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Running a business is extremely hard work.
You constantly have fires to put out and you need things to keep growing. And out of all the challenges you face, two of the biggest ones are customer acquisition and sales profits.
Thankfully, there is a way to address both problems at once.
Keeping a customer loyal to your brand reduces the costs of acquiring new customers. In fact, focusing on retaining an existing customer is five times cheaper than acquiring a new one!
One of the effective ways to attract potential customers and improve customer loyalty is through your pricing strategy.
But before we get to the various pricing strategies you can use, there are a few things you need to know inside out.
Have you experienced that feeling of being in a “buying mood ” when you enter a shopping center? Is it perhaps just the smell that puts you in that mood? It happens to me, too.
As it turns out, many retail stores deliberately craft their own smell. They’re doing something called scent marketing, and it works well.
That is the power of sensory experience. Sadly in ecommerce we can’t yet offer such powerful experiences. (Augmented and virtual reality, we are waiting for you!)
So when buying online, things are much more aseptic. The price is there at first sight – but the buyer can’t touch, smell or try the product, so all these subjective buying pushers are removed from the process.
Did you know that 90% of online shoppers say they compare deals on the Internet? Or that 47% of buyers only choose discounted products? Or that more than 6 out of 10 buyers say pricing is the key factor when it comes to the buying decision?
The fact is that price is an essential buying factor for objective purchases.
Ecommerce is in an environment where objective buying prevails. As we said above, the experience is quite different from brick-and-mortar buying, and the information is much easier to get. Nobody wants to pay more, and the internet offers some incentives to encourage objective purchases:
In short, access to all this information encourages customers to research and become experts in almost every kind of product buying.
Pricing is not just a way to sell more, but also a factor that affects the most important Key Performance Indicators (KPIs) of your business. Here are just some KPIs that your pricing affects directly:
All of these factors and much more are affected by your pricing. Do you know any ecommerce business that doesn’t have at least two or three of these KPIs in their marketing plan?
Price is an essential part of your brand’s market positioning strategy. It doesn’t matter if you’re in the luxury or low-cost market, your prices are sending a clear public message about your brand.
Figuring out your target market and how you want to position your business will lay the foundation for your future marketing and pricing tactics.
Here are a few questions that will help establish your target market:
Know Your Customers: Understanding customer personas, buyer persona, and your target customers
Now that you have a clear idea of who your target market is and where your business stands, it’s time to look toward your customers.
Understanding your customers better will help you further refine your pricing strategies later on.
The last step before figuring out your pricing is to calculate your costs.
If you are selling a physical product, the manufacturing cost will be the first to be included. After that, we move on to overhead costs.
Overhead costs generally fall under fixed costs and variable costs. According to Fundamental Finance, fixed costs are costs that are independent of output. These would include rent (for brick and mortar stores), machinery, etc.
In contrast, variable costs vary, increasing as output increases and vice versa. These costs will include wages, utilities, shipping costs, raw materials for production, etc.
After you calculate how much your products cost, we can decide which pricing strategy to use.
Pricing tactics take into account the market, shifts in demand, competition, and are more temporary, say over an introductory promo period or a particular quarter
Although we use the terms interchangeably, pricing strategies and pricing tactics are not the same thing. Pricing strategies are set at a higher organisation or brand level, aimed at the lifecycle of the product.
As an example, imagine the latest iPhone launches tomorrow. As an iPhone, it will follow the Premium Pricing strategy, and always be viewed as a luxury good and more expensive than competitors. During the first 2 weeks of launch or in Pre-Sales, retailers might sell it at a premium — Skimming Pricing Strategy. After a few years, when new versions come out, the price would drop to Economic Pricing Tactic levels, in order to raise demand and clear stock before Apple takes it off the shelves entirely. Whether it’s a pricing strategy or tactic is a discussion for marketing textbooks.
Your pricing needs to cover all your costs and then make a profit on top of that.
Your pricing decisions will be influenced by your competitors’ pricing (perhaps through price monitoring software), target customer personas, brand positioning, business type, and your total costs.
Let’s take a look at 11 of the most popular types of pricing strategies for any business type.
Aimed at price-conscious consumers, economy pricing gives a very thin gross profit margin per item.
This strategy is best used for items with low production and marketing costs. As a result of the small profit per item, large sales volumes are a must for this strategy to succeed.
Hypermarts like Walmart are best suited for economy pricing due to the sheer volume of item sales and commodities with high price sensitivity.
