When it comes down to it, there are few business decisions as important as price setting. Pricing strategy affects just about everything for a business, since price determines manufacturing costs, advertising costs, who fits the target audience, the product features, and how well the product or service sells. Since sales equal profits, proper pricing strategy is key in terms of maximizing profitability and product advertising.

Target Market and Competition

Once a business has a product or service to sell, the first step in price strategy is determining the target market in terms of demographics and spending power.
In addition, consider carefully the sales and popularity of competitors in the target market. Evaluate what makes another brand more or less popular and the associated price point to that popularity. Determine the effectiveness of the competition at various price points, both within the target market and within the larger population.

Demand

After the target audience is determined, the next step is to figure out how elastic the demand is for the product or service. This may require adjusting over time in order to figure out the price point at which the product or service is most in demand. Under-or-overestimating volume can be equally devastating in terms of profit.

Costs

The next step is to evaluate the cost of producing, distributing and advertising the product or service. This is as essential as understanding the target audience and demand, as the price point must be set above the production cost in order to make profit but not so high that consumers seek products or services from competitors or walk away from the market entirely.

Discounts and Deals

An important and often-overlooked pricing strategy is that of discounting. This occurs when the list price for a service or product is set higher with the known intent of discounting the item in order to convince customers that they are getting a deal.

An example of discounts as a pricing strategy is the recent popularity of “daily deals” wherein members are sent a specific promotion set at a large discount that is only available for a short amount of time, resulting in a high, short-term sales volume.

Other Considerations

There are several other important considerations to pricing strategy, including both current and long-term profit maximization and cost management. Balance these factors with estimated long-term demand, cost recovery and market survival.

Moreover, depending upon the product or service, businesses can take the strategy of penetration pricing, which is setting the price as low as possible with the intent of making up for low unit pricing through large-scale sales.

Alternatively, another strategy is skimming, defined as when the product or service is expected to sell fewer units but at a high enough price that the sales will result in profit. If there are varying levels of a product line, target both high-cost and low-cost customers with promises of quality (high-cost) and value (low-cost).

Use pricing strategy in a calculated method to maximize profits, lower costs and establish long-term demand.