Pricing: Understanding the Value Behind the Numbers

10 de abr. de 2024

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Pricing

What is Pricing? Learn Strategies to Define It!

In the business world, much is said about the fundamental role pricing plays in a company's strategy. But after all, what is pricing?

The answer to this question goes far beyond simply assigning a price to a product or service.

That's because explaining what pricing is involves understanding the market, competitors, customer preferences, and the company's own organizational goals.

With that in mind, we've prepared this article to discuss all the nuances of pricing and present various strategies to help you set it effectively.

This way, your company will be able to maximize profits and gain a competitive advantage.

Shall we learn how to do pricing in practice?

What is Pricing?

Pricing is the process by which a company determines the appropriate value to charge for its products or services.

In other words, when we talk about pricing, we are referring to a strategy that considers factors like production costs, customer perception, competition, market demand, and more.

Correct pricing is essential for business success, as it directly affects sales, profitability, and brand perception.

What is the Purpose of Pricing?

Pricing serves to establish a fair and profitable price for the service provided or product sold, ensuring that customer demands and expectations are met simultaneously.

Precisely for this reason, understanding what pricing is so important, as it plays a crucial role in achieving an organization's goals.

It's also worth noting that this process can be seen as the foundation on which strategies aimed at meeting various goals, whether general or specific, are built.

That's because, among the main objectives of pricing, we can cite the fact that it helps companies increase sales, maximize profit, and gain a larger market share.

Thus, it ensures survival in a competitive market and helps achieve other specific goals, such as improving the return on investment or the successful launch of new products.

In other words, exploring what pricing is and knowing how to set prices correctly helps balance an organization's financial health and influences its long-term sustainability.

Why is Pricing Important?

Pricing is important because it directly influences a company's profitability and financial sustainability.

In practice, it allows your organization to adjust its prices according to the market and production costs, ensuring an adequate profit margin.

Moreover, when discussing the importance of the pricing process, it's worth emphasizing that well-developed pricing can help position the company in the market.

This is because it has the power to differentiate your business from competitors and add value to the products or services offered.

Therefore, delving into what pricing is and how to do it correctly is a way to maximize profits and contribute to customer satisfaction and loyalty, building long-lasting and successful relationships.

What Are the Types of Pricing?

To give you even more insight into what pricing is, here we present the two main ways to do it: for products or services.

Product Pricing

In product pricing, it's essential to consider both tangible and intangible elements.

One example of product pricing is starting with the mapping of direct and indirect expenses and costs, from raw materials to water and electricity bills.

Then, it's necessary to calculate a reasonable profit margin, considering factors like market segment and sales volume.

Finally, you need to assess whether consumers are willing to pay the established price.

Service Pricing

In service pricing, while there are similarities, there are important differences.

This is because services involve more subjective and intangible aspects, such as the skills of the professionals involved.

So, here, pricing starts by setting the cost of the work hour, taking into account costs like transportation and materials.

Fixed and variable company expenses are also considered.

And just like with product pricing, applying an appropriate profit margin and analyzing the market's willingness to pay for the service offered is essential.

Price vs. Value: Understanding the Difference

To delve deeper into what pricing is, it's essential to understand the difference between "price" and "value," two terms that, although often used interchangeably, represent quite different concepts.

Price

"Price" is the monetary amount a customer pays for a product or service. Each company sets the price, and it can be influenced by various factors, such as production costs, competition, and market strategy.

Value

On the other hand, "value" refers to the customer's perception of the usefulness or importance of a product or service. A variety of subjective factors, such as perceived quality, brand, utility, and the emotional benefit that a product or service may provide, can influence this.

Crucial Differences

Therefore, the main difference between price and value is that the former is determined by the company, while the latter is perceived by the customer. This means that a product or service can have a high price but low value to the customer if the perceived quality or utility isn't high enough. Similarly, a product or service with a low price can have high value to the customer if they feel they are getting a great deal.

