How do successful businesses set the right prices and maximise their revenue? It’s simple: they know which pricing strategies will work. Find out more.
Setting the right price for a product or service determines the profit margin of a business. But it is easier said than done. If you sell your product at a too low price, it may reflect badly on your business. If it has a much higher price than your competitors, you may never reach your sales goals.
Sometimes, pricing has little to do with how much your customers are willing to pay. It is more about how they perceive your product or service. It is essential for businesses to focus on creating efficient pricing strategies to get the most out of their profits.
So, how should you choose the right pricing strategy for your business? Let’s find out.
What is a Pricing Strategy?
A pricing strategy is a crucial component of the marketing mix. It helps you set an optimal price for a product so that it drives maximum revenue and customer satisfaction, and sets you apart from your competition.
Types of Pricing Strategies
As a new business owner, it can be challenging to set the right price. You have to consider the costs involved in manufacturing your product. Or maybe there is a sudden demand surge for the product that you never expected.
Likewise, there are many other factors that can compel you to reconsider your current pricing strategy at some point.
Below are some of the most common types of pricing strategies with examples as well as advantages and disadvantages of each.
One of the best ways to introduce your product in a new market and widen your customer base is price skimming. In this method, you set a high price and eventually lower it.
In the price skimming strategy, you first reach the enthusiasts who will buy the product irrespective of the price. Later, when the demand saturates, you can lower the price. Lowering the price ensures your product is sold to the price-sensitive customer base as well.
When to Choose Price Skimming Strategy?
- Your product is a novel idea with no competitors
- Your brand is already established with a large customer base
Learn more about branding.
Example of Price Skimming
The best-known example of this pricing strategy is Sony. The brand is known for its video game console, PlayStation. The next generation console (PS5) has a few competitors such as Nintendo and Xbox, and it offers a long list of exclusive games than them.
Regardless of the premium price when the new PlayStations and bundles are released, early adopters buy them. Sony later decreases the price when its rivals start offering similar products.
Pros and Cons of Price Skimming
|It can bring early profits and cover marketing and production costs||It is good as a short-term goal and businesses have to know when to start reducing the price of the product|
|Brands can use a price skimming strategy to understand the market situation and segment the user base||It can be detrimental to the brand identity as it may make consumers think that the brand is being manipulative|
In this pricing strategy, brands look into how much the target customers will value the product to pay a premium price. In this case, brands do not lower the price of the product at any later stage. Instead, they add more features that cater to the growing needs of their customers.
When to Choose Value-Based Pricing?
- Your product is more customer-focused than the competition
- Your product is unique in the market
Example of Value-Based Pricing
Apple is one of the top examples of the value-based pricing strategy. They do not sell products. They sell a lifestyle. That’s why their customer base is hugel loyal.
According to Apple Insider, its current smartphone market share is 62%.
Pros and Cons of Value-Based Pricing
|Improves brand identity, making customers feel that high prices make products superior in quality||The production costs are much higher|
|Improves the profit margin||Not great for products in niche markets|
In this strategy, businesses set prices based on the price range of their competitors’ products in a specific market.
When to Choose Competitive Pricing?
- You have similar products to your competitors
- You can offer more features than your rivals to increase the price competitively
- You can increase product orders in bulk by reducing the price
Example of Competitive Pricing
Amazon is one of the most common practitioners of the competitive pricing strategy. It analyses pricing on a large scale and offers products in the lowest range available in the market.
Pros and Cons of Competitive Pricing
|There is a steady customer base with competitive pricing||It can be challenging to cover your manufacturing costs|
|You can utilise other types of pricing strategies with the existing competitive price points||If your competitors are setting the prices incorrectly, it will be detrimental for you to choose a similar pricing|
Cost-Plus Pricing Strategy
In this pricing model, you add a certain fixed percentage to the costs associated with manufacturing or developing the product. The fixed percentage is known as the markup.
The basic formula for this pricing method is
Total Costs + Desired Profit margin (%) = Price of the Product
When to Choose Cost-Plus Pricing Strategy?
- You are a clothing brand or retail store
- You are SaaS (software-as-a-service) or subscription business
Example of Cost-Plus Pricing Model
While there are many clothing brands that follow this model, one brand that does it successfully as part of its value proposition is Everlane.
For every piece of garment the brand sells, it shows the customers the total costs incurred to make it. It also shows how little they charge as its markup price as compared to other retailers.
Pros and Cons of Cost-Plus Pricing Strategy
|It is convenient to set the price correctly for any product as it is logical and much easy to calculate||It does not focus on the customers nor the competition|
|The product cost will always cover the manufacturing costs no matter how high it is||It does not evaluate the fluctuating demand of the product in the market|
Dynamic Pricing Strategy
Dynamic pricing strategy is all about optimising prices of the same product when its demand fluctuates in the market. Sometimes it is also referred to as surge pricing. It is also can become easily complicated to set prices as businesses will need software and machine learning algorithms to do it correctly.
When to Choose Dynamic Pricing Model?
- You sell consumer electronics or software
- You are in the eCommerce business
- You run Google Ads
- You are in the events or hospitality industry (Also explore: What is Event Management?)
- You are new to a market, and you have to outbeat your competitors with less prices and later increase them (Commonly known as the Market Penetration Pricing Model)
Related: eCommerce digital marketing strategy
Example of Dynamic Pricing Strategy
Airbnb is one adopter of the dynamic pricing model. It has its in-built feature called Airbnb Smart Pricing which the hosts can use for their listings on the platform. The tool recognises factors such as location, season and so on, to automatically set the price.
Related: Airbnb Digital Marketing Strategy
Pros and Cons of Dynamic Pricing Strategy
|Offers more pricing control and you can adjust to the competition||It can upset previous customers who bought the same product at a premium price|
|It can solve inventory management challenges, and at times, if you have excess stock, you can sell products at lower prices than your competitors and maximise profits almost instantly||It can get tougher to beat the competition that also uses the same pricing strategy|
Choosing the right pricing model is an essential element of a marketing strategy. It can certainly increase the sales volume your business intends when it comes to maximising profits.
Apart from the most popular ones mentioned today, you can utilise many other pricing models such as the bundle pricing model (for retail brands) and the freemium pricing strategy (for SaaS brands). Each of them has its own place in an effective business strategy. Some successful businesses also combine a few pricing strategies to maximise profits.
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