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The Price is Right

By John Sawyer on 15/11/2017 - 0 Comments

In the words of the old game show - how do you know if the price for your product is right?

Do you have a pricing strategy that maximises your competitive position in the market to get you the best results in terms of profit?

It is our experience at ICON that many companies do not have a pricing strategy, instead they tend to follow the what has worked for them well in the past and fail to update or review their pricing activity – often across their entire product or service.

However, failure to review pricing may mean that you are missing out on additional revenue gains that may potentially fall to the bottom line to increase profit.  This article describes some key pricing strategies and offers guidance as to how these may be used to have bring your pricing strategy up to date.


What are the Main Pricing Strategies?

Pricing for any product or service is normally based on the 3 dimensions of cost, demand and competition and a company can use any one, or a combination of these to as the basis to set pricing. The following is a review of some pricing strategy options.

Cost – Based Pricing

This refers to an approach where a desired amount of profit margin is added to the cost of the product to obtain the final price. Cost based pricing can take two key forms – cost-plus pricing and mark-up pricing.


Cost-Plus is a simple approach whereby once you calculate the cost of a good, this is multiplied by the mark-up percentage to derive the sale price. This is a simple approach but ignores the impact of competition, who may be charging substantially different prices. It also ignores replacement costs and is based on historical data that may have changed. Cost-plus pricing is also known as average cost pricing, and is widely used in the manufacturing sector.

Mark-Up Pricing

This refers to the process whereby a fixed percentage of the cost of the product or service is added to the price to get the sales price. This approach is common in retailing and is popular as most contractors are willing to accept this method for an agreement of a sale since it is assured of having its costs reimbursed and of making a profit. With mark-up pricing there is no risk on such a contract.

Target Return Pricing

This method involves identifying 3 key elements; - firstly, the price at which the product or service will be competitive in the market; secondly, the desired profit to be made, and lastly, the target cost by subtracting the desired profit from the competitive market price.

Demand Based Pricing

This refers to a method in which the price of its product is determined by its anticipated demand profile. If the demand is high then the price is set at high levels and low if the reverse is the case. The success of this pricing approach is dependent on the ability of the company to correctly determine the demand levels, and is often seen in the hospitality and travel sectors. For example, airlines use this pricing approach and have yield management teams to ensure maximum sales revenue from each class of seat sold on a plane.

Competition based Pricing

This is where the company reviews the market to identify a market pricing position compatible with the positioning of its own product or service against those of its competitors. This is a useful tool as it will oblige the company to review the market place and to identify how and where its own product or service fits in the competitive landscape. Apple computers use such an approach in order to reflect their premium positioning in the market place.

Transfer Pricing

This involves selling goods and services within and across departments and divisions within a company, and is used to manage the different profit and loss requirements within different areas within the same company. Big multinational companies use such an approach, and are often criticised for doing so, as by doing so, they are able to minimise taxation liabilities. Notable examples of this are again, Apple Computers and Starbucks.


Which Pricing Approach is Best?

The answer is that there is not one pricing approach that meets the needs of all business types and sectors. The above examples represent a summary of some of the key pricing strategies – there are others such as price penetration and market skimming.

A good example of price penetration is where a product is sold at a level to gain maximum sales which may be below its cost of sale, and in some cases is referred to as loss leading.

Retailers are skilled at enticing customers into shops with bargains on core staple food products such as bread, milk and eggs in the hope that customers basket spend is increased with many higher margin products.

If there is one lesson to be learned, that is to review your pricing and to have a strategy. For example, know what your cost of sales are and break-even point is. This is the sale price at which you equally offset the combination of fixed and variable costs.

Have an understanding of the competitive landscape and where you are positioned within it. You may be able to squeeze additional margin out of some of your product range, but without reviewing your approach, you will not know.

A solid understanding of what your customers are capable of bearing is also required. Don’t just focus on price increases at the start of each New Year, but look at how you can achieve marginal gains across your range of products and services at different times of year.

Research undertaken by ICON has found that the group most reluctant to increase prices is business owners themselves.

Failure to have and review a pricing strategy may lead to reluctance to change because of a perceived fear this may have a detrimental impact on sales. The reality may be that such a change may mean you lose customers that do not want to be loyal to your product or service as they only purchase on price alone. These customers may in fact cost you money to service.

So make time now to review your pricing strategy. Don’t be afraid to tackle these questions, but get an informed position, and from there take your appropriate course of action.

If you are able to squeeze extra margin from your sales by a change to your pricing strategy, just think what you could do with the incremental profit?

Get in touch with your local ICON advisor to see how this impacts on your business,

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