Pricing strategy overview

The first lesson of pricing is that you need a plan for doing it, rather than being random or arbitrary. That sort of seems like common sen...

The first lesson of pricing is that you need a plan for doing it, rather than being random or arbitrary. That sort of seems like common sense when you hear it, but most marketers setting prices don't have a well-developed plan.

pricing strategy

There are three basic pricing strategies that you can choose from. Pick one of the following:

Pricing Strategy #1  Premium Pricing

Also known as "Skim" pricing. This is the pricing strategy designed to take maximum money from the fewest possible customers. It's a strategy of the luxury brands and ultrapremium providers.

The premium pricing strategy requires the highest & best branding, photography, copywriting, and overall salesmanship. You can only do it over the longterm, and make money and a real business venture out of it, if you have a very powerful brand. Warren Buffett calls this, "a castle with an unbreachable moat".

This strategy requires a focus on quality, design, and brand building  not on shortterm sales goals. There is a lot of pressure to surrender and lower your prices when you use this strategy.

You can use this strategy for a short time when you're the first to offer a product in the marketplace. But as competition grows your ability to maintain premium pricing diminishes. Competitors will begin to offer lower priced alternatives. Therefore, the only lasting use of premium pricing is by businesses that can develop a powerful brand.

This strategy has the potential of giving you high profit from a low volume of transactions. Generally that is great because it's easier to run a business with fewer transactions and customers than it is with lots of them. You won't sell the most, but you'll be the brand that everyone says is the 'best', 'coolest', most admired.

Strategy #2  Neutral Pricing

A Neutral pricing strategy is designed to keep your prices similar to your competitors  not much higher or lower. It's a safe place to hang out, right in the middle of the pack.

Neutral pricing allows you to focus on competing in other ways  beyond price. You won't be raising any eyebrows, or starting any price wars. But if you can focus on quality, presentation, copywriting, and marketing skills, then you can earn a loyal following.

In a crowded marketplace, neutral pricing is frequently the best strategy for people who aren't the leader. It has the potential of allowing you to make moderate profit from a moderate volume of transactions. The problem with this strategy is that it's hard to build a successful business without either a lot of profitpertransaction or a lot of transactions. Using this strategy you have neither.

But you do have an emotionally safe pricing plan. Customers probably won't beat you up over your price. You probably won't hear too many complaints or frustrations. That makes life easier.

Strategy #3  Penetration Pricing

Penetration pricing is also known as being the lowcost provider. It is a strategy that can potentially give you the most sales volume, but frequently that comes at the expense of profits.

Penetration pricing has the potential of giving you a small profit from a high volume of transactions  the opposite of Premium Pricing. And as Walmart and Costco have proved, a small profit from a very large number of transactions is how you can make billions.

On the surface this is a very appealing pricing strategy. It gets you sales  and sales are the lifeblood of any business. But making sales isn't the same thing as making profit. There is nothing worse that working very hard at a business, making lots of sales, and then realizing you haven't made any money.

When the margins are tighter, you have to be much more careful.

Penetration pricing is only a good strategy if you can actually grow a profitable business using it. In a profitable business you can cover payroll, pay taxes, keep the lights on, buy new computers, and have enough money to do the marketing and advertising necessary to grow and expand. In other words  you're not broke.

Since penetration pricing gives you the least amount of profit per transaction, if you decide to use it, you’d better be crystal clear about your true costs for all the parts of your business.

If you don't know these exact numbers for your business, then you probably don't want to use penetration pricing:
  • Customer Acquisition Cost (how much it costs to get a new customer)
  • Cost Of Goods Sold, (per unit) (also known as material costs)
  • General & Administrative Costs (this includes payroll, utilities, rent, etc.)
  • Marketing Expenses necessary to hit your sales goals
It is called penetration pricing because low prices have the potential to penetrate the market and allow you to "take market share" from your competitors. Take enough market share and you become the market leader.

Many companies use penetration pricing strategies with a single product, in order to sell their other products to the same customer.

You can use penetration pricing for one of your products in order to get attention. The risk of doing this is that you permanently damage the "perceived value" of your overall brand. But, when you can do it without causing damage to your brand, then you'd be smart to try it.

The strategy of using a low price on just one product is known by various names, including:

  • A Sale (or shortterm discount): Putting a product on sale is a form of penetration pricing  in a way. You do it to try to get attention and make shortterm sales.

  • A Loss Leader: In a retail setting, many stores offer a very lowpriced product as a way to get customers into the store, or walking down an isle. It is called a "loss leader" because it leads to another sale, and typically the company takes a loss on selling it. Meaning that it costs more than they are earning by selling it at the low price.

  • An Ethical Bribe: In the online marketing world many people have come to understand that a free item, offered in exchange for an email address or other valuable customer action, is a wise investment.

  • A Trip Wire: The concept in online marketing of a "trip wire" is the idea that you can offer a "special" product or service at such a low introductory price  that you convert many people from "interested prospects" into "paying customers". If you can upsell these new buyers into higher priced products or services, then the "trip wire" was a wise pricing strategy.

Pricing strategy Action Step

Take a step back from everything you're doing and truly evaluate your pricing strategy at both the individual product (or service) level, and the overall business level. Are you following a pricing strategy or are you acting randomly? Begin acting intentionally and create a pricing strategy today.

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