Stages of The Development of a Price Strategy

By Thomas Bennett Financial expert at Priceva
Published on July 18, 2023
The decision to adopt a particular pricing strategy comes only after there's clarity on issues related to production or purchase volumes, cost management, advertising policy, and sales methods.

Let's explore the steps necessary to craft an effective pricing strategy.
In the development of a pricing strategy, you will need to:

‣ Determine the optimal amount of production and sales costs that will ensure the desired profit margin.

‣ Gauge the demand for your product among potential customers and how well the price you're asking aligns with its consumer properties.

‣ Identify the volume of product sales or market share at which its production is most profitable.

‣ Conduct a competitive analysis and define the price range in the market for similar products.

‣ Plan the revenue size and profit margin percentage at current market prices that will enable the company to achieve optimal profitability.

Now, let's discuss the steps in creating a pricing strategy that can aid in the pricing process.

A company's pricing strategy is developed in three stages:
  • Collection of baseline information.
  • Strategic analysis.
  • Strategy formulation.

I. The Stage of Collecting Baseline Information

The first stage of the process involves collecting information to develop a pricing policy. The following tasks are conducted at this stage:

1) Cost Evaluation

Before setting a price, it's useful to calculate the cost of production or procurement of the product, as well as account for delivery costs and other overheads. Pay particular attention to variable costs, which may fluctuate with changes in product output (sales) due to price changes.


Once you've determined the costs associated with delivering your product or service, you can begin analyzing other influential factors.

2) Determining the Company's Financial Goals

A key factor in developing a pricing strategy is understanding the company's financial objectives for the immediate future. Based on the financial plan and the company's strategic goals, you determine the minimum profitability level required from the sale of each product type.

The optimal profitability size is determined by what is prioritized at this stage of the company's development: profit-making or sales volume increase to gain market share.

3) Identifying Potential Customers

To identify potential clients and their potential demand for your product, it's recommended to conduct a market analysis and demand testing.

Various methods can be employed for analysis:
‣ Analyzing your existing customer base;
‣ Analyzing demand in search engines;
‣ Conducting surveys, interviews, and research;
‣ Gathering data on product popularity in marketplaces;
‣ Analyzing mentions and reviews on review sites and social media;
‣ Commissioning studies from marketing agencies;
‣ Purchasing pre-existing research;
‣ Using services that provide information on competitors' prices and sales volumes, and so forth.

From the information collected, try to understand:
· How much customers are willing to pay for your product or service;
· Current and expected demand for this type of product or service;
· How much they pay for similar products or services;
· The likely amount to be purchased;
· Additional features that customers value.

By analyzing the collected information, you can develop several pricing strategies for testing. The optimal price range can then be determined based on the results of these test sales.

4) Identifying Potential Competitors

To determine your price positioning, you need to understand which companies are marketing the same or similar products as yours, and whether they'll be competing for the same target audience.

If you don't know who your competitors are, you should use the same techniques as when identifying potential consumers:

1) Searching for key queries in incognito mode.

2) Surveying sales managers. Those who work directly with customers certainly know which companies they compete with during the sales process.

3) Industry rankings and other company rankings. For example, RBC 500 and Expert 400 rankings. There are also specialized rankings that cover only a specific niche.

4) You can also use specialized services like Serpstat, Keys.so, SimilarWeb. Free access on these services is enough to identify the main competitors.

Next, identify from the general list those competitors whose activity may have the greatest impact on your company's sales and determine their pricing level for overlapping products.

If you're not an exclusive supplier of the product, when setting prices, you need to know the current prices of key market players, taking into account all sorts of discounts and special sales conditions, and consider this when developing a pricing strategy.

II. Strategic Analysis

At this stage, the previously collected information is analyzed.

5) Financial Analysis

Conducting financial analysis is based on information about:

‣ Potential price options;
‣ The product and the costs of its production;
‣ Market segmentation and the most valuable segments, where sustainable competitive advantage can be achieved.

You need to calculate:

· The net profit amount from the production/sale of each unit of product at the current price,

· The potential growth in sales volume for each type of product in case of a price decrease, assuming the planned net profit of the company is maintained,

· The maximum allowable reduction in product sales volume in case of a price increase, at which the net profit of the company will fall to a critically low level;

6) Market Segment Analysis

During the segment analysis, it is necessary to:

‣ Identify all market segments where the product will be represented,
‣ Differentiate the company's product prices based on the costs of their production and sale.
‣ Differentiate the company's product prices based on the varying price sensitivity of different buyer segments.

