Pricing Strategies for a Strong Bottom Line

A price strategy is every bit as important as what you’ve got to sell. After all, they dictate what you will charge for the goods and services you have on the market. In the end, getting these pricing strategies right is a bit of a balancing act. You’ll need to find that sweet spot between market demand and maximum profits.

Here’s what you will need to consider to put together a good strategic pricing model.



What is Pricing?

Pricing is what you decide to charge for what you’re selling. Sounds easy but there is a little more to it than meets the eye. Any small business that wants to get this right needs to have a plan. Remember, finding the sweet spot is about a lot more than just finding out what customers are willing to pay at any given time. Good pricing strategies are sustainable and flexible.

Why is Pricing Important?

Pricing is important because it’s a major factor in a customer’s buying decision. In a nutshell, pricing is how you translate the value of what you’re selling into cash. Pricing strategies help you to tap into your target market. A low price can put you right out of business if you don’t meet your overhead. A high price that’s too far the other way can cut you out of your market.

Pricing Strategies

You need good pricing strategies in the same way you need a good business plan. Every small business needs to understand what they can charge for products and services. These strategies supply a road map to follow when it comes to pricing. Following one of these strategies can even let you know when you can charge a higher price. In a nutshell, they help you to determine the value of what you’ve got to sell.

1. Competition Based Pricing Strategy

If you are selling things that are similar, this is the pricing strategy your small business should be looking at. Here’s how competitive pricing works. First off, this works best for products rather than services. It works when the price for those products has reached a balancing point between your business and others.

This pricing strategy starts out using the going market rate to set a price.

The idea is to be able to charge a premium price to get ahead. To get that high price you’re going to need to be innovative. Generous payment terms and extra features are just two ways to lock down a bigger market share.

Competitive pricing strategy starts out with a price based on what the competition has established. Say you’re selling new software at $50 for a monthly subscription. So is the next guy. You add online customer service and charge $60 a month.

2. Value-Based Pricing

Basically this is pricing based on what customers are willing to pay.

There are several steps to this pricing model. You need to do a bit of detective work here to find a competitive product. Next, you’ll need to list all the ways your product is different. Stress the financial value on these differences. This is a reasonable way to defend your pricing strategy.

Here’s a tip if you’re thinking about using value-based pricing. This isn’t a one-off type of pricing strategy. It’s a process you need to keep tweaking as you go along. Here’s an example.

Value-based pricing works well in service industries like a restaurant. You can compare with a competitor’s menu and add ingredients to justify the higher price. Get your marketing department involved to defend the price difference.

Value-based pricing is established on what you can make customers think the value is.

3. Penetration Pricing Strategies

If you’re a business looking to break into a new market, penetration pricing is for you. Here’s how this pricing strategy works. It’s simple really. Your business enters the new market at a low price. And then you raise prices over time. Penetration pricing rests on customer loyalty. This pricing strategy rests on the value you’ve placed on your goods and services. And the hope customers will stay with you as prices go up.

4. Premium Pricing Strategies

This is the best pricing strategy for high-end or luxury items. A business needs to have a solid brand to make this work. Perceived value is important in premium pricing.

Take a look at the prices for SAAS products. Offering different premium pricing from the basic up to enterprise and Unlimited Versions is a good example of how this works.

How to Price a Product or Service

Whether you’re going to use premium pricing, value-based pricing or another version to set prices, depends on a few factors. By now, you know that pricing isn’t as simple as you might have thought. There is no one-size-fits-all pricing strategy for your business.

Below you’ll see some pricing tips to help you get started.

Pricing Tips

Here are some tips to get you going. Remember you can tweak these to suit your business model and style.

1. Don’t Go Too Low With Price

Christopher Grozdon is the CMO at  DASH-SEO. He cautions against pricing your services or goods too low.

“When you price too low, it’s ultimately a race to the bottom and you tend to attract a lower-quality client. As a business owner, nearly every lower-priced client we’ve had has always been much more demanding than the higher-priced clients.”

2. Be Patient Pricing

Getting maximum profits is about understanding the market when you’re pricing

Brian Robben, the CEO at Robben Media, explains one angle.

Once you bring out new prices, think about increasing them in six or 12 months if there’s no pushback.,” he says. “With enough price tests, you’ll find the right balance to thrive as a business and provide value to your customers.”

3. Know Your Market

Pricing is a journey. It’s important to take the right steps to get what you charge for your product just right. Don’t forget to do your homework.

