Implementing a good pricing strategy for your company's products can help you find the right price point to maximize your business profits. While setting your prices, you'll want to consider a broad range of different factors, including the cost to produce and distribute your items, what products your competitors have on offer, ways to position your product effectively and your company's target customers.
Customers won't buy your products if you price them too high, but you can also set your business up to fail if you price your products too low and can’t cover all of your costs. Along with a few other factors, your product pricing can have a dramatic effect on your company's future success.
Define Profit-Oriented Pricing Strategy
A profit-oriented pricing strategy is a method of pricing based on maximizing profit, locating a satisfactory profit level or having a targeted Return on Investment (ROI). In some ways, all pricing strategies are oriented toward profit, but a specifically profit-oriented pricing strategy places making a profit as the top priority versus other goals.
A company's profit maximization goal is typically to bring in as much revenue as possible relative to costs. The most commonly used profit-oriented pricing strategy involves setting a specific ROI goal that guides and determines the product price.
Other pricing objectives include a sales-oriented strategy, which focuses on maintaining a certain market share or maximizing unit or dollar sales of products and a status quo or competition-oriented pricing, which aims to not rock the boat by matching prices of competitors.
Other Common Pricing Strategies
Pricing plays an important role in our economy because it allocates various goods and services among buyers such as private consumers, governments and companies. The goal of pricing right always leans towards finding a price level high enough to produce a good profit because profit drives business growth, increased wages and attracts corporate investment.
Many pricing strategies come down to cost-based or cost-oriented pricing. Your cost to produce a product and bring it to market sets the floor for the prices that you need to charge. Cost-oriented pricing advantages and disadvantages can vary based on how efficient your cost structure is when producing your product and operating your business.
If your company has exceptionally high production costs or high administrative and other expenses, even with a cost-oriented pricing model, you may not be able to price your products competitively in the market. Companies such as Walmart work hard to become low-cost retailers and strive relentlessly to have lower prices than their competition. Because of Walmart's size, it can afford to use a cost-oriented pricing model with smaller margins, but because of its size, it still enjoys higher sales levels and profits.
Premium Pricing Strategy
Some companies choose to purposely price their products at a premium price that’s higher than the competition. Higher prices usually work best in the early days of a product’s availability, and also work well for companies offering unique products. But to support premium pricing, the business will need to work at creating a perception of value to match the pricing. Your marketing efforts, the way the product is packaged, the look of the store decor and your online presence all combine to lend support and credibility to the product’s premium pricing.
Going for Market Penetration
Pricing for market penetration involves trying to attract customers by giving them rock-bottom prices on products or services. New companies tend to use this method to attract customers away from the competition, although this pricing strategy initially causes a loss for the company. Over time, the goal of this strategy is for the company to raise its prices as it commands more experience and a larger presence within its market.
Economy Pricing Strategy
A large number of businesses use this type of pricing, including discount retailers and generic food suppliers. Retailers use this strategy to attract consumers who are very price-conscious, and businesses keep marketing and production costs low as a way to keep the product prices down as well.
Retailers using this type of pricing strategy often sell no-frills types of products. While large retailers such as Target or Walmart can handle this kind of pricing strategy, it can be dangerous for smaller retailers because of the thin margins and lack of sales volume.
The Skimming Strategy
Price skimming can help a company maximize its sales on newly introduced products or services. The strategy generally involves pricing products at a premium rate in the introductory phase, then the lowering of prices gradually over time as competitors bring similar goods and services to the market.
This strategy can benefit businesses because it skims, or brings higher profits in the beginning, and grabs customers who adopt the products early before prices drop. In the early phase, the pricing creates exclusivity and a high-quality illusion while also allowing the company to recoup some of the development costs for the products.
Some companies factor a little psychology into their pricing. Psychology pricing appeals to customers on an emotional basis rather than with a logical mindset. Setting a price of $29.99 has been proven to attract more sales than a price of $30, even though it's such a minimal price difference.
Marketers explain this phenomenon by saying that customers tend to put more emphasis on the first number of a price. Psychology pricing strives to increase customer demand and purchases by leading them to believe the product pricing is offering them an enhanced value.
