Variable pricing approaches are used for various purposes, such as maximizing sales, gaining market share, or terminal, and are dictated by factors such as market dynamics, customer demand, and your cost of goods sold.
The best pricing strategy for your company will be determined by its form, the products or services it sells, and its overall objectives.
What exactly are pricing tactics, and why do they matter?
Pricing techniques are the various ways used by companies to determine how much their products and services can cost. Companies weigh current commodity demand, cost of products delivered, customer behavior, and business dynamics when determining the best pricing approach.
Based on their objectives, business owners can select from a range of pricing methods. Others want to increase market share and find new buyers in their region, while others want to increase profit margins. Some enterprises, on the other hand, simply want to get rid of old inventory.
All of the above can be accomplished with the correct price approach. It all depends on the small business’s objectives.
Types of Pricing Strategies
Pricing strategies will help you expand your market, increase revenue, and increase profits. Here are a few pricing tactics to think about.
Pricing based on absorption
It’s tough for a company to reach a new market and gain market share right away, but penetration pricing will help. To earn initial sales, the penetration pricing approach involves setting a much lower price than rivals. These low prices can attract new customers while depriving competitors of sales. While your business would most likely lose money at first, once you start improving your rates again, you will be able to attract new customers and convert them into regular ones. This technique is used by companies like internet and smartphone operators to win market share.
Pro: Market entry is much better than joining with a standard offer, and new consumers can be acquired easily.
Con: It’s not long-term viable and can only be seen as a temporary pricing tactic.
For example, a new cafe opens in town which sells coffee with 40% cheaper than any other cafe in the city.
Skimming the price list
A skimming technique is used for businesses who charge maximum premiums for new goods and then steadily lower the price over time. When goods reach the end of their life cycle and become less important, their prices fall. Price skimming is commonly used for businesses that market high-tech or novelty goods.
Pro: You can boost new sales volume and cover development expenses.
Con: Customers will still get frustrated that they paid a premium price and have to wait for the price to drop.
For example, a consumer electronics store begins offering the newest, most modern television at a significantly higher price than the retail price. When newer goods join the marketplace, prices silicates over the course of each year.
Pricing that is both high and low
Skimming is similar to high-low pricing, but the price decreases at a different pace. When using the high-low pricing strategy, a manufacturer’s price decreases rapidly all at instead of once gradually. A high-low technique is commonly used by retailers that market seasonal items.
Pro: By discounting and placing out-of-date items on discount, you can always get rid of them from your inventory.
Cons: Customers can choose whether to wait for upcoming deals instead of paying full price.
Example: During the summer, a luxury retail store offers women’s sundresses at a hefty premium, but reduce the value until fall comes.
When prices are priced higher than the rest of the market in order to generate a sense of perceived worth, cost, or comfort, this is known as premium pricing. Customers are likely to pay a higher price if they are familiar with the brand and have a favourable impression of it. Premium pricing is commonly used for companies that offer expensive, high-tech, or exclusive goods, such as those in the apparel or technology industries.
Pro: Profit margins are higher so you can spend far more than the manufacturing costs.
Cons: This pricing approach is only effective if consumers find the goods to be high-end.
For example, a beauty salon establishes reputation in its market by charging 30% more for its services than its rivals.
Pricing based on psychological factors
Consumer psychology is exploited by psychological pricing techniques. In a way, you’re luring people in by changing the price, product placement, or packaging marginally. Dropping the price to $9.99 instead of $10 or offering a “bid one, get one free” sale are two examples of psychological pricing strategies. 90 percent of supermarket rates, for example, end with a “9” or a “5.” This technique can be used for almost any form of company, but it is most widely used by retail and restaurant companies.
Pro: By tweaking your promotional strategy marginally, you can sell more goods without wasting money.
Con: Certain consumers can view it as deceptive or pushy, which may harm your image or result in lost sales.
Example: A restaurant sets the price of a gourmet hamburger at $12.95 to entice consumers to buy at a cheaper price than $13.
Bundle pricing refers to the sale of two or more equivalent goods or services for a single price. Bundling is a great way to upsell consumers on additional items or add value to their order. Many companies use this technique, like restaurants, beauty salons, and department shops.
Pro: Customers learn about new items they hadn’t planned to purchase and might decide to buy them again.
Con: When shoppers save money on a packaged order, products delivered as part of a package would be purchased less often separately.
A taco cantina, for example, sells tacos, tortilla chips, and salsa separately, but provides a discount if consumers purchase a whole meal that includes all of these products.
Your goods or services would be priced at the prevailing market rate if you use a sustainable pricing approach. If your company is in a crowded market, your price is dictated by the other companies in your field, which lets you remain competitive. You may also choose to sell your goods higher or lower than the retail average, as long as you stay inside the price level set by all of your industry’s rivals.
It’s worth remembering that 96 percent of buyers match offers before making a purchase, which means you have a chance to attract customers by offering a discount that’s marginally lower than the national average.
Pro: In a dynamic environment, you can retain market share and draw consumers who are willing to spend marginally less than your rivals’ prices.
Cons: To retain a competitive edge for price-conscious customers, you must keep a close eye on average retail costs.
To draw price-sensitive buyers, a landscaping firm compares its costs to those of local rivals and sets its prices below the national level.
Pricing on cost-plus basis.
To calculate the final price, take the amount it cost you to produce the product and multiply it by a certain percentage. To figure out your markup percentage, start by calculating how much profit you want to make from each commodity sold.
Pro: When you limit the markup price to a predetermined percentage, profits are more stable.
Con: If you put your markup percentage too high, you can miss out on revenue because this strategy doesn’t allow for external variables like your rivals’ prices or consumer demand.
A pizza store, for example, sums up the cost of the ingredients and labour, then sets the pizza price to make a 20% profit margin.
Dynamic pricing suits a product’s actual market demand. When the commodity in question fluctuates on a constant or even hourly basis, this pricing technique is used. Hotels, airlines, and event venues, for example, set various rates every day in order to increase earnings.
Pro: When demand is high, you will raise total sales by raising costs.
Con: Dynamic pricing necessitates sophisticated algorithms, which small companies can lack the resources to develop.
For example, since there is a popular summer festival in town, a boutique hotel increases its room rates for one weekend.
Select a pricing approach that is in line with the objectives.
There are several pricing methods available, but not all of them are appropriate for you. To continue, you must first establish your company’s objectives. Then you should choose the pricing strategy that will help you achieve your goals, whether they be to maximize sales, gain market share, get rid of inventory, or a mix of these.