I have been thinking about pricing strategies lately; about how most businesses based their prices for their products and services that they offer and provide. If you own your own business, or you are an entrepreneur of some kind especially when you are still new in the industry, on whatever craft you are involved in, pricing strategies are something that you become more interested about. We want to make profit, but we also want to be reasonable on how we approach and set our prices for our products and services.
So, how do you determine how much to charge for your products for instance? There are many factors to consider when developing your pricing strategies for both short-term and long-term business objectives. For instance, maybe you are in a situation where you need to use a pricing approach that reflect the value you provide versus your competitors, or because your pricing approach need to match what the market will truly pay for what you are offering. Perhaps your pricing strategies need to support your brand and enable you to reach your revenue and market share goals, and maximize your profits.
Just recently, I did a little research of my own on the various pricing strategies that most entrepreneurs and business owners use, and why these strategies can vary from one business to another. There are several approaches or strategies a business can take to setting prices for their products and services. And these pricing strategies can based on various factors; cost-based pricing, cost-plus pricing, competitor-based pricing, value-based pricing, customer-based pricing, penetration pricing, price skimming, loss leaders pricing, predatory pricing, and psychological pricing.
- Cost-based Pricing
This pricing strategy is determined by adding a profit amount on top of the cost of making the product. You set a price by adding a fixed amount or percentage profit to the cost of making or buying the product. It is the most common one, somewhat old-fashioned pricing strategy, and most businesses use this pricing strategy to this day. Cost-based pricing strategy usually works because customers are not too concerned on what it costs to make the product or come up with the service, rather are interested in what value and benefit the service and product provides them.
- Cost-plus Pricing
This pricing strategy is widely used by retailers and the setting price is determined by adding a specific dollar amount markup to a product’s unit cost to make profit. Let’s say the unit cost of your product is $ 5, and you want to make sure to make an additional of $ 3 on top of each unit cost, so in order to do that you have to set your product at the price of $ 8. The problem of cost-plus pricing strategy is that it may lead to products being priced un-competitively.
- Competitor-based Pricing
This pricing strategy is mainly influenced by the price set by competitors. Often customers are faced with a wide choice of whom to buy from – the cheapest provider or the one that offers the best customer service, but usually they are always mindful of what is a reasonable or normal price in the market. Most businesses operating in a competitive market do not have sufficient power to be able to set prices above their competitors. They use “going-rate” pricing which basically is a setting price that is in line with the prices charged by their direct competitors. The good thing about this method is that prices are not an issue. The issue is that businesses need to find other ways, non-price methods to attract customers.
- Value-based Pricing
This is a pricing strategy that is based on value giving. It is the setting of a price for the product or service based on the benefit it provides to consumers. Businesses that offer unique or highly valuable and quality products or services are better positioned to take advantage of value-based pricing than businesses whose products and services are lower in value and relatively indistinguishable from those of their competitors. At the end of the day, doing business is about providing value. If you want to make money, you have to provide value. And if you want to make more money, it means you have to provide more value. Because people don’t just buy products or use services; they buy results, and benefits that products or services give. I have share more about this is “The Concept of Adding Value.”
- Customer-based Pricing
Customer-based pricing strategy is determined by what businesses believe customers will be prepared to pay. In this case, the business or company first sizes up its customers to determine how much each customer maybe willing to pay for its product or service and then charges the price each customer maybe willing to pay. This pricing strategy gives the company the flexibility to charge different prices to different customers, higher or lower prices it depends on the size of the customer’s wallet or what he or she is willing to pay. So, the same product can vary in prices depending on the customer’s financial situation. The problem with this pricing approach is that it ends up pushing away those customers who end up paying more than the bargainers.
- Penetration Pricing or Special Introductory Offer
It is a pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy is to attract customers to the product because of the lower price. The aim of penetration pricing is usually to increase market share or sales volume of a product, and provide the opportunity to increase the price once this objective has been achieved. Therefore, in short term, penetration pricing is likely to result in lower profits than it would be if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation, and where demand is based on price flexibility, so a lower price than rival products is a competitive weapon.
- Price Skimming
This pricing strategy involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition usually due to some product features. Such products are often bought by “early adopters” who are prepared to pay a higher price to have the latest or best product in the market. Good examples of price skimming include innovative electronic products in an ever-evolving technology era. Price skimming strategy cannot last for long, the soon competitors launch rival products; it will put pressure on the prices.
- Loss Leaders Pricing
This pricing strategy is used as a method of sales promotion – a sales discount. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of discounted prices products while they are in the store shopping. When a business undercuts its competitors on price, new customers may be attracted and existing customers may become more loyal. So, using this strategy can help drive customer’s loyalty. If the price discount is impressive, it makes sense for customers to buy as many products as they can. Using a loss leader is essential for a short-term pricing tactic for any product.
- Predatory Pricing
With predatory pricing, prices are intentionally set very low by a dominant competitor in the market to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing can be an illegal thing under business competition law in some Countries.
- Psychological Pricing
With psychological pricing strategy, prices are set by using unusual price points. For example, customers will buy something for $8.99, but think that $9 is a little too much. So a price that is one penny lower can make the difference on customer purchasing decision. The aim of psychological pricing is to make the customer believe the product is cheaper than it really is.
And that’s about it; ten pricing strategies that you can utilize today to your advantage for your business’ products and services that you are offering and provide. Each one of these pricing strategies has its own advantages over the other depending on which angle you are focused on. They both work, except maybe for predatory pricing in some Countries.
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