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More than ever, pricing strategy plays a huge role in the way eCommerce businesses operate. How and why you price your products determine the overall success or demise of a business. Resultingly, pricing policies influence the profitability of organizations. Because of this, strategic pricing cannot be overlooked. With pricing playing such an important role, it’s crucial to learn about what a pricing strategy is. Additionally, learning how to choose and properly implement the right strategy will help your business reach its full potential.
If you don’t price your goods and services effectively, you won’t drive sales. It doesn’t matter how strong your online marketing is. Your audience is becoming savvier and savvier, and they will only make the purchase if the price is right.
What is a Pricing Strategy?
A pricing strategy is a method a business uses to set prices for its goods/services. With so many different strategies, it’s important to find the one that best suits your needs. This process can be daunting. However, with a bit of patience and research, you’ll find the strategy that’s right for your business.
Pricing strategy vs. pricing model
Did you know that a pricing strategy and a pricing model are not the same? There is often confusion between the two, so let’s demystify this concept. A pricing model is based on the actual service/product. A pricing strategy is developed by analyzing the market the service/product is in and thus, includes competitor analysis as well.
The strategy and model don’t necessarily have to relate to each other, but some business owners prefer they do.
Why Pricing Strategies Are Important
Pricing strategies are not something a business owner should forget to include in their financial planning. Why? Because it is this factor that influences not only sales volume, but profit. In fact, price is one of the most important factors consumers take into consideration when deciding what to purchase. Here are just a few additional reasons pricing matters:
- Differentiates you from competitors
- Allows you to offer discounts or specials
- Encourages consumers to shop more
- Allows you to monitor and track revenue
Types of Pricing Strategies
With so many types of goods and services, how do you know what exact price to set it at? Not to worry, there are plenty of options out there to suit your needs. There are several common pricing strategies that will help you see results.
- Value-Based Pricing: Are you in tune with what your customers are willing to pay for a good/service such as yours? If so, this is the method for you.
- Competition-Based Pricing: Here we use the going rate/market rate for a good or service as a baseline.
- Cost-Plus Pricing: This method is quite simple. It takes the cost to produce the good or service (COGS) and adds the business owner’s desired markup.
- Dynamic Pricing: This flexible strategy moves prices up and down according to the market and consumer demand.
- Freemium Pricing: Want to offer potential consumers a taste of what your product or service is like? In this pricing strategy, a company offers a basic version of their goods/services for free. This makes users likely to pay down the line for full access or use.
- High-Low Pricing: Also known as a “discounting strategy,” a business will price an item high at first and drop it as soon as it loses relevance or demand.
- Hourly Pricing: This is most commonly used by service professionals who charge for their time. For example, a website developer charges $100 per hour until a website is completed.
- Skimming Pricing: With a skimming pricing strategy, the price of a good/service gradually goes down over a period of time. Think of how iPhones gradually drop in price over time.
- Premium Pricing: Here the price is based on the perceived value of an object or service, rather than the actual cost to make it or its value. This is most often used by luxury brands.
- Bundle Pricing: Deliver a heightened sense of value by selling two or more goods/services in a bundle for one price.
The Top 3 Pricing Strategies to Consider
As mentioned earlier, every business should begin by conducting a business impact analysis to reach its objectives and goals. It’s important to select the best pricing strategy for your company to place it on the track to success.
The three most popular pricing strategies are value-based pricing, competitive pricing, and cost-plus pricing.
The value-based approach relies on the premise that customers don’t really care how much it costs a company to make an item/conduct a service. Instead, the consumer cares about the value they gain by purchasing it.
Cars are a great exapmple of this. A potential buyer may narrow down their potential purchase to two SUV’s. One comes with an extra cup holder for $25 more while the other includes a sunroof for $300 more. If the target audience finds the sunroof more valuable than the extra cupholder, the car with the sunroof will prevail. The dealership may lose some profit by including a sunroof with the car, but they’ll increase their profits overall because they made the sale.
As mentioned earlier, this price strategy is well-known and looks at what the price or going rate is in the market for a good or service. Unfortunately, this method does not take factors such as demand or the COGS into account.
Let’s say you decide to sell dog harnesses. You conduct some research and find out your competitors sell them for $15-$45 for a size small. You can choose to price your harness slightly lower, the same, or slightly higher to remain relevant and competitive in price.
Cost-plus pricing has been used for centuries. It involves a business figuring out exactly what it costs to produce a good or offer a service. The cost is then marked up by their desired profit margin. For example, it could cost a business $15 to manufacture a running shoe. If they want a 30% profit margin, they will sell the shoe for $19.50.
Choosing a Pricing Strategy
It can be difficult to decide which strategy to use and how to initially price a product. However, with so many pricing strategies out there, it comes down to what’s best for your business.
If you want to figure out how to price a product, you need to decide what your end goal is. Are you offering innovative, one-of-a-kind products/services? Do you want to increase sales volume by offering lower prices than your competitors? Would you rather increase value by offering free add ons? The answer can only be found after some soul searching and calculations. At the end of the day, you need to decide what is right for your business and goals.
7 Steps to follow in a pricing strategy
While there is no exact formula for pricing, there are a few important steps to follow. Use these steps to formulate a pricing strategy that will stand the test of time:
- Create your Marketing Strategy: Thorough research–including a target market analysis– will help you understand your target audience. Additionally, it will tell you how to position your products/services and how to market them, to start.
- Develop a Powerful Marketing Mix: These factors are also known as “The 4 P’s” (product, price, promotion, and place). Finding harmony between them will lead to great results.
- Create a Demand Curve: How will increasing the price increase or decrease demand? This projection will help make things clearer.
- Figure Out The Cost to Make the Good/Service: What are the variable and fixed costs?
- Understand the Legal and Competitive Environment: Are there new laws in place increasing tariffs for your goods? Are your competitors charging more or less for the goods/service you offer?
- Be Clear On Your Goals: Do you want to boost sales or profits? Would you rather simply be the market share leader? Based on your objective, this will help you decide what pricing strategy to use.
- Use Data to Set a Price: Use what you learn through steps 1-6 to inform your pricing strategy.
Learning how to price a product takes time
As you can see, developing a price strategy will require a lot of research. However, it’s absolutely essential to the long-term success of any business. Accomplished businesses can attest to the direct impact that correct pricing can have on your bottom line. Make sure to follow the steps outlined to make educated pricing decisions. After all, the revenue you bring in can make or break your business.
It’s Time to Create Your Pricing Strategy!
Now you know how to boost your business performance by pricing products effectively using data rather than guessing. In the end, you’ll find you may need to continually update your strategy to stay with the times. Regardless of your situation, it’s essential to take the time to develop prices that satisfy your customers and business goals.