Your products or services are hands-down the best out there. You’ve worked super hard to level up your advertising game. You are, in many ways, a terrific seller. However, you can’t seem to be raking in the sales that your hard work and products deserve. What could possibly be the problem? Two words: pricing strategy.
There’s always a fine line between prices that are too low and too high. Charging too low can ramp up your sales volume but limit overall profit, while charging too much can alienate customers and limit sales. Your job is to figure out how to walk the fine line and create a win-win situation for you and your audience. This is where pricing strategies come in.
Today’s guide helps you understand what a pricing strategy is, how price affects buying behavior, the types of pricing strategies available out there, and why dynamic pricing does it better. Let’s dive in.
What is a Pricing Strategy, and why do they exist?
The term “pricing strategy” encompasses all the methods that a business owner uses to determine how much to charge for a specific product or service.
Using a pricing strategy encourages you to look at the internal and external factors that can affect your profit margin so your final decision is always based on logic. It alleviates the bias you may have as you’re pricing your products, and prompts you to take market research into account.
A great pricing strategy is essential for pricing competitively, differentiation, generating strong profit from the onset, and sustaining growth over time.
What are the ultimate goals of a Pricing Strategy?
Ultimately, your pricing objective will be specific to your company’s needs and interests—but there’s a good chance it will revolve around some common ends.
Optimize profit
This objective is simply aimed at making the most of every sale. Businesses that typically go down this road do so by raising prices and cutting costs wherever possible. Pursuing this particular pricing goal often comes at the expense of general volume or sales volume.
Real-world example: Price increases throughout Starbucks’ history have already deterred the most price sensitive customers, leaving a loyal, higher-income consumer base that perceives these coffee beverages as an affordable luxury. In order to compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to maximize profits from these price insensitive customers who now depend on their strong gourmet coffee.
Penetrate the market
Pricing for market penetration is a method used to attract a high volume of buyers by marketing products or services at a lower price than competitors. While this strategy can be extremely useful in increasing market share, it’s worth keeping in mind that many new businesses who elect this strategy experience an initial income drop that can be difficult to come back from. The idea is that once a business successfully penetrates the market, they will be able to grow and expand their brand to attain higher profitability to make up for this early setback.
Real-world example: Netflix used this strategy when it first entered the market in a bid to outdo Blockbuster. Back then, it charged no more than $1 per DVD for regular movie-watchers. Today, the company offers three monthly plans that cost $9.99, $15.99, and $19.99.
Improve retention
Retention is a popular pricing objective. If you elect to go this road, your prices will probably be tailored to retain the prestige of your product without raising prices to the point of alienating current customers. That generally translates to keeping prices relatively consistent. For some real-world brands, however, retention often means offering price guarantees.
Real-world example: Walmart guarantees that if their customers find a lower price somewhere else, they’ll do their best to match it.
Improve sales volume
Some companies set and modify their pricing strategies to maximize sales, setting prices specifically dedicated to fostering immediate, meaningful growth.
In some cases, the endgame is claiming or maintaining a specific share of the competitive landscape. In other cases, businesses might adjust their prices to make concentrated pushes to maximize their market share.
Real-world example: Furniture company Belleze uses psychological pricing for the product listings across its website: all items end in .99. The idea behind this strategy is that customers will read the slightly lowered price and treat it lower than the price actually is. Clearly, Belleze’s aim with this tactic has always been to ramp up furniture sales.
Beat the competition
Yes, beating the competition might sound obvious, but your prices can be a powerful tool for maintaining or increasing your market share. Pricing your product low can deter competition from entering a target market—some companies even choose to sell their products at a loss to prevent new players from entering their market. On the flip side, a high price can signal to potential customers that your product is high quality, increasing the likelihood that they’ll choose your solution over those of your competitors.
Example: The pricing of Louis Vuitton products shows potential customers that they’re getting the best quality possible. A Louis Vuitton bag typically goes for $1,000, yet it’s likely to run out of stock faster than a bag from a different brand that costs half the price.
How does price affect buying behavior?
Research has affirmed time and again that the price you set has a very significant effect on how the customer behaves. If customers believe that the price you’re charging is lower than that of competitors, it could cause a major spike in sales. However, if the price you set is significantly higher than expected, the results can be disappointing.
Sometimes, though, this consensus doesn’t always hold true. Take price hikes, for instance. Raising the price could have no effect at all, especially if it is a product that’s in high demand and not available elsewhere. In fact, charging a higher price sometimes entices customers to buy because some buyers equate a high price with a superior-quality product.
Lowering prices can also have a different set of effects on a consumer. In one case, the customer can become suspicious of the low price and assume it means that the product is of a lower quality. In other cases, a price-conscious customer is grateful for a price break and will probably stock up on the item to avoid being caught up by a price hike.
So, how then do you find that “sweet spot” where you’ll always be operating at a profit while keeping your buyers happy and satisfied? The trick is to find a way to adjust prices based on the willingness of customers to pay at a specific time for an item, competitors pricing, and other variables. It sounds hard in practice, but it’s doable (as you’ll find out a little later).
4 common pricing strategies (and their shortcomings)
There are dozens of ways you can price your products, and you may find that some work better than others—depending on your industry. Unfortunately, all these strategies are fraught with glaring shortcomings. Still, it’s worth mentioning why they’re popular in the first place.
