The price of your product is pivotal to your success as a business.
It represents much more than a financial transaction.
Some people may think that if a particular business offers a product at a lower price than its competitors, that business will automatically get more customers and make more money.
However, that couldn’t be further from the truth.
Your revenue and profit all come down to your pricing strategy.
Sometimes, underpricing your product makes potential customers perceive it as less valuable and of cheap quality. Lia Griffith, founder of Liagriffth.com explained in our webinar, Become Your Own Boss,
“When you price things too low people don’t appreciate it, it’s not important to them. So there’s a happy medium of making them feel like this is important and i’m getting good value for what i’m paying.”Watch Lia share how she set her membership pricing
In this article, you will learn:
- What is a pricing strategy
- The different types of pricing strategies
- Pricing strategies and customer psychology
What is a Pricing Strategy?
A pricing strategy is the model or method used to establish the best price for a good or service.
There are many different strategies you can use to convey different messages and attract different customers.
While many people may think that pricing comes down to making it as cheap as possible while still turning a profit, there are actually far more factors that go into determining pricing.
Below are the most recognizable pricing strategies to give you a gauge of what you need to consider when pricing your product.
Premium pricing is a strategy that consists of setting high prices. The high price will make customers perceive your product or service to be of great quality and added value.
This pricing strategy works best for products that are considered luxury goods/services, or for products that are very unique from others in the market.
When using this strategy, ensure that everything about your brand reflects the premium nature of your price, this includes your website design, packaging, logo, business cards, etc.
This strategy uses a very low price in comparison to competitors to gain market share rapidly.
Using this method typically insinuates that prices will be raised to a more competitive level after the promotion period is over, in hopes that your business will maintain its market share despite raising prices.
Penetration pricing is most effective for small businesses, start-ups, or a new product launch.
This, however, brings lower profits for a period of time, so ensure that your business is able to weather the time with little profits.
Economy pricing utilizes a “no frills” sort of price where businesses minimize marketing, packaging, promotions, and all other forms of overhead to keep their costs as low as possible.
Margins in this strategy are razor-thin, as prices are as low as possible. The overall hope for this strategy is to achieve a high market share by targeting the mass market.
Having a high sales volume is vital since it is the only way to stay afloat in a market with the generation of such low-profit margins.
This strategy places a high, premium price on products in their introductory phase to achieve the highest margins possible from early adopters.
Once more competitors emerge, businesses begin dropping their prices in order to attract consumers that have lower budgets.
Price skimming gives your product an exclusive and prestigious aura that can be carried along while competitors begin flooding the market.
Price skimming is most effective for new products in an emerging industry. An example of this is Apple.
The company was the first to release a smartphone at a high price, insinuating high quality and prestige. Since then, Apple has been able to maintain this image despite other competitors producing smartphones that may be considered more technologically advanced.
How can you further influence people’s perception of your product?
There are two popular strategies that deal even more so with the psychology of consumers and their purchasing decisions.
These are more relevant after a rough price is determined for your product, but can still be good to consider when looking at strategies.
At nearly any store you go to, in person or online, products will almost always use psychology pricing.
Also known as the “99 effect”, studies have shown that people are more likely to purchase a product that is priced at $0.99 than one at $1.00. This is true for all other price points as well, whether it be $99.99 vs $100.00 or $49.99 vs $50.00.
Using psychology pricing gives an illusion of greater value and plays off of a consumer’s emotional side rather than logical one.
Psychology pricing is perhaps the most common pricing strategy used as it is effective for relatively all businesses, consumers, and industries. It can be seen anywhere from home prices to a candy bar.
This strategy is one that is often used but much less noticed as psychological pricing.
Price anchoring consists of placing your product next to higher-priced alternatives to make your customers perceive the product to be of greater value.
Consumers will see the standard product next to one that is considered “premium” and view it as a great deal, influencing their purchasing decision.
Price anchoring is used anywhere from cereals to subscription plans online. In some cases you may need to pay for a shelf space next to a premium good, or it can be as simple as the order in which you list your products/services on your website.
Which Pricing Strategy is Best for You?
So, what pricing strategy is best for your business?
Well, it all depends on how you would like to be perceived as a brand or business, what kind of customers you are trying to attract and the market share you intend to have.
If you want control over a larger share of the market, you can try strategies like penetration or economy pricing.
If you want to be perceived as a more luxurious, higher-quality brand or business, then premium pricing or price skimming might be the way to go.
All pricing strategies are viable options when done effectively. Take some time to ponder on what you want your customers to think about when it comes to your products or services and proceed with the strategies that align with the goal.
Check out Inc’s post to help determine what strategy correlates best for your business.
There are also other strategies that can be used but the ones described above are some of the most popular and widely used by successful companies.