When you’re first starting out, it can be difficult to set prices for your products. Although pricing can be a difficult problem, it is also a crucial one to solve. One of the biggest factors that determines a business’ future revenue is its pricing strategy. Let’s take a look at the basics of five well-known pricing strategies.
This strategy is all about penetrating a new market and gaining market share quickly. It involves enticing customers by offering consistently low prices on commonly purchased products. Market-competitive pricing often involves a business selling products below a break-even point and, in some cases, below variable cost in order to maximise sales throughout. At its most extreme, this is not a viable long-term strategy although it can be an effective way to build a large customer base in a short space of time. One downside is that the customer base you initially build may be fickle and highly price sensitive – some of those customers will disappear when you later raise prices to more sustainable levels.
Premium pricing is the polar opposite of market-competitive pricing. This model involves charging higher prices than competitors are charging for comparable, but not identical, products. This strategy is often adopted by high-end and luxury retailers in a range of industries, from grocery stores to car dealerships.
Premium pricing works on two levels. Firstly, higher prices allow a business to discriminately select high value customers. Secondly, higher prices may signal that a product or store is higher quality than a lower priced competitor. While premium pricing does increase revenue per item, it is important to remember that this pricing strategy locks out a large base of value-oriented customers. Some retailers overestimate the profitability of premium pricing, failing to factor in the necessary marketing expenditure to maintain the product’s or store’s premium image.
This strategy is similar to market-competitive pricing in that the focus is on stimulating consumer demand via low, competitive pricing. However, while market-competitive pricing is a short-term measure commonly used to create market share and promote new businesses, economy pricing involves a long-term commitment to everyday low prices.
Stores that engage in economy pricing will still struggle to compete with market-competitive pricing; this is because economy pricing involves calculating a long-term, sustainable minimum price for each product and using this as a starting point in setting storewide prices. Businesses that engage in economy pricing will typically invest in new business models that enable them to deliver “no frills” service or to otherwise reduce their operating costs to the absolute minimum. This pricing strategy is often difficult for smaller businesses to implement as cost-cutting measures typically rely on economies of scale.
Behaviour-driven pricing (or ‘psychology’ pricing) involves using psychological techniques to adjust pricing in a way that stimulates customer demand. Many retailers use these strategies – a common example is setting prices one cent below a whole number ($79.99 instead of $80) to create the impression of a lower price. Other pricing techniques which take advantage of human behaviour include loyalty schemes, multibuy offers, bundles and ‘value pack’ sizing.
This strategy involves charging higher or lower prices depending on the consumer. This may be to take advantage of natural customer groupings, to avoid spoiling a ‘high value’ brand or to reward high volume customers.
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.