Pricing is to set strategy, and pricing is to set life and death.
This is a fact and is not exaggerated at all. I have met a lot of business owners. If they are in a good mood, they will lower their prices. If they are in a bad mood, they will raise their prices. Their knowledge of price is not deep enough, and the result is to kill their own business. Pricing is one of the most important contents in marketing work. Those who do not understand pricing are not good managers; those who do not understand pricing are equivalent to no entry.
The importance and strategic significance of pricing
Pricing is not based on the boss’s own mood, but a systematic project. Therefore, we must first clarify the importance of pricing and treat it as a strategic significance, so that the following work can proceed smoothly. In particular, enterprise managers and marketing planners should clarify five points:
1. For the customer group, pricing is to choose different customer groups. Different pricing determines who your customer base is, who you are competing with, and the size of your market. For example, the buffet of 58 yuan and the buffet of 199 yuan, the consumer group is different (a small part will overlap).
2. For customer value, behind pricing is the value that can be given to customers. When you set this price, you must give the corresponding customer value behind this price. Not only the basic and functional value of the product, but also the social and spiritual value of your product. For example, LV handbags are priced at more than 100,000 yuan. Behind this is that this brand provides customers with social value (showing their status).
3. For production benefits, pricing determines the income and profit of the business. Behind the pricing represents the entire interest chain of the enterprise. Contains various interests distribution mechanisms including customer interests, employees’ profit sharing interests, supplier interests, landlord interests, shareholder interests, etc. Therefore, it must be clear where the low and high prices of the products are, not only the cost of the product, but also the various interest chains behind it.
4. For business operations management, pricing determines your resource allocation and value chain. Different pricing requires different products, teams, services, environment, marketing and other resources. For example, the pricing of Hanting Hotel for one or two hundred yuan per night is completely different from the pricing for Four Seasons Hotel for three or four hundred yuan per night.
5. For market competition, pricing determines the size of your market competitiveness. Different pricing will determine who you directly compete with, how to break other people’s blockade, etc., so as to establish your own competitiveness, and even block competition. For example, Xiaomi’s early mobile phone with a price of a thousand yuan was not intended to compete with the market of Huawei and Apple, but with the market of most of the Chinese copycats.
In short, pricing determines the strategic focus of the enterprise, the entire value chain, profitability and resource allocation direction, and even determines the life and death of the enterprise.
What is the nature of pricing?
What is the biggest misunderstanding of pricing?
The price is determined by the cost.
In fact, cost is only one of the pricing reference factors. The pricing method adopted by many people is the cost increase method, but this is not a good pricing strategy, and it is not wise to use this method. For example, why the same glass of water, the convenience store sells a few dollars, and the western restaurant sells twenty dollars? The same products are affixed with different signs, and the prices are also very different. Price is not determined by cost.
What determines the price?
Consumers buy your products, what they buy is the value they bring to them. This value has basic / functional / social / spiritual and other values. Therefore, consumers’ perception of the value of this product is the key to determine whether the price is reasonable or worthwhile. Pricing needs to consider the overall interest chain, but the product ultimately needs consumers to pay, so the essence of pricing is still based on consumers’ value perception of the product.
Where do consumers’ value perception come from?
1. Consumer demand is strong or weak. For example, there is no need to buy high-end bags, even if you have the spending power, you will not buy it.
2. The value perception of the brand corresponding to the product in the minds of consumers. For example, Huawei mobile phones can be sold more expensively than Xiaomi phones, and LVs are more expensive than ordinary bags. The brand value is behind them.
3. The specific purchase scenario of the product. The price of a glass of water in a convenience store and a western restaurant are different, which is the difference in the scene.
Then know that value perception can be priced?
Nor is it. Knowing that the price is determined by the customer’s value perception, we can then reverse our pricing work and resource allocation. This is what is said at the beginning: “Pricing is to set a strategy”, and it is also the logic we must first understand. Knowing this, most traditional bosses can avoid more than half of the wrong pricing decisions! (This is not an exaggeration, but the factual data I observed)
For example, the cafeteria, after analyzing the entire competitive environment, you want to provide customers with a unit price of 198 yuan, then according to this pricing, you can reverse your resource allocation, so that customers feel that your product and service experience are worth the price, in line with customers The value perception. For example, at least your decoration environment, product structure (at least seafood products), service experience, etc. should make customers feel worth the price. Instead of saying how much your product costs, then add your other costs and the desired profit, and let the accountant set a price. If so, in the current business, the enterprise will die quickly.
Therefore, the correct order of pricing is from outside to inside (first determine your strategic positioning and what value to provide customers, and then reverse the internal cost reconstruction), rather than from inside to outside (first determine the total cost, and then increase the price to price ).
What determines the highest and lowest prices?
This is one of the most important parts of pricing. For the same product, the market price of the product, the actual price paid by the customer, and the activity discount price are different. Therefore, we must determine the highest and lowest prices of the products in the early stage, and then formulate our own price system and different product price structures for different marketing purposes.
