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Constructing a Pricing Policy

Establishing a pricing policy is a complex process because of all that is at stake and the long term implications of the policy. Many companies aim to create a strategy that will not commit them, only to find that their prices define them in the marketplace and that it's difficult to retreat into a higher (or lower) price zone. There is a solution however, and that is to develop the policy according to a well conceived process so that the end result is a well structured strategy that meets the company's broader needs.

 

There are a number of elements that you should be checking into prior to beginning the pricing consideration process. These elements are important because they provide you with a broader context within which to ponder your options. These include:

1. Review the Competition

Even if you don't wish to price according to a competitive model, you still need to understand where your competitors are on the price scale so that you can be sure that you are not inadvertently taking a market position that you do not intend. By checking trade journals and other public records you will be able to ascertain the price range in your sector. Knowing this will help you determine where on that scale you choose to be.

2. Determine Your Customer

Understanding who our customer is will help you understand where you want your pricing to fall. There are some markets for which certain prices would not be appropriate. By knowing your customer you will be able to understanding what price range they are expect and what value they assign to whatever it is you are selling.

3. Understand Your Costs

It may sound obvious, but if you are selling products at a cost that is lower than your total average cost, you will be losing money. The calculation of your total average cost includes all your costs, including administrative, overhead and all other expenditures. If you wish to enter the market at a lower price and gradually increase your prices, you will still need to make sure that you at least cover your fixed costs. Under this scenario, you have to make sure that you are not damaging your position in the market so that you don't wind up unable to increase prices, getting stuck at below your total average costs for an extended period of time.

While the three steps above are extremely important and should in no way be overlooked or ignored, the most important task in setting up your pricing policy is making sure that it serves your business objectives. Among the possible objectives could be:

- Maximize Profits

Certainly one of your objectives is to maximize profits, but this is not only a function of price. For example, your price may be low, but your profits high if your costs are at the right level. Similarly, you can implement efficiency procedures to make sure that there is little waste in your operations, which will also serve to maximize profits without any relation to your price. The role you price plays in your efforts to maximize profits is that it places you in the right ¡§spot¡¨ in your sector, establishing your company and your products as being value oriented, of top quality, or directed at a specific niche. For this set of objectives a cost plus pricing strategy might be most suitable.

- Meet Your ROI Targets

Provided your company is anticipating (or delivering) standard volume, the mark up you seek per unit sold can include as a consideration the return on investment you are seeking to generate from whatever investment in the business you put forth to date. Your target profit goal can serve as an overall performance measure, serving as a standard by which other investments into the business as judged.

- Hit Sales Targets

Some companies view their overall revenues as a measure of their business success. Consistent with this are those companies that view market share and the company's position within the competitive landscape. In these instances, a pricing policy that is designed to increase the number of units sold is consistent with the company's objectives.

- Enhance Market Share

In many cases companies will deploy aggressive pricing strategies in order to capture market share. While this usually requires a dropping in price, it can also include added value elements increasing the overall value perceived without actually dropping prices. In either case, the objective is to use price to draw new customers.

- Offset Competition

In general, when prices are at levels that are acceptable to consumers (which is demonstrated by the fact that people are buying the products) a small adjustment in one company's price can earn it a short lived windfall, as consumers flock to the savings being offered. Naturally, these short term gains need to be followed up with additional loyalty programs in order to retain the consumers that switched due to price incentives.

Constructing a pricing strategy is a combination of costs, market position, and your company objectives. Regardless of the proportion of each of these in your particular calculations, each must be present to some extent if your pricing is to be well rounded and, ultimately, successful.

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