One thing is to know the types of pricing, and another is to apply the most appropriate pricing strategy for your project – the ideal one is to find the break-even point (the one in which the profit from the sale of what you offer is maximum). So how do you know which one is the best tactic? Let’s take a look.
The first thing to do is to consider these factors:
- Production and distribution costs of the product.
- Target audience and their socio-demographic features.
From here, the pricing strategy is fundamental, as a very high price will dissuade consumers from buying. On the other hand, a meager price may have the same effect, as the product could be perceived as poor quality. On top of that, it will probably mean that your project will not last, as you should always ensure that you cover – at least – your costs.
Fortunately, several techniques can help us solve this problem and set a price that both companies and consumers find adequate. If you want to know more about these strategies, take a look at this list:
- Premium or prestige pricing. We will set a price above the regular market price. This price will make customers think your product has something better than those of your competitors. Make sure that this perception is justified; if your product does not meet these expectations, you will disappoint the buyer. And remember that your competitors could launch a better product at a lower price.
- Market penetration pricing. This tactic aims to attract potential consumers at the beginning with lower prices for our goods or services. We will enter the market more softly, and when we increase the number of customers, we will increase the price progressively to reach the price established at the beginning as the optimum. Calculate the margin well to avoid incurring losses at the beginning. Refrain from making sharp increases, as this could alarm consumers, and you will lose them.
- Price skimming. It is the opposite of the previous strategy: you set a high amount and then reduce it progressively (usually when competitors react and put similar products on sale). As the main benefit, you have an initial profit maximisation thanks to early adopters. However, remember that you need to target a segment of customers with a more solvent purchasing power.
- Psychological pricing. This tactic tries to move the consumer more by emotion than by reason. The simplest (and most common) is not to round the amount and, instead of asking €20 for our product, set the price at €19.99. It is only slightly lower, but the user will be happy with it. Again, it is only marginally lower, but the user perceives it as much cheaper, as the bulk of the attention goes to the first number in the figure (a 1 instead of a 2, in this case).
- Lot pricing. It consists of selling a set of products that, in lots, cost less than if they were marketed individually. This method helps eliminate excess stock and increase the customer’s added value. A note: the strategy is more effective if the items in the lot are complementary (a toothbrush and toothpaste, for example). Be careful, as the more expensive product must compensate for the lower margin left by the cheaper one – the total amount must be profitable for your company.
- Differential pricing. Different customers pay different prices for the same product, i.e., the amount varies according to the characteristics of each buyer (or group of buyers), according to previously established parameters. For example, your customers may pay more or less depending on the country they purchase (think of the Big Mac or the iPhone – with different prices in Spain and the United States).
- Depending on the competition. There are several scenarios for this tactic:
- Primed Price: your price is higher than your competitors, conveying a sense of premium quality. Remember that you must justify this perception.
- Discounted price: you sell cheaper than your competitors, which makes you more attractive to buyers. This technique will be limited in time, as your competitors will react and lower their prices. If you always look at your competitors to set lower prices, then you are following the comparative pricing strategy.
- Average price: the price you will use to avoid taking risks. Your amount will be similar to that of your competitors; to differentiate yourself from them, utilize other tactics.
- Based on incremental costs. Focus only on your unit costs and, on that basis, increase the percentage you want to obtain as a commercial margin. Increasing your profitability will depend on it. It is one of the best strategies when starting a project, when you do not yet know how to calculate the selling price – although it does not consider the competition.
- Dynamic pricing. A product can cost more or less depending on demand or specific dates, such as airline tickets.
- Loss Leader Pricing. It involves attracting customers with an attractive discount on a high-demand product. Still, once on the website (or physical shop), they are encouraged to buy additional items, thus recouping the profit margin.
- Value-based pricing. This strategy sets the amount according to the product or service’s value. Determining this can be subjective, as you have to consider the customer’s perceived value. Hence, you need to consider how much the customer is willing to pay for what you offer.
Now you just have to decide which strategy best suits your project, calculate the returns, and implement it. Sounds easy, doesn’t it?
Photo: Visual Stories || Micheile on Unsplash.