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How To Figure Out the Best Pricing Strategy for Your Business

How much should your pricing be for a product or service?

Price your product too high, and you won’t make any sales. Price it too low, you’ll make sales, but you’ll be losing out on profits. 

In this post, we will explore the key factors you need to consider before pricing your product. We’ll also reveal the 5 most used pricing strategies and the types of businesses they are most suitable for. 

Let’s dive in. 

The Value of a Good Pricing Strategy

Pricing is much more than covering your costs and turning a profit. It plays a significant role in how people perceive your brand, compare you to competitors, and make purchasing decisions. 

According to a study by KPMG, 57% of shoppers consider price as the most important company attribute when deciding where to buy:

The right pricing can help you reach your goals and drive revenue, while the wrong pricing can stunt growth and sales.

Before you can develop a winning pricing strategy, you should consider 3 vital factors:

Business Needs and Goals

You need to generate enough revenue per sale to cover your costs and make a profit, but what else do you want to achieve with your pricing strategy? Do you want to generate more profit per sale? Increase your market share? 

The Market 

The current market conditions and competitive landscape will impact your pricing strategy. Do you want to position your brand as a premium option? Or do you want to be cheaper than your competitors?

Prospect Customers

You can only charge what your customers are willing to pay. It’s also essential to determine what motivates a purchasing decision. Do your customers always choose the cheapest product? Or are they willing to spend more for a premium option?

Considering these factors should help you better understand the market conditions, the needs of your customers, and how pricing can impact your business goals.

How To Set Strategies for Pricing That Attract Customers to Your Business

Certain pricing strategies are more suited to some companies than others. We’ve compiled a list of the 5 most popular pricing strategies and how you can use them to improve business performance. Keep reading to find out which is the best option for you. 

Price Skimming

Price skimming is a strategy that involves charging the highest price your customers are willing to pay and reducing the price over time. 

This can be a good pricing strategy for a new product launch. You can target consumers with more spending power to recoup your development costs and quickly turn a profit. As more competition emerges, you can reduce the price and target the lower end of the market.

Apple is one of the clearest examples of a price skimming strategy. When Apple launches a new product, it charges a premium price. Over time, the price is dropped to open up opportunities for different market segments.

Factors that go into deciding on this strategy?

This can be an effective strategy if you are in a market with little direct competition. If there’s a competitor with a similar product, there’s a danger of being undercut and losing out on sales. 

Penetration Pricing

While price skimming starts with the highest possible price and reduces over time, penetration pricing does the opposite. This strategy is used to gain a foothold in the market and attract new customers by undercutting the competition. 

When you have grown your customer base, you can increase pricing to improve your profit margin. 

Penetration pricing is used by companies trying to break into a market or increase their market share. For example, when Disney+ entered the hyper-competitive streaming market in 2019, the service was priced at $6.99 per month – well under the maximum price consumers were willing to pay. As of 2021, the price has increased to $7.99 per month.

Factors that go into deciding on this strategy?

If you can afford to undercut your competitors, or you’re willing to take losses during your initial product launch, this strategy can be an effective way to gain a share of a competitive market. To keep customers on board when you start to increase your pricing, you’ll need strong marketing and branding strategies.

Value-Based Pricing

Value-based pricing is based on how valuable the consumer perceives a product to be. If your product is considered much more prestigious and valuable than a competitor, you can charge a higher price – even if the cost of bringing the product to market is similar. 

Fashion brands often use value-based pricing. For example, Dolce & Gabbana sunglasses are considered much more valuable and are priced much higher than a budget brand. The pricing is based on the perceived value and how consumers feel the product will improve their image – not on the cost of bringing the product to market.

Factors that go into deciding on this strategy? 

Value-based prices can be a lucrative strategy for companies with a high-quality product or service considered better and more valuable than competing products. You’ll need strong branding and marketing strategies to position your company as a high-end luxury brand. 

Cost-Plus Pricing

Cost-plus prices is one of the most straightforward pricing strategies. 

To calculate cost-plus prices, you take the total cost of producing the product and multiply that figure by your markup percentage to arrive at the unit price. 

For example, let’s say that it costs your company a total of $10 to produce and market a product. You want to earn a 50% profit margin on each product. 

Product cost: $10

Markup percentage: 150%

10 x 1.5 (150%) = 15

Selling each product for $15 would cover your costs and include your desired profit.

Grocery stores typically use cost-plus prices for their goods. The supermarket buys the goods for a set price and multiplies the cost price by the desired markup percentage. That’s why an avocado will always be more expensive than an apple. 

Factors that go into deciding on this strategy? 

Cost-plus prices is a straightforward way to price your products and services. But it can be limiting and leave you open to a competitor undercutting your business.

Bundle Pricing

Bundle pricing can be an effective strategy to boost sales revenue. Rather than having individual prices per product, you combine complementary products into a package deal – a bundle.

The price for the bundle is lower than if each item was purchased separately, but the bundle promotion can increase sales revenue and average order value.

Bundle pricing is based on the concept of consumer surplus. Every consumer has a maximum price they are willing to pay for a product or service. The difference between that maximum price and what the consumer actually pays is known as consumer surplus. Bundle pricing is a way to capture more of the consumer surplus.

Fast food restaurants often use bundle pricing for meal deals. Because the items are bundled with an all-in price, the customer is willing to pay a higher overall cost. If the consumer were to pay for each item individually, they would probably choose fewer items and pay less overall. 

Factors that go into deciding on this strategy? 

Bundle pricing is a great way to move inventory fast and encourage customers to try new products. For example, cosmetic brands often use bundled pricing to encourage consumers to adopt a new product into their skincare regime. 

Conclusion

Pricing is an area where minor changes can make a big impact on your bottom line. To work out the right pricing strategy for your business, take a deep dive into your buyer personas. 

When you know who you are selling to and what they are willing to spend, you can narrow in on a pricing strategy that maximizes revenue, helps you achieve your business goals, and aligns with your digital branding strategy.

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