Another common pricing tactic is called bundle pricing. In this scenario, a small business might sell a bundle, or a group of products to customers for a lower price than if they charged for each product separately. Bundling works well for companies because it helps them move out slow-selling inventory, and it also helps to make the customer feel like he is receiving more value for his money.
The bundling price strategy works best for companies that have a product line with complementary products. Restaurants can bundle a dessert with every entree purchased on Tuesdays, for example. One thing to keep in mind with this strategy, however, is that the profits earned on the higher-value items in a bundle need to make up for any losses taken on lower-value items.
Additional Strategies to Optimize Sales
Once you've chosen a price for your product that adequately covers your business overhead, the cost of your product and includes a reasonable profit, you may need to tweak your pricing a bit to optimize your product sales. The following methods can work with your pricing strategy to help you increase unit sales.
Try to avoid setting all of your products at the same price, which may sound strange, but according to a research study from Yale, with two similar products priced exactly the same, consumers are less likely to purchase at all, unless the prices have a slight variance.
An example used in the study was pricing on two different packs of gum, where only 46 percent of the test subjects purchased the gum when both packs were priced the same. However, with just a .02 cent difference between the two packs of gum, more than 77 percent of the customers chose to purchase some gum.
Anchoring prices is a commonly used sales tweak that relies on people's tendency to remember the most recent price they saw when they make a buying decision. For example, on restaurant menus, the restaurant will put the more expensive entree items on the fringe areas of the menu, to make all of the rest of the main items seem less expensive by comparison.
Whether in a retail store, on a website or a menu, when you place premium products next to standard product options, you are creating a perception of value to customers, and setting them up to see your less pricey options as a comparative bargain.
An Old Classic Pricing Strategy
One of the oldest pricing strategies in the book is to end your product prices with the number nine, as in $7.99, for example. While you may find it hard to believe that this strategy still works, according to a research article in the marketing journal Quantitative Marketing and Economics, the strategy is still alive and well. In fact, using prices that end with a nine was proven to be so effective that they outsold the exact same product priced at a lower price point.
As an example, for an article of women's clothing, the study found that a $39 price point sold more of the same clothing item than a $35 price tag. In the study, the $39 article of clothing performed 24 percent better than the very same article of clothing priced at $35.
Use Context As Your Ally
It might seem logical to think that a certain brand of beverage is worth the same whether you purchase it at a dive bar or an upscale restaurant. However, consumers have proven that where you buy an item matters just as much as what you buy.
Vanderbilt University ran a study that showed customers would pay higher prices to buy a Budweiser when they knew they were getting it from a high-end hotel versus a shabby, old grocery store. The customers perceived that the upscale hotel had more prestige that allowed it to charge higher prices for the same item.
Another way to use context is called reframing the value. Instead of offering a $1,000 annual subscription to your monthly research publication, reframe the cost into an $84-per-month, value-packed product. Breaking it down into monthly payments makes it easier for customers to have a bite-sized view of what they’re getting and feel like the publication has a reasonable cost.
Experiment With Different Pricing Levels
You might be leaving money on the table if you don't offer your customers enough different pricing options for your products. In a consumer test, when buyers had two product options available, a regular-priced option and a premium option, 80 percent of the buyers purchased the premium-priced product.
The researchers decided to add a bargain-priced product to the mix and found out that it resulted in worse buyer performance, as no one chose the cheapest option. This time, consumers chose the mid-priced option 80 percent of the time and only 20 percent of the buyers chose the premium-priced option.
The researchers tried the experiment for one more week by sticking with the regular-priced option, the premium-priced option and then adding a super-premium priced option. The addition of the third, more expensive option increased sales of the premium-priced product, from 80-to-85 percent, with 10 percent of the buyers even choosing the super-premium priced product.
Some customers will always pay for the most expensive option no matter what, so by adding a product with a super-premium price for those customers, you are making the rest of your prices look more favorable by comparison for other customers.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer and editor for several online finance and small business publications since 2011, including AZCentral.com's Small Business section, The Balance.com, Chron.com's Small Business section, and LegalBeagle.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.