Deciding how to price the product or service you’re selling can be one of the most difficult tasks in business. There are so many options available to brands looking to get their products out there, and a whole host of different ways of pricing those products in the hope of attracting loyal customers.
Pricing strategy offer business leaders insight into how their pricing decisions might be received, enabling them to decide which methods of price optimization would work best for their target demographics.
What is a Pricing Strategy?
Pricing strategies are different ways of pricing products or services, based on several potential benefits. Many traditional ways of pricing, such as value-based pricing and cost-plus pricing, are very well known and have been around for decades. But these aren’t the only ways of pricing products.
There are now several other, lesser-known strategies that many brands are using to attract key demographics and expand their market share. These include the likes of penetration pricing, dynamic pricing, and price skimming.
Types of Pricing Strategies
Start looking into different pricing strategies and you’ll soon find yourself spoiled for choice, with so many different options available. But how do you decide on the best pricing strategies for your brand? The answer lies in the results you’re hoping to achieve, and of course, your goals can change over time.
Take a look at some greatly simplified descriptions of the most commonly used concepts below to explore the advantages of some well-known pricing strategy:
Value-Based Pricing
Value-based pricing centers around the perceived value of a product or service, to the intended customer. It’s a little more difficult to work out than competitor-based pricing, but it can be more advantageous when used correctly.
To calculate value-based pricing, brands need to analyze the pricing of their competitors and understand how their product differs from those of similar companies. A financial value should be applied to any differences, and any negatives should be subtracted from the final score.
Competitor-Based Pricing
Competitor-based pricing takes a company’s main competition into account and seeks to outdo them where pricing is concerned. Pricing is therefore based on what similar brands are charging for comparable products or services.
This is an easy strategy to employ, as it doesn’t require a huge amount of statistical analysis. However, competitor-based pricing can make it difficult for a company to stand out from the crowd, so it may well hold them back in terms of growth.
Cost-Plus Pricing
Cost-plus pricing is one of the most basic pricing strategies there is, but it still works well for a large number of brands. The strategy involves calculating the cost price of a product and then simply adding a figure to that cost price to establish what price the product should be sold at. The sum added is ordinarily a percentage of the cost price, and this will determine the profit involved in selling the product.
Price-Skimming
Price-skimming strategies are perfect for brands looking to attract attention and position themselves as a quality company. The strategy involves setting prices at a high figure initially to create a buzz around a product – particularly while it’s brand new. Over time, this high price can be gradually reduced, making the product available to new layers of the market who might have lacked the budget to make a purchase initially.
Economy Pricing
Economy pricing (also known as volume pricing) involves setting a relatively low price point for a product or service while making sure that this low price point remains profitable due to the volume of the product being sold. When products are sold at lower price points, it encourages more buyers to make a purchase, therefore increasing the overall number of sales.
This opens up new opportunities for a company to benefit from wholesale purchasing at reduced rates, decreasing the cost price of the product and ensuring the profitability of the low price point.
Penetration Pricing
Penetration pricing is widely used in the most competitive industries. It sees new brands position their products or services at low price points, in order to attract attention and encourage buyers to try a different brand. Over time, and once a loyal fanbase has been established, these prices are gradually increased to boost the brand’s profitability. While this strategy works well for some companies, it can be a risky one when the time comes to increase pricing.
Dynamic Pricing
Dynamic pricing sees brands increase or decrease the price of certain items in line with changing demand. While it makes sense in economic terms, this strategy isn’t usually the best in terms of customer experience.
Dynamic pricing certainly works well for some products, but it can have a negative effect on customer satisfaction. Consumers might feel alienated by constantly changing prices, particularly if the product is a subscription-based service or similar.
How to Conduct a Pricing Strategy Analysis
Before any brand sets a price for its products, it should conduct a thorough pricing strategy analysis. This analysis will follow several steps to calculate the best possible price for a product, in terms of the sales and profitability targets that the company has in mind. Here’s how it works:
Step 1: Determine true cost of product
The first step is of course to establish the true cost price of a product. Brands must fully understand what their products cost to produce before any calculations can be made on the potential profitability of these items.
Step 2: Understand customer response to pricing
Customer analysis comes next, and customer responses are key here. Brands should research how customers are responding to certain price points, evaluating how these responses differ as prices increase or decrease.
Step 3: Analyze competitor pricing
Competitors will always stand in the way of a brand achieving maximum profitability on any product, so they should play a role in any pricing strategy analysis. Companies are advised to complete detailed research into the pricing strategies of their competitors, to understand how competitors’ products are priced and how customers feel about these prices.
Step 4: Review legal/ethical pricing constraints
There’s one final step to consider before a brand can arrive at its optimal price point for any product. Brands should, at this point, review any pricing constraints that could apply to their products or their industry as a whole. These might be legal in nature, or they could be ethical. Consider how pricing will be perceived by customers before making any changes.
Benefits of an Effective Pricing Strategy
An effective pricing strategy provides endless benefits, no matter what a brand is selling or who it’s selling to. The most effective strategies allow companies to achieve the best possible level of profitability for their products. In doing so they enable companies to continue expanding and building on their successes.
Adds value
The most effective pricing strategies put a value on products, cementing a brand’s position in the minds of consumers. Well-thought-out pricing strategies enable a company to position itself as a high-quality brand, selling products that can be relied upon. This adds value to the brand itself, ensuring that future products can be launched and promoted with ease.
When a brand is seen as a high-value company, it stands a far better chance of achieving good sales figures for any new product lines it chooses to launch. Thanks to its strong positioning, it’s also better equipped to increase prices over time – without alienating existing purchasers.
Persuades customers to buy
Pricing strategies can be used as a form of promotion – often very effectively. By pricing a product strategically, a brand can start to explore new markets and attract previously unknown demographics, thus expanding its market share considerably.
Optimizing prices allows companies to persuade existing customers to purchase new versions of products, or upgrade their existing purchases, further improving the profitability of a product line. This benefit also applies to brands offering subscription-based services. Such brands can easily attract greater numbers of users, simply by pricing their subscriptions in a strategic way that is centered around customer satisfaction.
Increases customer confidence in products
The perception of a product’s value and its true value aren’t one and the same. Pricing plays a strong role in how products are perceived, and therefore how customers value them. Great pricing strategies can therefore be used to sway customers’ opinions, giving them the impression that a product is of a higher value than they might otherwise have thought.
Well-designed strategies can be used to boost customer confidence in products, encouraging them to remain loyal to a chosen brand for prolonged periods. This boosts customer retention and also encourages existing customers to increase their average spend with a company once their confidence in the quality of the brand’s products grows.
Explore the Potential of Smart Pricing Strategies
A great pricing strategy can make a huge difference to the potential of any company, determining whether newly launched products sell out in minutes or are left languishing on shop shelves. Explore the opportunities of different pricing strategies to see how your pricing could be optimized to improve profitability, customer retention, and growth potential.
If you’d like to learn more about how to optimize your pricing with Vendavo solutions, get in touch with our team.