Too many businesses establish their prices without conducting proper research. They often analyse the cost of their products (COGS) alongside the rates of their competitors, then adjust their selling price by a few pounds. Taking the effort to improve product pricing can be a significant growth factor for expanding thebusiness.
Pricing strategies consider:
- Demographics
- Ability to pay
- Market conditions
- Competitor activities
- Trade margins
- Input costs
The importance of pricing strategies
An efficient pricing strategy helps strengthen your brand by building trust with your customers. In addition, they help reach your business objectives. Pricing is essential because it determines the value of the product you’re manufacturing and what customers use.
It is the measurable pricing point that tells buyers if it is worth their time and money.
Different types of strategies
Premium pricing
A premium pricing strategy, also known as prestige pricing and luxury pricing, is when businesses charge a high price for their products to project the idea that they are high-value, luxury, or premium. Premium pricing is based on a product’s perceived worth rather than its actual value or manufacturing cost.
If your business is successful, premium pricing will result in higher profit margins. A higher price per unit equals a bigger profit per unit sold.
Premium pricing also increases the value of your brand and the impression of your business.
It is dependent on an impenetrable USP (unique selling point). Without this, you can’t justify the higher price tag for your goods.
Your ability to sell your product to a large number of people is limited with premium pricing. While this is less of a worry for SaaS (software as a service) firms than it would be for, say, fashion brands, you are still intentionally pricing out some of your market shares.
Pricing at a premium exposes you to undercutting efforts from competitors, especially if your sector is saturated. If a rival comes along and delivers an equal product/service at a lower price, your premium pricing will work against you.
Penetration pricing
Pricing for market penetration is the opposite of price skimming. Instead of starting with a high price and gradually decreasing it, you take over a market by undercutting your competitors. When you have a solid consumer base, you can increase your prices.
Penetration pricing helps a business’s product or service to be quickly accepted by customers.
This pricing strategy provides a high volume of sales, allowing a company to gain economies of scale and decrease its marginal cost.
Customers who find a good deal on a product or service are more likely to return to the company. Furthermore, goodwill generates favourable word of mouth.
Customers expect consistently cheap costs when a company employs a penetration pricing approach. They may become unsatisfied and stop purchasing the goods or services if prices continuously increase.
However, low costs can hurt your brand image, leading people to consider the brand as cheap or of poor quality.
Value Based Pricing
This is when businesses set the pricing of their products or services according to what the client is prepared to pay. Even if it can charge a higher price for a product, a business can choose to set its rates depending on customer interest and statistics.
Value-based pricing is a pricing approach that bases prices solely on the perceived value of the product or service issue by the customer.
Businesses that sell unique or valuable products and features are better able to benefit from the value pricing model than companies that primarily sell commoditised goods.
High costs often cause customers to view goods as being of higher quality, increasing the brand value of such products.
If you are going to sell an item for the maximum price, it must be of the highest quality. This raises your manufacturing expenses as high-end goods cannot be cheaply made.
Competitive Pricing
Competitive pricing is based on what your competitors are charging. This can be an excellent approach in the correct conditions, such as a new firm, but it doesn’t allow many possibilities for expansion.
Lower prices: This method can be profitable for firms that can take advantage of economies of scale. Lower price points can also be used in a loss leader strategy, which is not profitable but attracts new clients.
Higher prices: The prices of your items or services in your market are higher than those of your rivals. Businesses that provide more features or perks than their competitors use this method.
Price Skimming
Price skimming is when a company charges the highest possible price for a new product and then gradually lowers the price as the product gets less and less popular.
Charging the highest initial price at the launch of an innovative product can help your business in recovering research & development expenses.
Price skimming is an efficient method of segmenting your customer base. Lowering the price over time will attract more price-sensitive customers.
Cost-Plus Pricing
Cost-plus pricing focuses on the cost of manufacturing your product or service. It is a typical method among small enterprises where other parts of manufacturing must take priority.
It guarantees that the entire cost of producing a product or service is covered. By expanding the arbitrary margin, businesses can create a cushion against unforeseen costs.
Cost-plus pricing is not appropriate for most businesses unless you are unable to dedicate more time to the most important aspect of your business. It should not be used by any software or SaaS company since the value you provide is typically more than your cost of doing business.
Economy Pricing
The idea is to price a product lower than the competitors and recoup the difference through increasing sales. It contributes to the company’s existing market share.
Even if the business cuts its marketing/advertising and overhead expenditures, it will still make a considerable profit. This means that economy pricing can help you make money regardless of your investment expenses.
Economy pricing helps pay the fixed cost of shipping large quantities of goods. In such cases, it is preferable to sell a large number of low-value products to pay a portion of the cost.
How to determine the right strategy for you
To price your products/services so that they generate cash flow, you must be clear on the following:
- The cost of manufacturing your goods
- The value of your products/services to your customers
- How much money do your customers have and prefer to spend
- Your company’s total operating costs
- What key expenditures must be covered in the short term (e.g. loan repayments)
- How your competitors’ products are priced