What is pricing, and which method and strategy should you choose for your business?

Candidate of Economic Sciences, Associate Professor at the Faculty of Economics of the Russian Friendship University Peoples' Friendship University of Russia (RUDN University). Specializes in economic research and educational methods. His teaching and research experience contributes to the development of a high-quality educational process and the training of highly qualified specialists in economics.

The fundamental principle of any pricing strategy is to determine a price that will satisfy the needs of the buyer and be acceptable to the seller. Otherwise, any economic calculations lose their significance. Effective pricing requires a deep understanding of the market, an analysis of consumer preferences, and consideration of the competitive environment. This allows for the creation of an optimal pricing policy that will increase sales and strengthen market positions.

In this article, Skillbox Media will examine in detail a topic that is relevant to many. We will analyze the key aspects related to this topic and provide useful recommendations. Stay tuned to learn more about how to effectively use the knowledge presented in practice.

What is pricing;
What determines the price of a product;
What pricing methods are there;
What stages does pricing include.

What is pricing

Pricing is the process of determining the cost of goods and services, which is a complex interaction of the interests of various market participants. Correct pricing uses mathematical methods, market research, as well as empirical data and practical experience. Correct price assessment allows companies to compete effectively, attract customers and increase profits. Pricing methods can vary, including competitor analysis, demand assessment and the use of psychological factors. Understanding the mechanics of pricing is a key element of a successful business strategy.

For professional economists, price is the combined cost of producing a product plus the markup necessary to generate profit. Meanwhile, for commercial and marketing departments, price is an important sales tool and customer interaction tool. It is directly linked to market demand for a product and competitors' prices, making it a key element in pricing strategy and market positioning. Proper price management optimizes sales and increases a company's competitiveness.

Prices are determined based on the sales season, geographic location, the company's pricing policy, and the income level of buyers. The optimal price balances the interests of both seller and buyer. It should be advantageous for the seller, allowing them to cover costs and generate profit, while being acceptable to the buyer, satisfying their needs and matching their financial capabilities. The key factors influencing pricing are supply and demand, as well as the competitive environment in which a company operates.

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What determines the price of a product?

Price is influenced by various factors that can lead to its change. Such factors include both raw material costs and external conditions, such as weather conditions. All price factors can be classified as internal and external. Internal factors include production costs and management decisions, while external factors encompass economic conditions, political situations, and other aspects beyond a company's control. Understanding these factors is key to effectively managing pricing strategy. Internal factors are elements within a company's control. These include aspects such as organizational goals, product go-to-market strategy, production costs, and other important metrics. Effective management of these factors allows a company to optimize processes, increase competitiveness, and improve financial results.

External factors beyond a company's control play a significant role in its operations. These factors can be divided into two main groups. The first group includes economic conditions, such as inflation, unemployment, and exchange rate fluctuations. The second group includes social and cultural aspects, such as demographic changes, consumer preferences, and societal trends. Understanding and analyzing these external factors helps companies adapt to a changing environment and formulate effective strategies for success.

macrofactors: inflation, refinancing rates, exchange rates, and others;
microfactors: price elasticity (variability) of demand, price trends in the market niche, and others.

Demand is a key external factor influencing business success. Buyer activity is the main source of income for companies. There are two main approaches to assessing demand.

With the quantitative approach, demand is estimated in monetary terms, in the number of units sold, and in the number of the company's customers.
With the qualitative approach, the method for assessing demand lies in the field of psychology. Often, such an assessment is subjective, irrational, which "spoils" the entire economic structure of the price.

Psychological factors make pricing a creative process that must be combined with strict economic principles. Each buyer is an individual with their own motives, preferences, and behavioral psychology, which are subject to change. Therefore, when setting a price, it is important to consider not only the company's costs and competitors' strategies, but also the psychological aspects influencing product choice. Successful pricing requires a deep understanding of consumer behavior and its dynamics to achieve maximum efficiency in the market.

The price of a product is determined by many factors related to the competitive environment. These include the overall price range in the market, the number of companies offering similar products, the type of product, and barriers to entry that may limit or facilitate competition. According to economic theory, there are several key aspects that influence price formation. Understanding these factors can provide a better understanding of price dynamics and market positioning strategies.

pure competition market;
monopolistic competition;
oligopoly is a limited monopoly;
pure monopoly.

For more information on these markets, please refer to the table.

Pricing Methods

Cost-based pricing is a method based on the cost-plus profit principle. This approach allows for the establishment of base prices that are standard and do not include discounts, markups for special conditions, or additional services. Using this method helps companies effectively plan their financial results and set competitive prices for products or services. Cost-based pricing ensures transparency in pricing and allows businesses to better control their expenses.

To calculate the cost of a product, both direct and variable costs are typically taken into account, after which a standard markup characteristic of the given industry is added. This markup serves as a guarantee of covering all costs, even under conditions of low sales volume. Here is an example of such a calculation.

