How do you know you’re offering the best pricing for your products or services? Most businesses base their pricing practices on competitor research, which entails finding out what the competition is charging and then charge a little (or a lot) less.
Sometimes this works. But only if the market cares for price alone—and it doesn’t undercut the costs of operating your business.
The key to creating an effective pricing method is to ensure the price appeals to your target customers while providing good profit margins.
What is a sales pricing strategy?
A sales pricing strategy is a set of actions businesses take to optimize sales. These actions may include things like promotions, discounts, free shipping, free samples, and so on. There are different types of pricing strategies to use, but the goal is always the same: To set prices in a way that maximizes profit and minimizes losses.
To achieve this, you must understand what incentivizes your customers to buy. Then you can use these insights to create optimal selling conditions for them. An effective competitive pricing strategy enables you to sell enough units at high margins. This way, you can focus on maximizing profits rather than minimizing costs.
Pricing strategies usually boil down to two steps:
Understanding why people buy from you.
Using these findings to design a winning pricing structure.
There are a number of competitive pricing methods you can use to hit your key performance indicators. For example, some offer a dynamic pricing strategy to remain flexible in a volatile market. This can work if you’re in an industry that fluctuates by season.
Dynamic pricing is one example of a successful sales pricing strategy. It involves setting prices according to demand levels. For instance, when there’s low demand, companies may offer lower prices or even give away items as promotional incentives. When demand increases, prices go up accordingly.
This type of dynamic pricing can be more profitable than static pricing methods. It’s a good idea to A/B test dynamic pricing to see if it generates higher revenues per unit sold.
Why is a competitive pricing strategy so important?
Sales pricing strategies are important because they help you understand your customers’ needs and preferences. They also determine the best price point for driving revenue.
With e-commerce becoming the norm across America (and the world), it’s vital to have a competitive pricing strategy. Consumers today are accustomed to conducting price comparisons to see which products are worth buying. And roughly 34% of consumers do it while shopping in-store.
So if you don’t have a clear strategy behind your pricing models to attract your target buyers, then you risk losing them to competitors (along with your market share).
If you want to earn customer loyalty, then you need to meet or exceed their expectations. Ignoring this could be detrimental to your business. One example shows 1 in 3 customers leave brands after a single bad experience. And another 92% will abandon a company after two or three negative engagements.
How to provide satisfying experiences to your buyers
Focus on quality first (speed second): If your product or service is fast but mediocre, no one will want to return.
Connect with your customers: Show them they’re more than just money to your business. Join in conversations on social media to show your human side.
Go the extra mile: Find ways to make their order better by adding a freebie or enhancing their experience. For example, send a gift to say thank you or go out of your way to ensure their purchase goes smoothly (offer tutorials, guidance, etc.).
How do you develop an effective pricing strategy?
1. Determine your customer’s perception of value for your product
How do customers perceive your product? Do they feel it’s overpriced for the value it offers? It’s critical to connect the value your service provides with your target customer’s willingness to pay.
This way, you can prevent under- (or over-) pricing your goods. If this happens, you can forget about convincing a patron to spend their dollar with your business. Overpricing may make customers feel your product isn’t worth it. And underpricing may make your offer feel unworthy of owning.
It’s all psychology, so there needs to be a balance between presentation and perception. Your best bet is to talk to your customers directly. Interview and/or survey them to see if they feel your product or service was worth purchasing. Then find out why.
For example, if people were wary about buying your product because it’s difficult to gauge its value, then consider offering discounts or demos. Or providing additional benefits like limited releases or early access.
Don’t forget to consider other factors such as brand equity, trustworthiness, reliability, quality, etc. This should also influence your decision about charging more or less.
2. Calculate your business expenses
What’s the cost of running your business? If you set your product prices too low, it’ll negatively impact profitability. But if you set them too high, you may lose potential customers.
The goal is to get expenses as low as possible, so you can price your products or services competitively. So factor in the development, customer acquisition, operations, marketing, and production costs.
3. Scout the competitors in your market
What are the prices competitors are offering for the same products you sell? Consider this when creating your pricing strategy to decide where you stand relative to others in your industry.
It also gives insight into market conditions and why customers choose one company over another. If you see a competitor getting more sales and their price is lower than yours, see if you can compete by lowering your own. This is typical with a penetration pricing strategy, which lures in new customers for a new product.
But price alone isn’t always the reason behind more sales. Sometimes, it’s the customer experience, product quality, and accessibility. These are all important considerations when deciding the best price and price structure to commit to.
4. Create personas for your target audience
A persona is an imaginary character that represents a specific type of buyer. You create these characters based on what you know about your ideal customer. They’re used to understand who your audience is and what motivates them.
This is why it’s ideal to identify the characteristics of each persona before setting your prices. For instance, some buyers may prefer convenience while others want something unique. Some may have children while others don’t. Each has different motivations and expectations.
How do you identify your target customers? Start by asking yourself questions:
What does my ideal customer look like?
How old are they?
