So you managed to keep your customer's coming back. Now finding the right pricing strategy is a vital element in running a successful business. A business can use a variety of pricing techniques when selling their product or service and the price can be set to maximize profitability for each unit sold or from the market overall. Price can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. Businesses may benefit from lowering or raising prices, depending on the needs and behaviour of their customers.
There are many ways to price a product. Lets have a look at a few of the techniques business can use.
When customers make a purchase they must often choose between products with different prices and attributes. This method of pricing is meant to influence the consumer in his purchasing decision and maximise the sales of one particular product. The seller will offer at least three products; two of the products will have a similar or equal price. The two products with the similar prices should be the most expensive ones, and one of the two should be less attractive than the other. This strategy will make people compare the options with similar prices, and as a result sales of the most attractive (and expensive) choice will increase.
As the name suggests, this pricing strategy involves alternating between high and low prices. It's a method of pricing used predominantly by organizations whose goods or services are normally priced higher than their competitors - which establishes the value of the item in the mind of the consumer. Through promotions, advertisements, and coupons, lower prices are offered on key items. The lower promotional prices are designed to draw customers to the organization who then believe they have got a bargain.
A Loss Leader is a product sold at a low price (often without profit) in order to stimulate other profitable sales or to attract new customers. The idea is that it will help the business to expand their market share as a whole. It's common pracice when first entering a market as it introduces new customers to a service or product in the hope of building a customer base and securing future recurring revenue.
This is a method of psychological pricing. Prices ending in 9, 95, 97, 99 are sometimes called “charm prices” and in this type of pricing, the seller fixes a price where the last digits are odd numbers. This is intended to give the buyer no room for manoeuving or for bargaining as the price appears to be less - a product priced at £9.99 will seems much cheaper than one priced at £10.00 - and yet there is only 1p difference. The theory behind this is that lower pricing such as this creates greater demand.
OPTIONAL PRODUCT PRICING
This is when companies attempt to increase the amount their customers spend once they start to buy. Optional ‘extras’ increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other. Budget airlines are prime users of this approach when they charge extra for additional luggage or extra legroom.
This is the practice of keeping the price of a product or service artificially high in order to encourage favourable perceptions among buyers, based solely on the price. It exploits the tendency for buyers to assume that expensive, luxury items are more desirable and represent exceptional quality - for which consumers are willing to pay a premium. To be successful, however, the product needs to justify the price.
The purpose of price discrimination is to capture the market's consumer surplus and generate the most revenue possible for a product. Identical goods or services are sold at different prices from the same provider to different segments of the market. Industries that commonly use price discrimination include the travel industry, pharmaceuticals and textbook publishers. Examples of forms of price discrimination include coupons, age discounts, occupational discounts, retail incentives and gender based pricing.
Price leadership is a low-cost pricing strategy. The aim of this strategy is to undercut all your competitors by offering the lowest possible prices on your products or services. This can be difficult to do as a small business, as you need to achieve a high sales volume to make profits off of small margins. Price leadership is employed successfully by large corporations that can reduce costs through economies of scale.
PRODUCT BUNDLE PRICING
Using this method, sellers will combine several products in the same package. It also serves to move old stock. Blu-ray and videogames are often sold using the bundle approach once they reach the end of their product life cycle. This technique is used at auctions where one attractive item may be included in a lot with a box of less interesting things. Buyers must bid for the entire lot. It’s a good way of moving slow selling products, and in a way is another form of promotional pricing.
This approach is used where external factors such as a recession or increased competition force companies to provide value products and services to retain their sales e.g. value meals at McDonalds - and other fast-food restaurants. Value pricing means that you get great value for money, i.e. the price that you pay makes you feel that you are getting a bargain, but not necessarily added value or service.
- The Strategy and Tactics of Pricing: a guide to profitable decision making. Thomas Nagle and Reed Holman. Available to purchase from Amazon: http://www.amazon.com/The-Strategy-Tactics-Pricing-Profitably/dp/0136106811.
- Power Pricing: how managing price transforms the bottom line. Robert J Dolan and Hermann Simon. Available to purchase from Amazon: http://amzn.com/B000062UIU.