Pricing Strategies explained for Small Businesses

Money and a keyboard - pricing strategies explained for small businesses article image

Oh it’s a tough one isn’t it? Setting prices. Especially for new businesses, or for services; when the costs aren’t as clear cut as with a product. And then there’s pricing strategies; reasons and methods behind the pricing and its variations, to maximise profit. Because pricing strategies are important and as I always discuss pricing with my marketing strategy clients and look at whether there are price opportunities, I decided that this month I’d write about some areas of pricing. As a marketer, however, I’m definitely not a pricing expert.

Pricing Strategies
Pricing strategies are the approaches that companies use to price their products and services. A number of factors should be considered, including market demand. These strategies pave the way to finding the optimum price for a product or service at any particular time and take both company and marketing objectives into account. Price is important because if you price too high, you can lose out on business, and if you price too low, there’s a chance you could weaken/damage your reputation in the market, or leave sales on the table.

Pricing strategy matrix graphic

 

The pricing strategy matrix with its four quadrants usually looks like this, but sometimes you see versions with the axis set the opposite way around:

Image attribution

 

Premium pricing is for luxury, aspirational brands and products. A high profit margin is often achievable despite there usually being high production costs too. The disadvantages is that it’s tough to sell at high prices from the outset and demand needs to be carefully aligned with availability.

Economy pricing is low pricing that suits those customers that are regularly looking for the best deal, the cheapest offer. Business overheads need to be low and prices need to be lower than competitors. The disadvantage is that economy pricing doesn’t lead to customer loyalty. Economy shoppers are quick to go and buy elsewhere.

 

What is price skimming?
When a high price is put on a low-quality product and then, following market saturation, that price is lowered – this is known as price skimming. A strong profit is made before the product is then sold, more cheaply, via a wider marketplace as demand falls.
The disadvantage of price skimming is that it’s a hard pricing strategy to manage; both getting the timings correct and avoiding brand loyalty damage with early stage customers that paid the premium price.

Penetration pricing
So that leaves penetration pricing. This is all about winning over customers with an opening special offer, encouraging customers to switch to your high-quality, lower priced product. Later on, the price is increased or a different pricing strategy is put in place. The focus is on achieving a significant market share. The disadvantage of penetration pricing is that it can be hard to retain customers and simultaneously raise the price and build the profit margin up.

 

What if you don’t have a pricing strategy?

Pricing quote in a graphic: a 1% improvement in pricing results in an average increase in profits of 11.1%
If you simply take your costs and add a mark-up, you may think that you don’t have a pricing strategy in place. However, this is known as cost-plus or markup strategy.

It is the simplest method but it, like the other strategies, it does have its disadvantages. These being that it is inefficient (it doesn’t allow for increasing profitability through price differentiation) and it doesn’t take into account how much your customer is actually willing to pay. The latter, is extremely important and it is the difference between cost and price. Price being the amount a customer will pay for a product or service.

 

The price quality matrix

Philip Kotler, a distinguished marketing professor, designed the price quality matrix. This tool helps organisations develop a better understanding of the connection between price and quality.

We love this great image of it created by SlideSalad:

Diagram of Kotler's Price Quality Matrix

The psychological and emotional aspects of product pricing can be used to create trust with customers to pave the way to long-term rewards. Working out where each of your products fit within the nine matrix categories can provide clarity on where the products and your brands sit within the marketplace. Plus, it can help guide you on where risks might be in the future. You could also develop an economy version of a product to establish a relationship with new customers and assess two versions of the same product using the price quality matrix. Of course, you’ll need to use it in conjunction with some market analysis data.

Rachael Dines, Director of Shake It Up Creative

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