Pricing a new product is probably the most difficult marketing task: set the price too high will encourage competitors to enter in, too low and you are out of the market pretty soon.
Though pricing strategies can be complex, the basic rules of pricing are straightforward:
The most common strategies are:
What the Market Will Bear
In a non-competitive market, companies might employ a strategy that optimizes profits. This strategy sets the price based on the maximum price the market will pay for the product.
Examples of no-competitive marketplaces: 1) Semi-monopolistic markets (e.g. credit ratings); 2) Early Adopters.
Gross Profit Margin Target
A gross profit margin is a difference between sales and the cost of goods & services sold divided by revenue. This represents the percentage of each dollar of a company’s revenue available after accounting for the cost of goods sold.
If a company produces phones and earns $32 million in sales but pays $24 million for the items sold, then the company’s gross profit margin would be ($32M – $24M) / $32M = 25 percent.
Profit margins are very dependent on sector/vertical:
- Manufacturers typically aim for a GPMT of 50%
- Distributors (Wholesalers) usually need a GPM of 10 to 15%
- Dealers (Retailers) require a GPM of 30 to 50% (the higher percentage is for retailers that have to train people to use the product and the lower margin is for retailers that are selling a product that does not require after-sale support)
Most Significant Digit Pricing
Psychological pricing (also price ending, charm pricing) is a pricing/marketing strategy based on the theory that certain prices have a psychological impact. Studies and experience show that sales will be significantly higher if a product is priced at say $29.95 or $29.99 instead of $30.
Combining all three
If a product is positioned as unique, smart marketing companies will typically use all three of these strategies in combination. The new iPhone 7, e.g. is prices at $799, $479 , etc …