Profit-based strategies are governed by the desire to maximize financial performance. With profit as the motive, prices are set to deliver fast return on investment. But, when market factors are not controllable, even high price points and the ability to realize a profit does not guarantee long-term solvency. The economic debacle that commanded worldwide attention, beginning in the fall of 2008, was a reflection, in part, of profit-based strategies that exceeded the market capacity to sustain them. To achieve success with a profit-based strategy, you must be capable of understanding and influencing consumer demand. To maintain it, you must position yourself to respond to market forces across time. You can do this through sound planning, ethical governance, trend monitoring, and research that provides relevant evidence for decision making and reliable forecasting.
Government and nonprofit organizations represent an alternative position to profit strategy. While they strive to cover costs and maintain a sound operating fund balance, they are not bound to deliver profit to investors or shareholders.
To gain market share, companies introducing new products or seeking to best their competition often turn to penetration pricing. In this case, sellers set pricing low enough to encourage customer trials and to stimulate sales. Penetration pricing works well in markets where buyers are very price sensitive or dont have an affinity for the product. One benefit of this low-price strategy is that profit margins do not typically inspire competitors to run head to head against you, while the lower price also helps move inventory.
When products enter the market at the highest price consumers are likely to pay, the management objective is generally to skim the creamtaking as much profit as quickly as possible in what appears to be a lucrative market. Skimming strategies work well for innovative, leading-edge products with strongly perceived benefit. But skimming is often a short-term pricing strategy. Profitable markets draw fierce competition; as competitors catch up with technological innovation, prices eventually drop. In the 1980s Macintosh computers entered the market at a much higher price than personal computers from IBM and other companies.
Consumers pay them because of the products high emotional appeal and because they have come to believe that they need these products to feel happy or satisfied.
Price is another way of communicating your brand positioning. When marketers vie to capture markets based on reputations of innovation, reliability, leadership, or social responsibility, they often command higher prices. Other companies set price based on easy access and friendly service, without frills. For example, Southwest Airlines has captured the market of price-conscious travelers. The airline makes up for its lack of luxury by featuring friendly, approachable staff and affordably priced flights.
To maintain profitability, companies often make price accommodations. Premium airline carriers, for example, may attempt to differentiate their brands through an exceptional customer experience. When setting ticket price, they would consider service variables as well as anticipated fuel costs. They would factor in the cost of wider seats, more legroom, premium food and beverages, entertainment systems, and varied passenger loads. Then, they could predict and continually recalculate pricing based on buying patterns, flight patterns, business expectations, and needs.
To maintain the prestige of unique products and services, premium pricing is effective when directed at tightly targeted, sustainable high-end markets where significant discretionary spending occurs for products such as luxury spas, yachts, travel, entertainment systems, and cars.
Many businesses set their price based on what competitors are charging, and the cost they think customers will bear. This strategy can work in two ways: it can eliminate price as an obstacle and open the door to a relationship sale. In other words, when prices are consistent from brand to brand or vendor to vendor, customers must compare product and/or service features to see the value of one brand or vendor over another. And, when companies recognize that market pricing is no longer the determining factor in a buying decision, they must look at other ways to build relationships with prospects and customers, such as guarantees, warranties, and more convenient service options. On the other hand, market pricing can turn your product or service into a commodity shopped by price rather than reputation. In this case, as vendors bring their prices into closer alignment, it becomes more difficult to differentiate your brand, particularly when the price cuts make it more difficult to find money in a budget to enhance product features and services that might attract customers, or to increase spending on marketing and sales efforts.
Remember: All businesses are not created equal. Overhead varies, as do customer relationships, business volume, and overall business capitalization. If you plan to match competitors going-rate prices, take stock of your firms financial wherewithal, cost, and markup issue. Also make sure you have done a good market analysis and can reliably forecast sales volume at your preferred price.