The process of creating, releasing, and managing a product or service throughout its lifespan is referred to as product management. It is essential to have a thorough awareness of customer wants, market trends, competition, and technology to ensure that the product satisfies consumer demand and provides the most profit for the company. The success of the product in the market is directly impacted by pricing, making it a crucial component of product management. Pricing structure affects a customer’s choice to buy a product by determining the value they place on it. It is crucial to determine the appropriate pricing structure for the product to balance the value offered to the client or consumer with the profit the company makes.
What Is a Pricing Structure?
Pricing structure meaning: A company’s technique or system for establishing the cost of its goods or services is referred to as its pricing structure. It is an essential part of a company’s pricing strategy and aids in the achievement of the company’s sales and profitability targets.
Pricing structure vs pricing strategy: Price structures, such as tiered pricing or pay-per-use, are logical or physical arrangements of prices. On the other side, pricing strategy refers to the method a company uses to determine prices and meet its financial objectives. Some of the different types of pricing strategies are as follows:
- Competition-based Strategy
This pricing approach does not take into consideration the cost of the product or consumer demand; instead, it concentrates on the current market rate (or going rate) for a company’s goods or services.
- Cost-plus pricing
A cost-plus pricing approach, often known as COGS, only considers your product’s or service’s production costs. It is sometimes referred to as “markup pricing” since companies who employ this tactic “markup” the prices of their goods by how much they hope to make.
- Dynamic Pricing
It’s a flexible pricing approach in which costs change in response to consumer and market demand. When a consumer is ready to buy, these algorithms enable businesses to adjust pricing to correspond to when and what they are willing to charge.
- Freemium Pricing
Freemium pricing, which combines the terms “free” and “premium,” is when businesses provide a basic version of their product in the hopes that customers would ultimately pay to upgrade or gain access to more features.
- High Low Pricing
When a business offers a product at a high price upfront and then reduces that price when the product loses its novelty or usefulness, this is known as a high-low pricing strategy. For this reason, this technique may also be referred to as a discount pricing strategy.
- Hourly Pricing
Those that supply business services, such as consultants, freelancers, contractors, and other people or workers, frequently employ hourly pricing, which is sometimes referred to as rate-based pricing. Trading time for money is essentially what hourly pricing entails.
- Skimming Pricing
Companies that use a skimming pricing approach offer the greatest price they can for a new product before gradually lowering the price as the product loses popularity. In contrast to high-low pricing, skimming lowers prices gradually over time.
- Penetration Pricing
When corporations join the market with a low price, as opposed to skimming pricing, they are effectively diverting customers’ attention (and money) away from higher-priced rivals. Yet, penetration pricing is often used for a little period of time since it cannot be sustained over the long term.
- Premium Pricing Strategy
A premium pricing approach is when businesses charge a high price for their goods in order to convey the idea that they are high-value, luxurious, or premium. It is also referred to as prestige pricing and luxury pricing.
- Project-Based Pricing Strategy
A project-based pricing model charges a fixed cost per project rather than a direct exchange of money for work, which is the reverse of hourly pricing. The cost of the project deliverables may be used to estimate project-based pricing. The projected project time can be used to produce a flat price for those who choose this pricing model.
- Value-Based Pricing
Pricing goods and services by what customers are prepared to pay is known as a value-based pricing approach. The business chose to set its rates based on client interest and data even if it has the option of charging more for a product.
- Bundle Pricing Strategy
When you provide (or “bundle”) two or more complementary items or services and sell them for a single price, this is known as a bundle pricing approach.
- Psychological Pricing
Using consumer psychology to increase sales is exactly what psychological pricing does. According to the “9-digit effect,” shoppers may see a product that costs $99.99 as a good deal even when it costs $100 because of the “9” in the price.
- Geographic Pricing
Geographic pricing refers to the practice of setting prices for goods and services that vary by market or region. This tactic may be employed when a consumer from another nation makes a purchase or when there are differences between the economies or wages of the places.
How To Set up a Pricing Structure?