1. Our cost determines the bottom line of pricing. Costs include fixed costs and variable costs, calculate your own costs, and determine that your pricing cannot be lower than this cost price. (This cost refers to the total cost. Because some products may be priced lower than the reserve price for purposes such as drainage, but the overall profit is sufficient)
2. The demand of the target customer group and the market environment determine the upper limit of our pricing. The origin of marketing is demand, and the essence of business is value exchange. If your pricing exceeds the scope of the customer’s needs, you will not be able to allow the customer to recognize your value and thus refuse to purchase. In addition, if your pricing does not meet the market environment, such as market policies, it will be difficult to sell normally.
3. Product planning and market planning determine the internal price planning. The product structure (image products/auxiliary products/profit products/drainage products) determines the different pricing systems for different products in a brand or store. There are also marketing plans. For example, if you focus on a certain market this year, it may be lower than the normal price in the early stage (such as the early pricing of brands such as Didi Taxi and Meituan).
The above content is more abstract, the purpose is to let everyone understand the underlying logic of pricing, and then the specific pricing method.
Specific strategies and techniques for pricing
It is divided into two aspects: strategy and skill:
1. Pricing strategy
There are many pricing strategies, but in the final analysis, there are three main types, which I summarize as: low price, high price, and super high price.
1. Penetration pricing strategy (low price). If the market already has the boss and the second, and is still developing at a high speed, companies sometimes set the lowest price to enter the market in pursuit of maximizing market share. This is also called “market penetration pricing”, which is actually a low price for customers.
Prerequisites: First, the market is highly sensitive to prices, and low prices can promote market growth; second, with the accumulation of production experience, production costs and distribution costs can be reduced; third, low prices can reduce actual and potential competition. For example, because of cost reconstruction and lower profits, Xiaomi has formulated a strategy to enter the market at a low price (high cost performance) and quickly gain market share.
2. Skimming pricing strategy (high price). Can be understood as high prices. For example, new technology companies that master core technologies often like this to maximize market profitability. This strategy can also be adopted when new products are in the initial stage of the market. In this way, not only can there be more room for price extension, but also more followers can enter the market because they see profits.
Premise: First, there are enough buyers, and the current demand is large; Second, the unit cost of small batch production will not be too high to benefit from the transaction; Third, the high initial price will not attract more competitors Compete head-on with you. The barriers to competition to meet market demand are higher. For example, Apple’s product pricing.
3. Improve the anchoring strategy (super high price). If the market you are in is already a mature Red Sea market, and the prices of products for consumers in this market have also solidified, how do you set prices at this time?
It is possible to rescan the market demand and the competitive landscape, and carry out the pricing strategy of “increasing the anchoring right”. In short, it means ultra-high prices and raising the entire price segment. This prerequisite is that the value of the product brought by this price can make consumers willing to pay, and there is a certain market volume. For example, the 8848 mobile phone endorsed by Wang Shi.
This pricing strategy is relatively risky and needs to be grasped depending on the situation.
Second, the specific skills of pricing
For most companies, the following four are commonly used pricing methods.
1. Cost-plus pricing method. It is to measure the cost of the product, add other costs and the desired profit, and finally let the company account for the price. This is the easiest method and is the method used by many traditional business owners. But this is a serious way of thinking about problems with internal thinking, and is not suitable for the current fiercely competitive business. Because customers simply don’t recognize your costs, customers only care about their value perception.
2. Target income pricing method. Enterprises price products in a way that achieves the target return on investment. For example, public utilities often use this method. For example, how to charge a bridge? Calculated the corresponding return on investment and cycle, and then amortized it, such as charging a bridge fee of 10 yuan, the investment cost can be recovered in two years.
3. Perceived value pricing method. This pricing method is most in line with most current product pricing in the consumer goods sector. Such as FMCG, catering, beauty industry, etc. It is to measure the target consumer’s basic / functional / social value such as product performance, delivery channel, quality warranty, after-sales, experience, etc., and compare the differentiation of competing products. After overall evaluation, price their products.
Here we consider the three dimensions of the enterprise itself, competitors and customer needs, which will be more reasonable. First, let customers perceive your value, and thus recognize your pricing; Second, you can provide differentiated value and give pricing a certain advantage.
4. Value pricing method. Simple understanding is cost-effective. Provide customers with the same value, but at a lower price than competitors. Behind this is the cost advantage of the enterprise. For example, through cost reconstruction and value chain shaping, its products have cost advantages, and it is still profitable to set low prices. For example, the grandma’s house in the catering industry and Xiaomi in the mobile phone industry.
Many books and articles on the market, such as the mantissa pricing method and the psychological account pricing method, are actually some of the pricing techniques under these strategies.
Step-by-step process of pricing
If you want to price a new product or optimize the price of an existing product, what are the steps?
