A previous article on pricing strategies covered 5 advanced pricing strategies. In this follow-up, the different aspects of cost plus pricing, value based pricing and dynamic pricing are discussed in more detail. Each pricing method is briefly described, when to apply the method and what considerations are important. These insights are crucial for business controllers and other financial professionals involved in setting pricing strategies within their organizations.
Cost Plus Pricing
This method involves a company adding up the total cost of the production process, both direct costs (such as raw materials and labor) and indirect costs (such as overhead) and adding a specific profit margin to this to determine the selling price.
This method is often used in environments where costs are relatively stable and where, for example, there are long-term contracts with customers, such as in the construction industry, or with custom products.
The following considerations play an important role in applying this method:
Cost Analysis: It is essential to conduct a detailed cost analysis to ensure that all costs are included in the price calculation.
Markup Percentage: Determining the right markup percentage is crucial. This percentage must be competitive enough to maintain market share, but also high enough to ensure profits.
Pricing Flexibility: Cost Plus Pricing offers some flexibility in adjusting prices as costs rise, but it can be less responsive to market changes and customer value perceptions.
Value Based Pricing
Value-based pricing involves setting prices based on the perceived value of the product or service to the customer, rather than on cost. This strategy requires a good understanding of customer needs and how the product or service meets those needs.
Value Based Pricing is particularly suitable for products or services that can be differentiated based on certain characteristics. For example, consider cars of different brands, where you can differentiate by engine size, trim and rims. You can attach a value to each of these characteristics.
The following considerations play an important role in applying Value Based Pricing:
Market and customer research: It takes time and energy to correctly assess customer value based on market research. Optionally, competitive analysis of similar products and services can also be used for this.
Competitive position: Frequent analysis of competitors and their pricing strategies is important to ensure that pricing remains competitive.
Price adjustments: when applying Value Based pricing, prices may be adjusted regularly in response to changing customer perceptions and market dynamics.
Dynamic Pricing
Dynamic Pricing, also known as Surge Pricing, Demand Pricing, or Time-Based Pricing, adjusts prices in real-time or within short time frames based on market demand, customer behavior, inventory levels, and other factors.
This strategy is widely used in e-commerce, airline industry, hotel sector and in event ticket sales, where prices can be flexibly adjusted according to changing market demand. Another great example today is at gasoline stations, where prices are adjusted daily based on changing purchase prices, for example.
To properly apply Dynamic Pricing, understanding the right data is essential. Therefore, the analyses below are considerations that affect this strategy.
Technology and Data Analysis: Dynamic Pricing requires advanced technology solutions and the ability to analyze large amounts of data for accurate pricing adjustments.
Customer Perception: While Dynamic Pricing can help maximize revenue, careful consideration must be given to how frequent price changes affect customer perception and satisfaction.
Regulation and Ethics: In some industries or regions, Dynamic Pricing may be subject to regulation or ethical considerations, especially when it results in significantly higher prices during crisis situations.
Each of these pricing strategies has its own advantages and disadvantages, and the choice of strategy depends on multiple factors, including industry, product type, market dynamics and customer behavior. Business controllers play a vital role in evaluating these factors and recommending the most appropriate pricing strategy to support business objectives and promote sustainable growth.
Would you like to know more? Then contact Alwin Dooijeweerd for an informal discussion.
