To price below or above your competition, that is the question. I think of the four P’s of marketing (product, promotion, place and price), pricing is the most challenging.
If you sell your product at a lower price to your competition, then you may be telling the market that it is inferior. It may be perceived as a lower quality product. Although the word “quality” is mostly misunderstood. Let me explain.
The best definition of quality is “conformance to requirements”. That means simply, if a product conforms to MY requirements (it does exactly what I want it to do) then it is a quality product to ME. Another person, with different requirements, may thus NOT perceive it as a quality product. Quality therefor, is SUBJECTIVE. There is no universal rating of what is quality. It has NOTHING to do with technical specifications, long-lasting use or durability.
If your product are superior to your competitors, it will be wise to price it higher, as consumers will perceive the higher price as being an indication of superiority. Pricing at a premium price is referred to as price skimming. In this case you are trying to sell less units but at a higher price. Economics 101 states that the lower the price of a product, the higher demand will be for it, and vice versa. If you want to sell “upmarket” products to an affluent market, be careful of pricing your product or service at a competitive level (too similar to other offerings). Rather go for a higher price. You may find it odd, but many people WANT to pay a high price. That way they believe it is a better and more exclusive product (think about brand name clothing).
Price Penetration refers to pricing at a low (generally lower than your competitors) level. This may be suitable for a FMCG (fast moving consumer goods) product with a lot of competition.
Your pricing affects your profit directly. Obviously one should determine your cost first and then consider the competitive products out in the market. The target market you are addressing also determines at what price level you can charge.
So, if you really have a superior or unique product, rather go for a high price. Most consumers will perceive it as such and buy your product. Pricing too low will be perceived as inferior and you will not make as much profit.