Pricing Strategies – Understanding the Essential 8

1 October 2019

Finding the right pricing strategies for your goods or services is essential. Providing you market your product at the right price, you can attract new customers, gain a bigger share of the market and increase your profits.

However, finding the right price point isn’t always easy. When you’re deciding how much your goods and services should retail at, it’s important to use established pricing strategies to guide you. Although there are numerous well-established pricing strategies, we’ve handpicked some of the best to get you started…

1. Economy Pricing

Economy Pricing Strategy

Low pricing, with minimal margins. If you offer economy pricing, you’ll have low marketing and advertising budgets to match, but you can capture the mass market. Ideal for businesses who produce non-branded goods and generic products, you can undercut your competitors and attract customers who may be struggling financially when you use economy pricing.

2. Price skimming

Price skimming strategy

If you’re the first to market, you can afford to inflate your prices to take advantage of your position in the market. Whilst you know competitors will catch up in the near future, maintaining a higher price now enables you to reap in sales before prices are cut due to increased competition. However, only companies who are delivering something new and innovative can opt for a price skimming strategy. Often used by electronics companies and technology firms, a new design or product can justify price skimming.

3. Premium Pricing

Premium pricing strategy

Primarily used by brands that want to establish themselves as luxurious, premium pricing reflects the exclusivity of the product or service you’re offering. Using premium pricing strategies helps to elevate your products and make them coveted items. In some cases, the price alone distinguishes your brand from competitors. A higher price gives the perception of higher quality, but customers will expect goods and services to live up to their price tag. Suitable for luxury clothing brands, high-end electronics, first-class travel services and 5-star hotels, premium business pricing reflects the quality and exclusiveness of the brand.

4. Penetration Pricing

Market penetration pricing

If you’re a new company entering the market, penetration pricing can help you to establish your presence and attract customers. Products and services are priced below their actual value, with companies making little to no profit at all. In some cases, a penetration pricing strategy may even result in the company taking a loss in order to gain market share.
Once the customer has experienced the product or service at a low price, they become aligned with it and view it as a ‘must-have’. At this point, companies can increase their pricing and retain the customer.

As well as being used by new companies, penetration pricing strategies are routinely used by established brands when they are bringing a new product or service to the market. When customers sign up for a new broadband contract, for example, they may pay £9.99 for the first 12 months, with prices increasing to £29.99 thereafter. The low-cost starting price attracts them, whilst the service and product retains them, even at a higher price.

5. Psychological Pricing

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Understanding consumer behaviour can affect how you price your products, particularly if you want to take advantage of consumers who are likely to be swayed at the point of purchase. When browsing, for example, consumers typically pay more attention to the first digit of a price. Pricing a product at £199, rather than £200, feels much cheaper to the consumer, despite only offering a difference of a £1.
A psychological pricing strategy can be used by almost any brand or company, regardless of what type of service or product they’re offering. Whilst it can be used in isolation, it can also be combined with other strategies to enhance the effectiveness of business pricing. Budget brands may combine economy pricing and psychological pricing to deliver a product at 89p, for example, whilst a luxury brand may advertise use premium and psychological pricing to advertise a holiday at £4,999, rather than £5,000.

6. Promotional Pricing

Promotional Pricing

Typically, promotional pricing is a short-term strategy, designed to gain new customers and boost sales. Food retailers often rely on ‘buy one get one free’ promotional prices to entice customers into buying a particular brand or product, for example. Similarly, the use of coupons, apps and loyalty points can be part of a promotional pricing strategy if companies offer discounts or vouchers in return.

Time-limited offers are particularly successful examples of promotional pricing. Customers feel they are making a considerable saving, whilst the time limitations make them worry about missing out. With pre-sale marketing, companies can create a buzz and gain visibility, although they may make very small margins on the products which are subject to the promotion.

7. Geographical Pricing

Geographical pricing

Pricing may be affected by the location in which products are sold or services are delivered. If you’re a global retailer, for example, shipping and high taxes in one country may drive the price of a product up when compared to another location. By using a geographical pricing strategy, companies can ensure they make the same amount of profit from each sale, regardless of the additional costs they may face when selling in a particular jurisdiction.

With many retailers and service providers operating globally due to the rise of ecommerce, almost any brand can incorporate geographical pricing into their operational strategy. However, you may be forced to compete with domestic brands who can undercut your pricing due to reduced shipping costs and fewer customs liabilities. In such cases, premium, well-known or coveted brands may get the most benefit from geographical pricing.

8. Bundle Pricing

Bundle pricing

Offering multiple items for one price enables customers to pay less overall than they would for each item individually. Providing the overall profit still puts you in the black, you won’t suffer a loss with this type of pricing strategy, although you’ll make less profit than you would if each item had sold individually.

Often used when a product is coming to the end of its lifecycle or when a product hasn’t sold well, bundle pricing can be an effective way of moving stock, managing your inventory and motivating customers to make a purchase.

What to do next?

Learn more about pricing strategies and how they are effecting your profits. For a free pricing review contact us by clicking here or call Maple now on 01332 207336.

Maple Accountancy is a firm of expert Business Advisors offering accountancy services, tax and business advice to owner-managed and family-owned businesses.

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