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Created on 17.12.2018

The right price strategy for your company

Calculating the price of your product or service properly is a key element of your business strategy. Ultimately, the sale price not only determines whether a profit or loss is made, but also the positioning of your company. But what is the right way to calculate pricing actually?

It has long been the case that not just materials and labour determine the price. Consumers have become much more price aware – also due to progressing digitization. Finding and comparing different prices for the same product is becoming increasingly easy – smartphones even allow customers to compare prices in the store with those in online shops and opt for the supplier offering the most attractive deal. It is not simply a matter of selecting the highest price for your product. The aim of the calculation is to develop a price strategy suitable for your product and company.

Be aware of your cost limits

To calculate the right price for your product, firstly compare your original costs with the market prices. This allows you to work out whether providing your product on the market is actually economically viable. The selling price must at least cover the variable production costs, for example, the material costs, hourly wages and machinery costs. However, this does not include the fixed costs incurred, such as administration, property rental, amortization and energy costs. If both variable and fixed costs are covered, this is referred to as the floor price. Total costs are covered from this point, but profit still stands at zero. Experience shows that the original costs tend to be high at the beginning, but this ratio changes with greater experience and increasing production volumes.

Keep track of the market

Monitor your sales market. What are the prices of your competitors? How is the market performing? What fluctuations is it subject to? The correct price calculation is not just based on the original costs, but instead also the pricing of the competition and the purchasing behaviour of potential customers. Price differentiation is often the easiest way to stand out from other market players. However, it is not enough just to undercut the competition with lower prices. Whether price differentiation is in line with your pricing strategy is also a key factor.

Find the right pricing strategy

The pricing strategy not only influences the selling price, but rather your company’s entire strategy. How are you positioning yourself on the market and what price structure is compatible with this? Do you wish to distinguish yourself from the competition through cost leadership or quality leadership? In other words, are you providing high-quality luxury products or bargain buys? Are you focusing on a niche market where you can better exploit the leeway in terms of pricing? If your product or service fills a gap in the market, you can automatically ask the top price.

Incorporate the selling price into your marketing

Key issues are addressed in the marketing mix. Which products are you selling, at what price and at what quality? How and where do you wish to advertise? It is vital that the product, distribution, communications and pricing strategy are coordinated to make a uniform and credible impression on customers. You cannot sell your products at prices which are too low, but then gear your marketing towards a high-price strategy. 

Summary

The right price strategy is complex and depends on many different factors. Your own cost coverage, external factors on the sales market and customer requirements must all be taken into account in the price calculation. Ensure your pricing strategy is aligned with your company’s strategy and that a harmonious overall impression is created.

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