Now, let’s move on to the second P, the Price of your product.
When you set the price of your products, you need to keep in mind a number of criteria. An effective pricing approach should accomplish the following:
1. The Price needs to help you achieve your company’s business goals. For example, your pricing must generate a profit. This means that the total revenue gain needs to exceed the total costs. In fact, the Price is the only element of the 7Ps that generates revenue. Everything else represents a cost.
2. The Pricing must fit the realities of the marketplace. Will the customers buy at that price you have set? Is it much less or much more than what your competitors charge? How much are customers willing to pay? How will competitors respond to your price? Will they lower theirs?
3. The Pricing must support a product’s positioning in the market. Positioning is the image or identity of the product in the customers’ minds. The more you charge, the more value or quality your customers will expect for their money. For example, since high-end Samsung phones cost more than other similar brands, you would expect that these Samsung’s phones have better features. Similarly, if you have an established brand that is fashionable among customers, you can sometimes charge more for the customers’ fashion statement.
There are many different types of pricing methodologies. The three most common types are:
Skimming: Using the skimming approach means that you can initially charge the highest possible price, and then reduce the price in phases to capture customers who would be willing to pay at different prices. This approach would allow you to charge more to people who are willing to pay more. And, people who are not ready to pay at the higher price would have to wait until the price goes down.
One concrete example how the skimming approach is used is for mobile phones. When a new model comes out on the market, they can cost up to 25,000 shillings. Some people buy at this price since they would like to be the first among their friends and family members to have it. Then as the price of phones drops, other groups of people start buying it.
Penetration: You use this pricing approach to charge a low price to your product to get more customers from the very beginning. For example, Airtel Money is offering products at a lower price than M-Pesa to compete with them and increase the number of customers. Airtel cares more about gaining the number of customers rather than how much money each customer pays. They know that once they capture these customers, they can sell other products to them.
Competitive: You can choose to match or not to match your competitors. You can identify competitors by searching for other businesses that sell the same or similar products as you do. For example, if you sell soda, other businesses that sell soda and any other drinks (such as bottled water and juice)you’re your competitors. Let me give you another example of two gas stations just across the street from each other. They often have very little price difference. In this case, their best strategy would be to match their competitor’s price. At the same time, you can charge more or less than your competitor to signal quality and reinforce your positioning. For example, a woman who sells African bead necklaces, top-notch materials and unique designs can charge higher prices than her competitors with lower quality materials.
For my business, I used the idea of competitive pricing. There were other people selling pumpkins, but I knew that my pumpkins tasted sweeter and fresher due to the superior harvesting process. Also, people can buy other products, such as pumpkin wine and juice when they come to my store. Therefore, I decided to charge my pumpkins at a higher price compared to other people. The average price is 200 shillings and I sold my pumpkins for 230 shillings. My customers are willing to pay the higher price for the quality and at the same time they have a broader selection of products than my competitors.
I would suggest that you discuss with a friend of what the best pricing approach would be for your product. Can you charge more at the beginning when you enter the market? At what price point does your competitors lie? Also, ask a few potential customers of how much they would be willing to pay.