Pricing Strategies for Higher Profits

DOUBLE YOUR BUSINESS

Pricing strategies are often an overlooked part of the marketing mix. They can have a large impact on profit, so your pricing strategies should be given the same consideration as promotion and advertising strategies.
 
A higher or lower price can dramatically change both gross margins and sales volume.  This indirectly affects other expenses by reducing storage costs, for example, or creating opportunities for volume discounts with suppliers.    
 
“If no one is complaining about your prices, your prices are too low!”
 
Double Your Business in 2008
Remember, our goal is to double your business in 2008.  Yesterday, we decided to used the power of 72 and settled on improving five components of your business that affects the bottom line, by 15% each.  Cumulatively, improving 5 components by 15% will have the affect of doubling your business.
 
The first component I recommend you improve by 15% is rather easy - raise your prices 15%.  Over 90% of the businesses I have worked with (this is now several hundred businesses over the years) have underpriced their products and/or services in the mistaken belief that they had to be the low price leader.  Works for Wal-Mart, but you are not Wal-Mart.  Properly value your product/service, educate your customer on the full value, separate yourself from the competition with your unique selling proposition — then you can charge the right amount for the value you are providing.  Not an absolute, but I’m 90% confident you all could raise your prices tomorrow by 15% and not lose one customer that you desire to keep.
 
However, not to be too cavalier about this, provided below is a primer on pricing.
How to Price
Keep in mind that your price is the amount of money charged for a product or service or the value exchanged for the benefits of the product or service.  For a new product, you must understand your positioning before you set a price. Make sure it is not too low, or the product will not be taken seriously. If it is too high, the potential customer will not take the risk. 
 
New Product Pricing Strategies 
There are two basic approaches to new product pricing strategies:
1. Market-Skimming: Initially set high prices to “skim” revenue layer by layer from the market. This strategy works when: 
- Quality and image support the higher price
- Enough buyers want the product at that price
- Cost of producing a small volume cannot be high
- Competitors should not be able to enter the market easily
2. Market Penetration: Set a low initial price in order to penetrate the market quickly and deeply to win a large market share.  This strategy works when: 
- Market is highly price sensitive
- Production and distribution costs fall as sales volume increases
- Low price must help keep out the competition
 
Overall Pricing Strategies 
There are a multitude of pricing strategies; here are 19 that cover most of the pricing territory: 
1. Competitive pricing:  Use competitors’ retail (or wholesale) prices as a benchmark for your own prices. Price slightly below, above or the same as your competitors, depending on your positioning strategies. Note you must collect competitor pricing information by observation rather than by asking them. Otherwise it could be seen as illegal collusion.  
 
2. Cost plus mark-up:  This is the opposite of competitive pricing. Instead of looking at the market, look at your own cost structure. Decide the profit you want to make and add it to your costs to determine selling price. While using this method will assure a certain per-unit margin, it may also result in prices that are out-of-line with customer expectations, hurting total profit.
 
3. Loss Leader:  A loss leader is an item you sell at or below cost in order to attract more customers, who will also buy high-profit items. This is a good short-term promotion technique if you have customers that purchase several items at one time.
 
4. By-Product or Close out:  Keep this pricing technique in mind when you have excess inventory. Sell the inventory at a steep discount to avoid storing or discarding it. Your goal should be to minimize loss, rather than making a profit.
 
5. Membership or trade discounting:  This is one method of segmenting customers. Attract business from profitable customer segments by giving them special prices. This could be in the form of lower price on certain items, a blanket discount, or free product rewards.
 
6. Bundling and quantity discounts:  Other ways to reward people for larger purchases are through quantity discounts or bundling. Set the per-unit price lower when the customer purchases a quantity of five instead of one, for example. Alternately, charge less when the customer purchases a bundle or several related items at one time. Bundle overstocks with popular items to avoid a closeout. Or, bundle established items with a new product to help build awareness.
 
7. Versioning:  Versioning is popular with services or technical products, where you sell the same general product in two or three configurations. A trial or very basic version may be offered at low or no cost, for example, with upgrades or more services available at a higher price.  Make smart use of these pricing strategies and your bottom line will soar!
 
8. Premium Pricing:  Use a high price where there is a uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries such as American Express - Platinum Card, Cunard Cruises, Savoy Hotel rooms, etc.
 
9. Penetration Pricing:  The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.
 
10. Economy Pricing:  This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
 
11. Price Skimming:  Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.
 
12. Psychological Pricing:  This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example:  99 cents not one dollar.
 
13. Product Line Pricing:  Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.
 
14. Optional Product Pricing:  Companies will attempt to increase the amount customer spend once they start to buy. Optional ‘extras’ increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.
 
15. Captive Product Pricing:  Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.
 
16. Product Bundle Pricing:  Here sellers combine several products in the same package.
 
“If people always tell you what a great job you do, your prices are too low — they are trying to otherwise compensate you with a complement, because they feel (they know) they got a really good deal.”

DAILY PRAYER  
Father, help us to look at prices with an eye towards the full value that we are delivering, give us comfort in charging a fair price for that value.  Keep us ever mindful of always applying a fair scale to what we do.  In Jesus name, Amen.
 
Challenge yourself, really think deeply about raising your prices at least 15%.  You are worth it — stop selling yourself, your products and your services short.
 
Grace and peace multiplied to you.