A price of a product or service can be an arbitrary number, a business place on it, or it can be more. How a business chooses to price its offering, affects how customers assess it, the competitive edge and the objectives of the business. In this article, we will look at:
– The definition of pricing strategies
– The common types of pricing strategies
– And, how to choose one that best suits your small business
Pricing strategies are methods of setting the price for a good or service.
Why is it important to have a pricing strategy?
The core reason for using pricing strategies is to achieve business objectives.
Depending on the particular objectives of a business, pricing strategies can help achieve them. For instance, a business that wants to position itself as a luxury brand can use premium pricing to do so. Or if it wants to expand into a new market, it can use a penetrating pricing strategy to achieve that goal. Whatever the goal of a business, there is a pricing strategy it can apply to help achieve that goal.
Now let’s explain how some common types of pricing strategies work, and how your small business can use them to achieve its objectives.
Common Types of Pricing Strategies
By default, most small businesses in Nigeria adopt a cost-plus pricing strategy. But there are many other strategies that business owners can explore:
1. Cost-plus Pricing
This is a very popular pricing strategy among small business owners. Calculated as the cost of production of a product with a certain percentage of profit margin.
2. Value-Based Pricing
This is pricing strategy depends on the worth a customer attaches to your product or service. To determine that price you have to research to know how much customers value and are willing to pay for goods or service.
3. Skimming Pricing
Businesses set a high price to introduce a product/service and as more competitors come on board, they lower the price. Businesses use this strategy to maximize the value they can get from the sales of the product or service.
An example of a company that uses this pricing strategy is Nokia.
4. Competitive Pricing
Businesses use this pricing to offer their product at a price that is affordable in the market. It is based on your competitors’ pricing. Say your competitors set N5,000 as the price of a product you order, based on that price you can sell yours at 5,000 Naira too or a price when that range.
An example of a company that uses competitive pricing is Coca-Cola.
5. Premium Pricing
The way a business positions itself is very important. The premium pricing strategy is used by business owners to communicate to the consumer that their brand is luxurious. Here, the business sets an inflated price for its product or service often beyond the price of its competition.
But customers respond to this strategy only when their perceived brand value is high. This is a popular strategy among luxurious fashion brands.
6. Penetration Pricing
This strategy involves setting a low price usually below market price and raising the price after attracting customers. This is a strategy, the business put in place to capture market share and enter into a new market. They introduce their products or services at a very low price to attract customers and raise the price to meet the going market price while hoping that the initial loss from the price cut would be made up for by sales volume.
Netflix is an example of a company that uses this strategy.
7. Dynamic Pricing
This is pricing strategy is flexible in that it changes depending on an increase or decrease in demand (or supply). Uber is an example of a company that uses this type of pricing. During peak demand hours the prices of Uber rides increases and then decreases when the demand falls. Businesses use this pricing to get the most value from an increase in demand.
8. Price Anchoring
This entails placing a higher-priced alternative side by side with a low-priced one. The intent here is that by doing so, the customer buys the lower priced item as he/she sees it as offering more value.
Factors That Determine the Right Pricing Strategy for Your Business
The pricing strategy your business chooses depends on a few important factors. Let’s discuss how they can influence what pricing strategy you should choose for your small business
1. Business Goal
One of the critical factors that determine the choice of a pricing strategy over another is the objectives of the business. Different objectives like market penetration and sales maximization need different pricing models.
The cost the business incurs to deliver value to customers whether as a product or service would determine what pricing strategies it chooses. Your costs are important to determine what pricing strategies you can afford to put in place. If you don’t factor your costs into your pricing strategy, your profit may not be maximized and worse still, you may run at a loss.
3. Target Market
The success of whatever pricing strategy a business chooses depends on its target market and how they respond to it. The business must take into account what their target customers can afford and the size of the market. If a business chooses to put in place a penetration pricing strategy but cannot get the right demand to offset its initial loss, it may have a fatal effect on the business.
It is important to analyse how your competitors are pricing their products before choosing an appropriate strategy. It would serve as a guide to whatever strategy you put in place.
It is hard to determine the appropriate pricing strategy that is right for your business from afar, but these factors guide you to the right choice.
If you want a more detailed guide for your pricing strategy or other areas of your small business. Reach out to the SME Coach today!!! You would be glad you did.