The 3 Most Effective Pricing Strategies

By Tom Egelhoff

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A question that I’m always asked by new startups is: how should I price my service/product? What are the most effective pricing strategies out there and which should I use?

There isn’t a simple answer to this questions and more often than not, you will need to factor in multiple pricing strategies. So, where do you start? Here’s a rundown of some options:

The 3 Most Effective Pricing Strategies

1. Penetration Pricing

Penetration pricing is a pricing concept that sets the mentality of “low cost and dependable quality equals high demand”.

This mentality is created initially by selling a new product/service into the market with a significantly lower price point than the suggested market price to quickly gain a larger boost in sales.

However, this strategy was not designed to work at all tiers in the market and are usually used by smaller businesses who provide products/services, where price is the primary concern when buying that service or product.

But don’t dismiss penetration pricing as a viable strategy, in fact, it being designed for the general market could allow a certain edge to exist in your business, especially as a new launch or temporary promotion.

Keep an eye on these launches and temporary promotions so that you’re not killing your margins altogether.

2. Image Pricing

Also known as “prestige pricing”, this strategy’s effectiveness in acquiring value is based on the opinions of your customers and the value that they put regarding what your brand provides for them despite the actual price point or quality of your product or service.

Image pricing is usually used on a higher end tier of the market since your business is shown to provide a certain level of luxury and exclusivity makes these kinds of customers more willing to pay for your products and services.

3. Price Skimming

This strategy involves your business taking a more aggressive approach to pricing by launching and promoting new, trendy, and/or much-improved products or services that charge a high price point for a short period of time and then lowering it when demand has fallen.

Price skimming could be an effective strategy because it allows you to “skim” the customers who were willing enough to buy the product/service sooner than everybody else.

Based on the activity from these “early adopters”, it allows you to check just how long you should maintain the product’s high price point before dropping it down to a lower one when the demand coming from those early adopters have significantly dropped.

The 10 Most Common Pricing Mistakes You Should Not Make

Despite the many pricing strategies out there put in place to potentially help your business run more effectively, it also often creates some unavoidable yet common pricing mistakes, which may result in the loss of customers and drops in profit.

Get to know these 10 common pricing mistakes and know what and what-not to do when it comes to the overall growth and success of your business:

1. Skimming over your product’s best features

The quality of your products reflects the customers’ perception of your business.

Being able to say that your product is more awesome or have better features and better quality customer service than its competitors increases its value and could allow you to charge your target market more for it.

2. Pricing changes without justification

Customers almost instantly notice the slightest change in pricing.

Customers react differently to increasing or decreasing the value of your products and services.  Make sure that your customers are properly informed of the reasons for these changes to avoid the risk of losing them along the way.

3. Overvaluing your product

You know your product best and you know how much time and effort it took to make it.

This often gets in the way when deciding on pricing because you are caught between its “personal worth” and “market worth”.  Remember that your product isn’t worth what you think it’s worth, but rather what the market says it’s worth.

4. Undervaluing your product to suit market perception

Pricing your products lower than they’re actual market value doesn’t always mean generating more profit.

The price of your product reflects the value of what your business sells.  Under pricing, it will give customers the impression that it is of inferior quality.  Avoid this by comparing your product to similar ones and price it based on the average market price.

5. Underestimating competition

Understand that like you, your competitors are also trying to get ahead and thus will also have pricing strategies in place.

Be aware and make sure you don’t go in blind.  Always be on the lookout for new strategies your competitors might be using and take advantage of what they might be missing out on.

6. A half-baked market research

Businesses tag their “ideal customers” as people who are willing to pay for the product and content to make profit off of them.

This is a sure way to earn a profit but it pays to know who your market is.  Take time to know who you are selling to and why they have decided to become your customers.

7. Using costs alone as basis for pricing

Pricing shouldn’t be based on production costs alone but on market growth as well.

Sales will either dip or rise depending on certain events.  Businesses should anticipate changes in buying patterns and market evolution and price their products accordingly and appropriately.

8. Ignoring varying needs of different markets

Location and demand will affect prices.

Product prices might be lower in the next town because the demand for it is lower there. Research your market’s needs and understand how your product value varies between markets to gauge if it’s worth selling in that location or not.

9. Too much automation

The market is constantly evolving and it affects the prices of your products and services.

Be more aware of what products generate to allow you to properly adjust prices on what sells better rather than leaving them to wasting unnecessary funds on what could have been profit, so be alert on what goes on in the market so that your business doesn’t fall behind.

10. Not choosing your battles

Aspects of a market that affect the value of your products (eg: events, season etc.) might not have the same impact on a business that is of a much larger scale than yours.

Avoid competing with the bigger businesses, compete with your peers instead.

Some final thoughts…

The market is constantly evolving, and sometimes it hard to keep pace with it. Pricing your products looks simple on the surface and yet very complex underneath.

One way or another your business will have some bumps along the way, whether you’re a veteran or just starting out it’s inevitable that you will be making mistakes that could greatly affect the profit your business is making.

But a lot of things are learned from failure, and that is surely true for the business industry.

Take the time to observe these mistakes and bounce back into your market with greater profit in mind!

We hope that this article was helpful. Have any questions? Let us know in the comments below, and make sure you sign up for the 21 point business startup checklist.

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