A price evaluation is one of the steps to optimizing your pricing strategy. Your strategy should be determined by your goals, meaning the steps you take should always work towards achieving your goals. So before you can even approach this step, you must have updated SMART goals, directly involving your pricing strategy. This is important because it will provide a lens for you to look at your pricing and evaluate what needs to be changed. To recap: first goals, then evaluation, then strategy. Depending on the type of business, this evaluation can include evaluating your product mix, and evaluating the competition. But no matter which type of business you are conducting, a price evaluation will be a multi-step, multi-faceted, process. While this is a guide to pricing evaluation, it will also include evaluations for your marketing and product development processes.
An integrated marketing mix will result in success if these factors are working together.
Pricing elasticity is a formula: percent change in quantity demanded when the price changes, divided by percent change in price. But what does that mean for marketers.Jill Avery, a lecturer at Harvard Business School told Harvard Business Review: “Marketers need to understand how elastic, sensitive to fluctuations in price, or inelastic, largely ambivalent about price changes, their products are when contemplating how to set or change a price.”
While it is common knowledge that, in general, consumers will buy more of a lower cost product and less of a higher cost product–– the opposite is also true. Consumers will buy more of some higher cost products than lower cost products because consumers use price to gauge quality and value of the product, especially when they do not have other points of reference. It is needless to say that determining price elasticity is essential to your pricing evaluation.
Cost analysis is very different from pricing evaluation. Cost analysis is a determination of the necessary investments into your business process. Understanding the difference, and how these two different analyses work, will help your overall pricing evaluation.
In a cost analysis, the first step is determining your direct and indirect costs of producing and distributing your product. A cost analysis can be very comprehensive, so be prepared to invest time and energy into it.
Steps of a Cost Analysis Include:
- Determine the variables of cost at different levels of production. When does the product gain value throughout this process?
- Determine the economies that affect your business costs. Can you create a scale for measuring the variables in price determined by economy?
- Determine the most cost effective levels of production. Is there a “sweet spot” where your production levels are working at capacity but are not overwhelmed?
For this phase in the price evaluation, you will need to compare both your prices and costs to that of your competitors. This can be difficult to determine, depending upon your industry and product. However, those who are experienced in marketing integration, due to their experience, can guess. Once you have come up with what you determine to be an accurate guess–– analyze, are your prices lower and costs higher? Or are they about the same as your competition?
Determine the “Reasonableness” of Price
Consumers and businesses looking to invest in your product will most likely already have an idea of what they want to pay. This determination comes down to a possible comparison of prices from your competition and what they think is the value of the price. Both of these could potentially be inaccurate and not reflective of the true value of the product. However, this determination of price reasonableness can change with proper information given to your prospect. Content on your website could serve to further develop prospects' ideas on what a reasonable price is. It can inform them on the value of your product that may not be apparent on the surface level.
While you can persuade your prospect to change their ideas of a reasonable price, you need to meet your prospects halfway. Prospects will not dramatically change their preconceived determinations based on a few blogs that they have read. You want your price to match your prospect’s idea of a fair price, especially if your prospect is well researched. If your price is too high, your prospects will turn to competition’s lower prices. If your price is too low then your prospects will question the quality of your product. Both of these are very unfavorable and your price will fail to complete its purpose–– to attract prospects and provide profit.
Pricing can feel overwhelming, especially when there are many potential formulas involved. However, it is important to remember the human aspect to pricing. Prices are ultimately your subjective analysis of what your product is worth. It is a projection of value onto prospective customers who will then interpret that and come up with their own subjective determination. The key is relating to your customers so that both parties can see eye to eye.