There are a wide variety of different ways that you can decide to set the price of your product or service. As with most things, all have their pros and cons.
Examples of the different pricing models can be found amongst some of the most famous companies in the world. But which one works best and, more importantly, which one is going to work best for your business?
As ever, the answer is not simple and there are a lot of variables to consider. That being said, knowing what the different models are can help you understand which one feels like it might be the best fit for your company.
If you are considering diversifying, launching a new product or service, developing a new software or planning an industry-disrupting coup, how you price can be the making or breaking of that idea. Many a new business has fallen foul of a wrongly positioned pricing model.
So, what are the most common pricing models?
Market Penetration Pricing
As the name suggests, this pricing model is designed to achieve market penetration. When you are introducing something new to an already saturated market this model can help you gain traction and quickly. In addition, if you are trying to convince customers to try something new or a new way of doing something, they are already familiar with, their natural suspicion can be overcome with the use of the penetration pricing model.
In essence, what you are doing here is pricing low. Intentionally lower than competitors and comparable products or services. Doing so draws customers in as it represents a low risk to them in order to give your business a go.
The upsides are obvious, your competitors cannot match your prices and customers flock to you for the value and you gain a good market percentage within a relatively short space of time.
The downside of course is that you might actually have to make a loss in order to offer this pricing model. As such, you will have to have the finances in place to absorb this loss for what could be a few years of marketplace establishment. Once a market position has been firmly established the business can then start to raise prices to reflect that new status.
Short term, this model is a loss-maker. But long term it can lead to significant market share and even market dominance if finances allow. Netflix is a great example of a company that used this model to gain market success. One of the first to offer a low monthly subscription for virtually unlimited content they were instrumental in the death of Blockbuster, the dominant company in the market when Netflix launched.
Premium Pricing
As the name would suggest, this is model involves intentionally pricing your product higher than your competitors. For businesses offering an unusual or luxury product this can work extremely well.
A high price suggests a high value.
Though your marketing has a vital role to play in this model, ensuring that the perception of value is effectively communicated to your customers, the price point alone can generate a sense of exclusivity. A premium product or service is often aspirational, and customers feel drawn to wanting it more as a result of its price and inferred quality.
You have no need for a Rolex watch, but somehow a part of you still wants one.
It is a human trait to want more than your neighbour, this means that you can price your product high to capture that upper end of the market. Furthermore, this pricing model means that you can sell less of your product to make the same money as one of your competitors.
Of course, you have to make sure that your product or service measures up to its price point. You will very quickly undermine your company if you provide a shoddy product at a premium price.
Economy Pricing
The exact opposite of premium pricing, this is often employed by discount supermarket chains or online retailers. In essence you are offering a cheap product (of generally lower quality) with a “no-frills” service, think Poundland.
This is often provided by finding a way to supply your business cheaply and in bulk, which allows you to offer it at a cheap rate to your customers. Often other cost-savings are put in place to reduce business overheads and allow a cheaper offering.
This can work for online businesses especially well as the majority of the business investment is at the setup stage. After which, each sale requires little or no work from the business in order to fulfil. This means the sale price can be offered exceptionally low and allow you to offer an economy service or product.
The downside to this price model is that it hinges upon large-scale sales. In order for your business to make enough money you will have to be making hundreds if not thousands of sales a day in order to generate the income needed to make the business worthwhile.
Price Skimming
The price skimming model is a strategy in which businesses set a high price for a product or service at its introductory stage. This intended to help businesses capitalise on sales on new products or services. This tends to work best with new products or services to the market that you are looking to pitch to, helping to establish them as luxury or high-end products.
Skimming then comes in as other competitors also enter the market and you reduce your price in order to remain competitive.
Apple are a great example of a company that used price skimming as a model. Being able to use proprietary technology as a competitive advantage they were able to price high and create a sense of a prime product.
When Samsung and others entered the smartphone market, though they priced lower than the iPhone, it meant that the new players had to also go toward the higher-end cost. In response, Apple slightly cut its prices to reflect the competition yet managed to remain a higher-priced and higher-end product as a result.
Price Anchoring
Another tactic which can be used in conjunction with the other pricing strategies is price anchoring. This is the tactic of placing premium or expensive items beside standard ones, which gives the impression that the standard product is a bargain by comparison.
This has been shown to be one of the most powerful psychological tactics in pricing. People are more likely to make a purchase if they believe that the product that is priced as standard is a saving.
This is because people have an unconscious tendency to make decisions based on the first piece of information offered to them when they make decisions. As such, if your website or your shop window lists three products or services the first for £10,000, the second for £8,000 and the third for £2,000 customers will believe the £2,000 product to be good value and will actually be more likely to buy it as a result.
This tactic is heavily used in retail and on e-commerce websites.
Psychology Pricing
This pricing tactic is used to try and get customers to make buying decisions based on emotion rather than logic. Similar to price anchoring, it aims to create an enhanced illusion of value in the customer’s mind.
The 99p effect is a good example.
Research has shown that customers are more likely to buy a product if it is priced at £9.99 rather than £10.00.
Again, this comes down to our psychological proclivity to pay attention to the first figure. The number 9 is lower than the number 10, despite the fact that the £9.99 product is as near as makes no difference £10, we still perceive it to be closer to £9.
This is one of the oldest tricks in the retail trade but has been shown to work so effectively that there is little doubt that it is here to stay.
Bundle Pricing
Another tactic to generate perceived value the strategy of price bundling relates to the practice of offering multiple products for a combined price lower than the sum of their individual prices.
For example, the buy one get one half-price tactic used in retail.
In reality, the cost to the retailer of the two products is less than what you would pay for just one, therefore it still gives them a profit, but gets you to spend more than you otherwise might have.
This has also been shown to improve customer loyalty as they feel that they have been given a deal by the business they are buying from.
Summary
As mentioned at the top of this article, different strategies will work for different businesses and you can even combine a few of the different ideas above together, maximising the psychological impact your price point makes on your customers.
There are numerous considerations, research and variables to understand before a pricing strategy is settled upon, and it is not a decision that can be made lightly.
Please get in touch with us today should you wish to discuss your pricing plans or find out more about how to settle on a strategy.
What are you waiting for? Drop us a call on 0203 150 0565 or email info@thealtitudeagency.com
