Lead Lines

Understanding Methods for Pricing

Pricing is one of the most significant determining factors for buyers. It can set a company apart from its competitors. In his marketing.about.com article, Jay B. Lipe discusses the importance of, the methods for and the risks of pricing.

“Each time a buyer chooses a product, they match up a price with its promises. So, it is your job to understand what are the price and promises for your services,” Lipe writes.

Factors that should be considered when setting price include packaging, quality of materials, product performance, delivery, deadlines and experience level of the provider. If promises are made and then broken, a company’s prices will be challenged through customer complaints, delayed payments and reputation risks.

When calculating prices, companies should be using more than one criterion. That way, if calculations are wrong or skewed, there are more ways to determine the correct prices. The three methods for pricing include:

1. Using cost. By taking into account the cost of the product and the desired profit, the total makes for a good starting point for a desired price.

2. Using competition. After creating a cost-based price, companies usually compare it to other market prices.

3. Using position. After making calculations, it’s time to really consider where the company stands in the market and make a final decision based on observations.

Even companies that are fully aware and well versed in the best methods for setting price can make mistakes. One major mistake is to set prices very low when business is slow and plan to raise them again when it picks up. This causes problems because it establishes the company as having lower quality compared to competitors. Also, it is difficult to cover basic costs with a very low price. Employees who suffer under price cuts also have a hard time working for such little payoff. Instead, Lipe says it’s better to err on the side of higher pricing.

“This will position you as higher quality and will ensure adequate profitability from the get-go,” he explains.

Another mistake is discounting. By offering discounts, reps may unknowingly communicate that their prices are over-inflated. This causes buyers to feel compelled to continue negotiating to the lowest possible price. A better alternative is to couple discounts with compromises in services or product. For example, when a rep lowers a price on an ad, it’s best to compromise by reducing the size or period of time it will run by a few days.

“Sure pricing is a financial matter, but just as important, it’s a marketing matter that impacts your position, your selling abilities and your brand,” concludes Lipe.

How has your understanding of your company's pricing made selling easier or more effective? What kind of information do you have to offer to your peers? Please comment and share.