For this reason, when studying what pricing is and establishing a pricing strategy, it's important to consider both the price you want to set and the value that customers perceive in your products or services.

The perception of value can be a powerful tool to drive sales and customer satisfaction, especially in highly competitive markets.

How Does Pricing Work?

Pricing can be done in various ways, depending on a company's business strategy. Some of the most common methods include:

Cost-Based Pricing

This is the simplest method, where the price is determined by adding a fixed profit margin to production costs.

Value-Based Pricing

This method considers the perceived value of the product or service to the customer. If customers perceive that the delivered value is greater than the price, they are more likely to buy.

Competition-Based Pricing

In this case, prices are set based on what competitors charge for similar products or services.

Dynamic Pricing

This is a more complex strategy that involves adjusting prices based on variables like market demand, time, customer profile, and more.

Where is Pricing Used?

This tool is essential in all sectors and types of businesses, whether in retail, industry, or services. It is crucial for determining the selling price of products, defining marketing and sales strategies, analyzing profitability, and managing business growth.

How to Do Good Pricing? Learn the Main Strategies

So far, we've clarified what pricing is and some variables involved in this process.

Now, get to know the most common pricing strategies adopted by entrepreneurs and companies in different sectors, along with an example of pricing for each.

Cost-Based

This strategy sets the price by considering the Cost of Goods Sold (COGS) and other direct and indirect expenses.

For example, if a store determines that the total cost of merchandise is R$100.00 and wants a profit margin of 30%, the price would be R$130.00.

Value-Based

Here, the focus is on the customer, understanding their perceptions and setting the price based on their point of view.

That is, your company needs to understand how the customer values its products and services and determine the price accordingly.

Competition-Based

This strategy, common in companies that resell products, analyzes the prices charged by competitors.

It's not about copying prices but understanding market behavior to strategically adjust your prices.

Seasonal-based pricing

In this format, companies adjust their prices according to seasonality, increasing them in periods of high demand, such as summer for ice cream parlors, and reducing them in periods of low demand.

Volume-based pricing

Finally, this strategy rewards customers who buy in large quantities, offering discounts or special promotions for volume purchases, such as combo deals or "buy 3, pay for 2" offers.

Main Features of Good Pricing Software

Now that you know everything about what pricing is, learn about the main features a good software must have for this process!

Flexibility and Customization:

The software should allow you to configure different pricing strategies to meet your specific needs.

Data Integration

The software should be able to connect to various data sources so that you can consider all relevant factors in pricing.

Data Analysis

Data analysis and visualization features are essential for understanding trends and making informed decisions.

Automation

The software should be able to automate the pricing process to save time and reduce errors.

Why Choose Mitra for Pricing?

Mitra's no-code platform is designed to meet your specific pricing needs. With it, you can integrate data from multiple sources, automate the pricing process, and create customized analysis dashboards. Additionally, Mitra's ease of use means you can do all this with the spreadsheet knowledge you already have, without the need for advanced programming skills.

In today's corporate world, proper pricing is more important than ever. With the right software, you can transform pricing from a complex and time-consuming task into an efficient and precise process that drives your business's success.

Get to know the Mitra platform and start your journey towards perfect pricing today!

Conclusion

So far, we've explained in detail what pricing is and its importance in the business context, emphasizing that its application goes beyond simply assigning values to products and services.

As you've seen, through strategies such as cost-based, value-based, competition-based, seasonal, and volume pricing, your company can adjust its prices effectively, considering both internal and external business factors.

We also understood the difference between price and value, highlighting customer perception as a key factor in price setting.

In addition, we discussed the relevance of good software to help with your pricing, like Mitra, which offers flexibility, data integration, analysis, and automation to simplify and improve the process.

After all, in an increasingly competitive corporate scenario, mastering the art of pricing is essential for business success and sustainability—and here, the help of good software is invaluable!

Therefore, investing in appropriate strategies and tools is crucial for achieving efficient results and driving business growth. And for that, count on Mitra.