Pricing based on demand and the subjective value of a product requires companies to be flexible in setting prices and adapting products to consumer needs. Even with the optimization of production costs, a situation may arise where the price of a new product is higher than what customers are willing to pay. It is important to focus on customer preferences and expectations to ensure successful sales and meet consumer demand. Thus, analyzing consumer behavior and their price perceptions becomes a key element of an effective pricing strategy.

Understanding consumer price perception is a key aspect of successful marketing. Companies must consider the values, financial capabilities, and risks that consumers consider when making a purchase. It is also important to determine how much customers are willing to pay for a particular product or service. Marketing research, which helps identify consumer preferences and expectations, is often used for this purpose. To stimulate demand, companies can use differentiated pricing strategies, develop loyalty programs, and run special promotions such as Black Friday. These methods not only help attract customers but also increase overall profits by generating interest in products and services.

Pricing based on competitors' prices is an important strategy for business. Companies can employ an aggressive dumping strategy, in which prices are significantly reduced for a certain period. The goal of this strategy is to force competitors out of the market. At the same time, some companies choose a skimming strategy, positioning their product as unique. They significantly increase prices compared to competitors, extracting excess profits amidst increased demand. This approach not only increases revenue but also strengthens the brand in the market.

To analyze prices and select the optimal company strategy, the reverse pricing method is used. This approach allows you to determine the profit a competitor can earn, provided that their costs match your company's costs. Comparing prices with competitors helps identify market trends and adapt pricing to improve competitiveness. Thus, companies can more accurately assess their market position and make informed decisions aimed at increasing profits and improving financial performance.

To calculate its own selling price, a company determines the competitor's selling price for similar products.
Then the analysis is performed in reverse order. A company tries to determine how much profit it will make if it sells at the same price as a competitor.
If this price provides an acceptable profit, the company sets the selling price at approximately the same level as competitors, but can adjust it up or down.

Pricing Stages

Pricing begins with a market assessment or analysis of a company's capabilities. The basis for determining the price is the base price, which is formed based on the company's costs. Selling below this price is impractical, as this will lead to losses. Typically, the base price is not directly reflected on price tags or in price lists, as it is adjusted based on various factors affecting supply and demand. The correct approach to pricing allows a company not only to remain competitive but also to ensure a stable profit.

The pricing process can be analyzed in detail using the example of the new "Shiksha" shampoo, which is based on medicinal herbs. The company produces various types of shampoos and plans to introduce this product into its range. To set the price for the new shampoo, several factors must be taken into account. First, it is worth analyzing production costs, including the cost of ingredients, packaging, and logistics. Secondly, it's important to research the market and competitors to determine the optimal price that will be attractive to consumers while ensuring the company's profit. The target audience and product positioning should also be considered. Taking all these aspects into account, the company will be able to set a competitive price for Shiksha shampoo, which will help attract customers and strengthen its market position.

Stage 1. Defining the base price and company goals. Let's assume that the planning and economics department has provided the necessary data for the analysis. At this stage, it is important to establish not only the base price of the product but also clearly define the company's strategic goals. This will optimize pricing and increase competitiveness in the market. English: Taking into account the information provided, we will be able to formulate a more precise pricing policy, which in turn will help achieve the set business goals.

productivity — 40,000 bottles per year;
investments in new production — 1,500,000 rubles;
profitability of current production on average — 8%;
variable and direct costs per 250 ml bottle — 87 rubles;
fixed costs for the year, including depreciation and sales and marketing costs — 3,800,000 rubles;
desired return on investment — 10%.

If the company has raised funds through a loan, the expected return on investment is calculated taking into account the refinancing rate. This allows for a more accurate assessment of the effectiveness of investments and the risks associated with credit financing. The refinancing rate plays a key role in financial planning, as it affects the cost of borrowed funds and, consequently, the overall return on investment. Proper analysis of these factors contributes to more informed financial decisions and improves the company's investment attractiveness.

To determine the base price, we use a special table. This table allows us to organize data and establish optimal price categories. Using it, you can easily compare various parameters and obtain precise values, significantly simplifying the pricing process. Correct use of the table contributes to more transparent and effective price management for goods or services.

We have determined the base price, which is the starting point for selling the product to stores and distributors. Setting this price allows for effective product positioning in the market and ensures transparency in relationships with partners. A correct base price helps increase sales and strengthen business relationships.

Stage 2. Estimating the required sales volume. At this stage, we determine how much product needs to be sold to recoup the investment. We calculate the minimum sales volume required to cover costs and begin making a profit.

To successfully sell 35,000 bottles of shampoo, you need to carefully consider your pricing and marketing strategy. First, you should analyze your target audience and identify consumer needs. Understanding customer preferences will help you determine the optimal price and highlight the product's unique features.

The next step is to assess the competition. Research your competitors' prices and formulate your pricing policy based on this. Setting a competitive price can attract more customers, which will increase sales.

Developing effective marketing campaigns is also important. Using social media, content marketing, and SEO tactics will help draw attention to the product and increase its visibility in search engines. Advertising, promotions, and special offers can stimulate demand and help you quickly achieve your sales goal.

