Businesses depend on their profits to survive. As a small business owner, you need to be diligent in your efforts to turn a profit for your company. One way your business can make money is through strategic pricing.
What is strategic pricing?
Businesses use strategic pricing when deciding how to price products or services. The company sets a price based on what they think will attract customers and maximize profitability. Strategic pricing methods help a company penetrate the market, compete with other businesses, or sell off products at the end of their product life cycle.
As a business owner, you want to have a high profit margin, meaning that your revenue is more than your business expenses. Strategic pricing uses different factors, like product value and consumer demand, to determine how to price products and services.
Be aware that different pricing strategies and methods can gain customers and increase revenue or lose customers and deplete revenue. When determining your business pricing strategies, pay attention to your company’s size, industry, and offerings.
Pricing strategies examples
Here are some popular strategic pricing methods used by small and large businesses. Find out which is right for your company.
Strategic pricing strategy #1: Market penetration pricing
Market penetration pricing is where businesses set a low initial price for goods and services. The business hopes to gain consumer attention and build a loyal customer base. Eventually, most businesses increase prices once they have a steady customer base.
If you choose to establish a market penetration pricing strategy, you will most likely be met with slim profits off the bat.
You could also experience a price war between competitors, which can be difficult for small companies. Small businesses might not have the ability to drop down to the same low prices as larger companies.
Increasing the price after the product has been on the market will probably lead to an increase in profits. But, you could lose some customers as a result of the higher prices.
Market penetration can be good for building a customer base. But, it might not be the best strategy if you need to make high profits immediately. Small businesses could have some problems using this pricing strategy.
Strategic pricing strategy #2: Price skimming pricing
Price skimming is the opposite of market penetration pricing. With price skimming, businesses initially set high prices in the hopes of turning a quick profit. Usually, businesses lower their prices once other companies offer competitive pricing.
If you choose to use price skimming pricing, you could be met with high profits off the bat. But, you need to be aware that some consumers will be turned away by the price. Oppositely, high prices can lead customers to believe they are getting a quality good or service.
Typically, you want to use price skimming strategies when you first introduce a product to the market.
Use the price skimming strategy when you introduce a brand new product, service, or feature that not many other businesses have. Because of the lack of competition, you can get away with charging higher prices, as long as there is demand for it.
With price skimming pricing, you will experience high profit margins when you first release the good or service. Eventually, your profit margin will be slimmer once other businesses offer the same thing at competitive prices.
Strategic pricing strategy #3: Economy pricing
Economy pricing is one strategy that prices certain products and services at a low rate. With economy pricing, businesses cut down on the costs that go into making the product or performing the services. The prices are low because the products are generic.
With economy pricing strategies in marketing, your products would attract consumers who aren’t willing to pay high prices. Many grocery and retail stores, like Wal-Mart, use an economy pricing strategy for their products.
Small businesses might have more trouble using this pricing policy. Large businesses might benefit more from economy pricing because they can obtain bulk items and turn profits.
As a small business owner, you don’t want to price your products or services too low. Economy pricing is a great way to attract a variety of people, but you also want to make sure you have a decent profit margin.
Strategic pricing strategy #4: Competitive pricing
Competitive pricing is where businesses base their prices on what competitors charge. Many businesses opt for competitive pricing to stick out from other businesses. With competitive pricing, the business hopes customers will choose the less expensive product.
If you offer competitive pricing for similar products or services, you will need to stay up-to-date on what other businesses are charging. You should do a competitive pricing analysis and study competitors.
You can offer customers a price matching offer. With a price matching offer, you vow to match a competitor’s price if a customer brings it to your attention.
You might consider a competitive pricing strategy if your products or services don’t vary from other businesses. However, competitive pricing can lead to narrow profit margins, so don’t use this strategy for all your offerings.
Strategic pricing strategy #5: Discount pricing
Discount pricing is a strategy where a business marks down the prices of goods or services in an effort to attract customers. Many times, the price discounts last only a short time. Sometimes, the discounts are given to products or services that were originally overpriced.
Discount pricing is also good to use toward the end of a product’s life cycle. You can clear your business’s inventory with discount pricing. For example, you have meat that is going to go bad in a few days. Instead of wasting it, offer it at a discounted price.
If you use the discount pricing method, you might see an increase in customers and sales. But, you want to be wary of marking down items too much. Leave yourself enough room to make a profit.
Big businesses might have more success doing discount pricing compared to smaller businesses. If you decide to use a discount pricing strategy, don’t try to compete with what large businesses can do.
