Effective approaches to pricing

Effective approaches to pricing

Pricing a product or service can be a challenging task for any business, especially with the increased competition that many companies now face.

The growth of online sales and the diversification of many markets means that it has never been more important for businesses to find pricing strategies that work for them.

Many businesses owners and management teams assume that pricing comes down to a ‘race to the bottom’ and that the main aim is finding a price point that matches or beats the competition, while still maintaining sufficient profits and cash flow.

However, there is a lot more that goes into pricing than just beating your main competitors on price.

Consumers have never been more informed about the value, costs and delivery of goods and services, due to the advent of apps and websites that help them to compare products and services like-for-like.

This means that companies need to take a smarter approach to pricing that not only takes into consideration the current market, but also the deeper reasons behind a purchase being made.

 

Incentivising 

Whether you are launching a new product or trying to encourage the uptake of an existing service, there are many ways to incentivise a sale.

One of the most common is offering a sale, discount or add-ons. This may be an overall sale across the business, such as a spring or summer sale, or a specific discount tied to a particular line.

The aim of discounting is to get consumers to purchase your goods or services over a competitor by making them more attractive. This is best employed where the item or service you are offering is commonly available to consumers, rather than something niche.

Incentives can also be an excellent way of getting rid of existing products ahead of a change to the items sold. This is commonly seen in the automotive sector during the change from one number plate year to the next or in the fashion industry where retailers offer seasonal sales to clear room for new stock.

It is important that businesses carefully review sales and incentives to ensure items remain profitable or tie in well to the overall strategy of the business.

 

Price matching 

Many businesses increasingly offer a price matching service, which encourages consumers to purchase items from you over a competitor by offering to match or beat the price offered by the other company.

These schemes can be highly effective for not only bringing business to your company but also preventing consumers from going elsewhere.

If you are in a highly competitive field, this can be an effective way of freezing out a competitor and securing new customers.

However, care should be taken over terms and conditions to ensure that consumers cannot take advantage of the situation. You must also consider the purchasing power of competitors, as in some cases they may be able to offer a service or product at a lower price, which may make the offer unprofitable to you and your business.

 

Psychological pricing

Possibly one of the most commonly used forms of pricing, which dates back as late as the 1800s, that remains effective even to this day is psychological pricing. At its core, this relies on the strategic pricing of goods and services just below a nice, round number.

You will have all seen this. Maybe a car dealership offers its latest model at £9,999 or who can forget the 99p store.

Many businesses use this trick and consumers are aware of it, so is it still effective?

Evidence suggests that yes, it is. Even though the price difference is negligible, customers still don’t round up the price and perceive the item to be cheaper than it is and are more inclined to buy it.

Another psychological approach to pricing is based on the fact that most people perceive a price ending in the number nine as better value and more cost-effective. This perception of value even applies when an identical competitor product is priced lower, according to academic studies that have been conducted.

 

Avoid price battles

Ensuring your price is relative to the rest of the market can be key, especially with the emergence of price checking apps. However, this shouldn’t be the driving force in setting an effective price.

Constantly trying to charge less than a competitor will squeeze margins to potentially unsustainable levels and may lead some consumers to think of your product as inferior.

 

Add context 

Price is justified by lots of different factors, not just the service or product on offer. You may decide you want to be a premium or economy brand relative to your competitors and should then price accordingly, but in doing so you need to think about how a product is marketed and delivered.

Many consumers will pay several hundred thousand pounds for a Bentley that gets them from A to B, which a Ford or Volkswagen could do for much less. Ultimately, at its core, these two products fulfil the same role, but there are other forces at play that determine the price of each item.

This contextual pricing is a factor in a sale that goes beyond price and can often be down to seemingly insignificant factors, such as the look of a company’s website or even the costs of other goods and services sold by the same business.

A business should, therefore, look at non-product/service changes it can make that will justify a higher price.

 

Subjective vs objective

When choosing a service or selecting a product, customers will rely on their own opinions of a product, which are entirely subjective, but they also rely on price, which is objective.

Prices for similar or identical products can be easily compared and may be a determining factor.

Where prices are identical this can complicate the purchasing decision of customers forcing them to rely on a subjective decision, which may mean that they do not decide to purchase anything at all.

In sales, this is referred to as analysis paralysis and often means both businesses lose out.

By purposely pricing differently to a competitor you give customers a simple choice if they like or require the same services or product equally. This can help to ensure a sale, although it may not always fall in your favour.

The pricing strategies and approaches outlined in this article often rely on a customer’s perception of the price, delivery of the product or service and the overall service they receive.

When setting prices, therefore, you must understand your competitors, the market as a whole and your key selling points, so that you can use one or multiple methods to increase sales and improve profitability.

However, it is important that in changing prices you do not undermine your cash flow or the profitability of your company. Pricing strategies should, therefore, be reviewed regularly.

 

Continually reviewing these factors to create effective pricing strategies can be difficult to achieve alongside the other pressures of running a business, which is why obtaining professional assistance is key.

For help and advice on matters such as pricing strategies, contact our Director, John Moffat, on john.moffat@benson-wood.co.uk  or at 01236 756161

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