Effective pricing strategy is needed to sell your products in a competitive market place so that you can make a profit.Price is one of the most flexible elements of the marketing mix which interferes directly and in the short term over the profitability and cost effectiveness of the company. There are a range of factors that you need to consider, such as prices offered by competitors, cost of production and distribution, product image positioning in the minds of consumers and determining the demographics of potential buyers. A pricing strategy is set to achieve pricing objectives which include profit maximization, sales maximization, market share as well as survival. Pricing strategies relevant to developing countries are competition based strategies as well as cost based strategies.
Competition based pricing strategy
Competition based pricing uses key information such as the competitor’s price levels, as well as behaviour expectations, observed in real competitors as well as potential sources to determine adequate pricing levels to be practiced by the company. This pricing works well for similar products such as bread, eggs and flour as these products do not have much differentiation. It involves setting a price based upon analysis as well as research compiled from the target market. With this primary strategy, you will base what you charge on the results from your research, for example, if your competitors are pricing their products at a lower price, then it is up to you to either price your products at a higher or lower price.
Advantages of competition based pricing strategy
One of the advantages of competition based pricing is that no complex computations are required because you simply follow a market price, or a price set by market leaders. Also in a highly competitive market, the burden of price-based marketing efforts is lifted. Competition based pricing allows you to control the competition while preventing a loss of market share and customers to competitors.
Disadvantages of competition based pricing
However, when you adopt the same price as the one charged by competitors then certain marketing efforts must be required to attract sales. These extra efforts will result in increased the costs for the business which therefore reduces profits. Concentrating on prices of competitors, may easily result in ignoring your own production costs as more time is also needed to conduct and update market research. Competition can easily mimic prices set by one firm. For many small businesses in particular, competition based pricing results in a narrowing of profit margins. As a result this makes the business vulnerable to a sudden rise in costs.
Cost based pricing strategy
Now cost based pricing involves calculating the cost of the product and then adding a percentage mark-up to determine the price. It is the easiest way to calculate what a product should be priced at. This appears in two forms of pricing, full cost pricing and direct cost pricing. Full cost pricing takes into consideration both variable and fixed costs and a percentage mark-up. Direct costs pricing on the other hand is variable costs plus a percentage mark-up. Historically it is the most common pricing strategy because it carries a series of financial prudence.
Advantages of cost based pricing
With cost based pricing strategies, it is easy to understand and calculate the price. The pricing models make sure that costs are covered. They can be helpful and simplify investment appraisal. You know exactly the amount of expenditure that you incurred on making a product and therefore you can add profit margin accordingly which helps you in achieving the desired revenue for your business.
Disadvantages of cost based pricing strategy
The downside of cost based pricing strategies is that it ignores demand and the price elasticity of demand. The strategy ignores the competitive situation. Cost based pricing strategies do not take into account the future demand for a product which should be the base for deciding the price of a product. It can result in the company overestimating the price of a product because the method includes sunk costs and ignores opportunity costs.
Well, the way a product is priced has a bearing on the profitability and in the long run survival of a firm. Cost based pricing and competition based pricing strategies are relevant to developing countries. This is because there are not much manufacturing industries, therefore most of the products in the market are imported and the firms will not have much idea on production costs.