“Where it concerns online and offline prices, it’s important to investigate consumer behavior,” says John Davis an Education Ambassador for Score Sense. “For example, if you’re selling craft products customers may be more likely to buy in bulk online. However, if you’re dealing with something that requires more assessment upfront, like a piece of furniture, you may want to tweak your in-store pricing to be lower than online to encourage visitors.”

See the section below for more information on this.

Pricing Q&A

There are some common questions about how to price a product or service. Below are some of the big ones about value and prices.

Should I Use Psychological Pricing?

Like the name suggests psychological pricing is about using psychology to sell. In a nutshell, it’s about tweaking the product price based on what’s known to work. Setting the price lower than a whole number is one of the tactics that’s used. It’s an effective way to set a price in the short term

A recent report from Stripe revealed that the simple act of pricing something with .00 or .99 can have a considerable impact on the purchasing decision of your customers.

  • When it comes to buying products, new customers make more overall purchases that end in a 9 for items that cost under $10. However, Stripe says it also extends to items costing $700, $800, or $900.
  • Evidence of this practice has resulted in higher purchases by consumers for items ranging from $.99 to hundreds of dollars.

To learn more, read: Psychological Pricing Online Helps Merchants Sell More, Study Finds

Is Pricing an Online Product or Service Different from Offline?

Here are a couple of things to keep in mind when pricing your product and service to sell online or in a brick and mortar space.

  • Loss Leaders Aren’t as Effective Online: Loss leaders, or products that are sold with little or no profit margin in order to bring in shoppers, are popular at brick and mortar stores. But because selling online can be a faster and more direct process, this strategy isn’t always effective. So you want to be very careful when discounting a product or offering a product with slim margins.
  • Your Policies Can Impact Your Prices: Another thing that can impact what customers are willing to pay is your policies for things like returns, exchanges and shipping mix-ups. If customers know they have the option of returning a product that doesn’t fit or work out, they are likely to pay a bit more than they would at a site that doesn’t offer returns or cover them in the case of shipping mishaps.
  • Your Products and Services Are in One Location Online. Pricing a product online is easier because there’s generally one price since there’s one location. If you’ve got several brick and mortar stores, your product can have several prices depending on where they’re sold from.
  • Multichannel Makes A Difference. Multichannel retailers often try to match product prices they find in online giants like Amazon. These strategies create a wedge from the price they charge in a physical store for the same product.
  • Product Costs Are Different Online. When you’re putting a price on your product, there are some similarities between online and offline. And there are differences. For example when you’re using value-based pricing on the Internet, your shipping costs and marketing budget are much lower. That gives you more wiggle room with the price.

To learn more, read: 20 Secrets for the Best eCommerce Pricing

How Do I Know When a Price is Right?

If you sell services directly, then one measure is the buyer’s reaction:

  • If the prospect rejects the offer out of hand, he believes the price is too high, which means you have failed to sell the benefits of what your company provides.
  • If the prospect takes the offer immediately, you have given away too much value for too low a price; your prospect feels like he’s discovered a Van Gogh original at a garage sale!
  • You know you’ve got it right when your prospect accepts your offer only after some deliberation. In this case, he knows the value he is losing if he says no.

If you’ve got a product you’re selling in a B2B setting, here are some tips you can use.

  • When you’re selling to another business, you’ll know the price is right when you never stop working on it. Getting input from the marketing and product development departments needs to be constant.
  • You’ll know the price is right when the tech tells you so. Businesses can use algorithms today that rely on analytics. Check these pricing analytics tools out.
  • You’ll know the price is right only after you’ve done your homework. In a B2B setting that means putting together a customer profile. Keep in mind customers are more price-sensitive than smaller ones. It also helps to know at what stage in the business cycle your prospect is. Don’t leave any details out. Dealing with businesses means adding in customer support to your price. It’s the kind of added bonus that can bump up your bottom line.

To learn more, read: How to Tell if Your Pricing is Right

Conclusion

Whether you are pricing a product for service, a thoughtful well-planned approach is best. One of the best things you can do is to first figure out your target market. When you know what that demographic looks like, you’ll be able to make some other choices.

Keep in mind pricing your goods and services properly isn’t a static process. The most successful businesses are always tweaking their approach. Pricing is important because it helps to define the value of what it is you are selling. For many businesses, it’s one of the most important aspects of everything they do.

Determining your price points is the most important feature next to what you are actually selling. Finally, remember getting pricing strategies right is a battle that depends on economic cycles as well. Considering all these factors will help you to get this right.

Image: Depositphotos.com




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