What is pricing

Pricing is the process of determining the price of a product or service.

This process is based on several factors:

• The costs borne by the company;
• The perceived value of a product by consumers;
• The price set by competitors, market trends, brand positioning, as well as other variables.

The definition of product and service prices influences profits much more than cutting costs or increasing sales volumes.

Pricing strategy

The activity of determining the price

 of a product or service is a very long and complex process and still not well developed among the activities of planning.

To determine a price that is effective for sales, the company must perform an accurate analysis of the prices set by competitors, of the prices where consumers are more directed, and of the objectives that the company wants to achieve.

When implementing a pricing strategy, it is important to follow steps:

• Define objectives: when a company determines the price of a product, it must also plan what it wants to achieve with that particular price;
• Identify demand: conduct an analysis of consumers and their product demand;
• Estimate costs: making an estimate of costs related to production, distribution, and sale of products allows determining the most suitable price to cover costs and ensure a return on investment made;
• Analyze the competition: the company must take into account the type of offer, prices, and also the costs incurred by competitors.

Therefore, once these essential steps have been determined, there is just one more decision step left:

• Decide on how to conduct the pricing strategy: analyze the previous steps and determine everything;
• Set the final price of the product: based on the implemented strategy, the company can choose the most suitable price for a given good.

However, there are periods in the life cycle of a product and a company that tend to change and therefore it must always be ready to adapt to needs and situations and to change prices when necessary.

Pricing models

There are various pricing models that determine the price of a product, namely: 

• Cost and Profit Margin: a profit margin percentage is added to the production and distribution cost of the product;
• Rate of Return: one calculates the unit price, that is, price = unit cost + [(rate of return x investment) / quantity sold]. Then, one determines the level of sales needed to cover fixed and variable costs;
• Market Pricing: one sets the price based on prices established by competitors;
• Introductory Pricing: one sets the price based on competitor research and customer opinions on the advantages offered by a product;
• Value-Based Pricing: one sets the price based on how customers value the product.

Finally, focus must be placed on how a customer perceives the value of a product and its real value, hence what the customer does not see.