Companies develop pricing strategies after considering a variety of factors. Your product or service prices impact your profitability as well as the perception of your brand in the marketplace. Setting prices that are too high can prevent customers from buying your products. If you set prices too low, you could miss out on additional profits.
The value customers perceive in your product is an important factor. If you charge $10 for a product that customers generally feel is worth $5 or $6, you may not get enough volume to generate suitable profits. In the same way, if customers see more value than what you charge, you could miss out. However, giving customers a good deal means having them feel like they go more than they paid for.
Some companies simply determine how much profit they want to make on products. If the norm in an industry is a 30 percent mark-up, you might set prices that give you a 30 percent profit. A challenge with this approach is that if your costs increase, you would have to increase the prices you charge to customers to maintain your profit margin goals.
In highly competitive industries, it is common to study the price points of competitors. You can set prices that are relatively in line with competitors — with flexibility to go higher or lower, as needed. If you want to attract customers and undercut the competition, setting prices 5 to 10 percent below competing companies makes sense.
Customers typically perceive that your price says something about the quality of your products. If you market you brand and products as top quality, a higher price point that matches adds consistency. Promoting a premium product at a low-end price may confuse customers, and more importantly, it is impractical to have the top product or service without paying to get it. If you produce or acquire a great product, you would need a higher market price to cover its costs.
In general, your emphasis on revenue or profits impacts your approach to pricing. If you are trying to generate revenue and cash in the short-run, discounted prices is common. To achieve long-term profits by optimizing margins, you need higher price points and customers that become loyalty to your business.