[Walmart.Image: Flickr via Wired]
For smaller businesses without a substantial sales volume, it is best to avoid this pricing strategy. You may not be able to compete with larger brands that are able to sell even lower due to economies of scale.
Keystone pricing is a strategy that puts the final price tag as double that of the wholesale or list price.
When keystone pricing was first introduced, it was done twice – once at the manufacturer’s list price and another at the retail price. So if a television set cost $200 to make, the manufacturer would sell it to the retailer at $400. The retailer would then sell it to a customer for $800.
It is generally not advised to use keystone pricing for all products in your company, as that would make everything too expensive. Keystone is also discouraged if your company sells commodities that have high price sensitivity.
If you are selling limited edition products, keystone would not be favorable for you either. This is because the market value of that item would probably be much more than keystone pricing.
However, keystone pricing would work in small town shops, especially brick and mortar stores. It is also beneficial for products that are unique on the market. This is due to less competition both offline and online.
Also known as price lining, product line pricing is a process in which products and services in a specific category are given different price points.
The price difference is usually to differentiate products according to differentiating features. This provides more options for the consumer and thus more opportunities for sales.
[Starbucks sizing – Short, Tall, Grande, Venti. Image: soranews24.com]
Starbucks uses product line pricing for their drink sizes to cater to different needs. Their cheapest tall size serves as the anchor, so convincing customers to upgrade is easy as the price increase is fairly small.
This is an extremely popular pricing strategy and can be applied to virtually any business which has products at different price points.
Also called cost-plus pricing, cost-based pricing is one of the easiest ways you can price your products.
All you have to do is calculate your total cost per product and then add a percentage of markup as the final price.
According to Sumo, this method of pricing is simple and fast, allowing you to add a profit margin to any product you are selling with minimal hassle.
Cost-based pricing is best used in businesses that have a diverse range of products that have competitive pricing, like supermarts. Cost-based pricing can save a lot of time when you have hundreds of different products on sale.
Similar to economy-based pricing, cost-based pricing tends to result in competitive prices and are thus target price-conscious consumers. It can also be useful for new products on the market that do not have an existing market price available.
As its name suggests, penetration pricing is one of the pricing strategies used when introducing a new product into the market.
The introductory price used in this strategy is always significantly lower than its usual price or that of the competition. This strategy is effective in attracting customers to try it, with hopes that customers will like it enough to purchase it at full price eventually.
E.g. Lay’s Stax
[Lay’s Stax. Image: The Crazy Coupon Chick]
In August 2003, Frito-Lay launched their Stax potato chips to compete with Pingles, which was popular at the time. Stax was identical to Pringles chips in many ways, from the shape of the chips to even the design of their containers. They were given an initial price tag of $0.69 for its first few months.
After their product had obtained a decent amount of market share, Frito-Lay eventually adjusted the price to over $1, similar to market price.
Penetration pricing is also a great way to measure public reception to the new product. You can follow up purchases with questionnaires for customers to give feedback on the product.
The price skimming strategy is another way to introduce a new product, but it is the opposite of the penetration pricing strategy.
In price skimming, the initial price of the new product is higher during the introductory period. This elevated price tag will generally lower to normal market pricing when other competitors enter the market.
A brand that uses price skimming needs to be well-established enough in an industry which has stiff competition, like consumer electronics.
[Samsung Galaxy Note 9, Image: Samsung via CNET]
Samsung is one such brand.
When they launched their Galaxy Note 9 in August 2018, it was available for preorder at $999. It features top-end features and the Note lineup has always been a crowd favorite.
In December, it was available in selected places at $699.
Consumer electronics is a red sea of competition, with brands constantly jostling for market share with the latest technology and innovative designs. Early adopters of smartphones will gladly pay the premium price to be the first to own the newest devices.
By the time competitors enter the market with new products, Samsung would have earned a significant amount of sales from early adopters, and can now reduce their prices to cater to the more price-sensitive customers.
Pulling off price skimming will require products that consumers will want to own for bragging rights and to be perceived as trendy or luxurious.
With promotional sale pricing, products are either given a discounted price or are included in a promotion such as buy one get one free.
This makes the products more competitive and appeals to price-conscious consumers. While it is sometimes used when introducing a new product, which is the same as penetration pricing, the promotional sale pricing can be used at any time.
[Black Friday sale in Sao Paulo, Brazil. Image: Cris Faga/REX/Shutterstock via people.com]
Year-end sales such as Black Friday are a great time for brands to use promotional sale pricing.
