Pricing your products is a big decision that will ultimately have
a large effect on your business.
A strong pricing strategy is a lot more than just calculating
the costs and adding a markup.
So today I'm going to show you eight effective pricing strategies that
will help you make your business more competitive, and make more sales.
Now, pricing your products always starts off with math.
You absolutely need to know how much it costs to make a product or obtain
a product and get it to market.
This includes your production costs, business costs, marketing costs
and shipping and handling costs.
But though it always starts with simple math, a pricing
strategy isn't all arithmetic.
The reality is that humans are creatures of emotion, and it's incredibly
rare that we make all our decisions exclusively through the lens of logic.
Here is a simple truth.
What a customer is willing to pay for product isn't really
about how much the product costs.
What it's actually about is how they perceive the product's value.
So let's get into some pricing strategies that just might change the way you
think about pricing your products.
First let's talk about Cost Plus Pricing.
Cost Plus Pricing is by far the easiest way to think about pricing your products.
I'm mentioning it here first, simply because it's popular.
Not because it's the best pricing strategy.
Cost Plus Pricing is exactly what it sounds like,
calculating the costs of your products and adding on a markup.
For retailers, this markup is often double the wholesale price, but
the market percentage is variable depending on your business.
While, this strategy does preserve a nice profit margin, there are
some issues because it doesn't take into account market factors like
competition or demand for your product.
So it can actually lead to a situation where you're charging
too much or too little.
Next we have Competitive Pricing.
Competitive Pricing is when you check out what your competitors are
charging to figure out the going rate.
Then rather than focusing on profit margin as a starting point, this
pricing strategy is about making the price of your products comparative,
and you can do this one of two ways.
The first is pricing your products slightly lower than competition,
thereby attracting value shoppers were price sensitive.
Think Walmart versus whole foods.
If you have lower costs and can actively promote your special pricing,
then this can communicate that your brand is economic and accessible.
The second is pricing your products slightly higher, signaling that your
product might be better and quality.
Think Starbucks versus Dunkin Donuts.
Competitive pricing is often used in highly saturated markets with
highly similar products, where pricing can be a differentiator.
Next we have Price Skimming.
Price Skimming is when a company charges the highest possible price
for a product, right from the outset, and then decreases it over time.
This is a pricing strategy that Apple has used for years.
Price Skimming works best when there is scarcity of a product and when new
versions of that product will be rolled out in the future, justifying the
reduced cost of the previous generation, because it's become less relevant.
This pricing strategy is best used by businesses that have stand-out
products with features that other companies just can't compete with.
So if your business has a prestigious image and creates innovative
products, Price Skimming could be the pricing strategy for you.
However, it's not going to work if you're in a saturated market and
your product doesn't truly stand out.
Now let's talk about Penetration Pricing, which is when you use
a low price to enter a market.
It's used to draw attention to your business and take away
business from competitors who effectively can't match that price.
Once you have more wallet share, then you begin raising the price.
This pricing strategy is famously used by internet service providers,
like Comcast, who attract customers with cheap introductory prices.
But once the introduction is over, the price of the service goes up.
In a retail, this means intentionally pricing items low.
For example, the grocery store Costco prices organic food items at lower
prices then can be found elsewhere.
But while these prices are low now, we can expect, they will
increase over time as they capture more of the organic food market.
Discount pricing like coupons, seasonal pricing, and of course sales, can all
be forms of penetration pricing as well,
helping stores get rid of old inventory and attract some
short-term traffic to the store.
The logic behind Penetrstion Pricing is that once the sale is
over, some customers will remain loyal to the brand in the longterm.
One important thing to be aware of is that too many sales can make people
weary of paying the regular price
and too low prices can create a perception of bad quality products.
Next we have Value-Based Pricing.
Value-Based Pricing is when you set the price based on how much the customer
perceives your product to be worth.
This is done by locating data on what customers pay for comparable
products, then listing what makes your product different and better.
Then you need to place a financial value on those differentiating features.
Lastly, you need to communicate that extra value your product provides to customers.
Now, Value-Based Pricing is one of the most ideal strategies for entrepreneurs.
However, it only works if you have a differentiated product and you
are genuinely providing more value than your customers pay in price.
Value-Based Pricing, when done right, is a great way to build customer loyalty,
but it demands you stay in lock step with your customer's desires.
Now let's talk about Loss Leader Pricing.
Loss Leader Pricing is a strategy where you price a product for a loss
intentionally to attract customers, to get them in the door or to your
site where they may buy other items.
Now, while this might sound a lot like Penetrstion Pricing on the surface,
it's only tangentially related
because the motive is entirely different.
The goal with loss leader pricing is to make your profit on other
items, not by increasing the price of the item you're taking a hit on.
Loss Leader Pricing is heavily employed in the video game industry
where game consoles are sometimes sold for less than the cost to build
because the profit is made on video games and subscription services.
A Loss Leader strategy is best employed by larger companies who have other products
they can sell to make up for the loss.
Now let's talk about Bundle Pricing.
As the name probably applies, Bundle Pricing is when you sell
two or more complimentary products together for a single price.
Now this doesn't require much explanation, but it's used by companies to add
value for customers at a lower cost, hopefully increase the number of sales
and increase loyalty to the brands.
For example, getting a new phone with your data and phone plan
is an example of Bundle Pricing.
Now let's talk about Anchor Pricing.
Anchor Pricing is the use of comparison, and everyone knows
humans love to compare things.
With Anchor Pricing a retailer lists both the discounted price and the
original price right beside each other, to establish the savings
you'll gain from buying right now.
Anchor Pricing triggers what is known as the anchoring cognitive bias,
where an initial piece of information is used as the anchor, by which
all following judgements are made.
If you've ever seen a price slashed out and a discount next to it and
thought, I better take advantage of this while it lasts, well you have
just participated in anchor pricing.
Now, if you're looking to get started, Shopify is offering a free 14 day trial.
Simply click the link above to take action to level up your e-commerce business.
Hopefully this video has given you a broad understanding of pricing
strategy and how it can be used to effectively grow your business.
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I've been your host Tyler, and I'll see you next time on Learn with Shopify.