Determining Pricing Strategy according to Kotler
Determining the price of your product or service is of paramount importance. Whether you're just starting as an entrepreneur or adding a new product to your range, you need to establish a good price. But how do you know if you're not asking too much or too little for your product/service? Fortunately, there are various pricing strategies you can follow for this purpose. American professor Philip Kotler has devised nine pricing strategies. In these strategies, the price-quality ratio is considered. We'll explain how this works here. In addition to quality, price, demand, and supply, the price can also be determined based on the specific value it adds to the customer or the customer's process. We refer to this as ROI Pricing. In Kotler's model, "quality" can also be replaced or linked to "added value."
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Determining the right price for your service or product can be quite challenging. There are many different factors to consider. Of course, you want to make money from your product or service. It shouldn't be the case that the costs exceed the benefits. But you also don't want customers to refrain from buying from you because they find you too expensive. At the same time, setting a too low price can also create problems. Not only will you earn very little, but customers may also start doubting the quality of your product due to the (too) low price. Finding the right balance is, therefore, crucial.
You can use various pricing strategies to determine the right price. There are many examples of such strategies. Philip Kotler, in his book Marketing Management, identified nine different pricing strategies. All of these strategies are related to the price-quality relationship.
As seen in the diagram above, Kotler identifies a total of nine strategies. We have highlighted six of them in green because they can work well. The two red strategies are best avoided, while the orange strategy only works in a few cases. We will briefly explain all the strategies.
With the Premium strategy, you offer a high-quality product at a high price. This works particularly well when there are few competitors, but the demand is high. With this strategy, you can maximize your profits.
In the High-Value strategy, you also offer a high-quality product, but you opt for a slightly lower price. You choose a market-oriented price to show that your products are worth it. This strategy works well if you want to position your service or product in the market as high-quality.
In the Superb Value strategy, you also work with a high-quality product. In this strategy, you choose to market the product at a low price. This works particularly well when there is a lot of competition. Due to the low price and high quality, customers are more likely to choose your product over the competition. However, be careful to cover your costs in this scenario.
If you have a product or service of average quality and market it at an average price, you are using the Average strategy. With this strategy, you price your product exactly in line with the market. Customers will not be surprised by this approach.
If you have a product of average quality, you can also opt for the Good Value strategy. With this strategy, you price your product below the average price. This lower price can often quickly gain market share. If you want to grow your business rapidly, the Good Value strategy is often very suitable.
Offering a low-quality product at a low price is the Economy strategy. This strategy is suitable for attracting price-sensitive customers. You provide the customer exactly what they are paying for. Customers know what to expect and choose your product primarily because of the low price.
If you market a product or service of average quality at a high price, you are choosing the Overcharging strategy. In only a few cases is this a successful strategy. For example, if the product is temporarily scarce or needs to be delivered urgently, Overcharging can work. In other cases, customers will not want to pay more than the product is worth.
Offering low-quality products at an excessively high price is the Rip-off strategy. This strategy will almost never work. It leads to many dissatisfied customers, which you should avoid at all costs. Therefore, we never recommend this strategy.
We also do not recommend the False Economy strategy. With this strategy, you offer low-quality products at an average price. This leads to dissatisfied customers and can seriously harm your business. In such cases, lowering the price or increasing the quality is a better choice.
When using Kotler's pricing strategies, there are six different strategies that can work well. The other strategies do not work or only work in some cases. But how do you determine which of these strategies is the best choice for your business? We provide you with some tips so that you can better decide which strategy aligns with your company.
Whether a pricing strategy works or not depends not only on the quality of your product or service. Much also depends on the current market and the competitors you are facing. If your competitors offer higher quality at a lower price, there is a good chance that customers will not choose your product. Therefore, conduct thorough market and competitor research before determining a pricing strategy. This way, you can determine whether a specific strategy will work or not.
Without people buying your products or services, your business will go nowhere. Therefore, it is essential to conduct customer analysis to understand what your potential customers want and expect. What do they consider an acceptable price for a product/service? And what quality do they expect for that price? Once you have clarity on this, you can better determine an acceptable price and which pricing strategy aligns with the quality of your product.
When determining a good strategy, it is also essential to consider your company's objectives. What goals have been set, and what is required to achieve them? For example, if the main goal is to gain a significant market share, the strategy will be different from optimizing profit. Therefore, ensure that your pricing strategy aligns with what you want to achieve with your company.
Determining a good price has a lot to do with psychology. Whether a customer considers a product worth its price depends on many factors. Quality is essential, but market scarcity and customer experience also play a role. Take luxury brands as an example. They can charge much higher prices for their products because customers are not just buying a product; they are also buying a piece of status. Additionally, they offer an excellent customer experience, justifying the high price.
Another psychological trick is not rounding prices. Something priced at €9.99 is often unconsciously perceived as much cheaper than something priced at €10.00. Such a clever trick can make people more inclined to make a purchase. You can also cleverly use discounts or bundle prices. These also work psychologically, making customers more likely to make a (larger) purchase.
Now that you understand the meaning of Kotler's pricing strategies and we've provided you with some tips for determining your ideal strategy, you can get started on your own. Keep in mind that your price doesn't have to be set in stone forever. You can experiment with the price and adjust it later, depending on what's needed.
However, remember that a good price-quality ratio is always important. Setting a product at a much too high price in the market is usually not very successful. Customers expect quality for their money and will hold you accountable if it doesn't meet their expectations. This can harm the future of your business.
If you're struggling to determine your ideal price strategy and need some assistance, our experts are happy to help. They can work with you to find a strategy that suits you, your organization, and the market.