Understanding pricing strategy dynamics for SMEs
By GEOFFREY SIRUMBA
Today’s operating environment is becoming complex and tougher more so for the SMEs. There are many problems that are encountered by entrepreneurs throughout the course of managing their business. However, pricing strategy remains one of the most challenging concepts bedevilling the SMEs today. Pricing is the only avenue in the marketing mix that is of paramount importance to a business; it is the only source of revenue. In this regard, proper crafting of pricing strategies is important to avoid revenue leakages and maximise returns.
Pricing strategies
The two major types of pricing are economic and cost-based pricing. Economic pricing provides an overall viewpoint where the amount demanded, and the amount supplied is in equilibrium while cost-based pricing, on the other hand, is price determination approach that involves totalling all costs associated with offering an item in the market then adding an amount to cover profit and expenses not previously considered. Most businesses use cost-based pricing as it’s easy to rationalise and quite predictable.
When doing the pricing, it is important to significantly consider the environment and look at the life stage of the product, whether it’s new in the market or has been in existence for a while. To do this you need to conduct product life cycle analysis so that you can come up with pricing that is flexible enough to match the varying marketplace characteristics at different life cycle stages.
Price skimming and price penetration strategy
Two basic strategies that may be used in pricing for new products are skimming pricing and penetration pricing depending on the life stage of a given a product. Price skimming is the strategy of establishing a high initial price for a product with a view to “skimming the cream off the market” at the upper end of the demand curve. It is accompanied by a heavy expenditure on promotion. A skimming strategy may be recommended when the nature of demand is unknown, when a business has spent large sums of money on R&D for a new product, when the competition is expected to develop and market a similar product soon, or when the product is so innovative that the market is expected to mature very slowly.
Penetration pricing, on the other hand, is the strategy of entering the market with a low initial price so that a greater share of the market can be captured. The penetration strategy is used when an elite market does not exist, and demand seems to be elastic over the entire demand curve, even during the early stages of product introduction.
Pricing strategies for established products
Changes in the marketing environment may require a review of the prices of products already on the market. A review of pricing strategy may also become necessary because of shifts in demand. An examination of existing prices may lead to one of three strategic alternatives: maintaining the price, reducing the price, or increasing the price.
Some of the reasons for lowering the price include: as a defensive strategy in response to competition; to shoot for higher market share and to secure as much experience as possible in order to gain a cost and, hence, a profit advantage and thirdly as a response to customer need. On the flip side, a price increase for an existing product can be implemented for various reasons. First, in an inflationary economy, prices may need to be adjusted upward in order to maintain profitability.
Prices may also be increased when a brand has monopolistic control over the market segments it serves. Sometimes prices must be increased to adhere to an industry situation. Of the few firms in an industry, one (usually the largest) emerges as a leader. If the leader raises its price, other members of the industry must follow suit, if only to maintain the balance of strength in the industry.
In a nutshell
Therefore, in selecting the pricing strategy and assigning the price for a product can be a complex task to small firms. And it becomes extremely challenging for start-ups and more so those in the cut-throat competition dominated the field. The revenue model and pricing strategy a firm chooses will impact a wide variety of aspects to the business such as the type of clientele the firm deals with and viability of the business in the long run. This means deciding a pricing model is very important for any firm survival.
Geoffrey Sirumba is the Head of Marketing at Metropol Corporation Ltd. Twitter:geoffsirumba
