Price is an often overlooked marketing strategy, as many tend to focus on promotions or advertising. Pricing strategies, however, can have a large impact on sales and (more importantly) profit. The price is what your customer pays and/or what the end consumer pays for a product or service. In the case of products not sold directly to the end user, pricing is often described as “wholesale” and “retail.” When the distribution channel is long (such as when there is a manufacturer, broker/distributor, retailer, and end consumer), multiple mark-ups can occur between the wholesale and the retail price.
Your optimal pricing strategy will depend on more than your costs. Forces within your business environment such as your competitors, your suppliers, the availability of substitute products, and your customers come into play as well. Positioning (how you want to be perceived by your target audience) is also a consideration.
There are a variety of pricing strategies in existence. Each strategy is used in a different set of circumstances. Some of the things to consider when choosing the best strategy for your situation are your costs; both short term and long term sales and profit goals; competitors’ activities; and customer lifetime value. While there are others, a few of the more popular pricing strategies available to you are:
Cost plus mark-up. Here, you decide the profit you want to make before setting the price. Figure out your costs and your selling price is simply your costs plus your pre-determined profit number. This approach helps keep your profitability top-of-mind, but may also result in prices that are out-of-line with customer expectations and competitor pricing.
Competitive pricing. When competitive pricing, you look at the prices your competitors are charging and use those prices as a benchmark when pricing your own products. You and your competitors’ positioning strategies will determine whether you price at par, slightly below, or slightly above the competition.
Price skimming. This technique is used when you offer a unique or scarce product with few or no substitutes. The price is set high, resulting in high margins for the seller. Buyers are those that are willing to pay the price because of the product’s prestige and/or uniqueness. In the case of a scarce but necessary product, customers pay the price because they have no choice. Often, price skimming is a short-term strategy as competitors enter with their own products, bringing prices down. In the case of scarce products, either the need passes (salt during an ice storm, for example) or the shortage is temporary. Before considering this technique, be aware that if your customers feel you have taken advantage of them, you could be building “bad will” for your business.
Penetration pricing. This is the opposite of price skimming. Prices are set low in an effort to gain large market share. Because the penetration price does not cover costs, this is also a temporary strategy. For this strategy to be profitable, customers must be willing to pay your normal, higher price.
Loss leader. Here, you price one or more products below cost to attract customers. You hope that those customers will purchase other profitable products from you. This strategy is often implemented as part of a short-term promotion.
Close out. This is a tactical move to clear slow-moving or excess products out of inventory. You sell the inventory at a steep discount to avoid storing or discarding the product. End-of season merchandise, perishables that are about to expire, and prior software versions or book printings are examples of eligible closeout items.
Multiple unit pricing. Also called quantity discount. The customer gets a price break for purchasing multiple units or large quantities.
Membership or trade discounting. Here, some customers (those that you know are heavy or frequent purchasers) are given an elite status, which gives them the privilege of a price discount on their purchases. This elite status can be based on occupation, membership in an organization, subscription status, or some other criteria.
Variable pricing. With a variable pricing strategy, different customers pay different prices. Often, this strategy is used for project work. Each project has unique characteristics so is priced by the job. In other cases, the price is negotiated with each customer (cars are an example).
Versioning. This is offering the same product with different levels of functionality. Each level is priced differently and includes a different bundle of attributes. Software and Web hosting companies often use this pricing strategy. A trial or very basic version may be offered at low or no cost. Upgraded versions are available at higher costs.
Bundling. Here, several items are sold together at a price less than if they were purchased alone. By bundling a popular item with lesser-known products, you can increase your sales. Additionally, in the case of inventoried items, you may be able to avoid a closeout.
Impact of Internet on Pricing Strategies
Aside from making some pricing strategies more prevalent, the Web has also affected the importance of choosing correct pricing strategies, by allowing customers to be better informed and more vocal. In the case of consumer products, the purchaser can go to http://www.MySimon.com or another price comparison service and in seconds look at a side-by-side price comparison from several online retailers.
There are also numerous forums and discussion boards where members discuss their experience with providers. For example, your customer in Paris can complain or spread praise about you to a potential customer in St. Louis. This means the customer can not only make a better decision before purchasing, but can also better spread the word (both praise and complaints) after the purchase. For these reasons, the Web has made it more important that you remain competitively priced with your competition and maintain sensible pricing practices.
Combined, smart use of both the Internet and available pricing strategies can help boost your company’s bottom line.