How SMBs Can Adopt and Implement Smart Pricing Strategies that Boost Profitability

Small- and Medium-sized Businesses (SMBs) in India have, over the years, assumed a significant role in driving the economy. A Zinnov report shows that they have contributed almost 40% to the Gross Domestic Product (GDP) in 2019. During the ongoing COVID-19 pandemic, more and more SMBs are shifting to online marketplaces to continue selling while mitigating the risks of spreading the contagion. The Zinnov report also suggests that the growth in digital spending will soon top $80 billion in India. It is in this context that we need to look at the digital opportunities that lie ahead for SMBs. However, it is not enough to have a product that you wish to sell; a good product may not sell due to a bad price-point or other reasons. Read this blog to learn how smart pricing helps your products find consumers with ease.
How SMBs Can Adopt and Implement Smart Pricing Strategies that Boost Profitability
Smart pricing is a dynamic concept but is simple to understand. Basically, it is a strategy that makes the price of any item in the online marketplace go up or down depending upon a few factors. Let us take a look at those factors:

- The pricing could change due to lower prices offered by competitors.
- It could change due to the cost of production, which fluctuates from time to time.
- Prices of goods can also change depending on the distribution network available and used for transportation and delivery.
- Customers also have a role to play in this. Intelligent pricing is always made keeping in mind the end-consumer – his spending ability and mindset. Read more here to learn about the demographic details of Indian online buyers.

Why Should SMBs Adopt and Implement Smart Pricing Strategies?

Without a good price-point that holds up in a competitive market, your product may not have better chances at selling. Here are the reasons why:

- With increased access to the internet and empowered by smart devices, consumers have at their fingertips a whole array of choices. They can browse different websites to narrow down the search to something that is on offer for less. Competitive pricing will help you grab and hold on to your customer.
- By tracking the prices being offered by your competition, you may choose to offer the same if not a cheaper price-point. This could streamline your operations in order for the business to become sustainable and profitable at the same time. In the long term, it could prove to be a beneficial move for your organization, subject to other conditions
- For consumers, this is a win-win situation. They get their money’s worth and are also encouraged to buy again from you, thereby unlocking repeat business opportunities for you.

What are the Three Types of Pricing?

Now, pricing a product is not easy. Some companies simply look at the prices being offered by other companies and price their products or follow what they have been practicing for years. There is, however, a need to look at the matter more closely.

There are three types of pricing. Let us find out more on them:

- Value-based Pricing: Value-based pricing is driven by the value perception. A company determines the price of a product based on its perceived value in the mind of the customer. It is focused on the customer to determine the pricing of its products. For instance, if the ownership of an item, such as an expensive bag or car, adds to the image of the customer, it will be priced highly.
- Cost-based Pricing: This is looked upon as the easiest way to price a product. When the fixed costs, variable costs as well as a percentage of markup for profit are all factored in, this is the full-cost of the product.
- Dynamic Pricing: In this case, the price of the product is determined by the market demand for it. It is flexible. Also known as “surge pricing,” dynamic pricing happens through continuous readjustments of pricing, depending upon the demand for it.

After studying the various pricing approaches that you can adopt and implement, here is a step-wise guide on how to price a product:

Researching and Understanding Competitors, Markets, and Consumers

The primary aim of any business venture is to turn in a profit. For this, you have to look at all the expenditures you are likely to make – from the procurement of raw materials to the cost of production, payment of labor fees to an overhead which accounts for actuals. Pricing boils down to how much it costs you to provide the goods or services and marking a percentage of profit over it. The profit you make is also impacted by market forces, such as the prices offered by competitors, the demand and supply for your goods in the market, and ultimately, a competitive price for the consumer.
  • When you look at your competitors, here are a few things to study:

    - First and foremost, conduct a market sizing analysis. Market sizing includes identifying your competitors. Who are the other players vying for the same marketspace as your products? Which are the other companies already in the business? It also includes finding out their sales figures. This will help you develop an idea regarding the demand for your product in the marketspace.
    - It is important to identify where they operate from. This will guide you in determining where they likely source their raw material from. It will also tell you about the transportation network they support to ship their goods.
    - Lastly, study the portion of the market share your competition already serves. This is an indicator of how fast you can grow in that space.
  • Apart from the competition, it is also important to look at the marketspace closely and study the following factors:

    - Prices in the market are determined by the forces of demand and supply. The higher the demand, the higher you can pitch the price point.
    - The market price of your product is the price you can ask for, depending on how high or low the demand for it is at the present. For this, study trends on demand surges to establish a timeline of demand and supply round the year.
  • Studying your consumer is equally vital before you price your goods:

    - For determining the price at which they would be willing to buy your product, study your end consumer. That different income groups have different spending capacities is a given.
    - Depending upon the nature of your product, your price point can vary. Essential items can be priced as per market rates while high-end consumer goods can be sold at higher prices.

Understanding your Product Features to Set the Best Price

This will help you reap further dividends. Identify the unique features of the product you wish to sell to cater to specific needs. Highlight and promote these features to attract the consumer. Let us see how:

- Product features, which are generic by nature usually attract an easy-to-afford pricing bracket. For instance, a bottle of shampoo which does not offer any additional benefit has to be easily affordable for it to move from the counter.
- Product features, which are specific and unique by nature, can demand a higher price. It is offering an additional feature for which it can charge extra. For instance, a bottle of shampoo which offers to control dandruff can cost more than a normal bottle of shampoo.
Product feature
It is important to note here that there may be more than one player in the market segment you are targeting. Compare your pricing with similarly-featured products to determine your price point. For instance, you can compare the price of a dandruff-control shampoo with another dandruff-control shampoo. Also, remember, not everyone needs a dandruff-control shampoo. So, the more features you add to your product, the narrower your target segment gets.

Developing a Pricing Strategy

Once you have studied your competition, market, and customer, it is time to formulate an action plan to price your product. There are many ways to go about it. Here are a few ideas:
- To initially penetrate the market, price your goods nominally when you launch them. This is called penetration pricing.
- With continued focus on manufacturing and transporting your goods, price your products economically. It can change from day to day. This is called economic pricing.
In premium pricing, prices are determined to charge a premium. This applies for high-end products.
- You can also approach the market with a high price. Readjust it later to offer a lower price to match your competitors through price skimming.
- Offer discounts and deals through promotional pricing.
- Psychological pricing is very clever. Do not break the threshold. Stay shy of it just by a small margin. For instance, brands price their products at INR 999 instead of touching the four-digit figure of INR 1,000 to attract customers.
- You can explore options to offer customized services through versioning. Offer good, better, and best versions of the product with additional features. Charge accordingly.
- Sandwich pricing is also a very clever approach whereby you offer high, medium, and low prices. It usually propels the customer towards the medium-priced product.
- Win through service. Set the same price as your competitor but offer customized services.
- Value-pricing, as discussed earlier, factors in how the customer perceives the product. This determines the price-point.
Pricing strategy
With the knowledge of these smart pricing strategies, choose the one that suits your product the best. Make business simpler by doing simple business.
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