Optimizing the sales process and logistics also plays a significant role. Ensure product availability in stores and online so customers can easily purchase it. Establishing partnerships with retail chains and online stores can significantly increase sales.

Therefore, to achieve the goal of selling 35,000 bottles of shampoo, it is necessary to take a comprehensive approach to pricing, marketing, and distribution.

Stage 3. Demand Assessment. We will analyze the regional market and determine our company's share of the natural shampoo market. This will allow us to understand the current state and prospects of our product, as well as identify potential opportunities for growth and improving competitiveness. We will focus on key indicators such as sales volume, consumer preferences, and trends in natural cosmetics.

The company's share of the natural shampoo market is currently 0.5%. This indicates current demand for the company's products is declining, despite overall market growth. Recognizing this situation, the company plans to introduce a new product to restore its position and return its share to the level achieved in 2021. It's important to note that implementing innovative solutions and adapting to consumer preferences can contribute to improved competitiveness and increased market share.

To achieve this goal, sales volume must increase by 35,000 bottles of the new shampoo, which is approximately 42% of current volumes. This means turnover must be increased by 50%. To develop an effective action plan, it is important to conduct additional calculations to accurately determine the strategies that will help achieve these goals.

Competitors' shampoo prices in this segment range from 200 to 300 rubles per bottle, VAT included.
The retailer's markup is 30% of our company's price.
The retail price of Shiksha shampoo at the point of sale, VAT included, will be: (200.61 + (200.61 × 0.3)) × 1.2 = 312.95 rubles. This is higher than the average prices in this region.

Stage 4. Determining the sales strategy. At this stage, the company must make an important decision: whether to keep the calculated retail price. Commercial and marketing departments are actively involved in this process, which allows for taking into account expert opinions and adapting the pricing strategy to market conditions. The correct choice of pricing strategy will have a significant impact on the competitiveness and profitability of the company.

There are two possible scenarios. The first option involves the possibility of increasing the price.

if competitors do not produce a shampoo with such properties;
the company's brand has an image of a reliable manufacturer of quality products;
the target audience is becoming increasingly interested in natural products, so people are willing to pay more for them.

Complying with all these factors makes it possible to set a retail price of 350 rubles. This creates room for flexibility: the price can be reduced in response to competitors' actions. Launching a promotion with a price reduction will also attract customers, which is especially important in a highly competitive environment. Considering the margin, such a strategy becomes possible and profitable.

When using this strategy, marketing should focus on the value of the product. It is important to establish partnerships with retail outlets offering high-quality products. This strategy is called "skimming" and is based on providing goods that provide high value to consumers. This approach not only attracts the target audience but also creates sustainable demand for the product, which in turn contributes to increased profits and a stronger brand image.

The second scenario assumes that the company's product lacks unique characteristics that could justify a higher price. In this case, the price must be reduced, dropping it below the psychological threshold of 300 rubles. For example, the company could set the retail price at 250 rubles. This decision would reduce profitability to 4-5%. A price reduction could attract more customers and increase sales, which would help offset the loss of profitability.

Marketing in this case would be aimed at the mass consumer segment. The product would be distributed in locations where the concept of "regular shampoo without unnecessary bells and whistles" most resonates with the target audience. This strategy assumes broad market penetration, with an emphasis on maximizing sales volumes. The main goal is to attract as many customers as possible and satisfy their needs for affordable and high-quality hair care.

Stage 5. Setting the final price. Let's assume the company has determined that the product has unique characteristics, which are emphasized through marketing tools. As a result, a retail price of 350 rubles including VAT was set. Thus, the planned indicators will be presented as follows.

Now it is necessary to closely monitor sales dynamics and adjust prices if necessary. This will help optimize revenue and ensure competitiveness in the market. Regular sales analysis will allow you to identify trends and adapt your pricing strategy to maximize profits.

The Main Points about Pricing - in Four Paragraphs

Pricing is the process of setting a price for a product or service, their monetary assessment. It is a complex tangle of interests of all market participants. To unravel it, mathematical calculations and market research data are used.
Price is a flexible indicator that should respond to market behavior.
When setting pricing, you need to take into account the manufacturer's costs, competitors' prices, and the characteristics of customer demand - their willingness to buy a product for the asking price.
The main rule: the buyer is ultimately always right. His assessment of the terms of purchase of the product is decisive in pricing. Love and cherish your customer.

How to learn more about pricing and finance

To calculate a fair price, you need unit economics. If you are not yet familiar with it, start studying the topic with this material. We discussed the main indicators that you will have to work with every day.
When setting pricing, different indicators can be taken into account. One of them is LTV, or lifetime value of a customer. Read this article to understand why this metric is important and how to calculate it.
Various specialists can be responsible for pricing. The marketing director is often involved. This person manages all of the company's marketing. Skillbox Media has an overview of the profession, where you can learn about what a marketing director does and how much they earn.
You can learn how to manage marketing with the Skillbox "Marketing Director" course. This program is for those seeking career advancement—it allows you to choose the right specialization and gain the skills you need.

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