the purchase only if the perceived benefits match the cost. The perceived benefits of a product change with time, and prices vary in proportion to such change in perceptions. For instance, in a free market economy, life savings drugs cost much more than normal during times of pandemic.
- Market size: A large market for the product typically means high volumes and hence better economies of scale, leading to lower cost per product. A small market, however, means low sales volumes, and hence not only higher input costs, but manufacturers seeking higher profits per piece.
- Market growth: Products in their growth stage tend to enjoy greater customer interest, and the quest to obtain the correct product specifications would mean constantly changing product specifications. This affects pricing considerably, and manufactures would test acceptance of the product at various price levels.
- Image or Reputation: Some time tested products become entrenched in the minds of customers, and many people actually associate the product with the brand name. One example is people associating Xerox for photocopying. Such products remain resilient to price based attacks from competitors.
- Point of Sales:The price of a product very often depends on the store. Up-market malls patronized by the wealthy and busy who tend to be less price conscious mark up prices when the same product would be available at a much lesser cost elsewhere. Stores in prime or costly locations might also charge higher to cover their higher overhead costs.
- Information: Closely related to the retail outlet is information regarding the product. Customers resist wide price fluctuations for a widely known and easily available product, but would remain unaware of the product pricing elsewhere when it comes to new, niche, or premium products.
- Behaviors: People tend to buy certain products such as fancy gifts on impulse, whereas items of regular use or high cost capital items receive much thought and considerations. The pricing of impulsive items would invariably vary and remain high for the quality, whereas prices for regular-use items would more-or-less remain consistent with the value or quality offered.
- Trends: Contemporary trends and fashions determine pricing in a big way. Customers readily pay a premium for trendy and “in fashion" items, whereas out of fashion items usually sells only at heavily discounted prices in bargain shops.
A major factor that determines pricing of a product is the presence and capabilities of competitors. Competition generally drives down prices, but the pricing of product depends on the following competitor-driven factors.
- Actual or potential competition: The presence of an existing alternative product usually lower prices, whereas the threat of future products might actually drive up prices of the existing product in a bid to maximize profits in anticipation of reduced profits when the competing product arrives in the market.
- Positioning: Competition drives down prices only when both products compete for the same market segment. For instance, a new budget entry-level car will not challenge a high-end luxury car.
- Strengths and weaknesses of competitors: The presence of strong competitors with ability to match the incumbent product in both quality and depth results in reduction of prices, but weak competitors with low quality, low marketing budget and low coverage will not lead to price-wars.
Image Credit: geograph.org.uk/Iain Thompson
The collaborators in the making and selling of a product, be it distributors, suppliers or other alliance partners influence pricing.
Shut down of a supply source might lead to raw material scarcity and increase product price whereas availability of multiple suppliers or new raw material source might lead to reduced raw material prices, resulting in lesser product price.
Inefficient distributors might create artificial scarcity of essential products and jack up prices whereas a wide and efficient distribution channel lead to reduced prices owing to increased sales, and customers acquiring better product knowledge.
The 5th C is climate. Examples of the five C’s in product pricing related to such macro-environmental factors include:
- Political & regulatory environment: Government policies such as laws preventing cartelization, taxation, import duties all have an impact on pricing.
- Economic environment: the general business cycle, the rate of inflation, interest rates and other economic factors all affect product demand in a big way. For instance, decrease in interest rate lead to more people taking housing or vehicle loans, increase demands for houses and cars. Prices naturally tend to increase when demand increase. Adverse economical climate such as difficulty in transportation, scarcity of workforce and high wages might increase input costs and hence cause price rise for products.
- Seasonal factors: The availability of a product determines pricing in a big way. For instance, prices of vegetables go up during times of extreme rain or droughts, when crops fail and the availability does not cater to demand.