1. Pricing steps and new product pricing strategy
(1) Pricing steps
Successful pricing is not a final result, but a continuous process. An ongoing process. It should go through the following steps:
1. Data Collection
Pricing strategies often fail because they do not take into account all key factors. Because marketing personnel ignore costs, their pricing decisions are only about maximizing market share, rather than maximizing profits; because financial personnel ignore consumer value and purchasing motivations, their pricing decisions ignore allocating fixed costs. Pricing decisions made without gathering enough information about competitors may look good in the short term, but not when competitors make unexpected moves. Good pricing decisions require information about costs, consumers, and competitors—the information that determines the success of pricing. Therefore, any pricing analysis starts with the following:
(1) Cost accounting: What are the incremental costs and avoidable costs associated with a specific pricing decision?
—including What is the incremental variable cost (not average cost) of sales, including manufacturing, customer service, and technical support?
——At what level of output will semi-fixed costs change? This change is How many?
——What are the avoidable fixed costs of selling a product at a certain price?
(2) Confirm consumers: Who are potential consumers and why do they buy this product?
——What is the economic value of the product or service to consumers?
- How other factors (e.g., difficulty in comparing alternatives, purchase of product represents a status and wealth, budget constraints, all or part of the cost can be shared by others, etc.) affect consumers price sensitivity?
——How do differences in perceived value by customers and differences in non-value factors affect price sensitivity? How to segment consumers into different markets based on differences?
——How does an effective marketing and positioning strategy influence customers’ desire to buy?
(3) Confirm competitors: Who are the current or potential competitors that can affect the profitability of the market?
——Who are the current or potential key competitors?
——What is the actual transaction price (different from the list price) of competitors in the current market?
——Based on competitors’ past behavior, style, and organizational structure, what are their pricing goals? Are they pursuing maximum sales or maximum profit margins?
——What are the competitors' strengths and weaknesses compared with the company? Is their contribution margin high or low? Is the reputation good or bad? Is the product high-end or low-end? Does the product line change more or less?
The three steps of the data collection phase must be completed independently. Otherwise, if those responsible for collecting customer information (step 2) believe that incremental costs are low relative to value (step 1), they will tend to estimate economic value conservatively. If the person calculating the cost (step 1) believes that the consumer value is high (step 2), there will be a tendency to set the cost of the product higher. If those who collect competitive information (step 3) know what products consumers currently prefer (step 2), they will ignore the threats posed by new technologies that are not yet widely accepted.
2． Strategic Analysis
The strategic analysis stage also includes three aspects: cost, consumer and competition. However, at this time, various information began to be related to each other. Financial analysis uses price, product, and target market selection to better meet customer needs or create competitive advantages. A company selects target markets by considering the incremental costs of serving the market segment and the company's ability to serve that market more efficiently or at a lower cost than competitors. Competitor analysis is, to a certain extent, intended to predict how competitors will react to a price change aimed at deepening customer segmentation.
Putting this information together requires three steps:
(1) Financial analysis: For potential price, product, or promotion changes, how much would sales volume need to change to increase profits? For a new product or market, what minimum sales volume should be achieved to recover incremental costs?
——At the base price level, what is the gross profit contribution?
——In order to obtain more contribution margin from price reduction, how much should sales volume increase?
—How much reduction in sales can be allowed before raising prices becomes unprofitable?
——How much sales volume needs to be increased in order to cover the additional fixed costs related to the decision (such as advertising, approval fees)?
——Given the incremental fixed costs associated with the sales level, what sales level needs to be achieved to make it profitable to sell new products or introduce old products into new markets?
(2) Market segmentation: Customers in different market segments have different price sensitivities, different purchasing motivations, and different incremental costs of serving them. How to price different market segments? How can you most effectively convey the value of your product to customers in different market segments?
——How to distinguish customers from different market segments before purchasing?
——How to establish "isolation fences" between market segments so that the low-price market does not affect the value of the product in the high-price market?
——How can companies avoid violating some statutory rules on price segmentation?
(3) Competition analysis: How will competitors react to the price changes that the company will adopt? What action are they most likely to take? How will competitors' actions and reactions affect the company's profitability and long-term viability?
——Knowing the production capabilities and intentions of competitors, what goals can the company achieve while making profits?
——How can companies use competitive advantages to select target markets to avoid competition’s threats to profits?
——If profits cannot be obtained from inevitable competitive confrontation, from which markets should companies strategically withdraw investment?
——How does the company use information to influence the behavior of competitors and make the company's goals more attainable and profitable?
3． Develop a strategy: The end result of the financial analysis phase is a price-value strategy, a plan to guide the future business. As mentioned before, there is no "right" strategy for every situation. Some strategic mistakes result from imposing the strategies of one industry on another industry with completely different costs, consumers, or competitive conditions.
The decision-making process does not have to be as procedural as the above. However, it is recommended that large companies standardize this process. In large companies, cost, customer, and competitive information are held by different people. Only a standardized decision-making process can make management confident that all information is reflected in pricing decisions. For small companies, this process is often completed in a less formal way. In order to be successful, any pricing manager must know what goal it wants to achieve, what information is needed to make the correct conclusion, and what analysis to perform.
(2) New product pricing strategy?
The difficulty in pricing new products lies in the inability to determine consumers’ understanding of the new product’s value. If the price is set high, it will be difficult for consumers to accept it, which will affect the smooth entry of new products into the market; if the price is set low, it will affect corporate efficiency. Common new product pricing strategies have three distinct forms: skimming pricing, penetration pricing, and moderate pricing. ?
1. Skimming pricing?
At the beginning of the launch of a new product, the price of the new product is set higher to obtain huge profits in the short term and recover the investment as soon as possible. This pricing strategy is like skimming the cream contained in milk to extract the essence, so it is called "skimming pricing" strategy. Generally speaking, skimming pricing strategies can be used for brand-new products, products protected by patents, products with small price elasticity of demand, popular products, and products whose future market situation is difficult to determine.
