There are a number of things in life you don’t want to learn after the fact — the weatherman predicted a downpour during your outdoor adventure, an expired driver’s license affects your insurance big time, or the shop around the corner has been outpricing your business for months.
While some scenarios are minor inconveniences, others are incredibly costly. For small business owners, not doing the right pricing research ahead of time can be especially disastrous.
What are common pricing strategies?
One of the first things potential customers notice about a product or a service is its price, so knowing your market is key. Price can make or break a deal. To help kickstart your research, here are six pricing strategies to help you decide which approach is right for you and your small business.
#1 – Competitive Pricing Strategy
If you’re looking to set your price based on what other key players in your market are doing, you’re already subscribing to a competitive pricing mindset.
Setting a price based on the competition is a great strategy to at least consider. If you’ve got a similar product or service to the next guy, you can assume he’s done his research, and that removes some of the trial and error for you.
If your business doesn’t differentiate itself by price, however, you’ll have to find another way to set yourself apart. Whether it’s your incredible customer service or the ease of purchasing your product, be sure to distinguish yourself from the competition in some way to land the sale.
#2 – Value-Based Pricing Strategy
This pricing strategy is all about what the customer perceives to be the value of your product or service. In your particular location, what are people willing to pay for what your business offers?
Finding this information out doesn’t come without some heavy lifting on the business owner’s part; a lot of time and research has to go into this strategy.
But if you’re willing to invest the time through customer surveys and data analysis, you’ll not only discover an incredibly accurate price, you’ll also have customers who feel valued and appreciated.
#3 – Price Skimming Strategy
Price skimming is a strategy where initially the price of an item is set considerably high but over time is lowered. Customers are willing to pay these higher prices when innovative products like the newest electronics hit the market.
If you’re in the technology sector, price skimming may be the right strategy to consider, but imagine the displeasure of early clients who come to find out how much lower they could have had your product for if they had just waited.
For this reason, carefully weigh the decision to use price skimming. It’s not advised if you’re in a crowded market or if the demand for your product rises and falls rapidly based on price.
#4 – Premium Pricing Strategy
If you’re certain your product or service will be seen as the cream of the crop, you might decide that charging a premium is the right move.
Many customers are likely to attribute more value to products or services that are at a higher price point, but the disadvantage of this one is pretty obvious — over-estimate what potential customers are willing to pay for your brand and they’ll be turned off completely.
If what your business offers is particularly unique, limited, or high-end (or if there’s at least the perception that this is so), the premium pricing strategy could prove to be quite profitable for you.
#5 – Penetration Pricing Strategy
In the short term, using penetration pricing is the equivalent of putting up a giant flashing sign saying,
“Hey! Look over here at this ridiculously low price!”
While prices are set surprisingly low to encourage an initial rush of customers, the catch, of course, is that those prices can’t be sustained forever, and a gradual increase will follow.
When employed wisely, this strategy looks like offers which include one month free for a yearly subscription service. On the other end of the spectrum is the company that got your attention with a great introductory offer but made little effort to let you know how high the price would spike once the initial time period was over.
However, long-term penetration pricing isn’t sustainable, and poor use will damage customer loyalty, so consider this strategy carefully.
#6 – Bundle Pricing Strategy
You’ll be wrapping multiple items up in one neat and tidily priced package if you opt for bundle pricing.
Say you own an athletic shoe store. Customers may be drawn in initially to just buy new running shoes. But if you bundle shoes with socks, you can price the combined items at a lower price than if they were purchased separately.
Using this strategy can help you position yourself as a problem solver. Done right, the customer will appreciate the convenience. Do your research, though. Bundling products unnecessarily will have your customers annoyed and likely searching for other options.
How should I make prices for my business?
Look, there’s a lot to consider when it comes time to set your prices. Know important factors like your costs, customers, and competition, but also spend time considering who you are as a brand and what your pricing will say about you.
Intelligent pricing will help set your business apart from the pack and set you up for success.