When embarking on a new business venture, there is no shortage of items on the strategizing agenda that need attending to. One crucial step to constituting a successful business plan, and ultimately a successful business, is determining pricing for your products and services. While there are myriad pricing strategies to choose from, certain options are more effective for one type of business than for another. In this post, we will provide pricing strategy examples and help you identify which choice is best for your business.
The first step to pinpointing your ideal pricing strategy is to establish your pricing objectives. The strategy you choose can make or break your business, as the price of your product or service directly affects the revenue of your company. Therefore, it is critical to consider which one will best help you achieve your business goals. Some things to take into account when figuring out your pricing objectives are whether you want to maximize short or long term profits, achieve market stabilization, increase market share, etc.
After you have arrived at your pricing objectives, you can begin pinpointing the pricing strategy that will best complement your product or service.
A price maximization strategy aims to make pricing decisions that generate the greatest revenue for the company. Calculating the fixed and variable costs a business will incur, and then figuring out how to minimize these costs, aids in arriving at a profit-maximizing output. According to Madhavan Ramanujam, pricing expert and author of Monetizing Innovation, maximization is one of the best strategies for startups who are looking to prioritize revenue growth.
Pricing for market penetration is a method used to attract a high volume of buyers by marketing products or services at a lower price than competitors. While this strategy can be extremely useful in increasing market share, it is worth keeping in mind that many new businesses who elect this strategy experience an initial income drop that can be difficult to come back from. The idea is that once a business successfully penetrates the market, they will be able to grow and expand their brand to attain higher profitability to make up for this early setback.
This strategy tends to work best during the introductory phase of products and services. It involves introducing a product to the market at a premium price, then methodically lowering the price over time to attract a larger customer base. This method allows a company to generate considerable profits in the introductory phase of a product, and works best for products that can be marketed to consumers willing to pay top price for the latest and greatest. Apple executes the price skimming strategy every year, pricing each new iPhone steeply during the introductory phase, then lowering that price as time goes by.
Economy pricing markets toward price-conscious buyers. This strategy intends to minimize business costs for the sake of selling products and services at a price lower than the market average. While this approach is effective in some cases, it can be risky for smaller businesses, as their profitability relies almost entirely on volume of sales and thus can jeopardize profitability.
Have you ever wondered why items are often priced at $9.99 instead of the near equivalent of $10? Well, the answer is psychological. As humans, we tend to yield to emotion rather than logic. This is why utilizing “9”s in your pricing creates the illusion of a less expensive product without significantly affecting profitability. Another way to capitalize on this facet of human behavior is by offering something “free” with your product, an example being when a beauty product company offers a complimentary travel-size version of a product for customers who choose their brand over a less expensive competitor.
Determining which of these pricing strategies will help you reach your pricing objectives requires serious consideration. A crucial aspect to examine is aligning price with value. You can't sell a valuable product for a ridiculously low price and expect to make a profit. Similarly, no one will buy an overpriced product that they feel is not worth their money. Figuring out how valuable your product is in the eyes of consumers helps you find the “sweet spot” between price and value in order to optimize success.
Another deciding factor in concluding which pricing strategy is best for your business is your profitability goals. At the end of the day, you still need to make money. Calculating your gross profit (the revenue left over after subtracting the price of producing a good/service from the total profit) is a major determinant in how you should price your product. It is beneficial to come up with a range of prices that all achieve profitability by accounting for any discounts or price hikes your business may need to make in the future.
It is important to acknowledge that there is no perfect pricing strategy for any company. Changes in the market and competition require flexibility and adaptability. While one pricing strategy may be perfect for your product during its introductory phase, that strategy may become ineffective later down the line. A prosperous company is prepared to adjust its strategy over time in pursuance of maintaining profitability and competitive advantage. Still, having a well thought out pricing strategy from the get-go is vital to making sure your business will thrive.
Melissa is a recent graduate of Northeastern University and a content marketing specialist at Repsly, Inc. She is committed to applying her skills in order to bring value to Repsly readers and customers. Outside of work, Melissa enjoys practicing yoga, making music, and anything dog-related.