Seven Pricing Strategies to Get the Price Right

by | Apr 13, 2022 | Accounting | 0 comments

It’s no secret that pricing things right is essential. Pricing affects your profitability and determines your cash flow, ultimately controlling the health of your business.

If you could have your druthers, you’d price your services with a 500% markup, right?! But, that wouldn’t attract many (read: any!) customers. So, how do you determine a pricing strategy for your services or products that is:

  1. Attractive to customers
  2. Fair
  3. Competitive
  4. And profitable for you?

Pricing isn’t one-size-fits-all, so there’s no universal answer, but there are some common strategies that are used successfully every day. Consider your industry, your inventory, your typical customer behavior, and the saturation of your market as you read about the strategies below.

Cost-Plus Pricing

This approach is simply math. Add up all of the expenses you incur by prepping your product or service, and then set your desired profit margin on it. 

If you’re having trouble determining a healthy profit margin for your products or services, do some research. Very generally speaking, a 10% margin is average, 5% is low, and 20% is high. But this can vary based on the circumstances of your particular business (Is it online or brick and mortar? Are your product in high demand seasonally? Etc.).

Competitive Pricing

This strategy requires a bit of sleuthing. Keep tabs on the prices your competitors are offering and either:

  1. Set your prices slightly lower, or
  2. Set your prices slightly higher, but position your product as better.

We witness #1 at intersections with gas stations on either corner. The price per gallon signs flicker back and forth at each other all week long. And #2 is demonstrated at Starbucks, whose coffee is pricier than Dunkin’s, but also marketed as premium.

Price Skimming

Price skimming is when you price your goods or services high but then decrease them over time. Businesses who price skim capitalize on the novelty and a “get it before it’s gone!” mindset, so it works well for products that are limited or scarce. Electronic manufacturers use this strategy when they release the latest and greatest models of their products at a high price and then lower it as the newness wears off or other models emerge.

Penetration Pricing

The opposite of price skimming, penetration pricing, describes the process of beginning with a low price and then raising it over time. Gyms and storage unit rental facilities utilize this approach with offers of minuscule first-month fees. The idea is to attract the attention of value shoppers and then hook them. How likely is someone to switch gyms after a month of attending a class they’ve fallen in love with, or how likely is a customer to move their stuff across town to a different storage unit? My back hurts just thinking about it.

Loss Leader Pricing

This is a unique strategy that involves taking a loss intentionally. Businesses who use this approach price a signature product extremely low, but make up for the loss on other products or services. This works well for businesses that offer a lot of products and services or ones that complement each other well. I.e. Waxing your upper lip for only $2, but waxing your brows for $25. (Bad mental image? Sorry!)

Bundle Pricing

As the name implies, this strategy involves selling products together for a single price. To go back to our waxing example (sorry!), you could offer a full face wax for $35. When you bundle services, customers perceive that they’re getting more for their money (even if that “more” includes services they had not planned on buying initially. Car washes employ this strategy also. Maybe you weren’t planning on having your car waxed, but when you saw everything included in the deluxe package, which was only $7 more than the basic you said – “Why not?”

Anchor Pricing

Businesses who use anchor pricing use the power of comparison – to themselves. This approach means advertising your discounted price right next to your regular price to create a sense of urgency. Customers are more compelled to buy your product or service right now because they can see that they’re getting a better deal compared to your regular price. They don’t know how long the sale will last. By positioning your prices together, you’re offering the regular price as an anchor for decision-making.

Still unsure of the model that would work best for your business? Give me a call. I love talking shop if it means making your business more profitable!

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