Pricing is the most important aspect of your business; it could either help or harm your business. If you set productive prices for goods and services, your business will generate profits. Whereas, you could wind up losing money by setting unproductive prices. Therefore, as an organization, you must identify effective pricing strategies.
11 Productive Pricing Strategies
There are many variables that must be taken into consideration to define the prices of goods and services. For instance, you must evaluate internal business components which include; organizational (revenue, marketing) goals & objectives, your market position, and your brand position. In addition, you much evaluate external business elements including; competitor pricing strategies, the cheapest products in your market, and the prices of trending products.
Below are 10 pricing strategies that will help drive sales to your business:
- Competitive Pricing
- Cost Plus Pricing
- Decoy Pricing
- Penetration Pricing
- Predatory Pricing
- Premium Pricing
- Price Discrimination
- Price Skimming
- Psychological Pricing
- Value-Based Pricing
Before you can identify effective pricing strategies for your business, you must understand the purpose of implementing pricing strategies. For beginners, your pricing strategy is the most important element of your marketing mix. This component alone enables you to start attracting your target audience.
Another purpose for implementing a pricing strategy for exploiting pricing strategies is growth. Most companies are in business to earn profits. However, to earn profits, a company must identify effective ways to expand or grow. For this purpose, organizations must determine an effective price to charge customers.
As an organization, you must deliver competitive prices to customers to increase your business competitiveness. The prices of your products and services must be decent to compete. Therefore, you must comb through unique pricing strategies to identify a productive pricing plan for your organization.
It can be the fulcrum of your business; it could, as already mentioned, make or break your business.
Competitive pricing involves keeping competitors in mind while setting a price for goods and services. This pricing tactic usually occurs when companies sell products that are like their competitors.
When it comes to selling products you have three options: sell items cheaper than competitors, sell products at the same price, or list products above the competition.
It’s important to understand competitive pricing is mainly effective when organizations are on a level playing field with their competitors. In other words, do not use this tactic if your business is just getting off the ground.
Cost Plus Pricing
Cost-plus pricing entails marking up the overhead cost, cost of labor & materials (to create a profit margin). Consequently, the purchaser can profit off the product(s) or services offered.
This method of pricing is often used by retail companies, including clothing departments, grocery stores, beauty salons, etc. Retail companies that have huge inventories can earn enormous profits from cost-plus pricing. Because markup percentages can be applied to any product.
Decoy pricing is a strategy that involves listing three items. The first two items cost the same or have a similar price. The third item is not attractive and the cheapest item of the three. Consequently, the third item drives consumers to purchase the most expensive items.
For example, imagine a company in the food industry selling hamburgers. The price for a hamburger is $5 and the cost of a cheeseburger is $7. However, you pay $8.50 to purchase an entire meal. Normally, most customers would choose to buy the food for $8.50 to get a better price for their money.
Freemium is a combination of two concepts; free and premium. Normally, this revenue is generated only by online organizations. Free products and services are offered, but a premium is charged for advanced features, special access, subscriptions, etc.
All in all, customers love the word free. However, the word premium is a different story. Usually, expensive and valuable are phrases that come to mind when the word premium is mentioned. For example, when purchasing gasoline you have three choices, unleaded, plus, and premium. Premium fuel is the most expensive of the three because it enables a vehicle’s gas to last longer and improves the performance of the vehicle, ultimately creating more value.
Hence, to attain success from freemium pricing, the product(s) or services offered must be valuable from the customer’s standpoint.
Penetration pricing is the act of lowering prices to attract customers. The aim is to set low prices in the initial phase of the market launch of products or services, and once a market share is reached, the products or services are priced at the normal price. Hence, an organization must retain customers to succeed with this pricing strategy.
All in all, lowering prices may influence consumers initially, but the goal is to win the loyalty of consumers for the long haul. Therefore, it’s essential to concentrate on product innovation, improving your company, and understanding what customers need and want.
Predatory pricing is an aggressive pricing technique used to drive out competitors. It consists of underbidding rivals. This strategy is illegal in many countries, however, many dominant corporations continue to use predatory pricing as a means to gain leverage in the market.
As mentioned, predatory pricing is illegal in many countries, so the question is how can corporations practice predatory pricing if it’s illegal? For beginners, this method of pricing may be illegal, but it’s tough to prove.
Premium pricing is when a product is artificially placed at a high price to create a favorable perception among buyers. The aim of this premium-pricing is to convince consumers by listing products and goods at high prices. However, organizations must offer distinctive or valuable products for this method to be effective.
For instance, if your competitors are selling basic watches with no diamonds, you must sell watches with diamonds or authentic gold bands. In other words, you must offer products or merchandise to your target audience.
Price discrimination is the practice of placing a separate price on the market for the same product in separate segments. For example, setting a price for young men and older women or different opening times.
Three types of price discrimination: 1. First-degree price discrimination — charges consumers what they are willing to pay. 2. Second-degree price discrimination — allow buyers to receive reduced prices for buying in bulk. 3. Third-degree price discrimination — segment markets into high demand and low demand groups.
Typically, price skimming or skim-the-cream-pricing occurs during the initial stage of business development. It involves listing products on the high end to recoup the cost of product development or return on investment (ROI).
Furthermore, price skimming is not a technique you want to use over an extended timeframe. Ideally, you want to use price-skimming until you break even. Anything beyond this can lead to the loss of valuable customers or damage the reputation of your company.
Psychological pricing involves listing products with the intention of creating a psychological impact. For instance, a company will list an item for $99 instead of listing the item for $100. In essence, customers are likelier to purchase cheaper items.
Many organizations use this pricing method to influence consumers. I’m sure you’ve noticed a campaign that said: “BUY ONE GET ONE FREE”. Notice how the word free grabs the attention of the audience.
Value Based Pricing
Lastly, value-based pricing involves setting a price valued from the consumer’s perspective. Ordinarily, this method is used when a customer’s value exceeds the cost of producing the good or service.
For instance, some casinos give players free compensation coupons to eat meals. This may cost them a few bucks, but in return, the player will lose more money gambling than the food comp is worth. Another example, casinos often give away free money comps to influence members to play. However, most players will lose the free play along with the money they did not plan to gamble.