Pricing strategies that work
22nd March, 2016
How much should you charge for your product or service? Should you offer discounts? What is everyone else charging?
Pricing can be a very controversial subject. In this information age we are bombarded with conflicting information about the best strategy businesses use to sell their products and services. What are the best strategies to use when pricing your product or service?
Here are some commonly used strategies to consider when setting your business pricing.
1. Low-margin or break-even pricing
With so many websites comparing prices the consumer has more choice than ever before.
Pricing your products at a low margin is often used by new businesses to break into a market. This strategy is used most commonly to gain exposure to potential clients and bring traffic to your business location and/or website.
When we started our accounting practice, we used this strategy to find our first clients. We priced our rate at approximately 50 percent of other similarly qualified accountants. While the strategy certainly worked, it posed a problem for our practice when we reached capacity. At that point it became difficult to renegotiate that price to a higher level with clients that we acquired during our first year.
READ MORE: Break-even analysis: Definition, calculations, examples, pros & cons
2. Meet or beat the competition pricing
This is an often-used strategy where the business will do a great deal of research (on the internet, calling the competition, checking price catalogues) to understand what pricing is used for similar products or services. In this age of constant price checking by using the internet, this strategy would have to be revisited on a continual basis to cross check what your competition is doing.
This strategy works best for product-based sales, where little or no service is needed. Harvey Norman is a good example of a large retailer that uses this strategy.
3. Premium pricing
If you are selling an exclusive product or service, you may wish to use a strategy where customers are not overly concerned about the price. They are more interested in acquiring a brand or service specialist. When using this strategy the business will deliberately set a higher price than their competition to distinguish their product or service from the others.
Examples include brands such as Pandora jewellery, Tag Heuer watches, and using the services of a prestige real estate agent.
READ: Six reasons why you should never discuss price with customers
4. Penetration pricing
If your business sells a product that will be high volume, or offers a service which can be performed by low-cost labour, this strategy may be of interest.
The aim is for high volume sales at a low price.
There is a famous story in relation to Penguin books around this strategy. In 1935 they offered a paperback book for only a sixpence and for the first time the common man could afford to buy books. Penguin books became an overnight success.
5. Value-based or fixed-fee pricing
Value pricing is becoming more and more common with service-based businesses. The question that a client is asked is ‘what is this service worth to you?’
Value-based pricing is often combined with bundle pricing – this involves packaging up a number of products and/or services for a competitive price.
Many businesses use a combination of pricing strategies as they mature. The main thing to keep in mind is that pricing is never static – it must be revisited continually to ensure your business remains competitive in the market place.