Components of a Pricing Strategy

by Derek Dowell; Updated September 26, 2017
Pricing strategy requires much thought and research to find the sweet spot.

Pricing your product for sale should not be undertaken as an afterthought. Factors like your overall business strategy and position in the market should be given serious consideration before putting anything up for sale. There is no one-size-fits-all approach to pricing and you should never consider pricing done; it's a process that requires continual tweaking in response to market conditions.

Premium Pricing

Some businesses find themselves with a unique product or service or perhaps even a superior competitive advantage (such as when no or very weak competitors exist). This sort of market condition might support premium pricing, which simply means that the price is set higher than normal if it was a common product or the landscape was teeming with competitors. To find out how high a price the market will bear, keep going up until sales drop off. At some point, your regular customers will probably let you know that you are about to price yourself out of their patronage.

Penetration Pricing

The opposite of premium pricing is penetration pricing, which means you set an artificially low price in the early stages of your business to get people through the door. This is a great way to quickly penetrate a competitive field and build name recognition. Depending upon how deep your pockets are, you might choose to price your product(s) at a break-even level or even take a small loss to keep people coming through the doors. Once you've got a good segment of the market, increase the price to a profitable level.

Economy Pricing

Certain businesses decide to employ economy pricing. This is a no-frills approach to sales. If you can keep marketing and manufacturing expenses low, this model supports a lower price point. Good examples of this are grocery stores that carry their own economy brand of products on the shelf next to the more expensive brand. Plenty of people opt for the lower-priced brand just because it's cheaper.

Psychological Tips

If you've ever noticed how businesses choose to price most of their items to end in .99 or .95 cents, you've seen the psychological pricing strategy in action. To the subconscious human brain, we see $6.99 as being substantially less than $7.00. To the consumer, it may be maddeningly because everyone knows what the game is but somewhere deep in the creases of our grey matter, we see the difference between those two prices as much more than a single penny. According to Small Business Trends, customers equate the number 9 with value and 0 with quality. That's why a $4.99 burger meal seems like a great deal and a $50 steak meal tastes like a million bucks.

About the Author

Derek Dowell has ghostwritten dozens of projects and thousands of blogs in the real estate, Internet marketing and travel industry, as well as completed the novel "Chrome Sombrero." He holds a Bachelor of Science in environmental legal studies from Missouri State University.

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