Balancing Pricing with Ordering Costs
Pricing strategy is an extremely important factor that contributes to a business’ overall revenue potential. Implementing prices that are considerably low may attract the customers interest, but it may also fail to offset behind-the-scenes expenses attracted by manufacturing costs, machinery costs and ordering costs.
At the same time, implementing exceptionally higher prices might seem to intuitively deter customers, but it may also do the opposite by sending a message about the exceptional quality of the goods being sold.
Pricing strategy is therefore a complex matter that requires careful attention and finding a balance between these two extremes. Below, we summarise the various methods for ensuring your company sets the most appropriate prices to attract and retain a customer base, while accounting for factors such as production, distribution and ordering costs.
Economy Pricing Strategy
This strategy seeks to attract price-conscious consumers by reducing expenses associated with marketing, production, distribution and ordering costs. In doing so, the company is able to provide exceptionally low prices to the customer, increasing sales and therefore driving profitability.
While this method has worked particularly well for American retailers such as Wal-Mart and Target, it may be risky for smaller businesses who lack the same level of sales volumes as these larger companies. The smaller volume of sales means that smaller companies may end up inhibiting profit if their prices fail to offset their own production, distribution and ordering costs.
An alternative but still effective route may be to offer selective discounts to your most loyal customers, to encourage their return in more of a controlled sense, which will prevent the risks associated with large scale discounts.
Alternatively, you might consider the strategy at the other end of the spectrum generally known as the Premium Pricing strategy. Here, a company will set higher prices than their competitors in order to attract customers by conveying a sense that their products are exceptionally high quality.
This strategy works best for smaller companies selling unique products, and it is most effective when used during the earliest stages of introducing a new product. The higher cost is intended to make customers perceive that what they are buying must be “worth it”. For this reason, manufacturers must ensure they are providing high quality goods.
Additionally, companies using this method should make sure they implement adequate marketing strategies to ensure the customer perceives that they are paying for an exceptionally valuable product.
Price skimming is a method that may go some way toward finding a middle ground between these first two options. This method sets prices higher during the introductory phase of introducing a new product, and later reduces the price as other competitors appear on the market.
Another option is to implement a strategy of bundle pricing. With this method, customers are offered the chance to buy multiple products at a reduced cost compared with the price of buying the same items individually. Bundling products in this way tells the customer that they are saving money, while getting more. This is a great way to increase the value perception in the eyes of the customer, and it is also an excellent method for getting rid of excess or obsolete stock.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.