|
|
Developing a pricing strategy for your products and services
There are a wide range of techniques you can use to set prices, and each has its advantages and disadvantages. In order to maximize profits, it is important that you choose the right method. Why the low-price strategy is unappealing Are you familiar with the term red flag? This is a term that the Internal Revenue Service (IRS) often uses when reviewing a tax return that seems unrealistic. Red flags lead to audits, which can lead to penalties, and sometimes even jail. If you would like to raise a red flag in your business plan, just say that your pricing strategy, and maybe even whole marketing strategy, is based on having lower prices than your competition. Upon seeing this strategy, potential investors will probably run for the door and start evaluating their next opportunity. Why is the low-price strategy unappealing to investors? Lower prices are associated with lower profits that cannot be made up with additional volume. The best place to get examples of this is the stock market. Watch a company's stock after it announces an "across-the-board-price-cut." Barring other factors, its stock price always moves lower. Usually the converse is also true. When a company announces a price increase, its stock price rises. AOL's recent announcement that it was raising monthly access prices to above $20 per month was complemented with a big jump in its stock price. If you are saying to yourself "this doesn't apply to me because I'm not a big company and don't ever plan to have any stockholders," then you are in for a big disappointment. Not only does this apply to your company, it is even more important since you do not have the financial resources of the larger publicly traded companies. As shown in the following table, look at what happens to your profits when you try to become the low-price supplier.
Although you only lowered prices by 5%, to be priced less than the competition, profits were reduced 50%! In order to get your profits back up to $10, you will now have to double your sales to $190. No easy task. That is why it is often said that price decreases "flow directly through to your bottom line." The price you charge for your products and services includes not only your expenses and profits, but also intangibles such as service level, warranties, image and quality. All of these factors are tied together in the mind of the consumer when making a purchase decision. In a perfect world, you could assign values to these intangibles and set the price accordingly. Unfortunately, consumers can be unpredictable and a high value for one consumer can be irrelevant to another.
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||