Being a businessowner, understanding different pricing strategies can help you set realistic prices for your product or service, create a robust business plan and win customers while generating sufficient profits.
Choosing from different pricing strategies for your business is a fraught process. If it’s too low, you won’t generate enough profit; too high and potential customers will look elsewhere for cheaper alternatives.
Pricing isn’t just a number that you put on a product or service. Instead, it’s the result of a mix of marketing, brand, promotion and desirability – with customers often making an emotional decision about what to buy, rather than a logical decision based purely on price.
That is why your business needs to investigate different pricing strategies, so as to choose carefully on which will work for your business.
1. Penetration pricing
Many startups adopt a penetration pricing strategy. This approach is designed to quickly establish your business in an existing market, win customers and gain market share. It works by initially offering low prices that undercut competitors to win business, then gradually increasing prices as market share grows. Many technology-based businesses adopt penetration pricing, forcing less agile competitors out of business.
Pricing strategy example: Supermarkets regularly feature price penetration, either for their own-brand products in a bid to take on established brands or as the platform for new product launches. New products – from cleaning products to ready meals – can debut with a low ‘introductory’ price designed to woo shoppers and find a place in shopping baskets. After establishing market share, the introductory price is abandoned for a more expensive retail price.
Pros: It’s an effective way to grow market share, achieve dominance and then increase prices when there is less competition, reaping more profit in the longer term.
Cons: Many businesses make a loss in the early years of trading while they establish a market presence.
2. Premium pricing
At the other end of the pricing spectrum is premium pricing. Used predominantly in the fashion and luxury goods market, premium pricing involves selling your goods and services for significantly more than competitors. Factors such exclusivity or greater customer benefits compared to similar cheaper products affect premium pricing. Premium pricing is found in all types of business – from first class seats on aircraft to smartphone manufacturers.
Pricing strategy example: With a heritage stretching back over 100 years, Rolexprovides an example of premium pricing. Its signature Submariner gold watch can set you back more than £26,000. Despite its use of precious materials and skilled craftsmanship, such a price should in theory serve it poorly when compared to other cheaper watches that fulfil essentially the same function. Its premium price, however, reflects its worth as a status symbol: wearing a Rolex shows how affluent and successful the wearer is.
Pros: Profit margins can be significant, and fewer customers are needed to generate a profit.
Cons: Your marketing must communicate luxury brand values and reasons to buy beyond price. Everything – from packing to a retail experience – must reinforce the premium-feel of the brand.
3. Competitor pricing
Pricing strategies based on competitors is a reactive move, though stores such as John Lewis & Partners have made it part of their brand. It involves monitoring competitor prices and ensuring your prices either match or are cheaper. Customers can either be refunded the price difference if they find the product cheaper elsewhere, or the price matched in store at point of purchase.
Pricing strategy example: Retailer John Lewis & Partners is founded on the principle of ‘never knowingly undersold’. It often reduces its prices in store and online to match promotions and discounts offered by competitors. Customers can obtain a price match if they can show the product is available for less from a rival retailer.
Pros: Builds customer trust as it removes concern that a customer could get the same product cheaper elsewhere, keeping customers loyal to your business.
Cons: Pricing and margin is susceptible to competitor activity, leading to lower margins. Costly to monitor competitors and change pricing regularly.