In the competitive world of retail, price increase situations are among the greatest decisions regarding profit and combined satisfying customers. Retail price strategy influences brand image purchasing behavior and sales performance overall when it comes to maximizing profits from attracting customers on the lower end of the pay scales. This article discusses major types of pricing strategies which are put into retail management and growth.
What is a pricing strategy?
Your pricing strategy provides a baseline upon which you can generate charges for the products and services you offer. There are many different strategies that you can go through, but before you can choose which pricing strategy to adopt, you will need to introspect on the production costs and compute the lowest price at which you would at least break even. After that, you can think about your desired profit margin and what is considered realistic when seen in the competition of the market.
Your considerations should comprise how your product or service measures against the competition in terms of quality, features, and price. By doing your research before you jump in, you can create a strategy that attracts the right customers, makes a profit, and keeps shareholders happy. By understanding the types of strategies in retail management offered by the British Academy for Training and Development, businesses can align their pricing with customer expectations, improve marketing sales, and boost long-term profitability.
Common types of pricing strategies
Choosing the right pricing strategy for your business means striking the balance between making sure the prices for your products or services are competitive and maximizing both short-term and long-term profitability. There are eight strategies adopted in pricing. Let's highlight what goes into each pricing strategy and see some of the examples.
1. Cost-plus pricing
Cost-plus pricing is commonly referred to as markup pricing because it determines the price for a specific product by considering the production cost per unit, with little regard to competitors' prices. To set a price using the cost-plus strategy, you add up the production costs, determine the desired profit margin or markup, then add that number to the production cost to derive your selling price.
Government contractors are known to use cost-plus pricing due to the peculiarity of lack of competition in the market. Retailers, including the supermarket and department store, have also relied on this method because it is simple, allowing consistent returns on the basis of a single formula.
2. Competitive pricing
On the basis of competitors' pricing, competitive or competition-based pricing will be the benchmark of the pricing. Rather than start with production costs or customer demand, for example, companies will look at competitive pricing data and then set its price below or above the industry average depending on their USP and their business goals. To have a product that is similar and fast growing in the market, the price will be relatively low. On the other side, a higher price would be set by a company that is giving a premium product with different features in it.
3. Psychological Pricing Strategy
Psychological pricing is based on the idea that certain prices have a psychological impact. For example, instead of charging $10.00, pricing a product at $9.99 would suggest cheaper pricing to customers. It employs the emotions and perceptions of people rather than logic to largely influence their buying decisions. Fashion, fast-moving consumer goods (FMCG), and discount retail are typical application areas. A consumer should feel a product is a better deal using this technique.
4. Price skimming
Price skimming establishes an early high price for market entry by the firm for the product or service. Doing so may imply great quality and provide early consumers ready to pay a premium with an exclusive experience. Companies use this technique to swiftly develop expenses and have a product with enough customers eager to acquire it even at a premium price point. Over time, though, the company gradually lowers its product’s price to attract a larger customer base.
Price skimming example: Tech companies have long employed price skimming while releasing novel products to the market. The starting price of a totally new or inventive product might be rather high. This is so the corporation is sometimes the only one providing this new item or cutting-edge characteristics.
Initially, they concentrate on a smaller group of clients ready to pay for earlier access. Once the company reaches all available consumers at its initial pricing, though, it starts to progressively reduce the selling price. Doing so attracts more price-sensitive consumers while pressure is put on other vendors who necessarily start to enter the market with comparable goods.
5. Economical Pricing
Economy pricing seeks to provide fundamental goods at the cheapest possible cost by controlling expenses. This plan suits price-sensitive markets and cost-conscious consumers. Although margins are usually slim, stores employing economic pricing profit from great sales volume. Supermarkets, discount stores, and private label products all share it often. The secret is effective supply chain management to reduce costs.
6. Penetration pricing
In contrast to price skimming, penetration pricing is when a company releases a product or service at an extremely low price in the market. At first, this plan grabs headlines and brings in swarms of inexpensive clients. Prices must eventually increase after grabbing market share for this to be sustainable (and finally lucrative). The hope is that customers will love the product or service enough to remain loyal even after the price rises. Otherwise, the corporation has to figure out a way to make the goods at less than its rivals.
Example of penetration pricing: Many internet or cell providers employ penetration pricing. With low prices, they make a splash but change to competition-based pricing after gobbling up market share and gaining more brand recognition. Early losses may be incurred by companies employing this disruptive strategy, but they gamble that the clients first drawn in by a cheap price will remain loyal once the price climbs.
7. Promotional Pricing
One short-term approach called promotional pricing lowers prices for a limited time in order to boost demand or clear stock. Common techniques are coupon codes, BOGO (Buy One Get One), flash sales, and discounts. Retailers utilize it to draw foot traffic, create buzz, or contend throughout holiday seasons. Although it increases sales volume, overuse could devalue the brand or harm long-run profitability. It has to be combined with aggressive marketing initiatives.
8. Value-based pricing
With this strategy, companies set a price based on what customers are willing to pay for their products or services to their perception of its value. Value-based pricing demands that you create a brand centered on the value communicated by distinctive goods, features, and benefits. Brands should invest more heavily in marketing for expanding companies, research, and public relations if they hope to successfully employ this pricing approach.
Value-based pricing example: Luxury goods including brandname leather handbags, high-end automobiles, and premium cosmetics brands are frequently priced based on value. These high-end companies advertise their products to convey their high value. Eventually, they come to be customer symbols of rank. Buyers are prepared to pay a premium once this succeeds.
Although premium brands can command more for their goods, it does not necessarily imply the real quality of their goods meets the expected value customers obtain from associating themselves with the company. Actually, the product quality and the production cost might not be measurably different from those of lower-priced rivals. Customers just believe their value is greater.