For these purposes, data from the analysis of potential consumers are used. The boundaries between individual segments are determined. Optimal prices are calculated for each segment.

7) Competition Analysis

The goal of such analysis is to assess the possible reaction of competitors to your planned price change and the actions they may take in response.

Within this stage, it is necessary to:

‣ Predict the influence of competitors' countermeasures on the profitability and efficiency of the pricing strategy you plan to implement,

‣ Determine the level of sales and profitability for each type of product you plan to achieve considering the possible reaction of competitors,

‣ Think about measures to influence competitors in order to achieve the results of your pricing strategy and reduce losses from competition,

‣ Identify those target segments where it will be easier to achieve a sustainable competitive advantage,

‣ Concentrate maximum efforts on these segments to increase the guarantees of achieving sales volume and profitability goals,

‣ Identify those market segments where it is strategically rational to stop spending. For example, reduce marketing costs or even abandon their production or purchase.

8) Development of a Marketing Strategy

A marketing strategy answers the questions:
✓ What are we selling?

✓ Why are we doing this?

✓ Who are we selling to?

✓ How are we selling?

✓ Where are we selling?

✓ By what methods?

✓ What channels are we using for advertising?

The strategy usually consists of two parts: an analytical part and a product marketing kit.

The analytical part includes:
· Competitor analysis in terms of marketing activities,
· Audience analysis and its segmentation.

In the product marketing kit, it is written down:
‣ Positioning - information about how we differ from competitors, what customer problem we solve, and how we talk about it.

‣ The final part of the strategy - the marketing plan: how, when, and in which channels we launch advertising campaigns, what we say in them, who we address.

In the end, you should have:
‣ An understanding of what percentage of the company's budget you are ready to invest in marketing promotion,

‣ A forecast of how your marketing actions will affect sales growth.

III. Determine your pricing strategy

At the third stage, having gathered the necessary information and analyzed it, you can start developing your own pricing strategy, which will become part of the overall development strategy of the company.

As a rule, the development and implementation of the company's pricing strategy are handled by a structural division responsible for pricing issues.

Most often, the activities of such a division are supervised by a top manager of the company, who is responsible for marketing or sales of products, in close interaction with the planning and economic department, if there is one.

It is advisable to develop a pricing strategy in a project team of specialists responsible for:

· Evaluating and planning the cost of production under different pricing policies and the corresponding production and sales policies,

· Justifying financial indicators, which the pricing policy should be aimed at achieving,

· Developing financial aspects of implementing such a policy (for example, determining the limits of financing advertising activities),

· Collecting information about the current market situation, determining the real structure and segmentation of the market,

· Forecasting sales volumes, possible at different price levels for the product.


· Evaluation of possible actions of competitors under various pricing policies,

· Justification of opportunities for increasing sales and improving financial indicators without changing prices,

· Conducting advertising campaigns, forming a brand image, and disseminating information that influences competitors' commercial decisions.

If the company is small, the team may consist of only 2-3 people, but they must possess the necessary skills and knowledge, fully understand the goals of such work, and follow the sequence of actions.

It should be understood that the pricing strategy is not something adopted once and for all. It can change depending on market trends and internal changes in the company itself. When deciding which strategy to make key for a particular time period, keep in mind which pricing strategies are most often used by modern companies.

The most common strategies are based on:
‣ costs,
‣ competition,
perceived value,
demand.

As a rule, strategies are combined, using the most optimal for different brands and product categories. Also, different strategies can be applied to different markets. On an old market, where the company has existed for many years, this can be a strategy based on perceived value, while on a new market for it, it can apply a competitive or predatory strategy.

Summary

Whatever strategy you eventually choose, the stages of developing a pricing strategy will be the same. The sequence of some stages may change. What will remain constant is that without a good knowledge of the company's economy, analysis of the market situation, purchasing power and demands of the target audience, pricing policies of competing firms, the phase of the product life cycle, and its economic potential, the implementation of a pricing strategy will look like an act of pure voluntarism. And the consequences of such implementation will be unpredictable.

Information and analysis are the cornerstones of success here. Stick to the algorithm suggested above, and the choice of an optimal pricing strategy will be fairly simple and obvious.

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