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 that 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.
How to Price a Product
Know The Market
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:
- New or well-established market?
If your product is the first of its type, you will have few competitors to compete with. But at the same time, your challenge will be educating potential customers on what you are and why they should buy your product.
If you are entering a well-established market, like televisions, then you will be competing with veterans that have already established a reputation for themselves. Your focus would be on differentiating yourself from the pack and winning consumers over with your novel features.
- Who are your competitors?
You may have direct competitors – brands that are selling the exact same products as you. They could also be indirect competitors, which are different products but serve a similar function.
An indirect competitor of televisions, for instance, could be tablets or smartphones. As mobile devices come equipped with bigger screens and better sound, consumers may choose them over your television.
- What do I offer that is better than my competition?
Knowing what’s offered out there and what you do differently/better will help guide your marketing strategy and also your pricing, e.g. in value-based pricing. Market research is key in helping you find out where you stand in your target market.
If your competitors only have televisions that are 50 inches wide, but yours are 60 inches, that is one feature you can focus on. Or maybe your product is 30% more power efficient?
The more differentiating features your products have, the easier it is to find your niche and zoom in on your target market.
- What’s my niche market?
After listing down the unique features of your product, it’s time to identify a niche market to focus on. Otherwise, your market will be “televisions” and you’ll end up competing with countless listings and brands out there online.
We found that using long tail keywords is a clear way to find out what your niche market can be.
Long tail keywords are keywords or phrases that are more specific than main keywords like “television”. However, they make up about 96% of total searches! Adding on to that, Ahrefs found that these keywords had fewer than 50 searches per month. So focusing on specific long tail keywords will allow you to stand out with little competition. This ultimately gives you a better chance to rank higher on search engine results.
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.
- Create customer personas
Customer personas, also known as buyer personas, are fictional representations of your target customers based on your brand positioning and target market.
You should already have a pretty good idea of who your target customers are, but personas will guide your brand positioning and messaging even better.
Customer personas can be created with demographics and psychographics of your customers. Demographics give you an idea of who your customers are, and comprise of hard information, such as age, gender, marital status, income range, etc. An example of a buyer persona for widescreen televisions would be a father in his mid-thirties who has two children and is part of a middle-income household.
Psychographics dive into the mindset of your customers to tell you why they buy. They include your customers’ values, thoughts, emotions, etc. What is important to them? How do they feel about certain topics? What are they willing to spend on? That father of two buyer persona example would probably view financial stability as his top priority. Being able to support his family comfortably will be central to his core identity as a husband and father.
While demographics can be generated from an analysis of your customer base, psychographics would require conducting customer interviews and doing market research.
- Do your market research
The most accurate way to know your target customers is to conduct market research. Apart from creating your customer personas, market research will help you understand your customers better.
Through research methods like customer interviews, online questionnaires and analyzing customer data, you will understand their pain points, concerns, and most importantly for pricing – how much they are willing to pay for your products.
This last question can be answered by asking them directly or through research on your competitors’ pricing and features.
Then it’s time to calculate your pricing, starting with your costs.
Know Your Costs
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.
What Are Pricing Tactics? What are the 5 pricing Strategies?
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. Pricing tactics takes into account the market, shifts in demand, competition, and are more temporary, say over an introductory promo period or a particular quarter.
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.
Know Which Pricing Strategies to Use – and which Pricing Tactics
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 pricing strategies for any business type.
11 Top Pricing Strategies and Pricing Tactics For Any Business
1. Economy Pricing
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.
2. Keystone Pricing
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.
3. Product Line Pricing
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.
4. Cost-Based Pricing
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.
5. Penetration Pricing
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.
6. Price Skimming
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.
7. Promotional Sale Pricing
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.
8. Bundle Pricing
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.
9. Value-Based Pricing
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.
“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.
10. Psychology Pricing
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.
11. Premium Product Pricing
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!