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 Pricing Strategies for Small Business

Standard Pricing Methodologies
Promotional & Discounting Pricing Methods
New Product/Service Pricing Methods

Pricing is a key strategic marketing decision as one of the four “Ps” of the marketing mix, (Product, Pricing, Promotion and Place). It is integral to your product/service marketing because it affects other marketing mix components including, sales promotion and channel distribution decisions (Place). Therefore, your decisions regarding pricing and the strategies you employ are crucial to producing a profitable bottom line.

Also, having positive and negative effects on your customers, pricing affects the perceived value of your product/services. If you price your products too low, they may appear too cheap. Price too high and the perception of quality may suffer, or customers may buy the competitors better perceived  price-valve alternative.

It is usually wise to employ several pricing strategies at one time. The specific types and methods of pricing strategies you will need to take into account depend on the overall marketing objectives of your company. It is also important to keep in mind, that a successful pricing strategy is not conceived in a vacuum, but is formulated to be part of a profitable overall product/service mix pricing strategy.

Most pricing methods emanate from business to consumer marketing, (B2C) companies and may not be appropriate for consultative business to business marketing, (B2B) firms. Developing your strategy and knowing which pricing methodologies to utilize may require substantial trial and error without the help of a marketing professional.

How to Establish a Pricing Strategy

Standard Pricing Methodologies

The following are the standard pricing strategies used in many types of businesses. There are also pricing strategies that are specific to promotional pricing and discounting as well as new product pricing.

• Competitive Pricing: After surveying your competitors’ prices, you can use their average or mean prices on which to base your prices. You can decide to price above, below or the same as your competitors depending upon your overall marketing and pricing strategy. Note: This pricing method assumes your cost structure is identical to your competitors, it does not guarantee you will be profitable only competitive.

• Cost plus Mark-Up Pricing: This pricing method focuses on your cost structure as the starting point to build your price list, not your customers’ prices. Knowing your costs, you add the amount of profit margin you want to realize by each product/service you sell. Note: This pricing method will assure you achieve a predictable profit margin per unit sold; it will not assure selling prices that are competitive either with your competitors and/or with the perceptions of your customers possibly stifling sales and total company profit.

• Perceived Value Pricing: This pricing method bases the product/service price on the effective value to the customer, relative to alternative products in the marketplace.
  Note: This is similar to competitive pricing but gives prominence to the customer's perception over the competitors pricing. Note: This pricing method requires market research to determine real customer perceived value.

• Cost plus Perceived Value Pricing: Sometimes called market-oriented Pricing this pricing approach combines Cost plus Mark-Up and Perceived Value pricing to mitigate the drawbacks to each. It starts with the product/service cost and then adjusts the final mark-up with a price relative to both the competitive and customer market price environment and not just an arbitrary profit margin percent mark-up.

• Premium Pricing: Use a high price where there is a uniqueness about the product or service. This approach is used where a substantial competitive product/service advantage exists.

• Psychological Pricing: - In this method, price is base on factors such as perception of product quality, popular price points, and what the consumer perceives to be a fair value. This pricing strives to promote a positive psychological impact on the customer. A popular example of this type of pricing is selling a product at $19.95 rather than $20.

• Economy Pricing: This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy or generic brands for soap, spaghetti, at prices lower than branded products.

Typical Pricing Strategies Decision Matrix

There are a number of additional pricing methods related to special circumstances, where standard pricing methods are not appropriate. One of the most popular categories is promotional pricing.

Promotional & Discounting Pricing Methods

A lot of promotional and discount pricing is used in B2C selling and where physical products are being sold from inventory. Promotional pricing is also appropriate for selling B2B and services too. How you use promotional pricing in B2B selling is just done differently and for different reasons that moving product inventory. Below are many of the common promotional pricing methods.

• Free: Free services is becoming the hottest method of promotional pricing  of those selling on the Web. Customer skepticism has become such a given that the practice of giving away products or services for free has become common place. This approach could be considered akin to the old B2C trial size promotional marketing approach. The idea is to lower customer purchase uncertainty by giving something away of real value and then up-selling the customer because you gained their trust.

• Buy One Get One Free: There are many examples of promotional pricing including approaches such as Buy One Get One Free or a slight twist on this theme, buy one item and get another item of equal or lesser value free.

• Loss Leader Pricing: The purpose of loss leader pricing is to entice new buyers. The approach is to offer select products/services at or below cost, with the expectation that these same buyers will purchase other higher profit products/services on the same purchasing trip.

• Close out Pricing: This pricing method is to offer excess or obsolete inventory at a substantial discount. The goal is to recoup some cash before storage or disposal costs place you in negative cash flow position.

• Membership or Trade Pricing: By segmenting customers in various groups the strategy is offer profitable customer segments by rewarding them with special prices. This is usually offered as a loyalty or frequenting buying program where these specific customers receive lower prices on certain items, a flat percentage discount, or free rewards.

• Quantity or Bundle Pricing: This strategy encourages people to purchase a large quantity or more total items by offering discounts for quantity or bundling their purchases. You can effectively bundle discontinued, phase-outs or overstocks with good sellers to avoid distress or liquidation pricing. You can also employ this technique with trying to establish new product/services by bundling a new product your are trying to promote with good selling items to build overall sales or to increase brand identity for your new product/service.

• Geographical Pricing: Geographical pricing is sometimes used where there are circumstances that necessitate pricing products/services differently around the world. This could be do any number of factors like shipping costs, cultural influences, and scarcity in one locale verses another.

New Product/Service Pricing Methods

For new products, the pricing objective often is either to maximize profit margin or to maximize quantity (market share). To meet these objectives, skim pricing and penetration pricing strategies often are typically employed during the initial introduction of the product/service for a limited period of time.

• Price Skimming: This is a excellent strategy for launching new products/services. The new product/service pricing is set at a high profit margin initially since the customer is not familiar with the price that should be paid for this new product/service. The strategy is to recoup R&D and other marketing launch costs prior to the entry of competitor alternatives into the marketplace. Eventually, the new product/service will be priced according to its real value as determined by the marketplace.

• Penetration Pricing: In order to gain market share quickly, the price charged for a product/service is set a deliberately low price.

• Versioning Pricing: This is now a classic up-sell approach to pricing used widely on the Internet for selling information products. Versioning is an often used pricing strategy for information, services or software. It is most appropriate selling the same base product/service in multiple editions or "versions". A introductory or basic edition is promoted at low or no cost. Then the customer is then encouraged to purchase an upgraded version with more services or value at higher prices.

• Captive Product Pricing: Often referred to as razor/razor blade pricing, the technique is to give away an item and bundle it with another item in a system. In this strategy you need two items that are required to work together in order to provide a customer benefit. In the razor razor blade example a razor is offered at a low or free price to entice the customer to purchase the razor. Once purchased the razor blades, which will only fit that razor are sold with a high profit margin.

How to Develop Your Pricing Strategy