I was reminded of a heated discussion between the general manager of a company and its marketing director about the right way to price the company’s products. The former argued that

pricing should be based on the products’ perceived value and market demand, without being tied to a specific profit margin, while the latter believed that Pricing it should be based on

a realistic formula that produces more accurate figures, making it possible to calculate each product’s total costs, allocate percentages to certain expenses—such as maintenance and marketing—and then

Add the desired profit margin to arrive at the product’s actual price, keeping the margin secure without overpricing.

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الطريقة المثلى

In my view, both positions are sound in principle, but the success of either depends on how it is implemented and the steps involved. Before I go into more detail about this case,

Several questions should be considered before setting a pricing strategy: What is the company’s overall strategy? What are its goals? What are the characteristics of its products? And what is the company’s strategy for those products?

In terms of development and quality improvement? What competing products are on the market? What is the company’s own product’s market share and position? Who is the target audience? And how

receptive are customers to the prices?

This approach should not be considered a general model to follow Pricing in every case. Pricing strategies vary and are shaped by many questions. This example was intended

to explain the importance of—and the process for—evaluating the pricing strategy being used.

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The product’s actual cost

After the general manager answered these questions, I felt the most effective approach was to arrive at the closest possible estimate of the product’s actual cost;

Then we add the required profit margin to arrive at an estimated price, which we use as the basis for our pricing strategy, as shown in this table:

But the process doesn’t end there:

—After entering the data in the table, we arrive at a price that helps safeguard the target profit margin to some extent. However, it would be a serious mistake to adopt

the price immediately. First, we need to ask:

—Is the suggested price appropriate for the market? If not, we need to review the table we prepared.

Can the cost of raw materials, for example, be reduced? Can some costs be eliminated or lowered without affecting product quality? Or is the profit margin

or the percentage allocated to marketing too high?

The next step before launching the product at the proposed price is to conduct an in-depth market study and reassess the profit margin based on its findings. Without

carefully assessing the profit margin before offering the product or service at the proposed price, you leave your product facing two possible outcomes:

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First: Losing more profit margin than intended:

For example, suppose the product’s total cost, including all costs and allocated percentages, is 10 riyals. If you apply the profit margin you set—say, 25%—and sell

the service for 15 riyals, might the market be willing to pay, say, 30 riyals for it? In that case, you would miss out on achievable profit margin, and here

We can maximize the profit margin, in the general manager’s view, because the market is willing to accept the product’s price.

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Second: Failing to achieve the sales target:

For example, suppose the product costs 10 riyals, including all costs and allocated percentages, and we apply the target profit margin—say, 25%.

If the service is then sold for 15 riyals, isn’t it possible that the market will not accept that price and that the maximum acceptable price is, for example, 11 riyals? As a result,

we would fail to achieve our target sales volume and fall far behind the competition.

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سياسات التسعير

This example illustrates why it is important to move away from rudimentary pricing based solely on experience, and to assess your product’s position in the market and research the market and customers

during the pricing process. It is also important to choose a pricing strategy that supports your company’s strategic goals, because policies

There are several pricing strategies, including:

تسعير التكلفة:

This strategy calculates the total cost (administrative expenses, raw material costs, maintenance costs, and so on), then adds the target profit margin to arrive at the

product’s price for consumers. It’s important to research the market before launching the product at the selected price.

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تسعير القيمة:

This strategy estimates your product’s value in the market. The benchmark isn’t simply your own experience; instead, it involves taking several steps and conducting research to determine your product’s true value,

It starts by studying the closest competing product and assessing your product’s features and added value to the market. Next, you assign an appropriate monetary value to those features, while taking into account

the product’s financial drawbacks and subtracting their estimated cost from the projected price, to arrive at a potential price that must be higher than the product’s costs. These steps also conclude

by studying the market again, assessing customer demand, and determining whether customers are willing to pay the proposed price.

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كشط السعر:

This strategy is used when entering a new market with little competition. It involves setting a high price for the product to achieve the highest possible profit margin for a period of time,

This period ends when new competitors enter the market with competitive prices. At that point, the company must adopt a new pricing strategy suited to the next stage.

You may have noticed the huge difference between mobile call prices 16 years ago and today. Back then, only one or two companies in a given country offered the service, at a cost that was

high—until new competitors entered the market with competitive prices.

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Market penetration pricing:

This strategy is used by companies new to the market, or to break into the market with a new product. It involves setting a low price, sometimes with a zero profit margin;

The aim is to penetrate the market and establish footholds from which to reach customers. Once the desired

results have been achieved, the company quickly shifts to a different pricing strategy.

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Pricing Strategies

There are many pricing strategies, and they should be closely aligned with the company’s strategies and objectives. They also evolve as the company’s objectives and strategies

develop. If the company’s strategy is to penetrate the market, it should adopt a pricing strategy that supports this goal. When the company begins

moving into a phase with different objectives—such as increasing its market share, competing on price, or leading the market—it should review its pricing strategy to ensure it aligns

with its new objectives.