Finding the right balance between sales volume and profit margin is one of the biggest challenges for business owners. When pricing their products, most businesses either conduct a quick spot of competitor research to see what they are charging, while others simply add a percentage on to the cost of delivering the product or service. But there is a more scientific approach businesses can take.
There are six pricing strategies businesses can use to get the balance just right. The most appropriate strategy for your business depending on the position you occupy in the market and the stage of the lifecycle your product or service is at.
We’ve outlined each of these pricing strategies below and included a few examples of how they work in practice…
1. Market penetration pricing
Market penetration pricing strategies are used by new businesses to help them break into existing markets and effectively steal customers from the competition. To do this, the prices of products and services are kept very low and can even be sold at a loss. As customers become aware of the product, the price and profit margin will start to rise.
It’s essential businesses considering this pricing strategy can afford to sacrifice profit initially. Typically, these businesses will have some form of funding in place to support them during this time. Examples of market penetration pricing strategies in practice include buy-one-get-one-free offers and giveaways. They are also used by utility companies and broadband providers offering new customers introductory deals before ramping up their prices.
2. Premium pricing
Pricing can shape the customer’s perception of a brand and that is often the motivation behind premium pricing. Premium pricing often works well for unique or luxury products and services. However, everything else about the business must also support that premium price point. For instance, the design of the product or service, the way it is promoted, where it is sold and even the website design or store décor must reflect the premium price point. If it doesn’t, this strategy won’t work.
Examples of premium pricing include organic coffee, where customers pay far above the market price based on the perceived improvement in taste and quality. Apple also uses a premium pricing strategy, charging higher prices for goods that are perceived to be better than the competition.
3. Economy pricing
The opposite of a premium pricing strategy is economy pricing, where businesses minimise the costs of production, marketing and packaging to keep their costs down. This allows them to charge a low price and maximise sales volumes. This approach is typically used by discount retailers and canned food producers.
While this approach can be incredibly effective for large companies like supermarkets, for smaller businesses it can be quite dangerous as many do not have the sales volume to support such low prices.
4. Price skimming
Price skimming is a pricing strategy used by businesses looking to maximise their profits on new products and services. By setting high prices when a new offering is first introduced, a business aims to capitalise on sales to early adopters and help to create a perception of quality and exclusivity. As rival products are released by the competition, prices will gradually drop to attract the mass market and more price-conscious consumers.
Technology products like the iPhone are prime examples of skimming in practice. At release, Apple products cost a premium, before gradually falling in price as competitors bring out equivalent but cheaper products.
5. Price anchoring
One simple pricing strategy some businesses choose to use is price anchoring. This relies on the consumer’s cognitive tendency to use the first piece of information they see when making a buying decision. By placing premium products and services by those of a lesser quality, consumers perceive the less costly option as the better value, even when that may not be the case.
For example, when placed next to a £100 pair of trainers, a consumer will assume a £50 pair offers much better value, even though the profit margin on the cheaper pair may actually be far higher. This practice is commonly used by online retailers who advertise a carousel of products with higher value items placed next to low-cost alternatives.
6. Psychological pricing
This near ubiquitous pricing strategy relies on the simple premise that consumers are more likely to buy a product priced at £2.99 than at £3.00. Research has shown that this simple tactic really does work. This is due to the fact that consumers focus more on the first number than the last. So, although £2.99 only represents a 0.33 percent price reduction, people feel like they are getting much better value for money. That means if your competitors are rounding their prices up, you may be able to steal a march by using this straightforward strategy.
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