It’s all good and well to have a brilliant team and an even more brilliant product – you still need to sell it. Over and over again. And to do that effectively, you can’t just stick it on the market and hope for the best. You need to know about the different types of pricing strategies, and then pick the one that is best for your competitive market so that you maximise profit.
How do you pick the right price strategy?
Good question! Choosing from the different pricing strategies is going to be down to the business manager, who weighs up a myriad of factors.
- Your competitors’ prices
- The costs of producing and distributing the product
- The correct approach for marketing
- And the demographics of the people who you’re properly targeting.
Once all of these factors have been properly weighed up, you’re probably going to be selecting one of the following major pricing policies:
1. Premium Pricing Strategy
If you’ve got something brand new to bring to market and confidence is high that it’s going to out-perform what your competitors are already selling, premium pricing is for you.
Effectively, you’re going to be charging more than what is already on the market – even if that can only be an initial strategy at the beginning of a product’s cycle.
To make it work, image is everything – so that in the consumer’s mind, they’re getting value for their bigger spend. It means the perception of high quality must be consistent to back up that image. Excellent packaging, staff uniforms, and the best website designs…every step in the process should have attention to detail.
2. Price Skimming Strategy
Price skimming is different to premium pricing in the sense that prices are high, but you’re merely taking advantage of a new product when there is little else on the market. Once competitors join the fold, prices will need to drop.
3. Penetration Pricing Strategy
This strategy is vastly different to the above two, in the sense that your consumers are going to think they’re getting a much better deal from you compared to what they could buy elsewhere. It’s a move to drum up awareness, and also an appeal to the concept of ‘give it a try’.
It might hack away at the potential profit, but by effectively ‘penetrating’ the market, gains through price can be clawed back later in the product cycle.
4. Competition Based Pricing
Competition based pricing is exactly what it sounds like. Since your customers will be comparing your pricing, analysing your competitors pricing is a critical step in order to set competitive price points. This is especially true for established types of products, as there tends to be a price expectation and convergence. Local services still need to be aware of competition pricing as most people will get three quotes for plumbing services for example.
5. Economy Pricing Strategy
Economy pricing means that profit is very much factored in – but it is kept to an absolute minimum. To make money with these low prices, you’ll need to be selling a lot of the product – like K Mart and Coles manage to do.
6. Psychological Pricing Strategy
With all of the different types of pricing strategies listed above, you’re basically appealing to a consumer’s common sense. But with psychological pricing, you’re appealing to emotions instead.
A great example is a product at $9.99 rather than $10.00, where even though a consumer basically knows the product is $10, they’re still inclined to think $9.99 is actually cheaper.
7. Cost-Plus Pricing Strategy
Otherwise known as cost-based pricing, this strategy involves adding a fixed amount to the price in order to guarantee profit.
It sounds like a smart move, but price consulting experts warn against a cost based pricing strategy. Firstly, it’s almost impossible to set an amount or a percentage. Second, if the selling price is dependent on costs, then successfully reducing those costs results in a lower price – which affects profits. But there are actually at least 3 other reasons not to use cost-plus pricing as well.
The Final Word: Pricing Strategies Are Crucial To Profit Margins
Price strategy is never just a light bulb or thought-bubble moment, but the result of a business coming up with exactly the right approach for their brand, market and product. Do you know any more marketing pricing strategies that we haven’t mentioned, or you just want to join the conversation about how businesses go about thriving through knowing how to set a price? We’d love to hear from you.