More and more frequently big name businesses are realizing the importance of strategic pricing as a solid base for their companies.
Pricing is one of the three, basic “P”s to remember when creating your business plan: Product, Promotion and Price.
This is just part of the life cycle of selling products.
Establishing the value of a product can be complicated and is considered one of the most difficult tasks in any business.
But with the current market conditions, consumer trust and the recent economic crisis there’s not much room left for errors.
It’s been said that pricing, “is the art and science to understanding how much any given client is willing to pay for a product or service.”
In other words, this is the methodology that we need to use in order to determine how much any given company should receive for their products.
In order to speak about pricing strategies, you need to first make sure that every area, such as technical management; sales, communication and commercial distribution are all on the same page or level.
The basic principle of any successful pricing strategy is to set prices that are beneficial for both the buyer and seller of any company.
The general idea is that the client and the business gain more or less the same amount of satisfaction (whether in cash or product quality). The price of any product is essential to successful business because the price defines the product.
Remember: It’s important to also keep in mind the type of market you’re working in.
You will surely ask yourself at some point or another what the best strategies are to follow in setting a good price. As said before, the most important thing to keep in mind are yourpotential clients.
Before even beginning to develop a new product, you need to choose which market you’re looking to conquer. In other words, your potential future cliental depends mainly on the market that you choose to work within.
If your product is already on the market, however, you should first check to see what the other prices look like out there. Check out the highest prices in comparison with the lowest prices and then try to find a happy medium.
Always keep in mind the relationship between price and demand.
The quantity of products that you sell must be relevant to the type of business that you’re in and how demandingyour product is at the moment.
Generally speaking, the most well known tactics in pricing are neutralizing, penetration (or ladder) and skimming. And while all of these tactics are wonderful, they’re certainly not the only ones being used. You must also take into consideration some psychological strategies.
What neutralizing is really all about is finding prices that are similar to yours in your same field of competition.
Neutralizing is really the most commonly used strategy that exists. The biggest advantage to using this particular strategy is that you can use it in almost any type of company no matter the size or financial status.
On the other hand, even if your business is in a financially stable situation, that doesn’t necessarily, mean that you can maximize your profits or increase your product demand.
A good example of this specific strategy would be the many types of auto service stations or stores that use pre-established prices.
Begin by first setting artificial, low prices in order to slowly increase your prices over time within the same market.
Once you have a solid cliental, you’ll then be able to slowly raise your prices as you wish.
However, we recommend that you keep in mind a few factors, such as: your consumer’s flexibility, if your products will generate large amounts of customers quickly as well as the potential threats your company will face in terms of competition.
By using the ladder effect, you can gain more clients from your competition, but the minute that sales start to take a dive, you will need to readjust your strategy and continue to do so every so often.
This strategy, however, is only most effective at the very start of opening a new business. Keep in mind that the older your business is, the less interested your customers will become and the number of sales may decrease.
You must be very careful using this type of strategy and always bear in mind that if your competition sees that you’re taking their cliental, they may lower their prices and thusly take back those same clients from you.
Consequently, a situation such as the one just stated isn’t the most ideal for anyone in any business.
So, remember that using the ladder or penetration effect is only truly effective when starting a new business because it’s new and the customers are excited and curious.
Being the best of the best in any business means that you can charge as much as you’d like because you have that rare advantage of topping all other competition.
Using this technique means that you use higher prices to draw the attention of customersaway from other companies and directly to your own.
However, as the demand of your product or service increases, the price of your product or service then begins to decrease.
Our recommendation is to use this tactic when the demand of your product is more or less flexible. In other words, don’t begin by using this method if the volume of production within the company is not high enough to support the tactic.
It’s best to use this particular strategy when the competition isn’t as strong, or, in other words, when the quality of your products or services justify the high costs.
Unlike the ladder approach, the skimming technique is most effective after your business has already been established within the market. Once you’re already got your name out there, you’re able to count on those faithful customers who will keep coming back despite your rising prices.
This is to say essentially that once your buyers have seen that your product is the best, they won’t have a problem paying more money. They have faith in you as the seller that they’ll get a bang for their buck.
Lots of big name electronic companies have been using this technique for years. OnceApple launches their latest gadget, Microsoft advertises their latest xBox and Samsungstarts promoting their newest smart phone all for much higher prices simply because they can afford to do so.
You’ll see after implementing this tactic that it can greatly help widen your profit margin without having to sell more products.
Using this tactic isn’t exactly the most logical one, but then again:
Most of what we do is not logical… it’s emotional.
Take a look around at the prices you see in your local grocery store or mall. It’s more likely that you’ll see any given product priced at $19.99 or $3.95 instead of an even amount like $20 or $4. Believe it or not, there’s a method to that madness.
For whatever reason, clients perceive these prices to be less expensive than an even price.
According to a study in The Marketing Bulletin, 60% of products are set at prices ending in the number 9. For one reason or another, the general public is under the impression that something selling for $9.99 is cheaper than an item set at $10.00 even.
In the business world, prices with decimals are perceived as lower and therefore draw a larger crowd.
As you may have guessed, this technique is used when going gets tough. When the economy is going through a shaky period or when the competition gets fierce in your field, you’ll be expected to come up with new presentations/ideas/story boards solely related tokeeping your current customers.
The simplest way to apply this concept is to increase your amount of products.
For starters, think about your packaging. Try implementing larger sized packages and thusly raising your prices a bit higher. This technique is used to convince your buyer that you are providing them with more products and therefore have the right to higher your prices accordingly.
Let’s face it: this is what most major companies are doing these days.
When you go to the grocery store, it’s not necessary to buy 5 gallons of washing machine detergent, but if people think they’re saving a couple bucks every month that they don’t need to spend on detergent, they’ll surely grab those 5 gallons over the single one sitting next to it on the shelf.
Just think about Walmart or Costco for a second. They started this trend years ago and over time, we see more and more companies implementing the very same tactics. Why?Because it works!
In this article, we have simple shared with you the most popular and successful methods in pricing. There are many more out there if you take a look, but, from experience, we recommend starting with 5 most successful listed above. Over time you’ll see just how effective they truly are.
If you’re educated on the life cycle of products and how to apply these strategies effectively, you’ll see your sales profit slowing rising each day and you could just save your company!
Remember that just as very person is different, so is their business and how they choose to run their business. With that said, choose the techniques you use carefully and always go with the one that you’re sure you can implement the best.