Follow the steps provided below to set up a pricing structure for your business.
Step 1: Determine your value metric
A value metric describes the method a business uses to estimate the cost of a single product unit for sale. For instance, you would figure out the worth of one pair of shoes if you sold footwear. Determine the fundamental component of the item or service you sell to build your value measure. What would you offer to a single consumer if you were to sell just one item of your good or service?
Step 2: Assess the possibility of pricing
Price potential is the maximum price you might charge for your good or service. Consider elements including your operational expenses, consumer demand, and competing items when assessing the pricing possibilities for your good or service.
Step 3: Analyze your clientele
How your present client base has reacted to prices thus far is a crucial factor to take into account when developing a pricing plan. How much were they prepared to spend on goods and services? Has the pricing increase improved or decreased sales? Keep in mind that market structure and pricing are interdependent.
Step 4: Choose a pricing range
The term “price range” describes the range of costs for a good or service that both the buyer and the supplier deem acceptable. To calculate a pricing range, consider the following:
Based on the costs of production, marketing, and promotion, what is the lowest price you can charge for a good or service and still turn a profit? What is the highest price you may charge for a product or service without alienating your target customers?
Step 5: Examine the price of rival businesses
The pricing of your rivals’ products is another aspect of efficiently pricing your own. Create a list of similar items and the prices they carry. Then, choose whether you wish to communicate greater value than rivals or undercut competitors’ pricing (by setting your items’ prices lower). Look at different examples of pricing structures by competitors and decide your ideal structure.
Step 6: Think about your industry
It’s a good idea to research the most popular pricing techniques employed in your sector because different pricing strategies work for various industries. For instance:
- Freemium pricing with varying price tiers to buy more features is a prevalent method in the SaaS sector to provide clients with a way to upgrade as their software demands grow.
- Luxury brands may employ premium pricing to project a higher standard in the restaurant sector.
- Designers, consultants, and other service providers may utilize project-based pricing in the service provider sector to tailor the service outputs and the price for specific clients.
Step 7: Think about your brand
Make sure your pricing plan is consistent with the brand because a brand identity may impact how consumers perceive the company and the caliber of the products.
Step 8: Ask clients or consumers for feedback
Customer feedback may be quite helpful when deciding how to price a new or current product. You can do surveys asking questions about the product from the customers.
Step 9: Try different price points
To get information on how your items will perform at various pricing points, do a few live tests. To determine which pricing is preferred, you may do an A/B test, which involves introducing a product to two distinct audiences at two different prices.
Why Do We Need a Pricing Structure?
Discussed below are pointers that explain why businesses need a pricing structure and why pricing structures are so important:
- Revenue maximization: By optimizing the price point at which the good or service is supplied, the correct pricing structure may assist a business in maximizing its revenue. A business should establish a pricing structure that is appealing to customers and brings the most profit by taking into account elements, including manufacturing cost, competition, market demand, and customer willingness to pay.
- Cost control: A pricing structure may assist a business in controlling expenses by ensuring that the cost of manufacturing, distribution, and marketing is included in the price of the product or service. A business may make sure it is creating a fair profit margin and being competitive in the market by taking these costs into account.
- Acquiring market share: By giving a price that is more alluring than that of its rivals, a pricing structure can assist a business in gaining market share. A business can obtain a competitive edge and expand its market share by setting a lower price point or providing extra value, such as superior features or services.
- Differentiating the product or service: A business may use its pricing structure to set itself apart from the competition. A business can tell customers that its product or service is of greater quality or offers more value by charging a higher price. A lower price point, on the other hand, may signify affordability and accessibility to a larger audience of buyers.
A pricing structure is required to guarantee that a business’s goods or services are priced in a way that maximizes profits while maintaining market competitiveness. Moreover, it aids in cost management, product or service differentiation, market share acquisition, client retention, and market response. Without a price structure, a business would find it difficult to meet its sales and profitability targets and might lose its market edge. To develop a better idea of how to set up an ideal pricing structure for businesses, enroll in the Product Management course from UNext