Pricing a product is one of the most important aspects of your marketing strategy.
It’s important when you are considering your price that you realise it is not for yourself, but for your target customers.
All pricing strategies are two-edge swords.
What attracts some customers will turn off others.
You cannot be all things to all people.
But, remember you want the customer to buy your product, which is why you must use a strategy that’s appropriate to your target market.
Generally, pricing strategies include the following five strategies.
Cost plus pricing involves adding a markup to the cost of goods and services to arrive at a selling price.
Under this approach, you add together the direct material cost, direct labor cost, and overhead costs for a product, and add to it a markup percentage in order to decide the price of the product.
One advantage to using the cost plus pricing method is it’s Simple.
It is quite easy to decide a product price using this method.
A disadvantage of Cost Plus Pricing is it Ignores competition.
A company may set a product price based on the cost plus formula and then be surprised when it finds that competitors are charging substantially different prices.
This has a huge impact on the profits that a company can expect to achieve.
The company either ends up pricing too low and giving away potential profits, or pricing too high and achieving minor revenues.
Competitive pricing is the process of selecting strategic price points to best take advantage of a product or service based market relative to competition.
This pricing method is used more often by businesses selling similar products, since services can vary from business to business, while the attributes of a product remain similar.
Businesses have three options when setting the price for a good or service: set it below the competition, at the competition or above the competition.
Above the competition pricing requires the business to create an environment that warrants the premium, such as generous payment terms or extra features.
A business may set the price below the market and potentially take a loss if the business believes that the customer will purchase additional products from their business once the customer is exposed to the other offerings.
When a company is unable to anticipate competitor price changes or is not equipped to make corresponding changes in a timely fashion, a retailer may offer to match advertised competitor prices.
This allows the retailer to maintain a competitive price point for those who become aware of the competitor’s offer without having to officially change the price within the retailer’s point of sale system.
Value-based pricing is a price-setting strategy where prices are set primarily on a consumers’ perceived value of the product or service.
Companies that offer unique or highly valuable features or services are better positioned to take advantage of value-based pricing than are companies with common products and services.
The value-based pricing principle applies mostly to markets where possessing an item enhances a customer’s self-image or delivers unrivaled experiences.
Price skimming is a product pricing strategy by which a business charges the highest initial price that customers will pay and lowers it over time.
As the demand of the first customers is satisfied and competition enters the market, the business lowers the price to attract another, more price-sensitive segment.
Price skimming is often used when a new type of product enters the market.
The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market.
Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market.
Generally, this technique is better-suited for lower-cost items, such as basic household supplies, where price may be a driving factor in most customers’ production selections.
Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service.
Penetration pricing includes presenting a low price for a new product or service during its initial offering.
The lower price helps to lure customers away from competitors.
This marketing strategy relies on the idea of low prices making a customer aware of a new product.
The price entices the customer to try the new product.
Penetration pricing, similar to loss leader pricing, can be a successful marketing strategy when applied correctly.
It can often increase both market share and sales volume.
Additionally, a higher amount of sales can lead to lower production costs and quick inventory turnover.
The major disadvantage, however, is that an increase in sales volume may not lead to a profit if prices must remain low.
Also, if the low price is part of an introductory campaign, curiosity may prompt customers to choose the brand initially, but once the price begins to rise or levels with a competing brand, they may switch back to the competitor.