Key Business Skill: Pricing strategy
Your pricing strategy is important in building the customers perception of the company and brand and will normally be agreed at senior management, or Board Level.
The marketing department will have a key part to play in these decisions, and will develop tactics to deliver the strategy.
In most markets, a high price contributes to the perception of your product as being of premium value. Conversely, your premium brand can justify the high price in the eyes of the consumer. High end pricing might encourage customers to buy from you, and may deter price-conscious customers.
The Marketing department will usually have a budget to allow them to fund various strategies, such as discounting. This is built into the overhead, so will not endanger profitability, if correctly managed.
Ideally prices should be set so that they cover your costs and can deliver a profit, but sometimes items are deliberately sold below cost as a “Loss Leader “, funded by marketing contributions.
Customers who are expensive to satisfy are normally less profitable, unless you can charge them higher prices.
Quick Facts: pricing strategy and tactics
Differential pricing. It can be useful to charge different prices to different customers, at different times. Discounts are a useful way to manage this. Ideally they would be funded by lower costs, to maintain margin.
- Volume related or Turnover related discounts can be given to clients who achieve a certain purchase level. Usually used commercially rather than in retail. Discounts can be tiered.
- Retrospective discounts can be given at the end of a season
- Time sensitive Discounts eg cheaper prices in January after the holiday season
- Multiple purchase discount
- Loyalty Discount to customers who purchase repeatedly, or buy add-on or related products, as a thank you for their loyalty.
- Clearance or sale discount
Other pricing tactics include;-
- “Loss Leader “Selling a product at a low margin or even below cost. Although you may not make a profit from this product, the objective is to attract attention, and draw customers who will also buy other, more profitable products.
- Skimming or scarcity pricing .If you have a unique product or service, you can sell it at a high price. This is a tactic often used by designer brands, who will deliberately create a demand for a unique or scarce product. The danger here is that you may just price yourself out of the market if there is credible competition.
- Penetration is the opposite of skimming. This is going in to the market at a low price to gain market share before competitors catch up with you. Once you have established a customer base, you will be able to raise prices later.