How do we know what price is fair for a product or service we want to sell? We are not just talking about numerical data but about one of the most important elements of marketing, since it can influence the purchasing decision, perception and loyalty of your customers. In this context, setting the appropriate value is not a simple task, but requires well-thought-out pricing strategies adapted to your business and the market.
In this post, we will explain what a pricing strategy is, how to choose the most appropriate one for your business and what types of strategies exist. This way, you will be able to make more informed decisions and you will be ready to move your project forward. Keep reading!
How to choose pricing strategies
The first thing you should consider is the elements to implement a good pricing strategy. Below, we summarize them:
- The costs of production, distribution and promotion of your product or service. This way you can determine the minimum price you should charge to cover your expenses and obtain profits.
- The demand of the market and your potential clients to know the level of interest and willingness to pay of consumers. At this point, keep in mind that demand is not fixed, it can vary depending on the season, location or market segment.
- The competition and its offer of similar or substitute products or services. Competition influences the price you can charge since you must take into account its level of quality, differentiation and positioning.
- The objectives of your business and your marketing plan.
Types of pricing strategies
Do you want to know more about the different types of pricing strategies? In the next sections, we will tell you about the most common strategies, so you can choose the one that best suits your business.
Price skimming strategy
It consists of setting a high price when launching a new and innovative product or service to take advantage of high demand and low competition. The objective is to obtain the maximum possible profit in the short term before the market becomes saturated or cheaper products appear. It is widely used in the technology sector, especially with products with high planned obsolescence, such as smartphones.
Psychological pricing strategy
It is based on the effect that price has on the minds of consumers, beyond its real value. In this way, it uses techniques that influence customers’ perception and purchasing decisions such as odd price, round price, package price or scarcity price. This strategy requires that the market be heterogeneous and that customers have little information or experience about the product or service.
Penetration pricing strategy
Unlike the skimming strategy, the penetration pricing strategy aims to set a low price when launching a new product or service to obtain high sales volume and high loyalty in the long term, compensating for the low margin per unit. It is very useful for businesses that want to enter a saturated or highly competitive market and that can produce on a large scale and reduce production costs, allowing them to make profits even with low prices.
Price discrimination strategy
This strategy involves setting different prices for the same product or service, depending on the market segment, the distribution channel, the time of purchase or the level of demand. In this case, the strategy requires that the market be segmented, that customers cannot resell the product or service, and that the cost of discrimination does not exceed the benefit.
An example of this strategy is that of cinemas, which usually charge different prices depending on the day of the week, the time of day or the type of customer.
Dynamic pricing strategy
It consists of adjusting the price continuously and automatically, according to market conditions, competition, demand and customer behaviour. It is ideal for taking advantage of opportunities and changes that occur in the environment, and for products or services that have high variability in demand, as well as high competition and availability of information.
E-commerce platforms are an example of this strategy, as they often adjust and personalize offers based on the customer’s purchase history or location.
Differential pricing strategy
It is based on offering the same product or service with different characteristics, qualities or benefits, and setting a different price for each one. This approach can be effective for companies that have a deep understanding of their target audience and can tailor pricing to specific customer segments.
Bait and Hook Pricing Strategy
Its name is due to the mechanism it uses for sales: it puts a product on the market at a very low price (bait) to obtain long-term profits by purchasing spare parts, consumables or services (bait). A classic example of this model is the sale of a printer and its ink cartridges.
Importance of having pricing strategies
Finally, remember that having a pricing strategy is very important for your business since the value we set for the offer is one of the factors that most influences customers’ purchasing decisions and the company’s profitability. Additionally, a well-designed pricing strategy can help the company:
- Attract and retain customers, offering a fair and competitive price that meets their needs and expectations.
- Differentiate from the competition, creating a competitive advantage based on the added value of the product or service.
- Maximize profits, optimizing price based on demand, the life cycle of the product or service and market conditions.
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