“Is the price right?” Whether you are shopping on high street or working on a product you want to sell, this is a question that you probably have asked yourself many times. How exactly do we know what price we should set for a product? Moreover, what’s there to do after a price is set?
Pricing a product too high or too low can lead to lost sales and negative impact on the brand. In this article, I will focus on pricing strategies, namely, strategies that business can use to maximize profitability, defend an existing market from new competitors, enter a new market, or increase market share within a market.
There is a plethora of pricing strategies in the market as businesses become more and more creative. Here are the 6 common ones that we often encounter:
- Price skimming: When a business wants to maximize sales on a new product, a high introductory price can be set along with heavy promotion. Later, the price is gradually dropped as sales momentum slows and competitors appear. This approach allows the business to maximize profits on early adopters before dropping prices to attract wider market so that profits can be “skimmed” layer by layer. This is a quite common technique for tech gadgets and video games.
- Penetration pricing: A low price is set for the product initially to maximize market shares. This strategy aims to entice new customers with low prices, which may result in initial loss of profit for the business. However, the power of word of mouth later comes in to create compounded demand which helps the business stand out from the crowd. It also sets up a barrier of entry for potential competitors because they cannot produce this product with a lower price. A lot of cable and broadband companies tend to use this strategy with a cheap introductory price for the first year of the contract, followed by price increases thereafter.
- Premium pricing: In some cases, a business may intentionally set prices higher than their competitors. This strategy works well with products that are in the early stage of their life cycle or products have unique features. Customers need to perceive the product as being worth the higher price so the business needs to put a lot of efforts in product quality and marketing campaigns in order to create a strong value perception. As seen in a lot of luxury brands’ stores, the product packaging and store décor will also support the premium price tag.
- Economy pricing: This strategy is used by businesses to attract the most price-sensitive customers. Such businesses tend to minimize costs associated with marketing and production in order to keep the final product prices low. We see this in action while shopping at Walmart, Costco, and Target which focus on attracting a specific segment of the market in order to generate sales volume rather than to maximize profit margin per product.
- Psychology pricing: The price is set based on the assumption that a given price point, color, or name has a psychological impact on consumers. This strategy encourages customers to respond on emotional levels rather than logical ones by creating an illusion of enhanced value. For example, the retailer will sell a pair of jeans for $99 because it’s proven to attract more customers than the one selling for $100, even though the actual difference is quite insignificant. One explanation is that customers tend to pay more attention to the first few numbers on a price tag.
- Bundle pricing: A group of products are bundled together and sold at a lower price than if they were purchased individually. This is a popular strategy used by supermarkets where they have “buy one get one 50% off” or even “buy one get one free” promotion frequently. This is an effective way to move unsold items that are taking up inventory space. It also increases the value perception from the customers’ perspective as they are essentially getting something for free.
Pricing is a balancing act of both art and science. A pricing strategy provides a forward-looking plan for price changes to win over customers. Combined with the right pricing strategy, a business will find it much easier to get ahead of the competition and create sustainable profit streams over the long run.