Pricing Strategies

When looking at ways to affect and improve profit there are lots of areas that you could focus on.  All of the activity in your Profit & Loss Account is ultimately added up to equal profit – these are a lot of components to think about.

So where do you start?

Well, naturally, some areas are easier to affect internally than others, for instance you’re almost always in control of your prices.  This means it’s an easier area to manipulate than your marketing activity and the attraction of new business, for instance.

So, when it comes to pricing, how do you get it right?  What is the right price for your service or product?

That’s actually a really difficult question, as there are lots of factors to consider, like:

  • Costs to produce and deliver your product or service
  • Customers willingness or ability to pay the price
  • The market in which you operate, or your products/service falls
  • Competitors in the market
  • Margin, how much you’ll make on the product or service

Let’s have a look at some strategies you can refer to when assessing your own prices.

Economy Pricing

This strategy attracts people who are price conscious, it’s no frills products or services at the most basic price.  This strategy is used a lot by supermarkets; they mass produce large quantities of items to take advantage of economies of scale, then sell products for a low price.

This can be a dangerous strategy for small businesses, as they often don’t have the demand to be able to take advantage of the economies of scale in production costs.

Psychological Pricing

This strategy uses techniques to encourage customers to purchase based on emotion, not logic.  For example pricing a product or service at £95 instead of £100. 

People tend to only see the first number, so the fact that there’s very little difference between the two numbers helps lock customers in.  The idea is demand is increased because there’s the illusion of value for money.

Bundle Pricing

This is where a business sells products for a lower rate when bought together, than they would be if bought individually.  Meal deals are a good example of this one.

The idea is customers feel as though they’re getting more for their money.  And the businesses make profit on their higher priced items, which make up for potential losses on lower priced items.  This is a good strategy to use to reduce inventory, particularly if a product is coming to the end of its life cycle.  The business then reduces inventory and storage costs.

Penetration Pricing

This strategy attracts buyers by offering reduced prices to competitors in order to attract customers to the product or service.  This, in turn, increases customers and market share by drawing attention away from competitors and increasing brand awareness.

This is a risky strategy for small businesses, as it can result in selling a product or service at a loss.  The long term view is to increase the cost to make it more profitable for the business, but the business has to ride the low profit/loss rollercoaster for some time first.  And not all companies can afford to do this.

Premium Pricing

For this strategy businesses set higher prices to customers because they have a product or brand that people will pay for, or can’t be competed with.  This is a good strategy if you have competitive advantage in the market in which you operate.

Businesses have to create the perception of value with this strategy, so customers will buy into the higher price tag.  This means high quality products or services, packages, customer experience, marketing strategy, in office/store décor will have to be evident.  Apple is a good example of this strategy in action.

Skimming Prices

This is a strategy often used in the tech industry when new inventions are brought to market and initially have no competitors.  During the initial stage of a product or service launch prices are set as high as possible, then they’re lowered gradually as competitors appear in the market.

Businesses maximise sales and profit on the products for early adopting customers, and the illusion of quality and exclusivity is created.  It also helps to recover development costs (although R&D tax credits should be used to help with this too).

Promotional Pricing

For this strategy businesses offer short term discounts on products or items, this can be to generate excitement about a product.  With this strategy customers are incentivized to buy now and not wait – this is the FOMO strategy (fear of missing out).

The best examples of this strategy is Buy One Get One Frees, 3 for 2 offers and vouchers for discounts when buying other items.  This strategy has the potential to cut into profit margin, as products are sold at discounted prices or given away for free.  This can be a risky strategy for small businesses.

Value Pricing

This strategy is based around what the customer will pay for the product or service.  Customers can get excellent value using this strategy, and customer loyalty can be driven as a result.

The fashion industry often uses this strategy; people perceive great value in designer goods, and are willing to pay for that value.

Optional Pricing

You will all know of an example of this strategy, even if you’ve not actually thought about it in too much detail before.  For this strategy an item is sold at a heavy discount, in order to hook the customer into repeat business for buying additional products or services linked to the initial item.

For example, electric toothbrush manufacturers sell the actually brushes at an accessible price.  Once purchases they then charge a premium for the toothbrush heads to use with the brush.  This means they earn a low profit on the initial item, and increased profits on the subsequent items.

The printing industry is another one that uses this strategy.  The cost of printers can be quite low, but the ink is where the companies have you hooked.

Demand Pricing

This is where businesses flex their prices based on the demand for the products or services.  The travel industry uses this strategy, it’s why the price for a holiday is much higher when the kids are off school to term time. 

The travel industry will also use algorithms to move prices based on demand; if demand goes up, so do the costs of flights or hotel rooms.

These are just ten examples of potential pricing strategies you could adopt in your business.  It’s by no means an exhaustive list.  And your business’s strategy will somewhat dictate which strategies you could potentially use, and others that you absolutely couldn’t use.

Pricing can have a huge impact on your profit, so we recommend thoroughly costing and investigating any potential pricing strategies you might implement.  If this is something you’d like our help with, why not get in touch.

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