From Gaebler Ventures: “For virtually all businesses, pricing comes down to a delicate balancing act among three factors: Your internal costs; the demands of the market you’re in; and, the one most people forget, your company’s strategic goals.
Think of these key variables as the legs of a tripod on which your pricing policy must have balance. The balance between cost and market is fairly obvious and doesn’t require a lot of space here. But the issue of company goals and maintaining the balance among the three is key over the long term.
Beyond the dollar figure involved, price is also a communicator of value. If you consistently under price products, your business may not only be leaving money on the table, but at work you are negatively affecting your customers’ perception of value. Again, clear strategy integrated with your pricing model is called for.
Most businesses can benefit from a technique (…) called the “Pricing Window”. By knowing your costs and understanding demand at various pricing levels, you can develop a window, or range, within which you know with confidence that the price must fall. The demand ride or market-driven end of the range varies greatly among industries and you must understand how it works in yours.
For example, people will drive out of their way to save a nickel on the price of gasoline. But the same person will examine the price of an elegant dining experience differently. If he or she desires to dine in a certain way, they are likely to pay the cost and not “shop around” for the same meal at a lower price. So, in the pricing of gasoline, there’s a tiny, sometimes infinitesimally small, window of opportunity in pricing. For an elegant meal, marketed correctly, the window is huge.
Within that window, one can position the product for maximum effect to achieve corporate goals. There again, we come back to the fundamentals of clearly defined goals and striking a balance among competing factors. (…)”