Competitive, premium, value-based, skimming, and penetration are five of the most used strategies in pricing goods and services.
Price is an extremely important factor for consumers. In fact, it is the number one factor in deciding where to buy. Pricing products properly is essential to obtain good financial results and still guarantee profit for your business. Today, consumers can buy from wherever they want, whether through online stores, apps, social media, etc. In addition, they can also compare prices using Google Shopping or specialized price comparison sites. The point is, buyers are smarter, so you also need to be. For this reason, consider the following strategies for attracting customers and increasing sales.
How does the customer evaluate the price?
Before we talk about pricing strategies, you need to understand how the consumer evaluates this variable. It’s not just the numbers on the label. There is a subtle difference between the price of your product and the value it has. It is the comparison between these two factors that will make your customer assess whether the merchandise is priced low, high, or fair.
The price is the investment made by the consumer in the purchase of this merchandise and involves the cost of production, taxation, profit margin, and operating costs.
Unlike price, value is not based on numerical data, but on subjective aspects of the consumer. The value refers to the extent to which a product meets the customer’s needs and the benefits that the customer perceives in the merchandise compared to the investment he will make at the time of purchase. Value is what makes customers willing to pay twice as much for a certain brand in relation to another with the same specifications.
Therefore, it is important to ask yourself what is the benefit that a customer sees in your products and how much they are willing to pay. With that in mind, consider the following pricing strategies.
1) Competitive pricing
This strategy relies on competition to define the final price of the product. This is common when your product or service differs very little from that of your competitors. Therefore, you adapt their price. Companies competing in a highly saturated space prefer this strategy, as the slight price difference may be a factor influencing the decision for buyers.
With this strategy, you can price your product slightly cheaper than your competitor’s, use the same price as your competitor’s, or set the price slightly more expensive than your competitor’s. Note that there is always a market leader that sets the standard, and competitors follow it.
The objective of the competitive pricing strategy is to increase the number of customers or increase market share by attracting customers from competitors. However, keep in mind that no matter what price you have chosen, competitive pricing is a path that will help you stay ahead of your competitors and dynamically maintain your pricing.
2) Premium pricing
This is a pricing strategy where you set the price of your product or service above the normal market price. This can make consumers think that your product has something special and of greater value than those offered by your competitors. Although this pricing strategy may make other consumers not buy from you, that’s okay. Because one of the premises of this strategy is that higher-priced products create a different perception of the market.
However, you should study your product and think about why it should be more expensive than others in the same category. It does not make sense that you raise the price of a product that does not really meet consumer expectations, or that the competition offers one that surpasses yours at a lower price.
3) Value-based pricing
A value-based pricing strategy is when companies price their products or services based on the consumers’ willingness to pay. In short, the price is set according to the perception of the buyer’s value on the product. Here, even if a product is assigned a higher price, consumers will still be willing to buy the product. However, it is difficult to measure the value that customers attach to a product. Therefore, you must work to establish the correct estimates.
If used correctly, this strategy can boost customer trust and loyalty. Likewise, it can help you prioritize your clients in other facets of your company, as well as marketing. On the other hand, the value-based strategy requires that you know your customer avatar well.
4) Price skimming strategy
Skimming pricing is the setting of a high price for a product or service in the initial period of sale and gradually reducing the price of that product or service later. This is done to reach more general consumers.
One of the biggest benefits of using this pricing strategy is that it allows businesses to maximize profits thanks to so-called early adopters. Lowering the price end up attracting those consumers who are much more sensitive to the price of a product or service. This strategy is suitable for products that have a short life cycle, such as those that are really trendy.
Before implementing this strategy, you should first understand the following:
- The strategy will be more effective when there is little competition (when you enter, you lower the price gradually)
- You can implement this strategy as long as your product or service has the necessary quality to be able to be purchased at a high price in its introduction phase
- Being a more expensive product, in the beginning, you need to target a segment of the population that has a higher economic profile
5) Penetration pricing
Penetration pricing is the initial low price setting for a product. The goal is to set a price to get a large group of customers interested in buying. When the products’ sales increase, the price is returned to the same level as the competitors.
Penetration pricing is suitable for products that can replace other products. For instance fast-moving consumer goods such as vegetable oil, detergents, soaps, toothpaste, instant noodles, and so on.
As for the progressive rise in prices, be very careful. You will have to take great care of the volume of these increases. If they are drastic, you will lose many customers as fast as you have gained them.
Clear examples of this pricing strategy were used by Netflix and Amazon.
Both offered quite affordable prices for great service, and have recently raised their rates. However, they have become necessary in our lives, and we consider that even with the rise, the price is still affordable for what they give us in return.
In principle, this strategy can make you known in the market and attract buyers, but it can also hurt your bottom line. Therefore, you must know your costs (and margins) so as not to incur losses.
| Strategy | Pros | Cons |
|---|---|---|
| Competitive | Gain market share | Lower margins |
| Premium | Higher margins | Higher cost + quality |
| Value-based | Customer satisfaction | Difficult to measure |
| Skimming | Higher (initial) margins | Only for certain products |
| Penetration | Gain market share | Lower (initial) margins |
Important tips for defining pricing strategies
These pricing strategies, when thoughtfully applied, have the power to attract customers to your business. However, it is important to evaluate other aspects before changing the prices of your products or services. So here are some tips to help you at this point:
Pay attention to your costs
Even with the increase in demand, reducing the prices of your products without observing the costs of production and acquisition of your merchandise can cause serious losses to the business. So, evaluate this information well when setting pricing.
Define your strategy in relation to the competition
Before setting a price, it is important to check how your company wants to position itself in front of competitors. Does your company want to offer more for the same? More for less? Or more for more?
Try not to set high prices for products of lower quality than those offered by competitors. This is the worst pricing strategy that your company can adopt.
The low price does not retain customer loyalty
A low price may attract more consumers, but that is not what will turn them into loyal customers. It is necessary for your small business to set itself apart and make consumers return. To distinguish itself through the agility of employees, the quality of service, or the environment of the establishment.
Count on the right tools
Price is an extremely dynamic variable. Controlling and managing all this through spreadsheets can be cumbersome and is prone to human error.
Software exists that can optimize your price management process. Find the tool that best suits your needs and makes your routine easier.
A guide to the five main pricing strategies
These are pricing strategies that can be applied in every business. Each strategy has its advantages and disadvantages. So, you must weigh those pros and cons.
Don’t limit yourself to using only one of these strategies. Combine them, and mix as many strategies as you require. This will help you find the one that guarantees sales, the flow of consumers, and positive results.