For small businesses that are retail and service-oriented, it can be difficult to know where to start when it comes to pricing products. For one, deciding on a price point is a balance of attracting customers to your product or service and pricing accordingly so your business can generate a profit. It’s certainly more in-depth than just calculating costs and adding a mark-up.
Finding this balance comes as a result of adopting particular pricing strategies, as well as the type of business you’re running. Here, we’ll define the most popular examples of pricing strategies, why they’re so effective and the most appropriate time to use them.
Premium pricing, put simply, is a strategy in which businesses set prices higher than their competitors. It’s usually at its most effective in the early days of a product’s life cycle, and a good idea if you’re a small business selling unique goods.
It’s all part of creating a perceived value for your goods; by persuading your customers that your products are of greater value than others, they are generally more willing to pay a premium. However, the product has to be of a high quality, and must also have packaging and a marketing effort to match.
If you’re new to a particular market, then it’s important to get your foot in the door. This is where penetration pricing can really help your business get off the ground. The basis of this strategy is to attract buyers by offering lower prices than your competitors on goods and services.
As you draw customers away from the competition, initially there’ll be a loss of income for your business, but the long-term increase in awareness serves to drive profits over time. Eventually, you’ll be able to raise your prices to better reflect the state of your position in the market.
Strategies that target your customers’ unconscious bias are a great way to set pricing of certain items. Price anchoring is one such method; if you have a particularly pricey item, then placing standard options near the premium ones gives potential customers the impression that the cheaper option is a bargain by comparison, making them more likely to part with their money.
It’s effective because consumers tend to unconsciously rely on the first piece of information offered to them when making a decision; it logically follows that they’ll opt for the lower-priced option out of a selection as they still perceive it as having good value.
Most often employed by retail marketplaces, you’ll often see this on Amazon’s price carousels on their site, where high and low-price items sit side-by-side. Customers will often opt for the lower one, despite the fact a more thorough search usually discovers products with even lower price points.
A commonly used strategy, loss leaders are products that are sold at, or below, the wholesale cost in order to stimulate further sales of more profitable goods or services. It’s often used to draw customers into a store who are there to buy other products – the idea being that this customer will purchase these other items at the same time as the loss leader. The profit made on these items then generates an overall profit for the vendor.
Take free samples, for example. If you get a free sample, then you subconsciously feel obliged to buy the product as a result. The small amount of stock, given away for free, can mean huge quantities of product can be sold in a short space of time. It’s something of a gamble, but they can also bring back former customers and lead to big profits if you’ve put in the proper calculations.
If you’ve a new product or service you’re bringing to market, then consider using price skimming. This involves setting a high price for an item at the introductory level, then lowering it gradually as your competitors’ goods appear on the market.
This allows businesses to maximise profits on early adopters, and following up with more buys from price-conscious customers through a reduction in price. In doing so, price skimming helps small businesses recover their development costs, and gives the impression of quality and exclusivity when items are brought to market.
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Rather than a logical level, psychology pricing is a strategy that businesses use to encourage buyers to respond and react emotionally. Take for example, signage and pricing that reads 99p rather than £1. Customers are more likely to purchase the former; researchers say that this is because consumers tend to focus on the big denomination and feel like they’re somehow getting more value for money.
It’s a time-honoured retail trick and businesses across all manner of sectors incorporate the tactic when pricing their items.
Bundling items together and selling them at a lower rate compared to purchasing them individually is another pricing strategy businesses employ. It’s an effective way to sell unsold items, but it also helps to boost the value perception for customers, as you’re giving away items for free, essentially.
It’s especially effective for businesses selling complementary products, like restaurants and beauty salons. However, small businesses should keep in mind that the profits they earn on higher-value items need to make up for the losses they endure on the lower-value product.
Bundle pricing is perhaps the greatest example of framing your products’ price points in a way to maximise profit, whilst also reassuring customers they are getting the best possible deal. And this is the golden ratio of pricing – marrying profit with customer satisfaction.
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