For example, when the ballpoint pen was invented in 1945, it was a brand-new product and cost $0.50 a piece. However, the inventor used advertising and a desire for novelty and difference to sell it for $20, which still caused people to rush to buy it. ?
Using the huge profits generated by high prices, companies can quickly recover their investment at the beginning of the launch of new products, reducing investment risks. This is the fundamental benefit of using the skimming strategy. In addition, skimming pricing has the following advantages:?
(1) At the beginning of the launch of a new product or a new product, customers have no rational understanding of it, and the purchasing motivation at this time is mostly Seek novelty and wonder. Taking advantage of this psychology, companies set higher prices to enhance product identity and create the impression of high price, high quality, and famous brand. ?
(2) Set a higher price first, so that you can have greater room for price adjustment after its new product enters the maturity stage. Not only can you maintain the competitiveness of the company through gradual price reductions, but you can also start from existing products. Attract potential demanders in the target market, and even win over low-income and price-sensitive customers. ?
(3) At the beginning of new product development, due to limitations in capital, technology, resources, manpower and other conditions, it is difficult for companies to meet all demands at the current scale. High prices can limit the progress of demand. Rapid growth can alleviate the shortage of product demand, and the high profits obtained from high prices can be used to invest and gradually expand the scale of production to adapt to the demand situation. ?
Of course, the skimming pricing strategy also has certain shortcomings: ?
(1) After all, the scale of demand for high-priced products is limited, and excessively high prices are not conducive to market development and growth. Sales volume is also not conducive to occupying and stabilizing the market, and can easily lead to the failure of new product development. ?
(2) High prices and high profits will lead to a large influx of competitors, and the rapid emergence of imitations and substitutes, thus forcing prices to drop sharply. If there are no other effective strategies at this time, the high-price and high-quality image that the company has painstakingly created may be damaged and some consumers will be lost. ?
(3) The price is much higher than the value, which harms the interests of consumers to some extent, easily arouses public opposition and consumer boycott, and may even be banned as huge profits, inducing Public relations issues. ?
Fundamentally, skimming pricing is a pricing strategy that pursues short-term profit maximization. If handled improperly, it will affect the long-term development of the company. Therefore, in practice, especially today as consumers become increasingly mature and purchasing behavior becomes more rational, this pricing strategy must be adopted with caution. ?
2. Penetration pricing?
This is a pricing strategy opposite to skimming pricing, that is, setting the price low at the beginning of the launch of a new product to attract a large number of customers. buyers and expand market share. The prerequisites for utilizing penetration pricing are: (1) The price elasticity of demand for new products is relatively large; (2) There are economies of scale for new products. On the basis of these two conditions, Japanese Seiko watches adopted a penetration pricing strategy to compete with Swiss watches in the international market at low prices, and finally captured most of the market share of Swiss watches. ?
Enterprises that adopt penetration pricing will undoubtedly only earn small profits, which is the weakness of penetration pricing. However, the two benefits arising from low prices are: first, low prices can make products accepted by the market as soon as possible, reduce costs through large-volume sales, and gain a long-term stable market position; second, low profits prevent competitors from entering. , enhancing its market competitiveness. ?
For enterprises, which one is better, skimming strategy or penetration strategy, cannot be generalized. It needs to comprehensively consider market demand, competition, supply, market potential, price elasticity, product characteristics, corporate development strategy and other factors. To be sure. In pricing practice, it is often necessary to break through many theoretical limitations and set prices through extensive research and scientific analysis of the selected target market. ?
3. Moderate pricing
Moderate pricing strategy neither uses price to obtain high profits nor lets price control occupy the market. The moderate pricing strategy minimizes the role of price in marketing methods and focuses on other methods that are more powerful or cost-effective in the product market.
Companies generally adopt moderate pricing when there is no environment suitable for skimming or penetration pricing. For example, a manager may not be able to use skimming pricing because the product is viewed by the market as being so common that no segment is willing to pay a high price for it. Likewise, a manager may not be able to use penetration pricing because the product has just been When entering the market, customers are unable to determine the quality of the product before purchasing and will think that low price represents low quality (price-quality effect); or because if the existing price structure is destroyed, competitors will react strongly. When consumers are extremely sensitive to value and cannot adopt skimming pricing, and competitors are extremely sensitive to market share and cannot adopt penetration pricing, a moderate pricing strategy is generally adopted.
There is another reason for adopting a moderate pricing strategy, which is to maintain the consistency of the product line pricing strategy. For example, General Motors' Chevrolet Camaro is priced at a level that is affordable to a sizable segment of the market, much larger than the segment willing to pay a premium for its "sporty" appearance. market. This moderate pricing strategy remained unchanged for several years even when the style of the car was very popular and demand exceeded supply. Why? Because GM's sports car production line already has a product that adopts skimming pricing - the Corvette, adding another product is redundant and will affect the sales of the original high-priced product. The significance of attracting a large number of buyers to the showroom to try driving the Camaro is far greater than the short-term benefits of selling the Camaro at a high price.
Although moderate pricing is less proactive than either pricing or penetration pricing, this does not mean that it is easy or unimportant to implement it correctly. Moderate Pricing There is no need to set the price at the same level as competitors or close to the average. In principle, it can even be the highest or lowest price on the market. Toshiba laptops have high-definition displays and reliable performance, and have high perceived value, so although the products are more expensive than similar products, their market share is still high. Similar to skimming prices and penetration prices, moderate prices are also determined with reference to the economic value of the product. When most potential buyers believe that the value of the product is equivalent to the price, even a high price is considered a moderate price.