We looked at how you might calculate your selling prices in our article under the Improving Profit Margins pillar. In this article, we’re looking at how you can use pricing as a strategy to grow your business.
There are five common pricing strategies that you might be able to use, even in just part of your business or for specific products or services:
Price skimming
This means setting high prices when a product is first introduced and then gradually lowering the price as more competitors enter the market. This is an option if you have a new product and have limited or no competition at the moment. Early adopters typically achieve high initial prices, and can then continue to make profits at lower prices while new entrants get themselves up to speed. Your product doesn’t need to be completely unique – just unique in your geographical area/market/niche.
Market penetration pricing
Otherwise known as buying market share. The opposite to price skimming. Usually the domain of larger, well-funded businesses who can afford to make losses initially while they build up their customer base in the hope of raising prices in future. It’s a risky strategy because a newcomer can always enter the market later and under-cut you unless you’ve built a rock solid, loyal customer base, or can differentiate your products.
Premium pricing
Suitable if your focus is on high-value products or services for customers who can afford them. Luxury and lifestyle brands successfully use this strategy. You need to be able to differentiate your offering from cheaper competitors if you take this approach and make a major investment in marketing to effectively communicate the higher value of your products.
Economy pricing
Provided your purchase costs and overheads are low enough you can still make a good profit selling basic commodities at low prices – think discount and pound stores. It’s a high risk strategy in the service sector where you are at risk of newcomers entering the market and undercutting you. There are no winners in the race to the bottom!
Bundling
Selling several products together for less than the sum total if bought individually. The obvious example is burger chains, where the “meal” option is cheaper than the sum total of the individual components, a win-win offering, especially where the marginal cost of the additional items is relatively small. Can also be a good way to clear out excess stock. Do your sums first to make sure that the overall margin is acceptable, as this strategy often involves selling some items in the bundle at a loss.
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