The price of your products or services can have a direct impact on your business’s performance. Pricing decisions dictate your margins and bottom line, and they also determine the brand’s acceptability and customer base. Many B2B and B2C businesses use pricing strategy tactics to sharpen their competitive edge, narrow their niche, or strengthen their market dominance.
The cost of a product or service significantly influences consumer purchasing decisions. So, pricing is not a matter of merely adding a markup on your offering and writing figures on a price tag. It takes a lot of considerations to arrive at a suitable price point. Here are four easy tips for effective pricing.
1. Select a pricing strategy
Pricing has a profound effect on marketing and profit margins. Yet, for many companies, price optimization is only an afterthought involving guesswork. It is crucial to develop a clear and effective price strategy that favors returns, customer satisfaction, and brand competitiveness.
Determining prices through research and informed decisions eliminates the risk of underpricing or overpricing. Most companies focus on just maximizing profits by setting price points that give the best margins. A good pricing strategy should also cushion your enterprise from competition pressure, market fluctuations, and unexpected changes in the cost of goods sold (COGS).
2. Take a psychological approach
Psychological pricing is a way of maximizing sales by influencing buyers’ intent. Studies have linked certain numbers, wordings, and images to how consumers perceive prices and make buying decisions. Most people are familiar with charm pricing, a simple but successful strategy employed mostly by retailers. It involves reducing an item’s actual price by only one unit of currency — for example, instead of $5, the price tag reads a more appealing $4.99. Contrary to what you would expect, buyers tend to round down the figures instead of rounding them up.
The commercial world is full of such seemingly obvious psychological pricing tricks that are surprisingly compelling — here is a list of some of the more common ones:
- Attractive price displays
- Comparative pricing
- Decoy effect
- Discounts and promotions
- Prestige pricing
- Price bundling
3. Set a new pace with price skimming
Price skimming only works for a new product or service. Begin by setting a high price when the product or service first hits the market to profit from those willing to pay more. Then, gradually reduce the price to reach consumers with a lower spending power or match the competition. Early adopters will still pay the high price despite knowing that they could pay less if they waited a short while.
The whole idea of skimming is to make a killing right after the initial launch, and later use slashed prices to lure more customers so as to increase market share and sales volumes.
4. Keep in mind that offering the lowest price does not always work
Most consumers go by the notion “cheap is expensive,” so being the lowest price provider may not necessarily yield the results you expect. In the minds of most buyers, a very low price indicates “cheapness.”
In some scenarios, a reasonable low price can drive high sales volumes if buyers see it as a bargain. However, the biggest risk is consumers assuming that your services or products are inferior to higher-priced alternatives. Unless you can distinguish your brand or prove that your products or services are exactly like those of your competitors, selling at the lowest price might send the wrong message.
Plus, you will probably struggle to cover the COGS and net a substantial sum if the sales volume fails to compensate for the low price. In short, selling at a price below the market’s benchmark does not work for every business or market.
In terms of marketing and cost optimization, everything comes second to pricing strategy. Every business takes a different direction when it comes to pricing; yours should be informed by consumer behavior, competitors, and market trends in your niche and your sales goals. It does not hurt to combine multiple pricing strategies covering various market segments to get the desired overall result.