Simple estimations of supply and demand might have sufficed for pricing leaders in the past, but they are not enough to keep you competitive today. No matter how much experience you have in your sector, without the right pricing strategy, you are inevitably leaving money on the table.
To maximize profit margins without driving down volume, you need two things: a strategy and a formula. At Canidium, our solution experts help enterprise and mid-level organizations find the optimal pricing strategies and tools for their unique industry, operational structure, and business goals.
Overhauling your existing pricing structure and processes is not a small task. So, to help you start, this article walks you through how to implement four of the most widely effective pricing strategies.
The Step-By-Step Guide to Successfully Implementing Pricing Software Series
Before we dive into the goal-setting process, here's more about this series.
These articles are designed to meticulously unfold the complexities of pricing software implementations. Our approach provides a clear roadmap from the project's outset, introducing each crucial phase in detail and making it easier to absorb and apply the information effectively. This article represents the third installment in the series, covering pricing strategies and documentation.
Over the course of this series, we will cover the following topics:
Why You Need a Product Pricing Strategy
A defined strategy allows companies to align their pricing with their business objectives, simplify decision-making, and reduce manual workloads. Expressing your pricing approach as a formula, such as cost-plus or competition-based pricing, can significantly improve revenue generation. For example, a vending services company might use a cost-plus strategy to set prices consistently across product families, simplifying both implementation and future adjustments. However, to leverage these strategies, you may need to expand your pricing infrastructure.
Modern pricing tools are relatively novel. Many companies are still using their outdated, manual processes. Specifically, manual data collection and analysis, usually through tools like Excel, is still prevalent. However, this ad-hoc approach can be painstaking and inefficient, leading to inconsistent pricing decisions and missed opportunities for optimization. Or, in other words, companies are losing revenue through nonoptimal pricing decisions.
Moreover, effective pricing strategies are exceedingly hard to manage at scale while using these manual processes. Software solutions enable businesses to automate calculations, integrate real-time market data, and ensure consistency across all pricing decisions. Without these capabilities, many pricing strategies are simply too complicated to implement and oversee.
4 Successful Product Pricing Strategies
Before you invest in a new pricing tool, you first need to determine the types of pricing strategies you are interested in leveraging. This way, you can select the best tool for your objectives, and your software implementation partner can more readily and granularly design and configure the software's infrastructure based on your goals.
There are a wide variety of established pricing strategies you may want to consider. Yet, the following four options are some of the most effective pricing structures widely used by big brand names.
The Cost Plus Pricing Strategy
Cost-plus pricing is one of the simplest strategies. It involves calculating the cost of producing a product and adding a markup percentage to determine the final price. This approach is particularly useful for products within the same family. For instance, imagine a company that offers multiple flavors of potato chips. Instead of determining a unique price for each flavor, the company might designate one flavor—such as classic salted—as the anchor product. The cost-plus formula is applied to calculate its price, and that same formula is then extended to all other flavors in the line, like sour cream and onion or barbecue.
Anchor Pricing
Anchor pricing, sometimes referred to as anchor ladder pricing, involves setting a baseline price that serves as a benchmark for other pricing decisions. This can include using a manufacturer's suggested retail price (MSRP) as a benchmark. While this structure is similar to the cost-plus strategy, companies can also employ anchor pricing in combination with good-better-best strategies, where products are grouped into quality tiers with corresponding price levels. For example, in the paint industry, different paint qualities—such as premium for high-traffic areas and standard for less critical spaces—are priced relative to an anchor product.
In this context, the anchor product might be a mid-tier paint suitable for a general-purpose room, like a bedroom or living room. Premium paint—formulated for high-traffic areas like kitchens and bathrooms—would then be priced at a premium relative to the anchor. Meanwhile, a budget option designed for less critical spaces, such as a basement or garage, might be priced lower than the anchor. This tiered approach enables companies to cater to a diverse customer base. Shoppers can easily see the value they're receiving relative to the anchor, making it simpler to select the product that fits their needs and budget.
Recommended Retail Pricing Strategy
Recommended retail pricing (RRP) is a straightforward approach where manufacturers provide a suggested price point for their products. While this strategy is often used in retail, it can also be tailored for various industries. For example, distributors may align their pricing to ensure uniformity across channels while allowing for occasional discounts or promotions.
Imagine an appliance manufacturer suggests a retail price of $500 for their standard blender model. Retailers across different channels—brick-and-mortar stores, online marketplaces, and specialty shops—adhere to this recommended price to maintain consistency. However, during promotional periods, individual retailers might offer a 10% discount to attract buyers without disrupting the overall perception of the product's value. This way, you can ensure customers encounter a uniform price across outlets while still allowing flexibility for competitive adjustments during sales events.
Competition Based Pricing
Competition-based pricing involves setting prices based on the market landscape. Businesses analyze competitors' pricing to position their products appropriately within the quality hierarchy. This strategy can involve setting prices at, below, or above competitors based on factors like perceived value and market positioning. For example, a company offering good, better, and best product tiers might price the good tier competitively to attract cost-conscious customers while commanding a premium for higher-tier offerings.
For example, imagine a company selling a line of consumer electronics such as headphones. The "good" tier consists of budget-friendly models priced slightly below competitors to attract price-sensitive customers. The "better" tier, featuring enhanced sound quality and features like noise cancellation, might be priced at the market average to stay competitive while appealing to mid-tier buyers. The "best" tier, offering premium features such as wireless charging and top-of-the-line audio quality, could be priced above competitors to position it as a luxury option for discerning customers.
How to Implement the Right Pricing Strategy for Your Organization
Once you have determined which pricing strategy matches your revenue goals, the next step is to align your strategy with the correct tool. Because of the complexity of these software solutions, it's best to speak with an experienced software implementation consultant to get an expert option. After you have selected your tool, you are ready to initiate your pricing project.
With your pricing strategy and solution determined, your next step is to document your approach before embarking on a software implementation project. This ensures that your solution architects and development engineers have clear instructions to work with, avoiding delays and additional costs. To clarify, your pre-implementation process should mirror the following steps:
Steps to Implementation:
- Define Your Goals: Clearly articulate your business objectives and how your pricing strategy aligns with them. For instance, are you aiming to increase market share, maximize margins, or enhance customer loyalty?
- Evaluate Your Options: Assess the available pricing strategies and determine which best suits your business model and product offerings.
- Engage a Consultant: Work with a pricing consultant to refine your strategy and ensure it aligns with best practices and market dynamics.
- Prepare for Implementation: Document your pricing formulas and strategies in detail before starting the software implementation process. This will enable seamless configuration and avoid disruptions.
- Leverage Technology: Use pricing software to automate calculations, integrate real-time data, and ensure consistency across channels.
Where to Start Your Pricing Journey
As traditional methods of pricing become less effective, companies must embrace modern pricing tools and strategies to optimize their approach. Having a defined pricing strategy that aligns with your business objectives improves revenue generation. The four effective pricing strategies we discussed—Cost-Plus Pricing, Anchor Pricing, Good-Better-Best Strategy, and Dynamic Pricing—provide a solid foundation for organizations seeking to enhance their pricing structures.
As pricing tools evolve, organizations can automate calculations and incorporate real-time market data, streamlining decision-making and facilitating growth. Ultimately, investing in the right strategies and tools empowers companies to make informed pricing decisions, leading to improved financial performance and sustained success in a rapidly changing economic environment.
If you want to learn more about what it costs to implement a pricing solution, check out this Pricefx buyer's guide.
