Researched and written by marketing consultant, trainer and author Nigel Temple.
Are you setting the right prices?
There are numerous pricing strategies available for your enterprise, products and services. Are you selling at the right price? Think about the psychological factors – what does the price say about the product and your brand? Are you maximising your profitability, via your pricing model?
BOGOF: Buy One Get One Free – this pricing strategy is much loved by supermarkets all over the world. AKA as ‘Bundled pricing’.
Competition pricing: See Market based pricing.
Cost based pricing: If costs are changing frequently, an enterprise calculates production and distribution costs and they then choose a markup each time that a quotation is produced or a price has to be set.
Cost plus pricing: A pricing strategy whereby an enterprise works out its production costs and adds a fixed percentage markup to give the selling price. For example, if a product costs £1,000 to manufacture and the markup is 25% then the selling price will be £1,250. Often used by manufacturing companies and governments within tendering processes.
Fear based pricing: Many smaller businesses undercharge as they are frightened that customers will not pay higher prices. They may be right, particularly if they have not invested in building their brand.
Freemium pricing: This is not just a pricing option – it is virtually a business model in its own right. The idea is to promote a free version of a product or service, with the objective of converting a proportion of the users into paying customers. Examples include LinkedIn and vast numbers of software products. Variants include ‘free for a month’ and ‘free forever’.
Loss leader: A pricing strategy which supports the objective of attracting new customers and market share. The product or service is sold at or below
Market based pricing: An analysis of competitive pricing leads to a price point for a given product or service. This may be lower, the same or higher than the competition – depending on the marketing strategy (i.e. differentiation and positioning). AKA ‘Competition pricing’.
Optional pricing: A extensive range of optional additional features are offered. Beloved by the car manufacturing industry (…“the engine is an added extra, madam.”)
Pay what you want pricing: The customer is allowed to pay whatever they feel is reasonable for the product or service. A ‘floor’ price may be set, or it may not be. This pricing strategy has been tried within the music industry and also by restaurants. It can attract considerable publicity.
Penetration pricing: The enterprise chooses low pricing in order to boost sales and market share. If sufficient market share is attained, they may choose to increase prices. Penetration pricing can start a detrimental pricing war within a given market sector.
Per diem: Used by knowledge professionals, such as accountants, management consultants and trainers. ‘Per diem’ is Latin for ‘per day’. In general times, I don’t advise this as a way to bill time based services. If you want to find out why, you are welcome to ask me or post this question via www.marketingcompass.co.uk
Premium pricing: A high price is set in order to reflect brand exclusivity and product quality. Think Rolls Royce and Rolex watches. Interestingly, it is not just the physical product that attracts buyers (think buying experience, service and all sorts of little additional touches).
Price discrimination: See Yield management pricing.
Price skimming: An enterprise starts with a high price and then gradually lowers the price, in order to increase market share. The result is that profits are ‘skimmed’ from the market, over time. Usually employed when there is a clear picture of the product’s life cycle (i.e. within the software industry).
Product line pricing: Each product line (or product category) is given its own pricing. For example, an enterprise is offering budget, standard and premium product ranges (and hopefully clearly differentiation each range within the minds of the buyers).
Sale! Retailers have sales, so why can’t other businesses? Well, if the sale occurs every year, for example, just before year end, then you will be training your customers to wait until that point in time before they buy. I have seen sales used within B2B marketing quite effectively, but it has to be done right, otherwise it may damage the brand.
Self liquidating pricing (SLP): The objective here is to recover your costs. SLP can be used, for example, to sell a promotional gift, a book or a seminar place.
Value based pricing: Often used by high end software companies, the idea is to pitch the price around the products’ value to the customer, in terms of benefits received.
Yield management pricing: Variable pricing is used by airlines and hotels where they have to sell the seat in the plane / the hotel room on any given day or that opportunity has gone forever. The challenge is that, for example, two airline travellers can be sitting next to each other on a flight and discover that they have paid different prices. How would this make you feel, if you had paid the higher price? (This is known as price discrimination, by the way).
Nigel Temple offers advice with regards to pricing, as part of his marketing consultancy services.
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