Pricing is always a tricky subject. If we price our products too high, we risk losing customer demand whereas if we price them too low, we risk not making a profit at all. Therefore, there needs to be a fine line when it comes to pricing anything.
That being said, there are specific steps that you can follow in order to help in your pricing framework. First is setting price objectives. Why are you pricing a product the way you are pricing it? In other words, what is the objective behind that pricing decision? Is it profit-oriented, sales-oriented, status quo and prestige oriented?
Similarly, the second step is to estimate the demand accordingly. Establishing a premium restaurant with higher prices would mean that the demand will be less than that of a medium restaurant. Conversely, fast food restaurants will have a high demand due to the nature of the business.
Then, we move on to determining the cost. What are the expenses like? Expenses include fixed assets such as furniture and kitchen supplies and interior decors as well as variable expenses like rent, salary, marketing cost and so on. Understanding the cost and then putting a profit margin on that cost is a better way to see whether the price will be competitive in the market or not.
Then we also need to determine the pricing strategies that we want to use. We could either use a price skimming strategy where we raise the price from the start to cover up the investment cost or price penetration strategy which allows us to capture a lot of market share.
Using cost plus pricing, leader pricing, price bundling and so on are all part of giving an incentive to the people in order to capture their attention. We can later give them offer and make price adjustments as needed.
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