Maximize profits and keep customers satisfied using these effective techniques
Pricing. It’s the million-dollar question that can make or break a company. Aside from being able to cover your costs and make a profit, do you know that your pricing is a strategic tool you can use to gain market share or send a signal to the market about the value of your product or service? If you don’t get your pricing right, you could be leaving thousands (if not millions) of dollars on the table.
Here are four different approaches to pricing:
Premium pricing can show customers your product’s value while improving profit margins
Premium pricing occurs when a business offers goods or services at a higher cost than its competitors, usually to signal the high value of the goods or services themselves. This usually works best when the business has something unique and specific to sell.
For example, it’s going to be tough to sell a yellow pencil or a roll of toilet paper at a 60% premium (though there are always exceptions), whereas it might be easier to similarly markup a unique new piece of business software. In the end, the more your product fills an unfilled niche or solves an unsolved problem, the higher premium you can charge compared to similar products.
Price skimming can help maximize initial profits for a novel product or service
Much like premium pricing strategies, companies utilize price skimming strategies by initially offering a product or service for a high price, signaling its value and increasing potential profits. As the market becomes more saturated with similar products or services, the company “skims,” or reduces the price, in order to retain its edge against the competition.
As a well-known example, when Apple releases a new iPhone with awesome features, the price is usually very high. But when it releases even newer models – and Android or other competitors release phones with similar (or better) features – Apple cuts prices on its older models to remain competitive.
Market penetration pricing can be expensive at first but may pay off in the long run
The diametric opposite of pricing skimming, market penetration pricing occurs when a business initially offers its products or services at a lower or discounted rate. As the products or services gain more clients/users and more credibility, the company can slowly raise rates to equal or exceed the competition.
Market penetration pricing can be an effective strategy when a business is trying to prove itself in an already saturated market; by keeping initial prices low, more people may be attracted to try the product, allowing the company to quickly expand its customer base.
Market penetration pricing strategies are often more effective when a product or service seemingly has little difference to its close competitors (e.g., the aforementioned yellow pencils or toilet paper.) For example, an initial low price might attract new customers to sample a company’s pencil, and, as they grow to love its other benefits (ex. durability, smoothness, smudge-proof graphite) they become willing to pay an increased price to stick with the product.
Bundle pricing strategies can get rid of unsold products and add a boost to your marketing
Bundle pricing refers to combining, or “bundling” two or more products or services into a package, usually at a reduced price. This strategy can work particularly well for businesses that sell physical products and are trying to get rid of unsold merchandise. By bundling a popular product with the less popular product, a business may be able to get more customers in the door. After all, they’re getting something for a big discount.
Smart pricing is more than just covering your costs and making a little profit
In the end, pricing shouldn’t just be about recouping your costs plus adding a premium. Instead, you should make sure you’re pricing in a way that fully maximizes profit for your business, and sends the right signal to the market while keeping your customers happy. If you’re wondering whether you’re getting the most out of your current pricing strategy, consider some of the methods above.
Profit Point Consulting’s mission is to accelerate the growth of small and medium-sized companies through sound, strategic advice, and proactive financial management. If you need a trusted advisor to help develop and execute your vision, call us at (973) 659-1430 or fill out our contact form.