The prices at which you sell your products can’t be too high to be unaffordable. But at the same time, it also must not be so low that you bear losses or have any profit at all. Your pricing strategy should bring balance to your financials as well as to the needs of your customers.
If the prices are too high, you will miss out on increasing sales volume. If prices are too low, you may have adequate sales but might miss out on generating meaningful revenue.
Hence, you need to adopt the right pricing strategy to assign the right price for your product or service. And this blog post will shed light on the best pricing strategies in marketing and how to implement them for your product and service.
Did you know? It’s a myth that pricing is a financial decision; in reality, it is a marketing one.
Pricing strategy in Marketing and Its Importance
A pricing strategy is an analytical model that can help you to determine the best price for your product/service. An ideal pricing strategy allows for adequate profit margins while aligning with industry standards. It also caters to your customers' budgets, ensuring an efficient business-client relationship.
The interaction between margin, price, and sales numbers required specific consideration while pricing products. Therefore, it’s important and involves a complicated process to design a pricing strategy that ensures the success of your business.
So, let us now look at the best pricing policies and strategies in the market that will boost your business.
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What Are the Different Types of Pricing Strategies With Examples?
There are dozens of ways you can price your products or services. Depending on the market you occupy, pricing strategies can be clubbed into four broad categories:
- Cost based
- Competition based
- Based on perceived value
- Product Based
Let us now have a look at the types of pricing strategies in each of these categories:
Cost-Based Pricing Strategies
These strategies take into consideration the production and distribution cost of the product. These can be mainly of two types:
Cost Plus Pricing
This strategy adds a small margin to the costs of producing and distributing the product or service. Care should be taken when calculating the price to ensure that all relevant overheads and taxes like Goods and Services Tax (GST) are factored in. If the cost calculations are accurate, this is the simplest strategy to keep your price competitive while ensuring profit revenue. Grocery stores and supermarkets work on a cost-plus pricing strategy.
Time-based Cost Pricing
Service-based businesses and independent contractors prefer using this strategy. Relevant prices of the product or service can be calculated at an hourly, daily, or weekly rate. Car rental services are the best example of this type of pricing strategy.
Competition-Based Pricing Strategies
Going Rate pricing
The goal is to price a product close to or cheaper than the competition to increase sales volume. This strategy is a safe way for small businesses like the commodity goods sector to remain competitive without eating into profits.
Value-Based Pricing Strategies
The value of a product means how much it is worth to the end-of-the-line consumer. Pricing strategies based on value can be:
Value Pricing
You set your prices according to consumer trends and what they think your product is worth. This pricing strategy works because customers feel that they are receiving a legitimate value for the price of a good or service. The best example of a company that uses value-based pricing is Starbucks.
Premium Pricing Strategies
Big brands use this strategy to set high costs because they have a unique product or brand that no one can compete with. You need to ensure that you develop a “luxury” or “lifestyle” product to use this strategy and appeal to the right type of consumers. The best examples are Tesla, Apple, etc.
Product-Based Pricing Strategies
Penetration Pricing
You need to adopt a market penetration pricing strategy when the market is filled with competitors and you do not have a first-mover advantage. This pricing strategy helps your new business grow when it has to redirect the pool of consumers already possessed by your competitors.
Skimming Pricing
It is a dynamic pricing strategy in which a business sets its initial price high and gradually lowers it when more competitors enter the market. The best example of this pricing practice is when tech companies introduce new technology. A 4K OLED Smart TV sells at a discounted price than an 8K TV.
Loss Leader Pricing
Retailers use it to attract customers with a desirable discounted product and encourage them to buy additional items related to the product. This aggressive retail pricing strategy is effective when used in conjunction with penetration pricing.
Bundle Pricing
With bundle pricing, businesses club multiple products for a lower rate than selling each item individually. The best example of this product pricing strategy is fast food chains offering meal options, and internet service provides bundling offers along with the data plan.
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How to Identify and Develop a Pricing Strategy for Your Business?
An adequate pricing strategy helps businesses generate maximum profits while taking into account customer satisfaction, as well as trends within the market. But you can't create a pricing strategy if you don't know what ingredients to use. So, let us look at what you need to do to identify which pricing strategy you need to choose.
Calculate Your Production Costs
To calculate the price, you need to calculate how much it costs to produce and deliver a product or a service. You must also consider various overheads and taxes when calculating this cost. Once you know the true cost of your product/service, you can analyse and choose the best strategies that suit the product.
Lay Down the Pricing Objectives
A key point to note when you want to develop your pricing strategy is that you need to identify your objectives. They can be any or all of the following but shall not be restricted to:
- Your business’s scale and position in the market
- Being price-competitive as a leader or providing competition to other businesses
- Increasing demand for new or existing products
Determine Which Factors Affect Your Business the Most
Pricing strategies can be dynamic and adjust the price of goods and services in response to market factors. Industry-based research, market trends, consumers’ willingness to pay, inflation, recession, etc., must be considered while developing a pricing strategy.
How to Implement and Monitor the Pricing Strategy in Your Business?
After identifying and selecting the optimum pricing strategy for your business, you must ensure that it is reaping the rewards you expect. Here are a few simple ways of implementing and monitoring your pricing strategy:
- Set practical benchmarks with a clear end goal in sight.
- Clearly define responsibilities & provide your pricing team with the technology to use data analysis and implement the strategy.
- Involve the sales staff in training about the pricing strategy.
- Set pricing key performance indicators (KPIs) & track the results by using pricing and accounting software.
- Make pricing strategy reviews a priority.
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Conclusion:
You have now looked at the various pricing strategies and ways to develop and implement them. Let's circle back to the basic fact that pricing is a marketing strategy, not a financial one. While deciding on a pricing strategy, you must account for many factors like revenue goals, marketing optimisation, target audience, product attributes, etc. You must also consider external factors like product demand and supply ratio, competitor pricing, and market trends.
A strategy is incomplete without monitoring. While deciding on the most profitable pricing strategy, your focus should be on offering value while increasing your revenue. However, you must consider a pricing software tool to ensure that your pricing is data-driven and fulfils your business objectives.
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