1. Determine the strategic direction and select the pricing target
Pricing is a strategy. So determining your strategy and goals is the first step. Enterprises generally have five goals:
1. Survive. If the company faces overcapacity, fierce competition or changes in consumer demand, survival is the company’s main goal. What the company pursues at this time is as long as the price can compensate for variable costs and part of fixed costs. But this is a short-term goal. In the long run, it is still necessary to increase the value of products and get rid of difficulties.
2. The current profit is maximized. Evaluate current market demand and costs, and choose the price that produces the largest current profit, cash flow, or return on investment. This assessment is difficult to grasp, and there are risks, because as long as there is profit, there will be competitors, so your pricing is easy to lose competitiveness. Unless the core competition barriers or brand effect is strong enough. (People who make a profit and leave are such goals)
3. Maximize market share. In order to maximize market share, some companies set the lowest price to enter the market.
4. Maximize market profit (skimming). To set a high price, in order to allow latecomers to follow up and enlarge the entire market.
5. Product-quality leadership. Setting high prices has not exceeded the purchasing power of consumers, shaping the industry’s leading position. Such as Starbucks.
Second, determine the demand
Demand determines your highest price. You need to clarify the demand elasticity and attributes of your products. For example, some products will not change sales with the price, and companies need to pay attention to this, such as edible salt. If your product pricing exceeds the acceptance of market demand, your high price will be no one to buy. The needs here are not only the basic needs of the product, but also advanced needs such as social networking and self-expression.
3. Estimated cost
Cost lets you know where the bottom line of pricing is. Costs are divided into fixed costs and variable costs. Fixed costs are the costs that you will incur regardless of whether you sell something or not, such as rent, bank interest, wages, and other expenses; variable costs will vary with changes in output, such as product raw materials, product packaging, and other costs. In order to better price, we need to clarify how costs change at different output levels. This can be calculated from the cost-sales function curve.
4. Analyze competitors’ costs, prices and products
Within the price range determined by market demand and enterprise costs, companies must also consider competitors’ costs, prices, and possible price responses.
1. If the product provided by the enterprise has a characteristic that the most similar competitor does not have, then the value of that characteristic to the consumer should be evaluated and added to the price of the competitor (price increase).
2. If a competitor’s product has characteristics that our product does not have, we should subtract this value (price reduction) from its own price.
Knowing the above information, we can better formulate higher, same or lower prices than our opponents. Because consumers choose a certain category or product, they will also face the choice of other products.
5. Choose a pricing method
After clarifying the pricing target, and after passing the customer demand level, cost function and competitor price given above, the enterprise can start to set the price.
Sixth, the final price
1. The company will formulate pricing plans based on different product lines. First of all, we must clarify the minimum and maximum prices, and then formulate a reasonable price structure. Cost estimates determine the lowest price, customer demand and market policies determine the highest price, and product planning and sales plans determine the internal price plan.
The original price and actual price of the market selling price are often different, such as agents or promotional activities such as discounts, or different markets have different pricing policies. This requires a reasonable price plan for the product in the early stage.
2. Different pricing based on different market policies and regions, groups, etc., also called price discrimination. For example, the pricing of the same Apple phone in Hong Kong and Mainland China is different. This is because of different market policies (customs duties, etc.). Some pricing is different for new and old customers, called “killed”, air tickets and hotels often engage in this set, also to maximize profits.
3. Adjust the price: increase the price and reduce the price.
One is to raise prices. Price raising strategy: there must be sufficient reasons. For example, consumers will judge whether your price increase is reasonable based on product specifications, product packaging, and product mix. If it is a market reason, everyone is raising prices and consumers can only accept it.
Disadvantages of improper price increase: If you are only raising the price, if your value perception to the customer is not sufficient to support the price increase, customers, especially regular customers, will be dissatisfied or leave you directly.
The second is price reduction. Price-cutting strategy: price-cutting should also have a reason, otherwise the customer thinks that your product is not good before the price-cutting. For example, discounts and discounts for store celebrations, festivals, season changes, coupons, and specific groups of people.
Disadvantages of improper price cuts: If you often blindly increase passenger flow and sales through discounts and promotions, it is effective in the short term and unwise in the long run, which will damage the brand image and long-term benefits.
The above are reference steps, the pricing of different companies and different products is subject to the actual situation.
To summarize, here are four main parts of pricing:
1. The importance and strategic significance of pricing;
2. What determines the price in essence;
3. Specific methods and techniques for pricing;
4. Step process of pricing.
You can ask yourself, how to price new products? Are the current product pricing reasonable? Do you need to repricing?
For example, the pricing of our consulting company is also to clarify our own goals, determine the corresponding customer needs and its own value, and finally report the final pricing according to our actual situation. The biggest cost of a consulting company is the unit time of talent, so we can only continue to raise prices as our value increases.