Adopting innovative pricing strategies is what really makes a difference when it comes to setting the selling price of a product or service, an activity that is one of the pillars of the marketing mix. In this guide you will discover several methods by which you can maximize profits and stand out from the market.
What are pricing models?
In order to know how to calculate the sales price, companies adopt (or, rather, should adopt) precise strategies, which differ from each other in relation to business objectives and certain internal and external factors, which differ from market to market. These strategies are the so-called pricing models.
Pricing strategy, in practical terms, is the method you use to determine how much to charge for your products or services. Your goal is to strike a balance between profit maximization and consideration of consumer trends and market demand.
Before we delve into the main pricing strategies together, it is now important that you know what is meant by dynamic pricing.
What is dynamic pricing?
Dynamic pricing involves adjusting the prices of products or services in real time as certain market conditions change, including changes in prices set by competitors, changes in supply and demand, and new market trends.
Main efficient pricing strategies
There are 3 main pricing strategies that you necessarily need to be aware of: price, in fact, can be set on the basis of the cost incurred in producing a good or providing a service, on the basis of competition (this strategy, of course, requires an analysis of competitors in order to establish an average price on which to adjust your own so that it is competitive), or on the basis of value.
The latter strategy is a bit more complicated to apply: you have to estimate the amount consumers are willing to pay for your product or service, consider the benefits it brings to customers, and finally, align the price with the value customers place on what you are offering them. Remember, in this regard, the words of Warren Buffett:
“Price is what you pay. Value is what you get.”
In the next few lines you will find out what are, more concretely, the most effective pricing techniques.
Price skimming
The technique of price skimming consists of charging the new product or service a high price (so as to maximize revenue) and then lowering it as soon as the first competitors appear on the market. In addition to ensuring high profits immediately, this technique also creates a perception of quality and exclusivity of the product or service.
Penetration price
The penetration price technique works in the opposite way to the previous one: it consists of charging a qualitatively high product a low price, so as to quickly attract new buyers and enter a new market more quickly.
Premium price
A premium price product or service is one that, by virtue of its high quality standards and/or high symbolic value, allows it to charge a higher selling price than the average price of competing companies. Generally, this strategy can only be applied by companies that have already achieved a high level of customer loyalty.
Bundle pricing
Bundle pricing, or bundle pricing, is the technique of selling a bundle of products or services at a price lower than the sum of the prices the products or services would have if they were sold individually.
Competition pricing
Competition pricing is the technique of charging a very low price relative to that of competitors while minimizing the costs associated with production and marketing. It is generally applied to products or services of not particularly high quality. This strategy can be useful for large companies, while it is risky for small companies (due to lower sales volumes).
Product line pricing
The technique called product line pricing involves dividing goods or services into different cost categories so as to create different levels of quality perceived by consumers. More functional or designer products are charged higher prices, but at the same time lower-quality alternatives are also guaranteed lower prices. A typical example is that of smartphone brands, which are used to launch phones in various price ranges on the market.
Cost-based pricing and cost-plus pricing
Cost-based pricing and cost-plus pricing are techniques that set prices based on production costs and the desired level of markup. In the case of the cost-plus pricing technique, profit margins are tied to a fixed markup. One must multiply the expected production costs (both variable and fixed) by the desired markup, thus obtaining a price for an anticipated level of sales.
Impact of pricing on brand and customer loyalty
You need to know that the pricing strategies adopted have a major impact on the brand, consumers’ perception of it, and how to build customer loyalty. An established company, for example, can afford to associate higher prices with its products or services, banking on the fact that customers see its brand as synonymous with reliability and quality.
Building a brand through pricing strategies
In the previous paragraph, we mentioned the example of a brand already established in the market. But how to create a brand from scratch and build it through pricing strategies? A brand that is newly established or, more generally, less well-known, can focus on lower prices to make itself known and build a reputation.
Maintain customer loyalty with smart pricing
Pricing strategies can also help you keep your customers’ loyalty high. In this regard, it is important for you to be familiar with what is known as loyalty pricing: this is a strategy of offering exclusive prices to your most loyal customers, so as to reward them for the continuity with which they purchase your brand’s products or services.
Adapting pricing strategies to the global marketplace
In this guide dedicated to pricing strategies, in the previous lines, we have already referred to the need to also assess market conditions (and how they change) when setting prices for your products or services. Dynamic pricing, in particular, can help you adapt your strategies to the global market.
Dynamic pricing and its effectiveness in different markets
By allowing you to change the prices of your products or services in response to changes related to supply and demand, competitor activities, and consumer behavior, dynamic pricing gives you the ability to capitalize on sales opportunities in the face of peak demand. Dynamic pricing is a useful strategy in various markets, most notably eCommerce, hospitality and the transportation sector.
Manage market fluctuations with flexible pricing
Adopting the dynamic pricing strategy is the most effective response to market fluctuations: in general, price increases when demand for the product or service is high, while it falls when demand is low. Price-we should remember this in closing this guide-also varies according to the availability of the good, competition and other variables related to seasonality or special events.
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