Most businesses are selling something, whether it's services or goods. The pricing method you use will play a pivotal role in the success of your business. Too high, and you might drive customers away. Too low, and you might be leaving money on the table. Finding the right balance between customers and profits will ensure your business continues to grow.
That's why you need a competitive pricing strategy. There are different types of strategy, and each one lends itself to certain scenarios. This article will explain what a pricing strategy is and why having one can increase your profitability. It will also discuss the various pricing models to help you pick one that will ensure profits on every sale.
What Is a Pricing Strategy?
A pricing strategy is an act of determining the value for your goods or services that is then passed on to the consumer. Pricing strategy is not done on a whim, though. In fact, it's crucial to go through a decision-making process before determining your prices.
Adopting the right pricing strategy involves determining:
- The cost you incur as the business owner
- The pricing of your competitors
- The demand for your product
Why You Need an Effective Pricing Strategy
An effective pricing strategy will ensure that you make the right amount of profits on your sales. Pricing, though, affects your profit in different ways. Higher pricing will bring in more profit, but if it's too high, it will also lower your sales volume. Lowering your pricing may result in more sales, but you don't want to lower too far, or you won't make enough to cover the costs you incur creating the product or providing the service.
Additionally, pricing creates a perception of your business. Setting the right price also means understanding your brand and having a strong marketing strategy. Higher prices can create a perception of higher-quality goods. Lower prices can attract bargain hunters. You may also want to build brand loyalty by providing lower prices at first to attract customers and then raise them later.
7 pricing strategies to help your business profit
If you're ready to find the pricing strategy that will work for you, here are several pricing strategies to consider for your small business.
A relatively simple strategy, cost-plus pricing means that before setting your price point, you have to know how much expense is involved in creating the goods or services. Once you know your unit cost, you can determine what you want your markup to be based on the profit margin you want to achieve.
It might sound simple, but there are some things to keep in mind. First, when finding your unit cost, you need to be thorough and include everything that goes into it, including production costs, labor, marketing, and more. Make sure, too, that you watch market conditions and any variable costs closely. If the price on those items increases or decreases, you may need to adjust your strategy.
Price skimming is a strategy generally used by businesses that have built their brands and are introducing new products to the market, such as certain retailers and e-commerce stores. When the new product is introduced, the pricing is set at the highest level and then lowered or discounted over time. Take the newest product from Apple, for example. The goal is to use that high price to cover the costs of bringing a new product out before the competition shows up. Then, as the price lowers, you gain customers who are more price-sensitive.
There are some disadvantages to using a price skimming strategy. If you're planning to use this strategy, make sure your product is ready to meet market expectations. If it doesn't, the price will be an anchor dragging your profits down. You also don't want to overuse this strategy, or your customers will become aware of what you're doing and just wait for the price to go down.
Market Penetration Pricing
With a penetration pricing strategy, you use lower prices to gain market shares. This strategy is also primarily used by companies putting a new product on the market. The goal is to use a low price, sometimes seen as promotional pricing, to move new customers to your company and away from the competition. Then, as you gain brand loyalty, you begin to raise the price back up.
However, be aware of the possibility of losing those customers once your price goes back up. People may become frustrated with price increases, and you may lose any bargain hunters you initially gained with the lower cost. Keep this strategy short term. Penetration pricing using a loss leader product is also not considered an effective long-term strategy. If you use it, you'll eventually need to pick a new strategy to continue growing your business.
Premium pricing gives potential customers the perception that the good or service being offered is high quality. It plays into the "you get what you pay for" philosophy. There are times when premium pricing strategies work best:
- New or one-of-a-kind products
- Limited-time items
- Patented items or items with additional legal barriers for possible competition
If you plan to use a premium price strategy, you can gain a more competitive advantage if you focus on what you offer rather than what your competition doesn't. You also need to have a strong branding for your entire business - think about the marketing elements, decor if you have a brick-and-mortar storefront, and overall presentation of the product and staff. Make sure your customer base believes you are there for the long haul and that they can keep coming back to you. If you can, find a way to do something a little extra with your product or service to give an exclusive, high-end feel.
A value-based pricing strategy means determining your price by the value your product line offers to your consumer. To do this effectively, you need to find the true economic value (TEV). To do that, you have to determine what value you offer beyond that of your closest competitor. Then, find what value your client or customer assigns to that value. Add the cost of your closest competitor and your additional value cost, and you have your price.
If you use this pricing strategy, there are two things to keep in mind:
- There is a bit of psychological pricing at play here. Know who you are targeting with your pricing and cater to them. Not every consumer will assign the same value to a product.
- You may know the ins and outs of your product, but your consumer will not - and that will affect the value they assign. You may need to do some educational marketing to fix the disconnect.
Bundle pricing means putting together a package of goods or services that provides a lower price than if each service or product was offered separately. This is a common strategy used by marketers in industries, from cable TV to your local car wash.
Bundling often gives the customer the perception of being given a discount, making them more willing to purchase from you. It also simplifies the purchasing process for your consumer - giving them one all-in price versus making them decide from a list of expenses.
With geographic pricing, you base prices on where you are selling your goods or services. There are a few reasons you would have different prices based on region. First, the perceived value may be higher in one region over another. For example, customers might have more need for a snow shovel in Minnesota than in North Carolina. Or the costs of doing business might be higher in one region over another. However, if you use this pricing strategy, it will create some additional accounting work for your business.
Manage Your Company's Finances With Skynova
Picking the right pricing strategy can help set your business up for success. No matter which of the different pricing strategies is right for you, though, a crucial part of the process is understanding your expenses, taxes, and profits. Skynova can help you track and manage it all. Our accounting software allows you to store receipts, create easy and fast invoices, and run financial reports at the push of a button. Explore our software products and let us help simplify your business.
Notice to the Reader
The content within this article is meant to be used as general guidelines for pricing strategies and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.