Conduct a Pricing Analysis for Higher Profitability

Master the art of pricing with our guide to pricing analysis and its impact on your business. Find out how to optimize your pricing strategy and profitability.

POST UPDATED:

May 9, 2024

Pricing Analysis

When it comes to running a business, the prices you charge are a critical component that can make or break your success. It’s difficult to strike the balance between competitive prices and making a profit.

To find the “sweet spot”, you must consider a variety of factors. Competitors, market trends, and consumer behavior are examples. And you need a process that helps you put everything together.

That’s where pricing analysis comes in.

In this blog post, to perform an analysis and apply a strategy to enhance your profits, market share, and gain a competitive advantage.

Table of Contents

    What are the different pricing analysis methods?

    Different pricing analysis methods include cost-plus, competitive pricing, value-based pricing, dynamic, and price skimming. Each method has its advantages and is used based on factors like market conditions, competition, and the product's unique selling points to maximize profitability.

    Pricing analysis: An overview

    Many experts believe price is the deciding factor in most purchases. The pricing model you use is one of the most important business decisions you’ll make. If you set higher prices than the market allows, you risk losing potential customers to competitors. But set your prices too low, and you’ll struggle to turn a profit.

    A price analysis is a process used to determine the optimal price point for a product or service. It’s the starting point that involves researching and reviewing all strategies involved in the process. To do an analysis, you must consider any factors you think will impact your ability to sell your product or service.

    In this sense, pricing analysis is a combination of art and science. It involves understanding what your customers value, their price sensitivity, and how they make purchasing decisions.

    You’ll need to do market research to gather both qualitative and quantitative data for a competitor pricing analysis. This includes historical product and pricing data for your competitors and for your own brand. This data allows you to uncover trends and patterns. As a result, you’ll be able to develop the right model for your business.

    A price analysis is a process used to determine the optimal price point for a product or service.

    Pricing analysis vs. competitive pricing analysis

    There’s some confusion around the difference between pricing analysis and competitive pricing analysis. So, I’d to clarify these terms before we go any further.

    The goal of competitive analysis is to explore the specific price points of competing brands. Then, you can see how you fit into the competitive market from a price perspective. This is important because your customers are comparing your prices to other brands. So, this part of the process allows you to step into your customers’ shoes and see your brand as they do.

    Pricing analysis is a comprehensive procedure that involves all aspects of price positioning. An analysis considers all factors that influence prices and profitability. Margins, cost of production, and required return on investment are examples.

    Companies use market price analysis and other data to figure out what consumers might pay. Then, they can develop a competitive pricing strategy that best fits the brand’s revenue and growth goals.

    Develop a pricing strategy (Click to expand)

    Benefits of a pricing analysis

    Higher profit margins

    For businesses to thrive, they must not only make a profit but also avoid loss. Lost profits can have a devastating effect on a company’s financial sustainability. So, you need to set prices that allow you to stay profitable without under- or overpricing.

    As an example, an analysis can show businesses which offers are the most profitable. This will help them avoid over-discounting or offering unnecessary promotions. While lower prices can drive sales, they can also reduce margins.

    A pricing analysis helps businesses understand the market dynamics that impact their products or services. It allows them to evaluate factors that influence prices. Consumer demand and market trends are examples that help companies set optimal prices.

    Another advantage of conducting a pricing analysis is that it can provide greater visibility into the cost structure of a business. This lets businesses assess the cost of goods sold, production cost, and other expenses associated with selling their products or services. By understanding their cost structure, companies can identify opportunities to reduce costs and increase profitability.

    Gain a competitive edge

    By understanding competitor prices, you can find a “sweet spot”.

    Let’s say your product offers extra features that benefit a specific market segment. Let’s also assume a competitor offers something similar at the same price point or lower. Here, you could create a messaging campaign to highlight the differences. This would show customers the value they’re getting for the extra cost.

    On the flip side, if you can produce products at lower costs, you could undercut competitors to ramp up sales.

