Pricing strategies are probably one of the toughest areas to approach when starting a new business. If pricing is not implemented with the correct method at the correct time it can spell disaster. The best way to set up a bright future for your business is to implement the right pricing strategies when they are needed. In other words, timing of your price initiatives is important as well.
Such pricing strategy allows you to enter a large market with a lot of competition, especially for new entrant. This strategy involves setting prices lower than competitors in order to gain a rapid market share. Coupled with this strategy is heavy promotion of the lower price. However, a business should avoid maintaining such penetration pricing for long because it could quickly result in lower revenues which could affect profits.
Well, competitive pricing doesn’t always mean lower pricing. With competitive pricing, you can lower your prices as compared to your competitors however this may not always be best for your cash flow. Also consider that when you drop the price of your product you send a message that it may be lower quality compared to your competitors. What some businesses do is sell at the same price of their competitors but take a value-added approach. They add other perks to buying their products which in effect gives more for the money spent. Other perks could come in the form of reduced interest rates if purchasing on credit or something free given with the product. This is also known as price bundling and with this type of pricing you can protect the image of quality in your product and still be competitive.
When is the best time to do competitive pricing or price bundling? It is probably best to try price bundling first in order to protect the image of quality in your product. After that, try setting the price lower than your competitors. In either case, there are certain key indicators that it is time to make an adjustment to your pricing strategy. Some of these indicators are:
- Several people telling you that your price is too high
- You have not sold your product in quite some time
- You need to reduce your inventory of the product (inventory is costly to store too)
- You observe that your competitors are all underselling you
To certain extent, this is something you should use all the time. Psychological pricing is when the numbers are presented in such a way that the customer perceives a good price. The most common example of psychological pricing is when a store sets prices like $9.99, $4.99, and $13.98. A price such as 9.99 has more of an effect than $10.00 because the consumer tends to look only at the dollar amount and not the cents. Another type of psychological pricing is referred to as prestige pricing.
This is based on the concept that if a price is set higher customers will perceive the product has higher quality. However, if you set prestige pricing at the very beginning, it may turn away customers who do not know much about your product or service. It is best to convince your customers of the product’s value first and then get to the price. Prestige pricing can also be used when you want to raise the quality of your customers. In some business situations, some customers (not all) who demand to pay the least can also be the most demanding. This may not work for your business–especially a service business. Overly demanding customers who want nothing but the lowest prices can put a strain on a business. So, using prestige pricing, you can draw in customers who are willing to pay a good price for a high-quality product.