Pricing is the exercise of determining the right price, that is, the one that will maximize your sales and your margin. This is a complicated exercise because too high a price could lower demand and too low a price will decrease the margin. Pricing is one of the 4Ps of marketing, but it has certain specificities. If the first 3 “P”s (Product, Promotion, and Place) make it possible to plant the seeds of success, it is pricing that truly makes it possible to materialize this success through sales. Let’s end this introduction by emphasizing that a good price is not a guarantee of success but that a bad price is a guarantee of failure.

In this article we cover most of the themes related to pricing to give you a synthetic overview. Of course we cannot be exhaustive and do not claim to replace the reference works that exist on the subject.

Pricing is an essential factor for the profitability and therefore the survival of companies. A study of 394 companies between 1970 and 2013 showed that the best performance was achieved by those that focused on profitability rather than growth.

However, pricing is a difficult exercise. Determining the best price is a strategic exercise for the company because it requires understanding the value perceived by the customer. However, understanding this value is a priori impossible without putting yourself in the customer’s shoes. It is therefore necessary to use market research techniques in order to approach as closely as possible:

  • perceived value
  • differences in perception depending on the profile of the prospect

Determining the best price requires understanding the value perceived by the customer.

It is from this exercise that segmentation is born and the possibility of applying different ghostwriters price models in order to maximize its margins.

We understand that pricing is not an exercise that would be reserved for the financial department of the company. It is an exercise that

  • arises where innovation takes place and new products/services are thought out
  • continues in the market research department
  • ends with a dialogue between the marketing and finance department of pricing

As you will have understood, pricing is therefore the activity that makes it possible to determine the “right” price.

Cost-plus pricing

The “Cost plus Pricing” method is undoubtedly the most basic and the most common. It consists of adding a margin to the cost of the product/service sold. It is a pricing approach which is therefore purely financial and in the hands of the department of the same name.

This pricing method is far from ideal because it requires understanding the cost structure of the product/service: fixed costs and variable costs. It also requires the fair allocation of overheads and therefore imposes Accosting type calculations. Finally, production costs may vary over time and “Cost plus Pricing” therefore involves constant recalculation.

Customer-driven pricing

The “customer-driven pricing” approach is undoubtedly better than the previous one. It takes into account the willingness to pay (Willingness to Pay or WTP) of customers.

This requires understanding the value that a consumer can attach to a product. It is a particularly perilous exercise when the product or service is innovative and the consumer has no point of reference. Studies have thus shown that the first consumers did not perceive the value of the first mp3 players, air conditioners, etc. and that fixing the pricing according to “logical” criteria would have resulted in an unviable situation.

Share-driven pricing

The third type of pricing is called “share-driven”. It involves letting competitive forces dictate the market price. Its objective is to gain market share.

In most cases there is not really a valid reason to want to conquer market share at all costs. This can only harm your margins and your long-term profitability. Share-driven pricing is therefore not advisable in all situations.

In the following paragraphs we present to you 6 business models that are based on price. From low cost to luxury via freemium, pricing is becoming a central element for companies that have adopted these models.

Price can be a differentiator. The price therefore becomes the essential element of the company’s strategy. There are many examples and the current crisis context can only reinforce the popularity of this business model.

Companies that go low-cost hope to capture additional market share through low prices. They are inspired in this by an old theory of pricing (PIMS or Profit Impact of Market Share) which made the reduced margin a growth factor by capturing market share.

The price difference

This pricing technique is very widespread. It consists of offering an alternative in the form of an option rather than displaying a total price. You will find 2 real examples below:

  • A car rental company that applies this technique to offer supplements (extended insurance, additional driver, etc.)
  • A magazine (Harvard Business Review) that offers different subscription plans but does not apply this pricing technique

Avoid round prices (“just below pricing”)

This pricing technique is very widespread. It consists of forming prices that are not “round”: €15.99, $299, €9990, etc.

9990€ is interpreted by the brain as being significantly cheaper than 10000€.
The underlying psychological mechanism has been explained in studies like this. As we read from left to right, it is the first digits read that form the impression of the price.

Psychological grounding

An advertised price influences consumer perception. North craft and Neale (1987) showed that the advertised price of a good influenced the perception of quality and the price actually paid.
This pricing technique is applied, for example, when “Novel Ghostwriter” are put forward after a promotion. The old price and the discount applied are likely to change your behavior and your purchasing decision.

The prices of the past

The last mechanism that influences purchase decisions are past prices. In another context (the school), Cavern and Prism (1990) showed that teachers were influenced by the marks already obtained by a pupil when they had to correct a new copy.

In terms of pricing, it’s the same thing. If you are used to always paying more or less the same price, you no longer think about when to buy the item. On the other hand, if the price increases in proportions that you consider unacceptable, your brain will restart. In times of inflation as at present, purchasing decisions can therefore be called into question, which does not suit traders. This is why producers opt for shrinkflation in order to keep prices constant.

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