The Many Options in Pricing Strategy – Which One Suits You?

To set prices for your products, you need to consider your profit margin, market demand, your competition, customer expectations and more.  So let’s take a look at various pricing strategies and when and how you may apply them.

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Pricing Strategy –  Some Common Options

Over the many centuries that products have been made and sold, merchants have evolved several different pricing  strategies. From the basic principle of just adding a percentage to the cost of making the product to complex pricing methods that can be applied at different times, at different stages of the product life cycle.

Cost-plus Pricing

This is a simple pricing strategy. You just calculate the cost of manufacturing/procuring the product, add other overheads, and total it up. You then add a margin to this cost, to arrive at the price. You need to be careful while setting the margin. It can be a difficult task to factor in all the costs. Experts advice that you add a margin of 5 to 10% to be profitable.

Competitive Pricing

In this type of pricing strategy you consider how your competition is pricing identical or similar products. You then set prices accordingly. Your options:

  • Premium Pricing: You set prices above competition. In order to do this you need to create an exclusive brand perception for your product. Your product needs to stand out in some special way from that of competitors. If you can get customers to set a higher value on your brand, you can set premium pricing.
  • Economy Pricing: You sell your products at low prices. This can be done in a market where there is high demand and repeat custom for the products. This pricing strategy is generally adopted by big box stores where they sell groceries, household items, and other staples at prices lower than the market prices. Economy of scale  helps them do this as they can sell in huge volumes.

Market Penetration Pricing

This pricing strategy is used to gain a foothold in a competitive market. This includes pricing methods like introductory offers. Products may be offered at low prices or there may be an offer of a free associated product. This helps the new brand gain customer attention and  lure them away from established brands. Once the demand for the product stabilizers prices will be raised.

Price Skimming

This is also an introductory pricing strategy, at the opposite end of penetration pricing. This is used in products where competition is scarce or the brand has a high value image among customers. Generally used in technology products where customers compete to be the first to buy a brand new product or a new release. In this pricing model, when the product is introduced, it is sold at a premium price. Early adopters rush to buy the product as soon as it is released The brand skims the top layers of customers willing to pay high prices. As the demand slows down, prices go down.

Loss Leader Pricing

Loss leader pricing is used to offset a slow down. It is applied to bring customers into the shop or to increase sales of associated products. For instance, a product is sold at cost price or even lower than the cost price. This induces shoppers to buy the product item. Once committed to buying, they then generally shop for more items to buy.. 

Psychological Pricing

This pricing strategy uses psychology.  This encompasses several pricing strategies that play with the minds of customers. 

Charm Pricing: This is the common practice of reducing price by a cent, to reduce the leftmost digit. For instance, pricing an item at $4.99 rather than $5. We generally give more importance to the leftmost digits in prices, and so this price is presumed to be near $4 rather than $5, even though the opposite is true.

Prestige Pricing: This is the exact opposite of charm pricing. You round off the price to the next higher number. To illustrate, you round off $54.78 to $55. As whole numbers are more easily processed, the rounded number is more enticing, This works in luxury or fashion products, where customers are willing to pay higher prices.

BOGOF:  Buy One Get One Free offers. This pricing strategy utilizes common greed. Who doesn’t like getting something for free? However, as this tactic has been used so often, merchants are now using variations like buy one get 10% off the next purchase, or buy 1 and get 2 free.

Price Anchoring: This involves fixing the customer’s mind on the first price. One practice that applies this tactic involves creating double pricing labels, with a previous higher price,  and a highlighted current lower price. Even if the general market price for the product has gone down, general customer perception is that they are getting a bargain. 

Bundle Pricing

Offering a set of bundled products at a lower price than the total cost of the products in the bundle. Even if the price difference is small, customers are always induced to buy products at a bargain. This is a good way to move slow moving products when bundled with high demand products.

Captive Pricing

In this pricing strategy you are induced to buy a main product at an economical price and then you have to buy support products frequently to make use of the main product. A prime example is printers. The printer is priced economically. However the consumables like the Ink cartridges you have to buy are expensive. Nevertheless, to make use of the printer you have to buy ink cartridges. So now, the vendor has a captive customer base for consumables.

There are numerous pricing models. Each pricing strategy has its own advantages and disadvantages, depending on when and how you use it. You can apply different pricing strategies to the same product at different times.

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