The price is right: improve profitability with five new pricing strategies

February 5th, 2020     Improve Your Business, More profit, News

An effective pricing strategy is the cornerstone of any successful business. Undervalue the price of your service or product and you risk leaving cash on the table. Overprice, however, and you leave yourself vulnerable to competitors.

In numbers, the Institute of Chartered Accountants in England and Wales (ICAEW) estimates that an increase in average selling prices of just five per cent results in an EBIT (earnings before interest and taxes) increase of 22 per cent, demonstrating pricing’s dramatic effect on profits.

But getting pricing right is a never-ending balancing act which requires care, attention and creativity. In this blog, we’re going to highlight tried and tested pricing strategies, as well as a few experimental ones, to help you level up your pricing game to maximise profits.

Psychological pricing

Pros: Scientifically proven to increase sales, effective in retail environment

Cons: Luxury products and services may be perceived as cheap

The price of your product or service is more than just a number on a sheet of paper. On the contrary, bodies of evidence show that the way your pricing is presented to customers is key to securing their business.

By now, almost everyone is aware of the power of the number nine. But why does a ‘£0.99’ price point seem more attractive than a ‘£1.00’ price point?

According to research, the tactic – known as charm pricing – increases sales by 24 per cent compared to traditional rounded prices. This is because customers read from left to right, resonating with the very first number on the price tag. In the above example, that’s ‘0’ instead of ‘1’.

But charm pricing isn’t the only psychological pricing strategy. Comparison pricing, for example, involves pitching your price – usually the lowest – against competitors. While effective, research warns that competing against major competitors using comparison pricing may sometimes result in consumers opting for trusted “household names” – rather than the lowest quote available. Instead, research suggests comparing the strengths of your product against the weaknesses of competitors’ to better inform the consumer.

Competition-based pricing

Pros: Simple, low-risk, accurate

Cons: Doesn’t consider the value of your product or service

Most new businesses will fall into the trap of copying competitor pricing. While the logic is sound, the theory does not work in practice. Competition-based pricing does not factor in the value or cost of your product, which can significantly reduce profitability. Likewise, a competitor is likely to have a monopoly over the product or service at the price it is offering at.

Instead, businesses should only use competitor pricing strategies as a reference point. To get started, click here to learn how to price your product effectively.

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Discount pricing

Pros: Attracts new customers, moves larger quantities of stock

Cons: one-size-fits-all discounts may devalue your brand

Discount pricing involves reducing the retail price of your product to market your brand or move higher quantities of stock. This strategy is especially effective for reaching brand new consumers, marketing new products, or increasing the volume of sales.

While widely used, discount pricing is hard to master but notoriously easy to get wrong. The price tag attached to your product or service should reflect its usefulness and quality, but blindly discounting your item can lower the perceived value of your brand.

Instead, it is recommended to target discount pricing campaigns at selected audiences. ‘New customer’ deals, for example, call attention to your product or service and build brand interest, but may be frustrating to existing customers. It’s best, therefore, to advertise these deals using targeted ad campaigns.

‘Trade-show only’ discounts, meanwhile, encourage customers to purchase there and then. By advertising these discounts elsewhere, you would be losing the element of limited availability.

Other discount pricing strategies include ‘bundled discounts’ to increase the average value of sales, ‘early payment discounts’ such as pre-orders, and ‘seasonal discounts’ to move cyclical goods.

Brand loyalty pricing

Pros: Retains customers, reduces costs of marketing

Cons: May leave cash on the table

While ‘new customer’ offers have exploded in popularity in recent years, brand loyalty has become increasingly absent. But did you know that it is five times more expensive to win a new customer than to keep a current one? Marketing is a major capital outlay, which means keeping your current customers satisfied should be a priority.

Show customers just how much you value them. Bespoke discounts, loyalty reward programmes, and negotiable prices will keep customers returning to your business.

Price skimming strategy

Pros: Optimises profitability and lifecycle of products

Cons: Rapid skimming may hurt brand loyalty among consumers who paid full price

This strategy involves charging the highest possible price for a new product or service, then gradually reducing – or skimming – the price until it reaches an equilibrium (where sales neither decline nor rise). This method is particularly popular in the technology sector, where products are priced according to their relevance over time. The iPhone, for example, starts at the highest possible premium price point before gradually getting cheaper to reflect new products on the market.

This strategy is similar to the high-low pricing model – where a company initially charges the highest possible price but reduces it to move stock quickly when the product or service becomes outdated or irrelevant.

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