    Customer insights

    A pricing analysis can also give you deeper insights into the customers you serve. You’ll learn more about the key characteristics that define your best customers. Examples are demographics, such as location, age, gender, income level, and spending habits. You can use each of these factors to develop an accurate picture of the ideal customer types.

    We don’t recommend setting prices based on product features or production costs alone. You should also consider your audience’s disposable income range and their buying habits. This will reveal the potential profit that exists within those customer segments.

    Strengthen your brand’s position and increase market share

    The price of a product or service is an indicator of its quality. How customers see your prices influences their opinion of your brand.

    For example, if you sell the same product as competitors at the lowest price, customers may doubt its quality. This sentiment carries over to your brand as well. If customers think your product has inferior quality, they’ll think your brand has less value, too. This is an unfavorable perception that damages brand equity.

    Problems with Pricing Strategies

    Conducting a pricing analysis

    In this section, we’ll look at the factors to consider in your analysis.

    The target market

    The target audience dictates much of your business strategy. But knowing simple demographics may not be enough. You should also look at customers’ budgetary restraints and opinions on prices. Every segment of the market is different. Your pricing strategy must reflect that.

    Here's how to set the right prices for your target audience:

    First, define your target consumers. Whoever they are, you need to know who you’re targeting before you can know if your prices are on point.

    To do this, you’ll need details about them. For example, median income can reveal whether your products or services are affordable. Your audience’s disposable income level is another crucial piece of information. Knowing what it is can avoid setting prices that are too high.

    Your customers’ buying habits are another consideration. How much do they spend on products or services in your category? The answer can help you set prices and refine offers.

    Consider who they are currently buying from and the reasons behind it. Perhaps their current provider offers a specialized package that you could replicate. Maybe the competitor offers a loyalty discount that your customers value. Knowing why they choose a brand over others can help you develop stronger messaging.

    Competitive pricing analysis

    Your competitors’ pricing strategies play a dramatic role in setting your prices. To perform this analysis, use direct and indirect competitors.

    Direct competitors operate in the same market and sell similar products. But you should also review a short list of indirect competitors. These businesses may not operate in your market, but they could compete anyway.

    For example, an in-home workout equipment brand may not be direct competition for a gym. But people could opt to buy equipment and workout at home instead of paying a gym membership.

    Use competitive pricing data to research their product positioning tactics. This includes historical data on base prices, discounts, and promotions.

    Once you have this information, run a comparison analysis. Look for opportunities to differentiate yourself. For example, if competitors sell at premium prices, you might gain an advantage at a lower price point.

    Also, consider the market demand for your product or service. If there’s a high demand and limited competition, you may use a premium pricing strategy. But if market demand is low or saturated, you may need to lower your prices to remain competitive.

    It’s important to note that competitive price analysis is not a one-time task. You should continue to watch your competitors’ prices to adjust your own strategy.

    Market price analysis: Economic conditions and market trends

    In today’s fast-paced world, market conditions can change at a moment’s notice. Many businesses scramble to keep up. That’s why they must be able to adapt quickly. Staying on top of current market trends is one of the most effective ways to prepare for change.

    Market analysis provides businesses with insights into the complexities of their industry. Without it, businesses may miss opportunities to adjust prices. They may also overlook threats that could inhibit growth.

    When monitoring trends, consider your competitors’ marketing strategy, substitute products, and price changes. Businesses can use software tools to help them keep up with competitors' pricing strategies. Prisync in one example.

    Optimal Price Point
    Optimal Price Point

    Setting profit goals and margins

    Profit goals play a significant role in a pricing analysis. But setting these goals and margins can be a tricky task.

    Set profit goals first because they influence the strategy you’ll use. For instance, customer retention is a profit goal. So, you could offer discounts or loyalty programs to existing customers. This would encourage them to stick with your brand, even if your prices are a little higher. Over time, the repeat purchases from existing customers will increase revenue. It’s also easier to sell to current customers than to attract new ones.

    Increasing profit margins is a common goal. Margin is the difference between the cost of producing your product and its selling price. A high margin means you have a lot of room to adjust prices. A low margin means you need to be careful not to undercut production costs.

    Product price analysis

    The best pricing strategy appeals to customers and optimizes profit.

