Pricing or deciding how much to charge for your product or service requires more than just calculating the costs & adding a mark-up. Effective pricing strategies must ensure that price points are placated at levels which maximize profitability whilst being affordable to consumers at the same time. The choice of a pricing strategy takes into consideration a lot of factors some of which are account segments, consumers’ ability to pay, market conditions, competitor actions, trade margins, input costs etc. One must make sure that they match their pricing strategy to their value proposition for the product or service they are offering.
I will delineate some commonly used pricing strategies that you can adopt for your business. Bear in mind, of course, that they are customizable or can be jelled to suit your particular business’ modus operandi.
Premium Pricing (Pricing At A Premium)
This is ideal for businesses selling products or services with unique properties. Input costs are set much higher than those of competitors, thus, a high price is used as a defining criterion. A premium-priced product or service is higher than its competitors’. This pricing strategy can be most applicable in the elementary stages of a product’s life cycle. Premium pricing is most suited in segments or industries where the business or company has a very strong competitive advantage or value proposition.
The crux here is to make customers see it expedient and worthwhile to purchase the product or service (despite the high price tag). This then brings to the fore the importance of creating a strong value perception in people’s minds. Essentially, you have to paint an image which causes consumers to perceive the products or services as wielding high value & being worthy of the high prices. Innovative and strategic marketing & advertising can’t be overemphasized here. For this pricing strategy to yield huge returns it must be ensured that product or service quality is very high. Product or service packaging & company image must also be riddled with high levels of excellence.
Penetration Pricing (Pricing For Market Penetration)
The thrust here is to lure as many buyers as possible by charging low prices so as to gain market share quickly. Ideally, the prices will be strategically & gradually increased as time ensues. Increasing the prices will be effected once you have been satisfied that your market share objectives have been achieved (i.e. market penetration has been consummated). This strategy is meant to initially usurp competitors. This is strategic for new businesses endeavouring to penetrate the market; however, the business could incur initial losses of income. The idea is to quickly increase product or service awareness & visibility over time so as to firmly establish the business.
Economy Pricing
This entails setting prices at the barest minimum & making small profits. It targets the mass market & seeks to increase market share. The margins here are wafer thin with overheads such as marketing & advertising being very low. Food suppliers & retailers usually use this pricing strategy which is meant to attract price-conscious/sensitive consumers. To adopt this pricing strategy one has to minimize input costs with regards to production & marketing so as to easily keep prices at bay. It’s worth noting that this strategy is most suited for large companies whilst being very risky for small businesses. Small businesses lack the volumes advantage which large companies enjoy. This is because profitability from this pricing strategy is realized from pushing high volumes of products purchases.
Price Skimming
This involves initially setting high prices then lowering them as the market evolves. The concept here is to maximize sales before product or service or the segment attracts more competitors. This can be used by businesses to increase sales revenue on new products or services. Basically, you set high prices during the introductory phase then you lower them gradually as competitor goods or services appear on the market. So you maximize on profit from early adopters of the product or service. When more competitors appear on the market, consumers become price-conscious & thus you’ll have to lower prices to tap into that demographic of price-conscious consumers. This pricing strategy aids in recovering development costs.
Bundle Pricing
This is about selling multiple products bundled together at a lower rate than if they had been sold separately or individually. This can be an effective pricing strategy when trying to dispose of items that haven’t been purchased in a while so as to clear up space to make room for other viable products. The idea here is to increase value perception in the eyes of the consumers, because, in principle, you are giving them something for free. This strategy is most actionable when the products being sold are complimentary, for instance, in restaurants. It must be noted that profits earned on higher-value products must compensate for the losses that may be incurred on the lower-value products.
Psychology Pricing
The technique here is to make customers respond emotionally rather than logically. For instance, setting a price at $299 is scientifically proven to attract more buyers than placating it at $300 (despite the paltry difference). The strategy here is premised on the fact that consumers are predisposed to place more focus on the first digit on a price tag than the last digit. The aim is to increase demand by presenting an illusion of greater value to the consumer.
Promotional Pricing
This pricing strategy can take on many forms; one can be very creative with this one. The commonest approaches to this strategy are buy one get one free (BOGOF), money off vouchers or discounts. All these approaches & more can be customized in an infinite number of ways that are profitable anyhow a business sees fit.
