What is a Pricing Strategy?
Whether you own a local business that is just starting out or one that’s been well established for years, pricing strategy is a critical element that you should keep at the top of your mind.
Pricing strategy is an important part of a company’s marketing plan. It is the process of defining prices for your services that will enable the company to achieve its goals.
In more technical terms, pricing strategy is a marketing mix component and will help you determine the point at which the quantity demanded by customers (at a given level of marketing effort) will bring in revenues that surpass the costs associated with making, distributing, and selling that output. Thus your pricing method should allow you to make a profit.
In this article, we’ll review:
The importance of pricing strategies
9 common pricing strategies employed by small businesses
The factors to consider when choosing yours
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The Importance of Factoring In Different Types of Pricing
Pricing strategy is important because it plays a key role in establishing the financial wellbeing of your business, as well as positioning your products and services for your customers and prospects.
It can influence how much demand there is for a product, and ultimately determine how successful a business will be.
When it comes to pricing, businesses need to take a number of factors into account. There are many different types of pricing to consider, and each type carries with it particular nuances that can affect the business’s profitability.
Some businesses offer the “good”, “better”, and “best” options in their pricing bundles/tiers. This strategy is designed to drive the buyer to the middle, avoiding the cheapest option, but delivering value in the middle tier.
For example, a cleaner could offer a package for $499 that offers the most basic features, one for $999 with attractive add-ons, and a final bundle for $1499 that is comprehensive of everything they provide.
Creating different tiers like this helps you avoid competition with lower-priced competitors and allows you to compete against higher competitor pricing (depending on the tiers you create)—while attracting different customers based on their budget.
A proper pricing strategy will maximize your profits and market share while ensuring that your customers are satisfied. Not taking these factors into consideration could negatively impact your business.
For example, a HVAC company could price a new heater with installation at a specific price. However, if top competitors in the area are offering significantly lower prices, you may find yourself in a situation where few people make the decision to purchase the heating installation.
9 Awesome Pricing Strategy Examples for Your Local Business
Local businesses can benefit from using different pricing strategies because they allow you to better understand what your customers want. Different pricing strategies can help local businesses encourage new purchases and reward loyal customers. Additionally, they can help increase the perceived value of your business.
Since there is no one-size-fits-all approach to pricing, it is important that local businesses experiment with different pricing strategies and try to understand the pricing psychology of their customers.
Here are a few that you can consider when setting prices today!
1. Price skimming
Price skimming is a pricing strategy in which a business sets a relatively high initial price for a product or service at first, then lowers the price over time.
A skimming strategy is most effective when:
The market is captive.
There are few close substitutes for the product or service.
Consumers have limited information about the product or service and its prices and features (e.g., because it’s new).
For example, an HVAC contractor might use skimming pricing to promote a new energy-efficient air conditioner. The contractor first sets a high price until early adopters are willing to pay it, then gradually lowers the price as more consumers learn about it and become interested in buying it.
2. Cost-plus pricing
Cost-plus pricing is a simple method of pricing. It involves calculating the total costs incurred by producing a product or providing a service and then adding a markup to give you a profit.
For example, if it costs you $100 to buy or make a product, and you want to make a 20% profit, the cost-plus price would be $120 ($100 x 1.20 = $120).
Suppose you run a roofing business. A customer asks for an estimate for replacing the roof on their home.
Here’s a basic example of how you would apply cost-plus pricing:
Estimate how many squares need to be replaced and multiply this by your cost per square (e.g. $55 per square). This gives you your total cost ($55 x 120 = $6,600).
Work out what percentage of profit you want to make (e.g. 20%). Multiply this by your total cost (e.g. $6,600 x 0.20 = $1,320). This is your profit margin ($1,320).
Add your profit margin ($1,320) to your total cost ($6,600) to arrive at your cost-plus
3. Penetration pricing
Penetration pricing, sometimes also called loss leader pricing, is a strategy whereby a business sets the price of a product or service low, often lower than its competitors, with the expectation that customers will be drawn in by the low price and purchase additional goods, services or upgrades that are an upsell.
This pricing strategy is often used when a company wants to increase its customer base percentage and market share in an industry.
An example of a market penetration pricing strategy would be to offer plumbing services for initial customers at a discount rate for their first call or to offer free work in exchange for referrals.
This strategy is most effective when the business offering it has the lowest production costs in their industry, so they can afford to price their products or services below what competitors charge.
4. Dynamic pricing
Dynamic pricing is a technique that allows a business to charge different prices for the same product or service. The price of a product or service responds to supply, demand, and competitor actions in real-time. Hence, the “right price” and sales volume will vary.
