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Target Markets and Pricing. Understand your Market. Since price is an important component of the “ 4 Ps ” of marketing, and a complex subject itself; then you must work your prices to reflect the value you are providing as opposed to your competitors.
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Understand your Market • Since price is an important component of the “4 Ps” of marketing, and a complex subject itself; then you must work your prices to reflect the value you are providing as opposed to your competitors. • This will require you to consider carefully what your market can afford to pay for your product or services, thereby enabling you to zero in on your target market share objectives; while obtaining revenue at the same time. • The best part of it all is having the ability to maximize your profits without necessarily affecting the environment around you.
Study the competition • Alternative and effective pricing strategies for starters call for matching (and in many cases exceeding) the strength that the competition displays. • A good example would be focusing more on your service and quality advantages, product differentiation using new and existing differentiating features. It’s always a good idea to know your competition so you can challenge them at their weakest, thus putting yourself in good ground. • This is where the need for a SWOT (Strengths, Weaknesses, Oppositions and Threats) analysis comes in. • Now that you have already identified their weaknesses, you have something concrete to work on. • This would mean going after their unhappy customers (those who are not satisfied with the products and services that the competition had offered) and moving in to exploit competitors with their low brand awareness. • You can also maneuver to focus on certain geographic locations where the competition is relatively weak, and where the opportunities to grab market share fast enough is possible.
What are your pricing objectives? • To maximize profit • To achieve or maintain market share • To achieve target return on investment • To meet or prevent competition • To maintain stable prices What are your pricing objectives? What do you aim to achieve with your pricing strategy and tactics? These are the questions you must answer before planning your business and marketing strategy. Below are some pricing objectives you may want to consider.
Cost Oriented Pricing • Competition Oriented Pricing • Demand Oriented Pricing After understanding your own products, and your competitor’s strategy; it’s now time to create your own pricing plan, strategy and tactics. Product Pricing Strategy: 3 Types of Pricing Methods and Tactics
7 Factors That Will Influence Your Product Pricing Strategy • 1. The level Of Competition • 2. Perceived value of your product • 3. Product development cost • 4. Economic trend • 5. Level of market demand • 6. Demographics • 7. Class of targeted customers
1. The level Of Competition • Effect of Product Characteristics on Market Structure • Good substitutes increase competition to Illustrate: transportation service Georgetown to Skeldon, there are a number of modes, mini-bus, shared taxi, private taxis and Private cars, each operation competes with the other. • The suitability of the modes determine their use by the target market. • Further, one must remember that market structures are dynamic as they change to satisfy the customers needs. • Changing structures is as a result of market intelligence. If the target market is lucrative there can become stagnation in the market as too many service provider present ensues the need for increased efficiency.
Effect of Production Characteristics on Competition • When minimum efficient scale is large in relation to overall industry output, only a few firms are able to attain the output size necessary for productive efficiency. In such instances, competitive pressures may allow only a few firms to survive. • On the other hand, when minimum efficient scale is small in relation to overall industry output, many firms are able to attain the size necessary for efficient operation. Holding all else equal, competition tends to be most vigorous when many efficient competitors are present in the market. • This is especially true when firms of smaller-than-minimum-efficient scale face considerably higher production costs, and when the construction of minimum-efficient–scale plants involves the commitment of substantial capital, skilled labor, and material resources. When construction of minimum-efficient–scale plants requires the commitment of only modest resources or when smaller firms face no important production cost disadvantages, economies of scale have little or no effect on the competitive potential of new or entrant firms.
Effect of Entry and Exit Conditions on Competition • Maintaining above-normal profits or inefficient operations over the long run requires substantial barriers to entry, mobility, or exit. • Abarrier to entry is any factor or industry characteristic that creates an advantage for incumbents over new arrivals. Legal rights such as patents and local, state, or federal licenses can present formidable barriers to entry in pharmaceuticals, cable television, television and radio broadcasting, and other industries. • A barrier to mobility is any factor or industry characteristic that creates an advantage for large leading firms over smaller nonleading rivals. Factors that sometimes create barriers to entry and/or mobility include substantial economies of scale, scope economies, large capital or skilled-labor requirements, and ties of customer loyalty created through advertising and other means.
Effect of Entry and Exit Conditions on Competition • It is worth keeping in mind that barriers to entry and mobility can sometimes result in compensating advantages for consumers. • Even though patents can lead to monopoly profits for inventing firms, they also spur valuable new product and process development. • Although efficient and innovative leading firms make life difficult for smaller rivals, they can have the favorable effect of lowering prices and increasing product quality. • Therefore, a complete evaluation of the economic effects of entry barriers involves a consideration of both costs and benefits realized by suppliers and customers. • Whereas barriers to entry can impede competition by making entry or nonleading firm growth difficult, competitive forces can also be diminished through barriers to exit.