    Setting optimal prices requires accurate data. You should also include a combination of qualitative and quantitative data. Using both will help you figure out how much customers will pay for your product or service.

    It’s also important to understand the concept of a value metric. A value metric is used to help a company measure the per unit value of its product for a sale.

    There are three key principles to consider when evaluating your value metric. First, make sure it aligns with the needs of your customers. For example, if your product is a help desk, charging per seat may be appropriate.

    Second, the value metric should be easy for customers to understand. Abstract values will be difficult for customers to appreciate. This also means they won’t pay for them.

    Finally, your value metric should grow in proportion to your customer base.

    Once you have customer data and established a value metric, it’s time to develop pricing tiers. These should correspond to the specific customer segments you identified during your research.

    Each tier should align with your value metric and meet the needs of your target customers. This approach enables you to set prices that align with your goals and please your customers.

    Pricing analysis methods

    Pricing isn't a one-size-fits-all proposition. The right pricing analysis method depends on factors unique to your business and the market it operates in. Let's look at the different tools you can use to determine the approach most likely to drive profits.

    Cost-plus pricing

    This straightforward method starts by calculating all costs associated with producing your product or service (materials, labor, overhead). Then, you add a desired profit margin percentage on top of this total cost. For example, a furniture maker might determine that a handcrafted chair costs $200 to produce. If they seek a 30 percent profit margin, the selling price would be $260.

    Competitive pricing

    Here, you focus on your competitors within the marketplace. If a competitor is selling a similar product for $100, you might decide to price yours slightly higher at $110 (premium pricing), match their price at $100, or undercut them at $95 (price below competitors). This method works best in highly competitive markets with easily compared products.

    Pricing Positioning Strategy (Click to expand)

    Value-based pricing

    This method centers on how much value customers perceive your product or service delivers. A software company offering a solution that saves businesses significant time and money could charge a premium price, even if their production costs are low. Understanding what customers truly value is critical.

    Dynamic pricing

    This model involves flexible prices that change frequently in response to real-time factors. Airlines are a classic example; ticket prices fluctuate based on demand, time of year, and seat availability. Businesses using this strategy need a system to collect and analyze data for timely price adjustments.

    Price skimming

    Companies launching an innovative product might deliberately start with a high price point to attract early adopters and create a sense of exclusivity. As time passes and the initial excitement wanes, they would gradually lower prices. This tactic is common in technology or luxury goods markets.

    Other pricing methods

    Other approaches to pricing include penetration, bundle, and psychological pricing. Selecting the most effective method (or even a combination) depends on your specific product or service and market dynamics.

    • Penetration pricing: Entering the market at a cheap price to gain market share quickly. This can be risky if you can't scale up to raise prices later.
    • Bundle pricing: Offering multiple products or services together at a discounted price compared to purchasing them individually.
    • Psychological pricing: Using tactics that play on consumer psychology (e.g., ending prices in .99).

    Performing a pricing analysis with The Brand Auditors

    Maximizing profits is the goal for any business, but it’s not always easy to achieve. In today’s fast-paced market, you must have the right pricing strategy. Otherwise, you could lose sales or leave money on the table.

    The Brand Auditors can help you with a pricing analysis. We’ll work with you to find the sweet spot that balances customer demand and profit. We’ll also show you how to adjust your prices in real-time so you can stay competitive.

    Click on the button below to schedule a free consultation with a brand strategist.

    Chris Fulmer, PCM®

    Chris Fulmer, PCM®

    Brand Strategist | Managing Director

    Chris has over 15 years of experience in brand development and marketing. He has designed strategies across various industries, such as technology, B2B services, and healthcare. His areas of expertise include brand positioning, competitive analysis, content marketing, and web development.

    Are you ready to find out how a brand audit can transform your business?

    Our brand audit process is a comprehensive analysis designed to help companies optimize performance.

    • Increase ROI on lead generation and sales conversions.
    • Reduce marketing expenses.
    • Strengthen brand positioning to become more competitive.

    We guarantee satisfaction or get your money back! Schedule a discovery call with a brand auditor to find out more.

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