For example, take the case of a general contractor. The business may charge different prices for different jobs depending on the size of the job and the complexity of the work.
The business could also charge different prices based on how much demand there is for their services. If they are extremely busy, they could charge more than if they were less busy.
This strategy works for many industries including home services, especially due to changing economic conditions.
5. Economy pricing
Economy pricing is a pricing strategy where the product or service is priced at the lowest possible price for which the manufacturer can cover its costs and still turn a profit. With economy pricing, customers are attracted to the product’s low price, with little emphasis on other factors (such as quality).
Economy pricing is often used by businesses that are just starting out, because it allows them to attract new customers and gain market share by offering competitive pricing. For example, a new electrician may offer “$25 per hour” economy pricing to get more customers than his competitors.
The downside of economy pricing is that there is no room for increased costs or miscalculations; if the business doesn’t manage its costs and expenses effectively, it could lose money on each sale.
6. Premium pricing
Premium pricing is a strategy where a brand sets high prices for its products or services. The aim is to associate the brand with high quality and set it apart from the competition. Premium pricing can be used as a marketing strategy, especially in the introductory phase of a product launch. It can also be used to maintain market position when the product has acquired strong brand recognition.
When using premium pricing as part of a marketing strategy, there are some key factors to consider:
The target audience: Premium pricing is only successful if you have an audience willing to pay for quality.
Perceived value: Is your product or service worth the higher price? Does it have a unique competitive advantage? If not or if the service is price-sensitive, your potential customers and consumer demand will shift to businesses with a competitive pricing strategy.
Product differentiation: A premium-priced product/service needs to stand out from similar products offered by competitors through superior quality or unique features.
7. Bundle pricing
Bundle pricing is a process in which a seller combines several products or services and offers them at a lower price than the one they would have if they were sold separately.
As an example, in the context of a home service business, bundle pricing can be used by plumbers to offer their customers both plumbing and heating services. For example, during the winter, they could charge $100 per hour for heating services and $150 per hour for plumbing services. However, if they offer these two services together they could charge $200 per hour.
Bundles are particularly useful for home service businesses because there are many services that must be performed periodically. Examples include pest control, lawn care, pool maintenance, etc.
Each service has a certain frequency at which it must be performed (monthly, quarterly, biannually). Your company can entice customers to sign up for all the services they need by offering them a discount if they purchase all the services together.
8. Low pricing
Low pricing can be defined as a pricing strategy where the company offers the product at very low prices due to low operating costs.
A good example of this is a home service business such as maids, carpet cleaners, and movers. These companies have fixed costs that are generally comprised of labor and transportation costs. It is easy for these companies to lower prices, as they don’t have inventory to maintain or warehouses to operate.
In fact, low pricing is an effective way to build trust with customers who don’t know your business yet.
9. Psychological pricing
Psychological pricing is a form of promotional pricing that involves setting the price point just below whole numbers. People tend to read $4.99 as $4 instead of $5, so they feel like they’re getting a deal.
When you think about psychological pricing, you might immediately think of retail or fast food businesses, and those are certainly examples where we see the strategy used frequently. However, psychological pricing can be applied to any business type and even home service businesses.
For example, if you are running a cleaning business, you can use psychological pricing by setting the price as $24.99 instead of $25.00 for your weekly cleaning services. The reason for this is that your customers will feel like they are paying less than it “should” cost. Glancing at that price tag, they will be more likely to make the purchase because they see a good deal.
Studies have shown, however, that using a rounded price encourages customers to rely on feelings, whereas a non-rounded price (like .99) encourages buying decisions to be guided by reason.
Save on Your Overall Costs with Signpost
There are a lot of tactics that go into saving money. From budgeting to making sure you’re always getting the best deals on products and services, it can take a lot of time and effort to keep your spending in check.
As a business owner, you don’t have time for that. Instead, you should be focusing on the things that matter most: making your business grow through the right pricing strategy.
That’s where Signpost comes in. We make it easy for you to save money so you can focus on what really matters: growing your business.
Here are just some of the ways we bundle products and services and help businesses cut costs, so they can offer their products and services at more competitive prices:
Marketing automation, which enables one person do the work of an entire marketing team
Payment automation, which allows users to set up recurring billing and sends out payment reminders automatically
Live receptionist, which saves businesses money on customer service while still giving customers access to live help 24/7
Review management, which helps businesses get more 5-star reviews
If you need review management software for your business without the headache, Signpost is a cost-effective solution. Start a demo today.