Effect of Entry and Exit Conditions on Competition • Abarrier to exit is any restriction on the ability of incumbents to redeploy assets from one industry or line of business to another. • During the late 1980s, for example, several state governments initiated legal proceedings to impede plant closures by large employers in the steel, glass, automobile, and other industries. • By imposing large fines or severance taxes or requiring substantial expenditures for worker retraining, they created significant barriers to exit. • Barriers to exit can dramatically increase both the costs and risks of doing business. Even though one can certainly sympathize with the difficult adjustments faced by both individuals and firms affected by plant closures, government actions that create barriers to exit can have the unintended effect of retarding industrial development and market competition.
Effect of Buyers on Competition • Generally speaking, if there are only a few buyers in a given market, there will be less competition than if there are many buyers. • Monopsony exists when a single firm is the sole buyer of a desired product or input. Monopsony characterizes local labor markets with a single major employer, as well as many local agricultural markets with a single feed mill or livestock buyer. • Monopsony is more common in factor input markets than in markets for final demand. • In terms of economic efficiency, monopsony is least harmful, and can sometimes even be beneficial, in those markets in which a monopsony buyer faces a monopoly seller. For example, consider the case of the town in which one rice mill is the sole employer of unskilled labor. • The mill is a monopsony because it is a single buyer of labor, and it may be able to use its power to reduce wage rates below competitive levels. If workers organize a union to bargain collectively with their employer, a single monopoly seller of labor is created that could offset the employer’s monopsony power and increase wages toward competitive market norms. Not only is monopsony accepted in such situations, but it is sometimes encouraged by public policy.
Effect of Product Differentiation on Competition • In addition to the number and size distribution of actual and potential competitors, market structure is also described by the degree of product differentiation. • Product differentiation includes any real or perceived differences in the quality of goods and services offered to consumers. • Sources of product differentiation include all of the various forms of advertising promotion, plus new products and processes made possible by effective programs of research and development. • The availability and cost of information about prices and output quality is a similarly important determinant of market structure. Competition is always most vigorous when buyers and sellers have ready access to detailed price/performance information. • Finally, market structure is broadly determined by entry and exit conditions. Low regulatory barriers, modest capital requirements, and nominal standards for skilled labor and other inputs all increase the likelihood that competition will be vigorous. Because all of these elements of market structure have important consequences for the price/output decisions made by firms, the study of market structure is an important ingredient of managerial economics
2. Perceived value of your product • This is another factor you must take into consideration before setting a price for your product. Your first step is to ask this question • “what is the perceived value of my product in the heart of the customer? • You must strive to find a good and definite answer to this question before fixing a price for your product. • The reason perceived value is a critical factor to consider in a product pricing strategy is because customers often associate low price with low quality. • Meaning, if your product is priced too low, the customers tend to feel the materials used in producing the goods is inferior and so therefore, the product is of low quality. • So before fixing a price for your product, make sure you strike a balance between the price of your product and its perceived value.
This is another unavoidable factor that can influence the pricing of your product. • As an entrepreneur, you should know that economic factors such as taxation rate, labor cost, inflation rate, currency exchange rate, government’s fiscal and monetary policy will definitely influence your adopted product pricing strategy either positively or negatively 4. Economic trend
5. Level of market demand • This is the fifth factor that can greatly affect your product pricing strategy. • Just like economic factor, I feel this point is self explanatory. • In business economics, if demand exceeds supply, there tends to be a mad rush for the few available products, thus inflating the price of the product and vice versa. • Some companies even go as far as creating artificial scarcity in order to gain a stronger hold on the industrial price level.
6. Demographics • The demographics of the targeted customers will indisputably influence the pricing of your product. Demographic factors to consider before taking a stand on your product price include: • The age bracket of the customers you are targeting • Your business location and customer’s location • Educational status of your targeted market • Demographics is all about who your targeted customer is. • For Example: • Assuming your product is a portable bag specifically designed for students. If the region you are targeting has a population of maybe 100,000 out of which 90% are students. • The result is that your product price will be affected positively. • But if the case is reversed and you have a population where only 10% are students; you know what to expect.
7. Class of targeted customers • The class of customers you are targeting will greatly influence the pricing of your product. • In the society, there are three classes of people. The rich, the middle class and the poor or more preferably “low income earners,” who are always the majority in terms of population. • So when devising your product pricing strategy; consider the societal class of your targeted customers first. It’s very important. For instance, there are cars for the rich and cars for the middle class; both can’t be can’t be sold in the market place with the same product pricing strategy. • It’s worthwhile you know that price is a double edge sword that can either make or break your business. So when devising a product pricing strategy; do it with utmost caution.
to be on the safe side, don’t do it alone. It would be wise to avoid meeting head-on with your competition while implementing your tactics; so try and work your way around into areas that are less competitive. Devise a product pricing strategy together with your business team, professionals or external advisors. Agility and fast thinking really helps in this case. Start somewhere else comfortable so you can initiate changing the rules of the game to your favor. Learning how to create a competitive product pricing strategy will lead you to understand how to stay one-step ahead of the competition and working your way from there. Who knows, your product price; if unique, can give you a competitive edge Conclusion on Pricing