Businesses depend on their profits to survive. As a small business owner, you need to be diligent in your efforts to turn a profit for your company. One way your business can make money is through strategic pricing.
Strategic pricing
Businesses use strategic pricing when deciding how to price products or services. The company sets a price based on what they think will attract customers and maximize profitability. Strategic pricing methods help a company penetrate the market, compete with other businesses, or sell off products at the end of their product life cycle.
As a business owner, you want to have a high profit margin, meaning that your revenue is more than your business expenses. Strategic pricing uses different factors, like product value and consumer demand, to determine how to price products and services.
Be aware that different pricing strategies and methods can gain customers and increase revenue or lose customers and deplete revenue. When determining your business pricing strategies, pay attention to your company’s size, industry, and offerings.
Here are some popular strategic pricing methods used by small and large businesses. Find out which is right for your company.
1. Market penetration pricing
Market penetration pricing is where businesses set a low initial price for goods and services. The business hopes to gain consumer attention and build a loyal customer base. Eventually, most businesses increase prices once they have a steady customer base.
If you choose to establish a market penetration pricing strategy, you will most likely be met with slim profits off the bat.
You could also experience a price war between competitors, which can be difficult for small companies. Small businesses might not have the ability to drop down to the same low prices as larger companies.
Increasing the price after the product has been on the market will probably lead to an increase in profits. But, you could lose some customers as a result of the higher prices.
Market penetration can be good for building a customer base. But, it might not be the best strategy if you need to make high profits immediately. Small businesses could have some problems using this pricing strategy.
2. Price skimming pricing
Price skimming is the opposite of market penetration pricing. With price skimming, businesses initially set high prices in the hopes of turning a quick profit. Usually, businesses lower their prices once other companies offer competitive pricing.
If you choose to use price skimming pricing, you could be met with high profits off the bat. But, you need to be aware that some consumers will be turned away by the price. Oppositely, high prices can lead customers to believe they are getting a quality good or service.
Typically, you want to use price skimming strategies when you first introduce a product to the market.
Use the price skimming strategy when you introduce a brand new product, service, or feature that not many other businesses have. Because of the lack of competition, you can get away with charging higher prices, as long as there is demand for it.
With price skimming pricing, you will experience high profit margins when you first release the good or service. Eventually, your profit margin will be slimmer once other businesses offer the same thing at competitive prices.
3. Economy pricing
Economy pricing is one strategy that prices certain products and services at a low rate. With economy pricing, businesses cut down on the costs that go into making the product or performing the services. The prices are low because the products are generic.
With economy pricing strategies in marketing, your products would attract consumers who aren’t willing to pay high prices. Many grocery and retail stores, like Wal-Mart, use an economy pricing strategy for their products.
Small businesses might have more trouble using this pricing policy. Large businesses might benefit more from economy pricing because they can obtain bulk items and turn profits.
As a small business owner, you don’t want to price your products or services too low. Economy pricing is a great way to attract a variety of people, but you also want to make sure you have a decent profit margin.
4. Competitive pricing
Competitive pricing is where businesses base their prices on what competitors charge. Many businesses opt for competitive pricing to stick out from other businesses. With competitive pricing, the business hopes customers will choose the less expensive product.
If you offer competitive pricing for similar products or services, you will need to stay up-to-date on what other businesses are charging. You should do a competitive pricing analysis and study competitors.
You can offer customers a price matching offer. With a price matching offer, you vow to match a competitor’s price if a customer brings it to your attention.
You might consider a competitive pricing strategy if your products or services don’t vary from other businesses. However, competitive pricing can lead to narrow profit margins, so don’t use this strategy for all your offerings.
5. Discount pricing
Discount pricing is a strategy where a business marks down the prices of goods or services in an effort to attract customers. Many times, the price discounts last only a short time. Sometimes, the discounts are given to products or services that were originally overpriced.
Discount pricing is also good to use toward the end of a product’s life cycle. You can clear your business’s inventory with discount pricing. For example, you have meat that is going to go bad in a few days. Instead of wasting it, offer it at a discounted price.
If you use the discount pricing method, you might see an increase in customers and sales. But, you want to be wary of marking down items too much. Leave yourself enough room to make a profit.
Big businesses might have more success doing discount pricing compared to smaller businesses. If you decide to use a discount pricing strategy, don’t try to compete with what large businesses can do.
6. Psychological pricing
Psychological pricing is when a customer thinks they are getting a good deal. There are different types of psychological pricing:
- Charm pricing: using numbers that end in “9” (i.e., $24.99 vs. $25.00)
- Prestige pricing: using rounded numbers (i.e., $25.00 vs. $24.99)
- BOGO pricing: buy one, get one free discounts
Any business can take advantage of psychological pricing. Whenever you try to make a price look more appealing to a customer, you are using psychological pricing.
7. Bundled pricing
Lastly, bundled pricing is another strategy many businesses use. Bundled pricing is just like it sounds: businesses bundle multiple goods or services together and give consumers a lower price than if they purchased the items separately.
For example, you offer cable, WIFI, and phone services. You might set up a pricing strategy that looks like this:
- Cable: $49.95
- WIFI: $55.00
- Phone: $24.99
- Bundled (cable, wifi, and phone): $84.99
The customer saves money if they bundle all three products instead of buying them separately.
Bundling encourages customers to purchase more products or services, which means more money for your business.
Strategic pricing do’s and dont’s
Before coming up with a pricing system for your business, keep the following do’s and don’ts in mind.
Do:
- Conduct a competitive pricing analysis to evaluate the pricing strategies of similar companies
- Leave yourself enough room to make a profit
- Try different profit strategies to see what works
Don’t:
- Lower your prices so much that you don’t make a profit
- Raise and lower your prices frequently
- Try to compete with big businesses who can get bulk pricing
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This article has been updated from its original publication date of August 15, 2017.
This is not intended as legal advice; for more information, please click here.