Premium pricing
Premium pricing is for businesses that create high-quality products and market them to high-income individuals. The key to this strategy is developing a product that is high quality and that customers will consider to be high value. You’ll likely need to develop a “luxury” or “lifestyle” branding strategy to appeal to the right type of customer (think: Louis Vuitton).
Where it falls short:
- It depends heavily on price-inelastic consumer demand—without an impregnable USP, you can’t justify the higher price tag for your product
- Limits your ability to sell your product to a mass market
- Leaves you vulnerable to undercutting tactics from your competitors, particularly if your industry is crowded
Cost-based Pricing
Cost-based (or cost plus) pricing is the simplest method of determining price, and it embodies the basic idea behind doing business. You make something, sell it for more than you spent making it (because you’ve added value by providing the product). Many businesses use cost-based pricing as their main pricing strategy when releasing products. A lot of these businesses calculate their production costs, determine their desired profit margin by pulling a number out of thin air, slap the two numbers together, and then stick it on a couple of thousand widgets. It’s really that simple.
Where it falls short:
- It can be horribly inefficient—the guarantee of a target rate of return creates little incentive for cutting costs or increasing profitability through price differentiation
- Discourages market research
- Doesn’t take consumers into account
- Can lead to an inefficient and unethical production process
Value-based Pricing
Value-based pricing could easily be called “customer-based pricing” because that’s essentially what it is. The more formal definition describes value-based pricing as basing a product or service’s price on how much the target audience believes it’s worth. Instead of looking inwardly at your company or laterally toward competitors, this strategy gives you an outward look.
Where it falls short:
- Difficult to justify the added value of commodities
- Perceived value is not always stable
- Price is harder to set
- Requires ample research, resources, and time
Bundle pricing
Using a bundle pricing strategy means selling customers two or more products or services for a lower cost than if they were to buy them separately. It’s typically used to entice potential customers to purchase additional products or services that companies know will be valuable.
Where it falls short:
- Some customers may prefer to buy separately
- Customers may not need all of the bundled products
Why dynamic pricing is better?
Dynamic pricing is, quite frankly, the best pricing strategy out there today. That’s because it’s both consumer and competitor aware.
Dynamic pricing is a strategy where you change prices based on changing market trends and outside conditions, such as time or location. In essence, the idea is to sell the same product or service at different prices under different circumstances.
So, what makes it such a formidable pricing strategy?
It factors in trends and seasonality
Do you make a lot of money during certain times of the year? You’re not alone. A lot of eCommerce businesses are seasonal, so it’s important to make the most of your pricing strategy during your busy season.
During busy shopping seasons, price becomes even more of a customer touchpoint: customers are constantly scouting for seasonal deals and bargains. With dynamic pricing, you’ll not only maximize profits from the seasonal crash, but you’ll also provide customers with a great experience.
It caters to customer fluctuations
The best part about adopting dynamic pricing is that you can maximize the amount you make from each sale. For instance, if there is a low demand for your product, you can reduce the price to encourage your clients to buy from you while ensuring none of the products go past their due dates.
Food retail is the perfect example of an industry in which this might happen. When demand slows down, a supermarket that uses dynamic pricing will charge lower rates for food items in an effort to capture as much demand as reasonably possible while reducing waste. Similarly, if your product is in high demand, you can hike the price to match the positive fluctuation.
It provides more insights into competitive behavior
With dynamic pricing, the pricing curve for each competitor in your field becomes easier to calculate. You’ll know exactly how and when they tweak their prices so you’re able to adjust yours accordingly.
It goes without saying that when you offer the same product or service at a lower price, you’ll inevitably attract the attention of the market. More customers would come to buy your product or service, and as you know, more customers mean more sales.
Track the Goldilocks Zone of your industry for optimum profitability
What is goldilocks pricing? The Goldilocks zone is simply the optimal intersection between goods sold and profit margin per product. Your industry’s goldilocks zone is an ideal state whereby you can comfortably adjust prices and still remain profitable regardless of other inherent factors.
Uber and airlines successfully use dynamic pricing to find their goldilocks zone, and it’s a strategy they’ve perfected over the years. Unfortunately, finding this zone is far from a cakewalk, especially if you’re doing it manually.
Our automated dynamic pricing technology is built to find your goldilocks pricing and utilizes that benchmark to leverage other benchmarks when necessary. By asking a few inputs from you (think: costs, price range, desired objective), we can begin to build pricing profiles on each of your products. These pricing profiles model your profit sensitivity so you can set optimal prices. As purchasing behavior changes, your prices will update to meet a fluctuating goldilocks zone. What’s not to love?
How to automate the whole process? Say hello to Trellis
Amazon sellers, your search for a next-level, market-aware dynamic pricing software ends here. Trellis is the name, and pricing products with confidence is the game.
When we were building Trellis, we knew that we wanted to create a tool that would alleviate the hassle of manually repricing products every now and then. We knew we wanted to give Amazon sellers the power to price their products for maximum competitiveness. We knew we wanted to help eCommerce businesses run better by offering a great price, every day. And judging from the overly-positive customer reviews we’ve received so far, we can confidently say that we nailed it!
Talk to us about your pricing goals, expectations, and strategies, and see if they can be met through our platform.