Even though products sold during big sale events are usually on massive discounts, the sheer volume of products sold would still yield a profit. In a way, brands are also forced to go on sale for the fear of losing out to their competitors who are using the strategy.
Bundle pricing is a type of promotional pricing tactic that combines multiple products into a bundle that sells at a lower price than if they were sold individually.
This strategy is useful for selling off slow-moving or unsold items that are occupying storage space. Items that are sold at a slight loss is still better than not being sold at all. The bundle package price will also give your customers the perception that they are getting a good deal.
[Unimom Minuet LCD + Breastfeeding Starter Kit Bundle Deal. Image: mummysmarket.com.sg]
The beauty of bundle pricing is that you stand to create a more compelling product package by combining items that complement each other. In this kit, everything in it helps make the process of breastfeeding easier and will feel like a more attractive deal.
Value-based pricing is a strategy where the price is determined based on a product’s current market value with an increment according to any differentiating features from its competition. It is similar to competition-based pricing whereby the price is benchmarked based on the competition rather than costs.
This final price is termed True Economic Value (TEV) – how much a customer will pay for a product/service that can deliver more value than its closest competitor.
Harvard Business Review defines TEV as:
“TEV = cost of the best alternative + value of performance differential”
Say the television you are selling is identical to your closest competitor, except your screen is 10 inches wider. How much would your customer be willing to pay for that extra 10 inches?
That would be the value of performance differential.
Finding out that value through customer interviews and questionnaires will help you price your product in a way that is fairer to your customer and put you in a competitive position within the market.
Psychology pricing is a group of techniques based on psychology that appeals to customers’ emotional or irrational aspects rather than rational ones.
They leverage various cognitive biases, which are errors in rational decision-making, in heuristics, which are decision-making shortcuts. Logical decision-making often consumes time and energy, so we use heuristics to make a choice faster, but that comes at a cost of logical accuracy.
Nick Kolenda has compiled a list of popular psychology pricing strategies that you can apply to your pricing.
The most popular psychology pricing around is the .99 tactic.
[Supermart coupons that utilize the .99 tactic. Image via widerfunnel.com]
While the Tide detergent is clearly closer to $10 on closer inspection, some of us would think it’s closer to $9 when we are looking at it in a hurry. If a company sells one of its products for $9.99 rather than $10, it is using psychology pricing, or odd-even pricing
Because we read from left to right, we see the digit 9 first, and that forms an anchor in our head. Anchoring is a type of heuristic that allows us to make a subsequent evaluation based on the first piece of information we see, which is the 9. So even though $9.99 is closer to $10, it feels cheaper to us.
This particular strategy is best used for products with competitive pricing, targeted at price-conscious consumers.
Premium pricing is the direct opposite of economy pricing and involves setting the price of a product high to convey an impression of luxury and quality.
It is similar to price skimming, except that prices will hardly ever drop. It is a type of psychology pricing that appeals to a customer’s self-image.
Luxury brands like Louis Vuitton and Audemars Piguet are great examples of brands that utilize premium pricing.
[Audemars Piguet’s Roal Oak Offshore Self-winding Chronograph in steel, $28,700. Image: Monochrome]
Now, it’s hard to imagine the total manufacturing cost of a steel watch coming close to $10,000, let alone $28,000.
Due to the perception of luxury goods and association with social status, customers aren’t buying an item so much as they are buying prestige and social class.
For a brand to utilize the premium pricing strategy effectively, it must first work hard to establish a value perception. Every part of the consumer journey and marketing messaging has to reinforce that perception of high quality and luxury.
When you walk into an Audemars Piguet boutique, you walk out feeling like nobility.
If everything about your brand conveys the message of quality and luxury, then customers will deem it worthwhile to spend their money on you.
There is no singular best pricing strategy out there.
However, understanding your market, customers, and costs will allow you to plan a more effective marketing strategy. It will also help you make better-informed pricing decisions.
Do your research on your target market and customers to decide an optimal pricing strategy for your business. Also, you can use multiple pricing strategies for various products and services within your business.
Each product has its place and purpose, and a specific pricing tactic that suits its positioning will optimize your sales and boost customer loyalty!
As a finalist in Esquire's Best Dressed Real Man contest, Samuel is ReferralCandy's fashion eCommerce expert and resident sartorialist. He is obsessed with human behavior, social psychology, and handstands. He is also the lead calisthenics trainer at Weightless.
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