Pricing your product or service appropriately to make a profit in the face of competition is challenging. One way to mitigate that challenge is to utilize pricing strategy for your products or services. Companies have several options, based on where their product or service falls in the matrix of quality and price.
What is Pricing Strategy?
Primarily, pricing strategy takes into account the current marketplace price of goods or services. Pricing strategy is also about considering your costs and pricing your product appropriately, so that you are able to make money off of your sales.
Economy pricing is useful for companies who are keeping their overhead low. For example, generic grocery store brands of products usually have a lower price than the name-brand items, due to the lack of advertising or out-of-store promotion. Because these companies save on those aspects of the product, they are able to keep their pricing low. Companies who use economy pricing count on the fact that their lower price compared to the product next to them on the shelf will increase the number of sales. Economy pricing does particularly well during times of economic recession.
Price skimming occurs when a company sets an artificially high price for a product or service, but knows that competitors will soon enter the product or service arena. The high price is temporary and meant to encourage a profit boom to offset the price drop later. Products or services have to be in a very unique position of being the first of its kind to the floor, whereas everyone else will have to fall in line behind this original price in order to be competitive. Often, we see this in new cell phones when they first come out. The same phone that we can buy this year could have been double or triple the price last year, when it first came out into the market.
Penetration pricing sees products or services priced much lower than their actual value in order to make an entrance into the market. Once customers view the product or service as a must-have, the prices can gradually rise. Often, this is seen with internet companies or cable companies. They will advertise a remarkably low price to begin a contract with them, say $19.99 a month, but only for half of the contract. Once the first year is over, the price spikes to $49.99 a month. In this age of computers, we see penetration pricing even more often, with websites and software offering free trials, but requiring a credit card number to begin the trial. Once the trial is over, customers either cancel the service or continue to be charged for it monthly. If the product is unique in the market and useful for the customer, the service’s profit far out ways the loss of the free month.
Premium pricing is used for products or services that are clearly of a higher luxury value than anything else on the market. Premium pricing is reserved for 5-star hotels, first-class airline tickets, and other products that give the customer the perception of being of the highest quality. While premium pricing isn’t useful for commodity goods, it does make your product or service seem more desirable and more buzz-worthy than the less expensive, similar products on the market.
If you’re searching for a consultant to work with you on pricing strategy for your products or services, look no further than Froehling Anderson CPAs. We work with businesses to find the right balance of profitability and pricing that will see the best outcomes for each product or service.