7 pricing strategies that will help your business grow even more!
No matter how special your business is, you’ll probably be faced with one of the most common dilemmas any business owner faces before even launching their product in the market.
And that dilemma is precisely how should you price your product so that it doesn’t sink and instead thrives in the market?
Most businesses set their pricing without any care for strategy or any plan whatsoever. That’s because they don’t realize how a good pricing strategy can actually save you money and increase your profit.
It’s probably easier to just slap the “base” price on your product and call it a day, right? By base price, we mean the average price of your competitors in the market. However, that won’t get your product to shine, won’t it?
If you’re putting 100% of your attention on sales and marketing yet neglect to price your product properly, that can lead you to lose a drastic amount of sales just because the price point isn’t applicable to your specific product!
If you’re wondering, “how else should I price my product?” then you’ve come to the right place! By answering these 7 important questions, you’ll be able to not just understand the most common pricing strategies in the business, but also know exactly how you can price your product in a way that makes it stand out.
But first…
What Are Pricing Strategies?
Simply put, if pricing is the amount of money you charge for your product, the pricing strategy would be the theories and processes you can use to accurately determine the amount of money you should charge for your product.
Why Do They Matter?
An effective pricing strategy does more than just help you set a price point to stamp on your product, it can help build trust with your customers and gives you a roadmap to reach your business goals.
Not to mention that it subverts some of our most common misconceptions.
A great pricing strategy would portray value to a customer. Because many products are poorly made yet cost a lot of money simply because they’re brand items. Your product might be of higher quality at a cheaper price.
Not to mention that a good pricing strategy accelerates the customer trust-building process, as well as directly raising your revenue!
Studies have shown that just small variations in pricing can raise or lower your revenue by 20%-50%. Still think pricing strategies aren’t worth your time?
If you take more than a few minutes to sit down and develop your pricing strategy, then you’re already ahead of most of your competition. However, what kind of strategy fits your product the best? Well, you need to ask yourself a few questions to find out.
Are You Planning on Using Value-Based Pricing?
Value pricing is when you have your clients determine how much your product is worth for them, as in they set the prices according to the value they receive from it.
Sounds like a profit margin nightmare? Not at all.
Think if you’re running a SaaS (Software As A Service) business, and you’re marketing your product to multiple people, from giant industry moguls, to small startup entrepreneurs.
Do you think they would pay the same price for the same product? They might even have entirely different uses for your software!
Which is why offering a value based pricing strategy would do wonders for your profits.
How Can You Use Competitive Pricing to Get an Edge?
This is probably the most common and misused strategy that businesses end up using…
Competitive pricing is when you set your prices entirely based on the competition you’ll be facing in the market. While this can be great if you’re just starting out, or are trying to test the waters with a new product line, it ultimately blocks the product from growing any further.
That’s because from its inception, you’ve started to base the value of your product according to the value your competitors are viewing their products! Even if your product ends up being of a higher quality and value, trying to raise or lower prices in the future will leave any future customers skeptical.
Think You Can Use Price Skimming to Get a Strong Head Start?
On the other end of the spectrum, we have price skimming. Price skimming is when you set your price so high that it’s way above anything in the market, and your price can be its own marketing campaign if done correctly.
Afterwards, you start lowering your prices bit by bit over time and stopping once you find an equilibrium between all of your competitors and how much your customers are willing to pay for your product.
This can be a huge boost to your product. However, you should be extremely cautious while using this strategy, as it can kill your product before it even gets on its feet if not done correctly. We recommend hiring the help of marketing experts for this particular strategy.
Why Is Cost-Plus Pricing The Most Stable Option?
Cost-plus pricing is truly the safest, most stable, and most reliable option for your business, if a bit boring…
It’s one of the simplest pricing strategies and has that traditional feel to it; you simply take into account your production costs and add a suitable percentage of profit to it.
Now, the profit margin depends on various elements, which is why we recommend reading our 10 Questions for a higher profit margin article if you’re interested in reading all about them.
Now, the biggest problem with cost-plus pricing, is that it’s terrible for anything other than a physical product. This is why we’re starting to see less and less usage as we go further into the digital age, where ecom stores and SaaS businesses are king.
Can You Use Penetration Pricing in Highly Competitive Markets?
The answer is: Absolutely!
Penetration pricing can generally be split into two steps, the first one being that you enter your product in a highly competitive market with a much lower price point than everyone else.
Once a customer sees that your product has its own strong points and really doesn’t offer anything less than the much higher priced competitors, they will do their best to grab your product in order to capitalize on it.
The problem with penetration pricing lies within the second step. You see, you’ll have to provide a high volume of products in order to keep up with the demand. And secondly, once you’re ready to raise your prices again, you’ll inevitably see a decline in your customers. Unless, you’ve been able to cultivate a truly loyal consumer base.
How Can You Overwhelm the Market With Economy Pricing?
Similar to penetration pricing, economy pricing takes it up a notch in the “overwhelming” department.
You might see this strategy used when a soda company or energy drink enters an oversaturated market with expensive products. The main goal would be to promote a product that’s way cheaper than the existing monopoly.
Once you make your money back by selling a large amount of volume, you’ll end up facing similar problems to penetration pricing. However, if your product truly stands out, customers won’t mind a better product for a higher price.
Economy pricing is much better suited for physical products than digital ones. While it can work great with soda and drinks, it’s more likely to be catastrophic if you’re trying to sell a subscription-based service.
How Can You Make Use of the Most Versatile Dynamic Pricing Strategy?
Another eccentric pricing strategy that wouldn’t translate well in the digital age, is dynamic pricing.
Dynamic pricing essentially has you constantly changing the price of your products to match the current demand for them.
You see it all the time with seasonal products such as summer wear or swimsuits hiking up in price just before the summer, or companies might opt to markdown their products in order to get rid of their excess inventory.
Another example for dynamic pricing comes with local businesses that don’t have a stable supply chain; they would price their products according to the number of investments they put into the business.
While dynamic pricing works great with some industries, it’s considered an unethical practice with services that require a subscription, such as Netflix or Amazon Prime. Could you imagine you wake up one day and your Netflix subscription tripled in price?
We hope this article helped you figure out the popular pricing strategies and their effects on your business! Send us any topics you’d like for us to cover in the future.