Strategic pricing strategy #6: Psychological pricing
Psychological pricing is when a customer thinks they are getting a good deal. There are different types of psychological pricing:
- Charm pricing: using numbers that end in “9” (i.e., $24.99 vs. $25.00)
- Prestige pricing: using rounded numbers (i.e., $25.00 vs. $24.99)
- BOGO pricing: buy one, get one free discounts
Any business can take advantage of psychological pricing. Whenever you try to make a price look more appealing to a customer, you are using psychological pricing.
Strategic pricing strategy #7: Bundled pricing
Lastly, bundled pricing is another strategy many businesses use. Bundled pricing is just like it sounds: businesses bundle multiple goods or services together and give consumers a lower price than if they purchased the items separately.
For example, you offer cable, WIFI, and phone services. You might set up a pricing strategy that looks like this:
- Cable: $49.95
- WIFI: $55.00
- Phone: $24.99
- Bundled (cable, wifi, and phone): $84.99
The customer saves money if they bundle all three products instead of buying them separately.
Bundling encourages customers to purchase more products or services, which means more money for your business.
Strategic pricing do’s and dont’s
Before coming up with a pricing system for your business, keep the following do’s and don’ts in mind.
Do:
- Conduct a competitive pricing analysis to evaluate the pricing strategies of similar companies
- Leave yourself enough room to make a profit
- Try different profit strategies to see what works
Don’t:
- Lower your prices so much that you don’t make a profit
- Raise and lower your prices frequently
- Try to compete with big businesses who can get bulk pricing
How to raise prices without losing customers
Are you ready to raise your prices, but worried about losing customers? The way you raise your prices affects your customer pool. For small business owners, it’s essential to know how to raise prices without losing customers.
There’s always the chance of losing a few customers when you raise prices. But, you can prevent losing customers by raising your prices with these methods:
1. Explain your price changes honestly
Though it may seem like spreading bad news, be upfront with your customers about price changes. The earlier you tell customers that you are raising prices, the better. Often, customers will value your honesty.
Telling customers about price increases early helps them prepare. Customers can budget for the changes before they owe you money.
But, if you are not open about price changes, new prices could confuse and upset customers. Customers like to know what to expect when making a purchase. Learning about new prices at the point of sale might cause you to lose customers.
Give your customers an explanation of why you are raising prices. Keep your explanation positive. Instead of talking about your business expenses going up, explain the price raises in a way that benefits customers. For example, you might have raised prices because you started using higher-quality materials in your products.
Create a plan to tell customers about price raises using several forms of communication. For example, you might speak to customers, hang signs, send emails, or post on social media. Carry out your communication plan in advance and answer your customers’ questions.
2. Add value to your products and services
As a small business owner, you should add value each time you raise the price of your products or services. The extra value might be a new feature on a product. Or, the value might be that you have become more skilled at a service over time.
Give the customers a reason for your methods of pricing that directly benefits them. If customers see value in your products and services, new prices might be more welcomed.
For example, you own a music supply store. You raise your price for guitar repairs, but you give customers a free set of strings with each repair. The extra value of the strings makes your new price more acceptable.
3. Inform employees about price changes
Make sure your employees understand price changes before you raise prices in your business. Also, be certain your employees are comfortable with explaining the price changes to customers.
You don’t want your employees to be confused about your prices in front of customers. Customers may think your business is disorganized.
Before you raise prices, hold a meeting with your employees. Tell employees what the prices will be raised to, and why your price increase strategy needs to take effect in the first place. Teach employees how to handle your customers’ questions about the new prices.
4. Charge per project, not per hour
The longer you operate your business, the more efficiently you work. As your skill levels increase, so should your prices. When you charge per hour, you penalize yourself for working more proficiently. As you get more efficient at your work, it takes you fewer hours to finish a job.
Instead of charging per hour, charge customers per project. When you quote a price, outline what services you will provide and your credentials. In other words, show the customer the value of your work.
Charging per project can be beneficial for you and your customers. Typically, customers want their projects finished faster.
Switching to per project is a more subtle price increase strategy than just increasing a bottom line price. And, you can make more money than if you charged per hour.
For example, you charge $40 per hour to paint a room. It takes you three hours to finish the project, so you make $120.
But if you had charged per project, you might have made more money. Let’s say for the size of the project you charge $160. You would have to work an extra hour to make the same amount as your per-project price.
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This article has been updated from its original publication date of August 15, 2017.
This is not intended as legal advice; for more information, please click here.
