How you price your product can affect not only your profit margins, but your sales, position in the marketplace and ability to compete and increase market share. Maximizing your profit margin should not be your only concern when setting your pricing strategy, because high profit margins can actually lead to lower overall profits. Understanding how pricing affects your business will help you make the optimal decisions for selling your products and services.

Position or Brand

The price you set for your product or service sends a message to consumers about the quality of your product. If a shopper sees five different brands of shampoo selling for approximately $1.99 per bottle, and one brand selling for $10 per bottle, she will probably assume the quality of the $10 bottle is better without even reading the ingredients label. This is known as perceived value pricing. Some lower-priced goods or services might be seen as a better value, or they might be seen as cheap or inferior. Consider the brand, or image, you want to create in the marketplace, look at your competitors’ prices and determine what price point will help you promote or maintain your brand goals in the marketplace.

New Products

Trying to get consumers to switch from a brand they know and like is difficult, so many businesses use a temporary pricing strategy when they launch a new product or service. For example, your business might sell a new product or offer a new service at 50 percent off during an introductory period or offer a rebate or discount on a first purchase of the product. It’s more difficult to raise prices after people have been buying a product than it is to lower prices, so make any introductory low-price offers obviously tied to a temporary introduction.

Sales Volumes

How you price your product or service affects your sales volumes, creating one of two profit strategies. You can price your product high, generating lower sales volumes but higher profit margins, or reduce your prices, resulting in lower margins but higher total profits. The trick is to find a price that won’t lower your sales so much that your overhead costs per unit eat up your profit margin.

Barrier to Entry/Market Share Protection

As your sales increase, you can make it more difficult for competitors to enter the marketplace or expand by lowering your prices. Competitors with lower sales volumes and/or higher operating and production costs might not be able to compete with you on price and still make a profit. While it might seem counter-intuitive to sell products for less than your customers are willing to pay, keeping the competition at bay might be worth the incremental decrease in profits if it results in greater long-term profits.

Selling a product below your cost with the intent of driving a competitor out of business, then raising your prices is known as “dumping” a product, and it is illegal. Some companies use products as loss leaders, selling them below cost to generate other business. For example, a restaurant might offer a special entree at a loss to get more customers into the restaurant, who then order more appetizers, drinks and desserts. A tennis shop might sell balls below cost to get people into the store, who then buy clothing, rackets and shoes. These instances of selling at a loss wouldn’t drive a competitor out of business. Offering a product at a very low price but only having a few on hand or offering an obviously inferior item, with the intent of trying to upsell customers once they arrive is known as bait-and-switch and is also illegal.