The first consideration for any price setting is to define the goal or objective of the company. Companies measure product success in a variety of different ways and not all pricing techniques are appropriate for every objective the firm is undertaking. The marketing manager needs to know which activity is going to be measured: ROI, as is most common, or market share? The answer to this question makes a big difference on what price to set for a product even in a recession.
Other important questions also need to be answered. For example, how long has the company been in business and/or what is the age of the industry? What is the relationship of this company to the competition? Is it a service oriented business? Organizations usually gain more control over their marketing and sales scenarios or more power over their suppliers the longer they are in business. In most situations service organizations should avoid lowering prices. However, almost everything in business is relative to what is happening with serious competitors, including unforeseen competitors that might enter the market because barriers like capital expenditure are low. In certain cases, lowering prices may be the best option in order to retain market share or to counteract potential loss of existing business.
In most cases differentiation is a better strategy than discounting. Cutting price before building value is the most unsophisticated approach to selling; and just pushing prices down will not guarantee success. For one thing, competitors can match prices. Secondly, customer loyalty can only be achieved by differentiation, not by price. A manager needs to be able to protect the reputation of the brand while also maintaining the gross margin on the product; irresponsibly cutting the price can affect both the brand recognition and the gross margin very negatively.
A successful manager needs to continually perform research to gather and update data on what really determines value in the relevant industry. The manager can then leverage that knowledge to better understand the kind of strategies that are employed by different competitors within the industry. Value-based pricing is a technique used in tough economies or in times of recession. Value bases can focus on design, superior technology, unique features, or even custom distribution. “To understand the customer’s perception of the value of your product or service, look at more subjective criteria such as customer preferences, product benefits, convenience…” (Small Business Notes).
A small business can alleviate some of the burden of marketing by using a seasoned sales representative that works on commission. A seasoned sales rep can be the secret to getting penetration without having too low of a price because he or she already has established relationships in the industry, knowledge of the territory, and the competition.
Small Business Notes: Pricing – Value-Based Pricing. Retrieved November 17, 2010. http://www.smallbusinessnotes.com/operating/marketing/pricing/valuebased.html