20 Ways to Set a Price Tag - The Ultimate Pricing Strategies Summary
This is the missing summary of what you need to know when you are stuck with how much your product should cost and wondering where you start from. By now you must be aware that there are three main ways to increase your profit: (1) lower your costs, (2) increase your positive income-bearing sales volume and (3) increase the sales margin. The problem comes because (2) and (3) are closely related to each other and a manager should find a proper balance. Here is where you start from. This is a list of 20 pricing strategies that I have researched on. You will find them in 4 different groups according to the main decision making driver.
1. Production Based Pricing Strategies:
- Cost Plus Pricing - Decide on a specific marginal profit and put it on your production costs. Be aware that this strategy does not considerÂ the demand and takes no marketing approach for the readiness of the market to embrace your end-user price;
- Contribution Margin Pricing - Company CFO should decide on these two metrics when setting the price:Â (contribution margin per unit) X (number of units sold] X [product's contribution / total firm profit]. Sales price is considered a variable, the rest are constants, known in any specific moment;
- Target Pricing - fixing a specific rate of return and then calculating the price needed to reach the desired profit;
- Absorption Pricing - covering your basic costs in order to stay in business as long as possible until a window of chance opens.
2. Customer Based Pricing Strategies:
- Targeted Pricing - selling the same product on different price for different target groups. Usually using discount methodologies to match the demand;
- Psychological Pricing - fixing a price that corresponds to the aptitude to catch buyerâ€™s interest â€“ e.g. $3.99 instead of $4;
- Premium Pricing - maintain high price artificially in order to stimulate the brand support due to the overall social perception that a higher price brings better quality;
- Freemium Pricing - a specific service is offered for free and then customers are charged for premium add-ons;
- Value Based Pricing â- setting a price entirely evaluating the benefit that it will bring to a potential customer;
- Auction Pricing - a minimal price is set and then the customer bids for the product.
3. Competition Based Pricing Strategies:
- Low-cost Leader Pricing - sell specific goods on loss in order to stimulate market share on a group of higher priced products in your portfolio;
- Skimming Pricing - enter at highest possible price in order to skim early adopters who are not price sensitive. This is short term strategy to cover the investment, then lowering the price is a obligatory;
- Market Orientation Pricing - sell at a price determined by a market analysis and then considering a top down approach to see if you can produce at given low variable costs;
- Price Leadership Pricing - in less competitive businesses one strong brand usually makes the first step of regulating the price and the rest of the players are forced to follow;
- Predatory Pricing - it is a legally regulated strategy that aims to get the competition out of business by forcing prices lower than the assumedly acceptable production costs;
- Penetration Pricing - start low to gain market share and then increase price;
- High-Low Pricing - goods and services are regularly priced higher than the competition but a specific discount policy is used for an offering of specific goods;
- Premium Decoy Pricing - an organization sets an artificially high price for a set of goods to boost the sales of another mid-priced product or service.
4. Sales Based Pricing Strategies:
- Dynamic Pricing - using automated algorithms to change pricing in real time according to buyers behavior and current purchasing volume - well used by airlines and betting services;
- Collecting Pricing - using tables of discounts according to the sales volume per deal. It is also technologically implemented in the Gropon type of services.
Do you have your winning strategies floating in your head now?
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