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Pricing Strategy

 

Disciplines > Sales > Sales articles > Pricing Strategy

Cost | Loss | Competitive | Message | Premium | Penetration | Discountable | Expectation | Bracketing | Market | See also

 

How do you set the price of something you are going to sell. There are a number of approaches and some important psychology to consider.

Cost plus

The most basic approach to pricing is to start with what the product cost you, either to make or to buy. To this is added a proportion of all the other costs you have (including your salary and commission), taking into account the number of units you expect to sell. This gives you a basic cost which you have to recover through your pricing.

Then something is added for profit to give the final price. This is typically a percentage, from over 100% in a good market, 50% when it is tighter and only a few percent when competition is tight. A part of the percentage added may well be deliberately to allow for negotiation space so you can give customers a 'special' discount and yet still make a profit.

Cost-plus pricing is sometimes 'contribution pricing' or 'margin-based pricing'.

Target

In target pricing the sale price is set with the goal of meeting market share, revenue, profit or other targets in mind. Hence, for example if you want to make 1,000 in revenue and you expect to sell 100 products, then you may price them at 10 each.

Target pricing is generally not a very good idea as it typically results in products which are over-priced (so you sell less) or under-priced (so you could have make more profit by selling for more).

Loss

Sometimes it makes sense to sell products at less than it costs you to make, even though this may seem at first to be ridiculous.

'Loss leaders' are products sold at a very low cost in order to get customers to consider other products of high functionality or to introduce them to the brand.

When you are introducing a new product and you have a large stock of the old product, you may decide to sell it very cheaply. It is important when doing this that you do not cause problems for the new product One way to do this is to sell off the old product in a different geographic region.

Another reason for selling at a loss is as a strategy to drive a competitor out of the market. This is best done if they are in financial difficulties and you have very deep pockets. This is sometimes called 'predatory pricing'.

Competitive pricing

When you have products which are similar to that of competitors, then you have to take their pricing into account. Low prices can also act as a deterrent to possible new competitors entering the market.

Competing on price is not always a good idea, but it can be a very powerful tool, especially when you can sell significantly more if you are seen as offering a good price.

Brand pricing

Premium pricing

At the high end of markets customers are often less price-sensitive and a 'premium price' that is many times the cost price may be not only acceptable but expected.

Another premium pricing strategy is to give no discounts. Discounts imply that customers cannot afford the product. which is an insult to rich people.

Premium pricing is also called 'skimming' or 'creaming' as it intents to capture the high end of the luxury-goods market.

Penetration pricing

Penetration pricing is used where the goal is to gain market share, to displace a competitor or to introduce a new product.

The basic principle of penetration pricing is to cut the price to a point where it is particularly attractive. This may be at a loss or a low margin, although in higher end markets it can just be more expensive.

A danger with penetration pricing where big competitors have similar products is that it can lead to price war that can seriously damage the company.

Discountable pricing

If you set the 'recommended' price artificially high, you then have plenty of scope for offering 'bargain' discounts, either in direct negotiations or for 'sales'.

This is typically used in retail, where sales of '70% off' are preceded by products being on sale for the minimum legal period (often only in one store) to prove that they really have been reduced in price.

This is sometimes called 'decoy pricing'.

Expectation pricing

Price has to take note of what customers expect and can afford. And what they expect is driven by such factors as the prices of similar things, what your competitors have told them. And, of course, with the research power of the internet, a low price can easily be found online.

However, it is not just price that customers expect but product quality, service and so on. Selling on price tends only to be a strategy for those who can sell in volume, and 'lifetime cost' is a common reframing to show that ongoing costs can be more important than the initial outlay.

Bracketing

If you have three products with increasing features or functionality, then you will naturally have three levels of pricing.

This sends a message about value. The high-end product may sell very little, but it can make the mid-priced product seem good value. At the other end, the low-end product may be so stripped down and featureless that again the mid-price product also seems to be of good value. At the same time, some will buy the high-end product because it is the 'best' and others will buy the low-end because it is the cheapest.

Market pricing

When you are selling into a number of different markets which are completely separated, for example being in different countries, then you may decide to price the product differently for each market, using a different strategy for each.

This is typically used where competition is stronger in some markets, forcing the price down, whilst in other more affluent or captive markets the price may be safely set higher.

A difficulty in this is that 'grey imports' may arise, where entrepreneurs import your product from the cheaper regions and undercut you in the more profitable marketplace. A way this is countered (other than legally) is to name and/or package the product differently in each market.

See also

Pricing Psychology

 

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Site Menu

| Home | Top | Quick Links | Settings |

Main sections: | Disciplines | Techniques | Principles | Explanations | Theories |

Other sections: | Blog! | Quotes | Guest articles | Analysis | Books | Help |

More pages: | Contact | Caveat | About | Students | Webmasters | Awards | Guestbook | Feedback | Sitemap | Changes |

Settings: | Computer layout | Mobile layout | Small font | Medium font | Large font | Translate |

 

 

Please help and share:

 

Quick links

Disciplines

* Argument
* Brand management
* Change Management
* Coaching
* Communication
* Counseling
* Game Design
* Human Resources
* Job-finding
* Leadership
* Marketing
* Politics
* Propaganda
* Rhetoric
* Negotiation
* Psychoanalysis
* Sales
* Sociology
* Storytelling
* Teaching
* Warfare
* Workplace design

Techniques

* Assertiveness
* Body language
* Change techniques
* Closing techniques
* Conversation
* Confidence tricks
* Conversion
* Creative techniques
* General techniques
* Happiness
* Hypnotism
* Interrogation
* Language
* Listening
* Negotiation tactics
* Objection handling
* Propaganda
* Problem-solving
* Public speaking
* Questioning
* Using repetition
* Resisting persuasion
* Self-development
* Sequential requests
* Storytelling
* Stress Management
* Tipping
* Using humor
* Willpower

Principles

+ Principles

Explanations

* Behaviors
* Beliefs
* Brain stuff
* Conditioning
* Coping Mechanisms
* Critical Theory
* Culture
* Decisions
* Emotions
* Evolution
* Gender
* Games
* Groups
* Habit
* Identity
* Learning
* Meaning
* Memory
* Motivation
* Models
* Needs
* Personality
* Power
* Preferences
* Research
* Relationships
* SIFT Model
* Social Research
* Stress
* Trust
* Values

Theories

* Alphabetic list
* Theory types

And

About
Guest Articles
Blog!
Books
Changes
Contact
Guestbook
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