When a company launches a new product or model they always try to price is reasonable and in most cases low to infiltrate into the market and appealing. Those initial prices are usually promotional offer or if not intentionally kept lower than the market for an above-mentioned reason. Companies usually target break even to minimal margins when price those goods but once product attains its maturity and gain consumer confidence companies try to recover the investment and make the profit. The raising of prices is the very challenging task, it is just not a random number but require a complex calculation and analysis of the consumer behavior and the market. From cost to profit margin each step is being considered with careful attention.
This is no art to set the pricing it is science. A lot of efforts require which includes customer behavior and cost margins calculation and economic conditions to raise the price of a product. As the production starts on a mass scale the cost to move bulk product rise, material cost and all other cost associated to the product also raises which eventually causes the companies to revise the pricing to stay profitable.
Consumers nowadays in this technological environment are informative and price sensitive and move to another alternative brand in no time unless they are loyal to the brand and somehow associated with the brand or product. A company can raise the price but has to be very prudent in doing that and avoid such mistakes which derive the customer away from buying the product.
At first step, before rising the prices company should aware of the potential mistake companies have made in past. As per the article historically there are companies cut back the coupons and special offers which did not work and fired back. Cutting back on coupons and promotional offer stops customer to keep coming back. Customers have a better understanding of price they are paying and what they are getting for that price.
Another mistake company should avoid, is that companies instead or raising price cut down the cost to achieve the same level of profitability. Saving cost and compromising quality is the worst mistake a company can make to save cost. The customer soon finds a better deal especially with the food products customer preferences change much faster if quality goes down.
Companies also have to be careful about cutting the quantity sometimes it seems like cutting by few numbers or ounces does not make any difference but once customer discovers the fact the consequence will be surprising.
To raise the price effectively a company should consider following facts:
If the prices are not demand driven, then the prices cannot be changed on daily basis. Unless the situation where the prices of any goods or services are demand base the prices do not fluctuate on daily basis. So, for example, the prices of the commodity which is set through a set rule of commodity exchange change on daily basis for example prices of oil, cotton and gas or other similar kind of commodity gold silver etc etc. Prices of stocks and derivates are more sensitive and change on hourly or sometime in minutes. Consumer goods prices change in months or year because the cost has been incurred and the contract has been signed from manufacture to wholesaler and retailer. The retailer cannot set the price of good except under a certain range, which is allowed by the manufacturer. Company when raising prices should also consider to recover all cost associated with the product but also cost needs to be incurred over the course of a certain period. Raising the prices in the period of soaring economy and with rising fuel and gas price makes more sense to the customer to think why the price went up which allows the consumer to analyze the reason of change. Companies with a wide range of products portfolio should also consider which products price should go up. It has been seen the customer are more sensitive to the price of luxurious goods as compare to necessarily. This term refers to the price elasticity of demand which drives the prices based on consumer behavior. If the good is luxurious a slight increase in price may bring the fewer sales in tight economic condition.
Another point to consider charging higher prices is when a company introduces a new model with a better feature in the product. The best example is cell phone it has been observed that when a new model of cell phone launch it priced higher than the previous and it totally justified in the head of users, the same theory applies to cars industry a newer model sold for higher price.
Dominating companies play as a price leader. Their price leadership defines the prevailing price in the market and all other companies follow the price determined by the price leader.
Company when raising its price should also start offering the discounts and deals to keep the customer brands loyalty. Customers tend to use the coupon and avail the deals when they are getting a discount. A human brain has the tendency to excite to take the opportunity when available. Customers are more inclined to buy an expensive product and get a bigger discount on the product which priced low. The company should send customer coupons and deal to keep them coming back for shopping. There are higher chances that consumers just get attracted to the lower price and come to stores to use the coupon but buy other stuff too which actually help in recover the discounts. Also, some companies just to bring the customer back sends the coupon and promotional offer on cheap or less attractive products and let the customer take a look at the better product to willing to buy something else.
Another technique is to redeem coupons. The customer often buys expensive product to redeem the coupon but a small number of the customer actually redeems it.
With every launch of a new model or product companies willing to charge much higher price by offering the new feature which was not available in old models and charge higher prices for better products and gradually decrease the prices to keep the sale going and attract more customers with tight budgets.
The strategy of pricing works best is reasonableness. The margins should be reasonable and the product should be the price in middle to convince the customer that it is affordable. So for example, if the customer is willing to spend 250 it is more likely that customer agrees to increase the budget from 250 to 300 if the customer finds something more appealing. In contrast to that, it is less likely that a customer spends 650. In order to achieve this level company should always make the products more valuable, in term of design, shape, and functionality. Electronics and car industry is the best example every new model is more attractive and sometimes offer the additional feature. With car industry even there is no additional feature offers all the time but customers are just willing to pay for the shape of performance. When Apple launched its first phone the design was immaculate but with every new model, the product got better.
Change in packaging also brings customer attention. Same product with new appealing package may get customer attention. The best example is packaged food, food, and beverages companies offer all the time same product in new packaging with a slogan of new and improved packing to keep the item fresher and charge high prices.
In conclusion, there is no set and specific rule that when to charge the high price and how but it all depends on the nature of the products its internal and external factors and economic conditions which defines the right strategy for that particular product and time.