Setting the right price to meet business objectives

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In a recent article we looked at how a leading technology company like Apple can use strategic pricing to stem the competition.

While this may be one particular objective for a company, ultimately they need to be able to set the right price to meet their specific objectives.

Price is a strategic tool for communicating and capturing value from clients for all types of companies. It represents the value that customers are prepared to pay to gain the benefits of a product, service or experience.

Taking for example a Software-as-a-Service offer, there are a multitude of factors that a SaaS provider must consider to establish the right price strategies for its given situation.

The right prices considers perceived client value and cost

Generally the right price should consider the customer’s perceived value of a company’s offer. If customers perceive that the price of the SaaS offer is greater that the value offered – the price of investing and managing in-house software -, they will not buy.

At the other end of the spectrum, a company will have a set of fixed and variable costs for delivering a new offer. In the case of a SaaS provider this includes the HW, SW and overhead costs needed to run the online services. If the company prices below that level its profits will suffer.

Pricing must also reflect strategy and market conditions

Aside from these two limits, the right price must also account for other internal and external factors including:

  • Company strategy – The SaaS provider may want to compete as the price leader, they may want to gain market share, or simply offer tailored SaaS offers to each client
  • Product portfolio mix – Prices should be set to reflect the comparative differences in plans and options offered
  • Existing reseller relationships – Prices should enable the SaaS resellers to earn sufficient margins
  • Market demand –  Clients will balance the price they wish to pay for the service against the benefits of using the service
  • The nature of the economy – In the current economic downturn clients may expect more value from a service, but for the same price

Price adjustment strategies can also be used to account for customer differences and changing situations. They including offering different prices according to volume of SaaS users, during special promotional periods, or by distinct geographic markets.

Optimized prices balance sales with profit

Price is only one element of a company’s marketing mix, but it is the one that can be changed with the least effort. Given its direct impact on revenue, and the key role it has in determining the profit and markets share for a SaaS provider or for any other company, it must be managed effectively by those in charge.

Overpricing will lead to lower sales, while under-pricing can negatively impact a firm’s market position.

Are the strategies used by your company optimized for achieving your business objectives?

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