Where do they live?
Do they work full time?
Are they married?
Do their kids attend school?
Are they college students?
Then start your market research. Conduct surveys of past buyers and those that purchase products similar to yours.
Understanding your ideal customers will make it easier to set prices affordable to their budgets. Maybe economy pricing is the best route to take all year round vs. having occasional sales.
5. Assess your growth potential
What’s the growth potential of your current market? Or better yet, what are your future plans as a business? If you’re looking to open up new store locations or expand into a global market, then you need to set your prices accordingly.
For example, you’ll need to find ways to consistently acquire new customers or retain the ones you have. The latter works well if you have a subscription-based service or product delivery option.
6. Use accurate reporting software
Once you determine the best price for your target customers, it’s time to track your success. This is easier to achieve when you’re using an inventory management system like Shopventory that tracks sales in real-time.
Use it to determine if sales are increasing—if so, then you’re on to something.
What are the different types of pricing strategies?
There’s no part of inventory management that’s more subject to mind games than pricing. The way you set your prices dictates a lot about the consumer’s behavior—whether they realize it or not.
Not sure where to start? Take a look at your Dead Inventory report to see what products haven’t moved recently and test out these pricing strategies to see if that helps get them out the door.
William Poundstone’s book Priceless: The Myth of Fair Value (and How to Take Advantage of It) on the subject of pricing is a title we highly recommend. We borrowed a few of his ideas for this post. Read his book for more detail.
1. The Framing Effect
Customers are more aware (or price-sensitive) when they consider the price as a loss instead of a worthwhile gain. This is what makes payment plans a great selling point. You’re probably familiar with sites that offer six monthly payments for an item.
By adding this concept to your effective pricing strategy, you can turn an expensive $250 item into five simple payments of $50.
Spending $50 today is easier to justify compared to dishing out $250 in one go. Sure, they’re paying the same price in the end, but the level of commitment is higher when the entry point is more affordable.
2. Reference Price Effect
When a customer can directly compare the price of a product with a competitor, price sensitivity increases.
Knowing the price difference of stools at Wal-Mart and Target, may deter them from buying it from a small (but more expensive) shop. This effect is difficult to work with because each customer has their own priorities and values when it comes to products.
This is why you shouldn’t bother making an argument that your product is better. Rather, you should talk about why your product is different.
3. Fairness Effect
Customers are more price sensitive when they consider a product’s price to be past the point of “fair” or “reasonable,” depending on the context of the purchase.
Similar to the Reference Price Effect, this concept of fairness and what the customer feels they should be paying is relatively unpredictable. Customers may have an average price they’re willing to pay for a product, but there are always outliers above or below the average.
4. Shared Cost Effect
The smaller the amount of the product price customers pay for themselves, the less price-sensitive they tend to be. For example, offering a product that comes with free shipping over a certain amount. Additionally, consider giving a customer points for every $X dollars they spend that they can use to purchase products in your store.
The goal is to make the customer feel like you’re sharing in the costs of doing business together.
5. Difficult Comparison Effect
If a customer feels finding the best price takes too much effort, they’re less likely to become sensitive to price. Similarly, if they have to compare an unknown product to a familiar one, and it takes a long time to discern the difference, they’ll probably select the familiar one regardless of price.
Customers may also be less inclined to find alternatives on the fly if they’re short on time or there’s a sense of urgency. This is exactly why limited-time offers work so well. By using this strategy, customers feel pressed for time and may choose to make a quick buying decision rather than perform the research.
Besides using time-limiting strategies, you can use originality to make it tougher to compare prices. For example, having a product or service that’s unmatched in the features and benefits it offers. There’s no way to compare products if what you sell is unique.
6. Switching Costs Effect
The higher the inconvenience a customer must make to switch providers, the more price-sensitive the customer becomes looking for alternatives. Switching costs take many forms—investment of time, resources, complexity of the purchase, number of people a buyer needs to convince.
7. Price-Quality Effect
Customers worry less about the price if higher prices denote higher quality. Creating a perception of exclusivity, rareness, or quality will persuade the buyer to be ok spending more. This is true for businesses like a coffee shop. Customers are willing to pay more for a locally roasted cup of coffee compared to a cup at a fast food chain.
However, the product itself doesn’t need to be of the highest quality. If the branding denotes a high-quality ethos, customers will spend.
Just think of brands like Nike and Adidas. They use the same (or similar) manufacturers as unknown brands. Yet, people are willing to pay higher for the logo because it’s perceived as having higher quality.
8. Expenditure Effect
Customers are more price sensitive when the purchase accounts for a significant percentage of a customer’s available income or budget.
Customers on a budget are more price-conscious than someone with a higher income. So they don’t mind price hunting to find the best deal. Delve deep and consider their spending means and income to direct your business.
9. End-Benefit Effect
Customers don’t just look at the product and price—they want to know the benefit it offers.
Derived Demand: The more sensitive customers are to the end benefit price, the more sensitive they are to the prices of the products that make up or contribute to that benefit.
