Pricing is setting the price of a product or service.
It is an extremely important element in marketing and must be done in alignment with various factors such as customers, competition, products, distribution, and advertising.
Let’s take a look at how pricing is determined and some specific examples of pricing strategies.
Pricing is a crucial element of marketing
Pricing is setting the price of a product or service.
Kazuo Inamori, Honorary Chairman of Kyocera, says, “Pricing is management,” and “Pricing determines the fate of management.”
When it comes to pricing, there are two extremes: selling in large quantities with a low profit margin, and conversely selling in small quantities with a high profit margin, and there are countless possibilities in between.
It is difficult to predict how much profit margin a product will sell.
However, Mr. Inamori says that management is about accurately recognizing the value of a company’s products and seeking the one point where the product of profit margin and sales volume is maximized.
Pricing is one of the components of
the marketing mix
(4P), the four areas that should be addressed first when conducting marketing.
The marketing mix consists of the following four elements:
1. Product
2. Place (distribution)
3. Promotion (advertisement/publicity/communication)
4. Price
Price should not be considered in isolation; it is important to set it in line with the other three elements of the marketing mix.
Purpose of pricing
Let’s take a look at the purpose of pricing.
●Maximize sales
Maximizing sales is a major objective of pricing. You can maximize your sales by setting a price that is neither too high nor too low.
●Achievement of target profit rate
In addition to maximizing sales, the goal of pricing is to achieve the target profit margin.
However, at the start-up stage of a business, achieving the target profit margin, which is the basis of management, may be prioritized over maximizing sales.
●Price stabilization
Stabilizing prices not only leads to stable profits but also to gaining customer trust.
If the price of a product falls, customers may think that the quality has deteriorated.
●Maintaining and expanding market share
Pricing may also be used to maintain or increase market share.
This is because if you expand your market share and reduce costs by increasing product shipments, you will be able to increase sales and profits.
●Response to competition
Pricing may also be used to respond to competition.
If a competitor drastically lowers their prices, you may need to set similar prices.
Pricing method
Let’s take a look at commonly used pricing methods, especially for existing products and services.
●Cost-oriented pricing method
The cost-oriented pricing method is a method that determines the price by adding a certain profit margin to the cost.
In the manufacturing industry, the mainstream is the “cost-plus method using a margin rate,” which calculates the price by adding a certain percentage of profit (margin) to the manufacturing cost.
In the distribution industry, the “cost-plus method using a markup rate” is used, which adds a fixed rate of profit margin (markup) to the purchase cost.
●Demand-oriented pricing method
Demand-driven pricing is a method of determining prices based on how much customers are willing to pay for a product or service.
After determining the target price through market research and questionnaires, we develop products or procure raw materials that can generate sufficient profits at the target price.
●Competition-oriented pricing method
Competition-oriented pricing method involves setting prices with consideration to competition.
Set a price that is the same as or lower than your competitors’ prices.
●Psychological pricing method
Psychological pricing is a method of setting prices based on the status of branded products, the custom of products such as sweets being sold at the same price for many years, or fractions that give the impression of being cheap, such as 98 yen.
Typical pricing strategies for new products
When introducing a new product to the market, a pricing strategy may be different from that of existing products.
Typical examples are penetration pricing and skimming pricing.
●Penetration pricing
Penetration pricing is also known as “market penetration pricing strategy.”
The goal is to set dramatically low prices with the aim of rapidly increasing market share.
It is said to be effective when it is possible to develop a product at an overwhelming price by reducing costs through mass production or by repurposing technology from other fields.
●Skimming pricing
Skimming pricing, also known as a “skimming pricing strategy,” is the exact opposite of penetration pricing.
They set a high price for a new product when it first launches, and gradually lower the price as the market grows.
It is said to be effective when there are customers who want a new product even if it is expensive.
Specific examples of pricing strategies in BtoB
Let’s take a look at a specific example of pricing strategy in BtoB.
●Dell
Dell, a computer manufacturer, quickly became the world’s number one in the BtoB computer market by purchasing large quantities of chips and other products and cutting distribution margins through a direct sales system, resulting in significantly lower prices.
However, when other companies such as HP and NEC introduced direct sales systems and were unable to maintain their price advantage, they transformed themselves into IT solution providers.
●SmartHR
SmartHR, a labor management cloud, conducts pricing based on user interviews.
Instead of asking, “How much do you want to spend?”, by asking “How much do you think is expensive?”, in response to the replied price, “Would you like to use it if it were 80% of that price?” ”, and it is now possible to determine the ideal price.
●Allied Architects
Allied Architects, which provides SaaS-type products, was able to increase its average annual contract amount several times in one year by not participating in price competition with other companies.
Participating in price competition has disadvantages, such as being easily replaced by competitors, reducing customer commitment, and making it difficult to make profits.
summary
◆ Pricing is an extremely important element of marketing
◆ Pricing has many purposes, including maximizing sales and stabilizing prices.
◆ Pricing is generally determined by factors such as cost, demand, competition, and psychology.
◆ When introducing a new product, we may set a drastic low or high price.