Pricing is one of the hardest aspects of developing a product’s marketing mix. You can have the greatest idea under the sun, the best market research, the greatest marketing strategy, and execute the best marketing plan ever, but if it isn’t priced properly then consumers won’t be attracted to it.
So how do you find that golden price at which you make profits, but your customers are also pleased with the price they paid? What is the secret to a perfect price? There is no secret, however, these strategies can help you achieve your goal of a perfect price.
1. Cost-Plus Pricing
Cost-plus pricing is the most basic pricing strategy out there. A cost-plus pricing strategy is exactly what it sounds like. You take the cost of your products, including material costs, direct labor costs, and overhead costs. Then with this cost in mind think about the profit margin you’re looking to achieve for your product and set your price off of that.
Say you’re looking to sell a necklace that cost you £10 and you wanted a 50% markup on the product. You would set the product's price to be £20 to achieve the mark-up you want.
2. Contribution Margin-Based Pricing
Contribution margin-based pricing is the next step from cost-plus pricing. It still works on the same basic principle of taking your costs and then adding a markup, but contribution margin-based pricing takes this concept to the next level by adding the variable of sales volume.
To get the most out of contribution margin-based pricing you want to maximize the relationship between the contribution margin per unit and the number of units sold. While this can be hard to achieve, if you do achieve it, it will be a massive benefit to your business.
3. Loss Leader
Have you ever wondered why Gillette’s razors are so cheap, but the razor blades are so expensive? That’s because Gillette uses their razors as their loss leader. By taking a reduced price on the razor Gillette pulls customers into using their products and then makes their profit from people buying their razor blade replacements.
Loss leaders are most commonly found in supermarkets on their cheaper items. Products like eggs, milk, and toilet paper are common loss leaders to keep you coming to their store and buying their products.
4. Premium Pricing
Premium pricing is the cornerstone of many high-end brands. Premium pricing is when you set your product to have a high price to boost the perception of your brand. This is especially apparent in the fashion industry with brands like Gucci, Louis Vuitton, and Yves Saint Laurent who keep the perception that their products are more desirable through premium pricing.
This is why rappers will brag about owning high-end brands, like how Kanye West calls himself the ‘Louis Vuitton don’. The image that a premium pricing strategy gives off is desirable and draws people to a brand.
5. Price Skimming
Price skimming is a pricing strategy where a business sets the price of their product higher so that fewer sales are needed to make a profit. This pricing strategy is very common in the electronics industry where new and exciting pieces of tech are priced higher and the price gradually comes down with time. The beginning price works well for early adopters, but not so much for the average person.
When Sony’s PlayStation 4 first came out it was brought to market with a higher price at £349.99. As time passed and the technology started to age the price dropped and now a PlayStation 4 can be bought for as cheap as £259.99.
6. Price Leadership
Price leadership is a pricing strategy used by the market leader, generally in more limited markets, where the market leader sets the standard price that the other competitors in the market use as the benchmark price. For example, in the soft drink market, Coca-Cola is the market leader, so they set the price that competitors such as Pepsi follow.
7. Psychological Pricing
Psychological pricing has to do with how we display prices. Buying a product for £100 just doesn’t feel as satisfying as buying one for £99.99 does. We all know that the two prices are the same, but having the price be reduced makes us feel like we are getting a deal which is why this pricing strategy is so widely employed across so many different retailers and online stores.
8. Price Discrimination
Price discrimination is when a business sets different prices for different customer segments in their market. These customer segments can be set up by factors such as age or location. Price discrimination is not an easy feat to accomplish however, to successfully partake in a price discrimination strategy a business needs three things. They need to accurately segment the market, prevent resale, and have market power.
A popular example of price discrimination is children and senior discounts. If you go to the cinema to watch a movie there are different ticket prices for kids and seniors. This is to encourage greater sales during the day amongst a group of people who aren’t working and have the time to go see a movie during the day.
9. Performance-Based Pricing
What if you’re selling a product that there is no guarantee it can be delivered on? Then you use performance-based pricing. Performance-based pricing is when a seller works with the buyer but only makes the buyer pay if the seller can deliver.
This pricing strategy is common amongst personal injury lawyers who apply a clause where they only get paid if your case wins in court. This method allows for greater security for the buyer who doesn’t pay if things go wrong and allows the seller to attract more customers.
10. Penetration Pricing
Penetration pricing is for people looking to enter a market and gain a sizeable amount of market share by entering with a lower price than their product would normally be sold at. This strategy’s goal to get people to buy your product while it’s at a low price so that there is a high demand that remains when the product goes back to its long-term pricing.
Pricing your product can be nerve-racking. Even with these strategies being implemented it can be hard to know whether or not your price will attract consumers. If you want help developing the perfect pricing for your business contact gigCMO today. Our market experts are ready to help with your pricing strategy needs.
