When we develop a product, we have a target market in mind. Segmentation variables, including demographics, geography, psychographics, and behavioural characteristics, will shape the target market. Grouping individuals or organisations by one or more of these characteristics gives the enterprise a clear understanding. This helps define what the target market is willing to pay.

When considering the pricing parameters, value is not just a factor; it’s the central decision-making point. It’s about understanding how much the customer is willing to pay for the benefits returned by the product (Value = Benefits – Costs). This understanding reassures us that for a customer to return and refer to our product or service, the benefits, in the customer’s mind, must outweigh the costs. The dollars paid and the time invested by the customer for ownership transfer are all taken into account. This reassurance is key.

Where to Start

The first decision on pricing for your market is strategic. Pricing relates directly to the product’s positioning. The pricing strategic decision identifies whether you are planning a cost-based, value-based, or competition-based approach.

A cost-based decision is a more straightforward approach. This approach adds a percentage to the costs the enterprise has invested in the product as the profit margin. This is also known as ‘mark-up’ pricing. Companies adopt cost-based pricing when they want to appeal to a broader market. Their sales objective is focused on quantity.

Value-based pricing is most effective for enterprises that prioritise quality and the unique attributes of their products. The price is the point at which the enterprise believes the customer is prepared to pay for a unique set of benefits. The costs invested in the product are still taken into consideration. However, they are not the reason for the final pricing decision. Instead, it is about maximising the profit return.

The third option is a competition-based pricing decision. This option involves considering the costs invested as secondary to the prices of its industry competitors. Competition-based pricing can be applied when you have a similar offering to your competitors (a more homogeneous market). Therefore, the price is heavily weighed when the customer makes a purchasing decision.

Do The Pricing Scenarios

When making pricing decisions, the question is how the target market customer will interpret the price. Considering product positioning, i.e., cost, value, or competition-based pricing, the enterprise must analyse different pricing scenarios.

When undertaking the scenarios, each should assess different product quantity outputs against various assumed prices, considering both fixed and variable costs for each scenario. These scenarios allow the enterprise to test the relative price points with its target customer group before finalising the production quantity levels and go-to-market pricing.

Digital Implications

The distribution channels, mainly digital marketing, are essential to consider when making the final pricing decision. Digital provides customers with access to more information. It also offers similar options based on their search filters. Therefore, price will be a determining factor without the benefit of brand value for the customer.

The digital environment brings additional factors that will also come into play. These factors include purchasing incentives, time-sensitive decision periods, immediate application of loyalty benefits, free samples for demand generation, and free delivery.

Therefore, while the digital environment offers numerous benefits to customers, enterprises need to compete and ensure that they understand their market positioning and connection with their customers. Ultimately, this comes down to how well the enterprise focuses its message to its target market regarding its attributes and benefits and why the customer should choose them.

Therefore, when making pricing decisions, it is crucial to consider the target market. This understanding is how the enterprise presents its overall proposition to them. The customer will always be driven by value. However, how the enterprise interprets that value will determine whether the pricing approach wins the customer.

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