Pricing Strategies: Pricing your Products and Services
A challenge met by many new businesses is how to calculate the right price to charge their customers. There are various strategies that businesses use in order to price their products and ensure profitability. Your business may be able to adopt one of them in order to help you make a profit.
The pricing strategy adopted by your business can depend on the products and services you are offering, as well as, where, when and who to. In order to better understand the strategies, let's look at them in more detail.
Creaming or Skimming
The first strategy on our list is creaming, or sometimes known as skimming. This is where you charge a premium price for your product or service but expect lower sales. This enables the business to turn to profit quickly. It's a strategy often seen in research and pharmaceutical organisations where a new, unique product is being developed.
Think of areas where a large sum of money has been spent on researching and developing a new product. Investors would be keen to see a return on this as soon as possible. This strategy would allow them to do this as it would be a unique product so they can "cream" the market. However, it would also be planned to reduce the prices as time goes on and new competition launches so they can remain competitive. Think of products such as a games console where they've introduced up to date hardware.
Even though the product itself may not be a luxury, with a well defined marketing strategy, a company can portray a product as a "must have" and give it a matching price tag. Think of things like particular smartphone, or sports gear brands. Customers are more inclined to pay a higher price if they believe they are receiving a higher quality product.
The opposite end to creaming is economy pricing - charging lower prices but minimising expenses. This can be seen as the "stack them high, sell them cheap" method.
The pricing in itself works as a marketing tool and works well with word of mouth. Companies such as budget supermarkets or pound shops can be seen selling the same quality products, and in some cases the same brand, as larger more expensive competitors. The difference is the price.
When the financial crisis hit high streets and retail parks around 2008, they saw an increase in low price outlets. Now, in 2018, these have become popular household names.
Lastly on our list is penetration pricing. This is where a company prices their product below that of their competitors to give them a pricing advantage. This could even result in little or no profit for a period. But in the long term, once production has been scaled up, the cost of production may be reduced through economies of scale, leading to an increased profit.
It may take a while for these products to materialise into any profit, but it helps businesses raise awareness of their brand and products. It also encourages potential customers to change brands without too much sacrifice. For some, the long term goal would be to increase the price over time, but this depends on demand and the reaction of competitors. It would need a bit of monitoring in the marketplace to ensure they remain competitive.
So, how do you price your products?
There is no hard and fast rule on how you should price your products or services. But these strategies are good place to start to establish your pricing. It's important to consider your market, your audience and your competitors. To help ensure the success of your business, work out your break even point based on your prices and costs, and conduct research before making any decisions.
- 06 Jan 2021 - Planning for Shareholder Exits
- 17 Dec 2020 - How Do Management Companies Make Decisions and Manage Disputes?
- 10 Dec 2020 - Becoming a director of a management company
- 24 Nov 2020 - Are Directors and Shareholders Liable for Company Debt?
- 06 Nov 2020 - Can My Company Make Contributions Towards My Pension?