Price Proportion Cost: This refers to the percent of the total cost of the end benefit determined by a particular component that contributes to the end product. The smaller the components share of the total cost of the end product, the less sensitive customers will be to the end benefit’s cost.
10. The 9 Effect
It’s difficult to walk into any retail store in the US and not see the number 9 at the end of a price. This is what’s known as “charm” pricing.
Simpler, “rounded” pricing may seem like a more customer-friendly approach, But it could end up deterring a customer out of a sale rather than enticing them into it. Also, this illustrates that using 9 is even better than using 4. In other words, you may be able to price something higher and make more sales!
11. The “Original Price Was…” Effect
Showing customers the before and after price for an item can promote them to buy now. They’ll see they’re saving money and may want to purchase soon before the price returns to its original rate.
There are several ways you can do this, such as by having the original price crossed out above or below the new price. The goal is to emphasize the original price and how much of a discount you’re giving. It may not be much, but just letting the customer know they’re not paying full price is a step in the right direction.
12. The Big Gap Effect
When a customer is deciding on the right price, context matters. Any good restaurateur will tell you that the best way to sell a $100 bottle of wine is to list it next to a $250 bottle of wine. The principle here is there should be a huge difference between your highest-priced item and your second-highest-priced item.
For a liquor store, this may mean investing $1,000 in a costly bottle of whiskey. That bottle may never actually sell, but it sure makes the $100 bottles look a lot better. Plus, let’s say you actually do sell the $1,000 bottle of whiskey. Congratulations! You just sold a premium item at a huge markup. So don’t overlook the potential of a premium pricing strategy.
Where they’re buying from also matters. If a customer walks into a rundown local grocery store and buys a bottle of beer, they don’t expect to pay the same price as they would for that same bottle of beer at a luxury hotel bar.
Consider using a bundle pricing strategy to offer a “steal.” For example, include a bundle of lower-tier products with your premium products to make it feel more valuable. Shopventory’s Bundle feature simplifies customizing a set of products to create your promotion.
What is a Loss Leader Pricing Strategy?
A loss leader pricing strategy is a marketing technique where you offer products at a low price to attract customers into your store. Once inside the store, you offer the customer additional products at higher prices. This strategy is used to increase sales volume and profit margins.
Baiting Customers with a Short-Term Sale
Ever wonder how electronics stores on Black Friday make money selling a TV for $50 less than what they paid for it? They don’t—not on the TV, anyway.
When a customer sees an ad for a marked-down TV, and it’s only available while supplies last. So they rush to the event to pick it up, but it’s already sold out. Strategically, the store placed other similar TVs in the same section. The customer purchases the alternative and on their way out, they pick up a wall-mount and an audio-boosting soundbar displayed near the checkout counter.
The cashier can then upsell the customer for a limited 90-day warranty on their purchase. The TV is what’s called a “loss leader.” It’s a product retailers are losing money on, but using it as “bait” to lure in shoppers. It’s a strategy employed by some of the most successful retailers in the world. And it applies to almost any type of business.
So what was a shopping trip for one TV turned into a bundled purchase. The customer received deals on items they’ll enjoy and the store sold more products in a single visit.
Offering Everyday Great Deals
Loss leaders aren’t just reserved for electronics on Black Friday. For example, corner stores and gas stations may offer large sodas at a loss. A customer can walk in and buy a super-sized soda for only 79¢. The thing is, no one usually walks out of a convenience store with just a drink. They grab a snack or a tank of gas too.
It’s the same for small diners. Offer free desserts or kid’s meals to get more customers in the door. In doing so, waiters can upsell the other items like side orders or promote new dishes and appetizers they may want to try.
Using Lead Loss as a Price Setting Strategy
Offering freebies and major discounts on menu items may drive in some customers who take advantage. But the ends justify the means. Not everyone who steps into your restaurant will take advantage. Some patrons will end up ordering more food and drinks, which will make up for any loss you take. Remember, it’s about your bottom line (and the law of averages).
For small and mid-sized businesses, it’s best to start small. Pick one popular item that pairs naturally with others—wine and cheese, t-shirt and jeans, phones and cases, etc. Take a hit on one and see if that boosts sales on the others. Odds are it will, but if it doesn’t, you can experiment and learn through A/B testing. Discounting one may not do the trick, but it could be that discounting another will.
Add Flair to Your Pricing Model with Flashy Price Tags
Whether you like to DIY or buy ready-made tags, using unique price tags can be a simple way to inject personality into one of the simplest and most common customer experiences—checking the price.
Choosing an Effective Price Strategy for your Business
Selecting the right pricing technique for your business takes careful consideration. It also requires experimentation. Test out the different pricing strategies business owners use to see what works best for your target customers and business goals.
With inventory management software like Shopventory, you can test the various pricing methods above with accurate, real-time reporting. We automate gathering data and insights to measure the impact of the different types of pricing strategy models you use.
So give them a test run to see what works for your business.