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5 Popular Approaches To Pricing Products And Services
Pricing can be a big headache and a constant business issue that you have to manage carefully.
Many times, pricing is not as straight forward as you think. It could take some time of testing before you find a price point that delivers the best bottom line for your business.
The thrill of watching sales go through the roof when you decrease it, and the misery of watching sales come to a halt when you increase it, can be fun at times.
With all that said, here are the 5 most popular pricing strategies that businesses practice.
1) Introductory pricing
This is a popular pricing approach used by startups to grab market share. It also plays a dual role in that the early customers become beta testers for the startups for their products. The experience gathered from user experience is then used to refine the product before charging a higher price.
Because it is a strategy often associated with startups, the products or services being offered here are usually of better quality or value. Because… why would you start a business offering something that is inferior to the competition.
The startup usually brings value to the table in 2 ways:
- As good as the market leader but cheaper
- Better than market leader but same price
And as there is no track record, it is really not ready to charge a high price for a better product. Doing that will meet with a lot of resistance in consumer acceptance.
This leads to their adoption of introductory pricing where the price is below the specific market their are targeting, but higher than lower end markets that they want avoid.
For example, if the a premium product in that particular market is $49, and lower end merchants are selling at $35, an introductory price approach will often be between $35 and $40.
The price will of course start rising when demand rises and more consumers start recognizing your superior product at a lower price. Higher end buyers at this point will be more comfortable in switching to you.
2) Going rate
in certain businesses, the rate that you can charge is already determined by the market. This happens when consumers are so used to paying a particular amount for a service that a price other than what they expect can raise questions on how legitimate your business is.
An example of this is calling a plumber over the unclog the pipes.
If you run a type of business like this, even if you have a better service, it is better to stick to the industry practice than to proclaim yourself as a maverick.
You can easily exceed customer expectations by doing more for the same price.
Instead of charging a higher price, you will raise revenue by repetitive sales, up-selling, and cross-selling.
3) Go down the middle
In times when you are uncertain of where you are positioning your products, the wise thing to do is to split the difference and go down the middle. This helps you avoid being too cheap or too expensive.
This is a common approach used by new entrants to an industry filled with numerous similar products are a variety of price points. Don’t be surprised that all those competing products belong to only a handful of competition.
As big companies with big budges try to corner markets, they release similar products with different brands at different price points. Very often the only difference between the products is just a label on a different packaging. This is so that they capture the whole spectrum of consumers in terms of price.
In markets with fierce competition, you can go down the middle and test the market response. You position in the consumers’ minds will be revealed after some time. You can then adjust your price accordingly.
If you really want to start off with a bang, price your products at a bargain price.
Many problems can come up with such a tactic if you don’t know what you are doing.
- You might get too much customers than you can handle. Resulting in poor service.
- You could be selling at a loss.
- Negative impact on brand.
- Price sensitive consumers are often also consumers that are most difficult to please.
- You could ignite a price war that you cannot win.
If you have to go with bargain-basement pricing, consider merging it with the introduction price approach. This leaves you a little leeway to maneuver if things don’t go along as planned.
If you are in an industry that is all about branding, you can go with premium pricing if you are confident enough about how you are branding your stuff.
An example is the market for perfumes. These liquids are easy to manufacture. And if you are too busy to find out how to make them, don’t worry. Just walk into a manufacturing plant and describe to the sales manager what kind of scent you want to produce. They will then mix and blend one according to your requirements. All that is left then, is to package it nicely and sell for 5 times the cost to make it. The distribution channel plays a critical role for success in perfumes.
In the market for premium products and services, consumers are often willing to pay more for quality. They have the buying power. It’s left to businesses to court their attention.
This means that if you indeed produce a better product or offer a better service, consider charging a premium price for that added value. Consumers in the premium market are often receptive to paying more for something that provides a better experience.