When you’re a small business owner, establishing your pricing strategy is one of the most critical decisions you’ll make. It directly affects your bottom line. While you want to make sure your pricing is competitive, setting the lowest price doesn’t guarantee success. There are many factors to weigh. You need to assess your production costs to establish a pricing model that will keep you profitable, research market competitor pricing, and anticipate how your pricing will affect consumers’ value perception.
As you evaluate the best pricing model for your business, here are some popular strategies to consider.
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Everyone appreciates a good deal, which is why discount pricing is one of the most widely used strategies to generate sales. With discount pricing, you temporarily mark down the price for a good or service. Companies often employ this strategy seasonally, or as part of a specific promotion. While it can be effective for increasing sales and getting rid of inventory, it should be used in moderation. If it’s overused, consumers come to expect reduced prices and become unwilling to pay full price.
On the opposite end of the spectrum from discount pricing, there’s premium pricing, which is when businesses deliberately set prices higher than competitors. By doing this, you can establish your product or service as high quality in the minds of consumers. If you use this strategy, having a high-quality product is a must, and every aspect of your company, from your branding to your service, must project that the product is worth the higher cost. This can be a useful strategy if you have a unique product, or when you introduce your product to market, assuming there’s not much competition. The downside is that your production costs are higher. If you use this strategy, make sure it can support a high enough sales volume to keep you profitable.
Market penetration pricing
A market penetration pricing strategy is as it sounds: When you first enter a market, you keep your prices low to attract new customers and increase market share. This is a worthwhile strategy if you know your product will be in high demand. By keeping your prices low, you can discourage competitors from entering the market and therefore keep sales volume high. While this is a smart short-term strategy, as you establish your position within a market, you may want to consider raising your prices.
Unlike market penetration pricing, with price skimming, you set your prices high when you enter a market. With this model, you’re basing your prices on the valuation of your products, not on the competition. However, as more competitors enter the market, you’ll want to consider dropping your prices. Skimming is a smart strategy if you’re a new business in an emerging market where consumers are willing to pay top dollar. It enables you to maximize your profits early on. That way, you can comfortably cover overhead costs, and have more pricing flexibility once there’s more competition in your market.
Also known as “odd pricing” or “charm pricing,” psychology pricing is a well-known strategy. It’s based on the theory that certain prices have a bigger psychological impact on consumers than others. For example, selling a product at $99.99 rather than $100.00 attracts more customers based on value perception. While the difference is nominal, consumers are more compelled to buy your product or service because they think they’re getting better value. Psychology pricing is a good way to increase sales with little cost impact to your business.
Get the price right
Pricing strategy is complex, and you need to strike a balance between competitive pricing and turning a profit. There’s a good chance you’ll need to tweak your pricing strategy over time, but put the time in early on to develop a plan that works for your business model.