Pricing Strategies for Dummies: Everything You Need to Know
Pricing your products or services may sound intuitive and simple at first glance, but in reality, can be quite complex and tricky. For this reason, too many businesses underestimate its importance and do not put as much thought and effort as they should into their pricing strategies.
Choose a price point that is too high and you will miss out on valuable sales that could have potentially made your year. Conversely, choose a price point that is too low and you will lose valuable revenue for no reason.
The goal is to find the right balance a.k.a the ideal price. Fortunately, researchers and economists have come up with various models that will help you implement the perfect strategy for your company’s circumstances.
This article will serve as a guide to eight of the most widely used pricing strategies nowadays.
Not necessarily the best option, but one of the most popular ones out there is what we call cost-post pricing. The formula is exactly what it sounds like. Here it is:
Cost + Markup (%) = Price
Basically, we add a markup amount to the total costs of what we are trying to sell. This new sum is now our market price. Note that the markup percentage varies depending on the nature of your business.
Even though this strategy entails a large profit margin, it doesn’t guarantee one. This is because it does not consider market factors such as competition or demand for your product/service, which could play a large role in increasing or decreasing market value. To illustrate our point, if you’re selling backpacks and stationery, then “Back to School” season could trigger a huge demand for your products.
Competitive pricing is pretty self-explanatory. As the name implies, the term refers toå businesses looking at their competition as their main source for setting their own prices.
There are two ways to go about this. The first is to place your products/services at a slightly lower rate than that of your competitors to attract price-sensitive customers who prioritize their budget above all else. In this case, part of your branding could revolve around the idea that you are more budget-friendly and accessible. On the other hand, you could price your products/services at a slightly higher rate than that of your competitors signaling that what you are selling is of higher quality.
In a nutshell, price skimming is when you have the privilege of charging the highest possible price for your product/service than gradually lowering it as time goes on. This aggressive approach only works if you are introducing a high-end innovating product/service into the market.
This model is most commonly used by tech companies as their products become more outdated taking into account the exponential growth of technology. Think of how much a DVD player used to cost in its early days versus what it is worth nowadays.
As opposed to price-skimming, penetration pricing is when you charge the lowest possible rate for your product/service and then gradually increase it over time. This method comes in handy when you are setting your foot into a highly-competitive market and your only way to attract customers is because of your affordability. This will motivate consumers to switch brands making yours more and more established.
Penetration pricing relies on the loyalty of your customers so one issue you might face is when disloyal value-shoppers will let you go after noticing a price increase.
The ideal pricing strategy for most companies is value-based pricing. This is when you set the value of a product/service primarily based on what your customers perceive its worth to be. In other words, you don’t have to increase or decrease your price out of the blue, but instead, aim to match what consumers think it should be.
Here are the steps you need to take to follow value-based pricing:
- Collect data on your competitor’s consumer behavior with regards to pricing.
- List everything and anything that makes your product/service stand out from the rest.
- Come up with a reasonable financial value on the above-mentioned differences.
- Justify the newly added value to potential customers.
Loss Leader Pricing
Loss leader pricing may initially seem like it is destined to fail even though that is far from true.
To put it briefly, loss leader pricing is when a company intentionally sells a product/service at a very low rate, sometimes even equal or lower than its cost of production, in hopes of attracting customers who will later buy the other higher-priced product/service bringing in the actual revenue.
Marketing “bundle” deals help companies sell more than one product/service much faster than they would otherwise. They are usually targeted at customers who are willing to pay extra upfront for additional offerings.
This beloved business strategy is what is technically known as “Bundle Pricing.” It is when complementary products are sold together whilst sharing a single price.
Last but not least, we have anchor pricing, which relies on the art of comparison and anchoring cognitive bias.
Think about a discounted price displayed right next to its original price, highlighting the savings one might gain by not missing out on this limited and timely offer and instead of making the purchase right away before it is too late.
In conclusion, it is highly recommended for companies to put in the time and effort and plan their pricing strategy in advance. Yes, there is no “one size fits all” solution but it is well worth it to take into consideration the targeted audience, the type of product/service you are trying to sell, and the current state of the market as they all play a role in determining your profit.
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This is a great article. I’ve been looking for a way to price my products, and this article has given me some good ideas.
I really like this article because it touches on a lot of different pricing strategies companies can use to set their prices, and it explains in a way that’s easy to understand. It’s great for beginners who want to learn more about pricing.
I also like that they give an example of how to use each strategy, so you can see how it works in practice.
I’ve read it twice, and I’ve learned so much about pricing strategies.
This is a great article. I especially like the section on customer value, where you explain how to figure out how much to charge for your product or service.
This is such a great article! I’m a big fan of the pricing strategy tips and tricks you’ve shared here. I especially love the section on discounting, because I think it’s always so hard to decide when to do it and how much to do. Thanks for sharing your insights!