A pricing strategy is so important that it can make or break a business. A good pricing strategy can help a business attract more customers and become more competitive while ensuring the bottom line that supports business operations.
How do you choose a pricing strategy, then? The answer lies in discovering details of every potential strategy you can take. Today we are going to introduce you to operations-oriented pricing. Let’s see what it is and whether it is the best strategy for your services and products.
What Is Operations-oriented Pricing?
While every business is unique, you can also say that for every market and each of its customer segmentation categories. A couple of internal factors can limit a company and prevent it from increasing revenue. The most important one is a productive capacity. It stands for the maximum possible output of a business.
For instance, a productive capacity can be the maximum possible product units manufactured and shipped in a month, the maximum number of clients you can have at one time, or a maximum number of projects you can work on.
You can find yourself in a tough spot if you reach the maximum of your productive capacity and the market research report tells you that the demand for your products or services is increasing or decreasing. Is there a way to increase profits? That’s where operations-oriented pricing comes in.
Operations-oriented pricing is a pricing strategy that enables businesses to ensure optimal use of productive capacity on-demand while ensuring profitability.
When To Use It?
Generally speaking, there are two instances when organizations can leverage operations-oriented pricing to use their productive capacity in the best possible way.
First, if the demand for the products or services in the market exceeds your productive capacity, you can use operations pricing to increase profits. For instance, you can increase your prices to generate more profit.
Secondly, if you want to maintain a productive capacity but the demand is decreasing, you can reduce the prices to sustain it.
Let’s see what makes this pricing strategy different from other popular strategies at your disposal.
Revenue-oriented vs. Patronage-oriented vs. Operations-oriented Pricing
Unlike operations-oriented pricing, which is focused on the optimal use of productive capacity, revenue and patronage-oriented pricing strategies help achieve completely different goals.
Revenue-oriented pricing, for instance, is solely focused on enabling organizations to maximize their profits. The ultimate goal of revenue-oriented pricing is to make the top line insignificant compared to the bottom line.
Companies take a close look into their expenses to efficiently implement revenue-oriented pricing, including fixed, semi-variable, and variable costs. After completing the analysis, the companies put additional resources into highly profitable departments, products, and services to ensure every sale generates a maximum profit.
Patronage-oriented pricing, on the other hand, enables companies to attract new customers. These strategies include free trials, introductory discounts, product upgrades, and unique pricing plans. The goal is to match the perfect price with every customer segment, thus delighting customers and increasing sales.
There are various benefits operations-oriented pricing offers to businesses. The most noteworthy ones include the following.
Minimize the Number of Unproductive Assets
With a good operations-oriented pricing strategy, you will be able to maintain productive capacity and minimize unproductive assets. Unproductive assets generate expenses, and dealing with these expenses can be fatal for an organization in the long run. It not only includes infrastructure and other material assets but also professional assets you have on payroll, which you still have to pay even if they don’t work;
Once the demand in your target market exceeds your business capacity, the operations-oriented pricing can help you increase profits. You can raise prices to ration the demand and attract clients and customers willing to pay more for what you have to offer;
Both productive capacity and market demand are subject to change. Adopting this pricing strategy can help businesses become more agile. It can render them ready to quickly respond to developments in the market and industry, more competitive, and prepared for the uncertainties the future might bring.
Operations-oriented pricing is not something that you should take lightly. There are some common mistakes that you can avoid to ensure business continuity and minimize certain risks.
First, reducing prices whenever the demand dwindles and boosting prices as the demand goes up is a pattern your competitors and customers can easily identify. Doing it every time can chip your reputation and get you called out for price gouging. You can avoid it by having various pricing strategies in the mix to diversify your approach.
Increasing and decreasing prices to match the demand to supply is risky. You should never do it before doing market research. Market analysis and customer segmentation will help you find out two things.
First, you will learn to what extent you can boost prices and still appear like an affordable brand to customers. You can learn to what extent you can bring prices down to still appear valuable while remaining profitable.
Operations-oriented pricing is a versatile and engaging pricing strategy to implement. Besides helping you optimize your productive capacity, it can help you minimize unproductive assets, increase profits, and improve business agility. Basing your decision on up-to-date market data can fail-proof your pricing strategy and help you achieve your goals.