7 pricing strategies that maximize business revenue
Updated on 15 Jan, 2021 | 8 min read
How do you choose among different pricing strategies when launching a new product? Read this guide to uncover why some products increase revenue with increased prices, and others don’t.
How do you choose among different pricing strategies when launching a new product? Why do some products increase revenue when prices are increased and others don’t? Do you have high sales volume but declining profitability?
Well, are you using the right pricing strategies for your business?
Pricing is one of the most important pillars for the success of a business. As pricing makes a huge impact on profitability of a business, big companies in every industry are extremely careful with their pricing, spending millions of dollars to find the best pricing strategies.
But pricing is also one of the most overlooked factors by small business owners. Many small businesses simply price their goods and services based on the cost of goods sold. However, this is really risky for businesses. Setting the price too high will lead to a drop in sales volume, while a price too low will eat into your profitability.
Today we will look into various pricing strategies for retail to achieve better prices for your products, and maximize your profits.
What are the most common yet practical pricing strategies?
4 different pricing strategies if they were milk cartons
There are more than a dozen pricing strategies that businesses use today to maximize sales. In this blog, we will focus on practical pricing strategies in the retail industry, but many of these apply to other industries as well.
Competitive pricing / Competition-based pricing:
Competitive pricing is the most commonly used pricing strategy as it is simple and effective. This strategy works by setting prices based on how competitors charge for the same or similar products.
This strategy is suitable for businesses with a lot of competitors and benchmarks can be easily found.
Cost-Plus pricing / Markup pricing
Markup pricing is also one of the most popular pricing strategies, especially for retail businesses. Markup pricing refers to adding a price margin on top of cost of goods sold. Businesses employing this strategy normally determine the prices based on the revenue or profit goal set. It is often used together with competitive pricing.
Value-based pricing refers to setting a price based on how much the consumers are willing to pay.
This is often used for differentiated products. By monitoring the prices of similar products, you can figure out how much people are willing to pay for products with similar features or of the same category. This also depends on a business’ understanding of their customers’ pain points.
Then, you can carefully analyze how your product is different from the monitored ones and decide how to adjust your prices.
Premium pricing (for premium products)
Premium pricing is to keep the price of products artificially high in order to give customers favorable perception and prestige.
This strategy is often used for luxury goods or premium goods. For example, luxury handbags such as Gucci and Hermes are priced much higher than normal handbags. Their high prices bring pride and prestige for their customers, and products like this actually have increased demand for higher prices
Penetration pricing (for introduction phase)
Penetration pricing works by setting a low price for a product in order to increase market share rapidly. This is normally used for products newly introduced into a competitive market. Businesses, which use penetration pricing, hope to attract consumers to convert to new brands or new products with low prices.
The prices set are always much lower than the competitors’ prices. However, this strategy can be highly risky if the prices set are lower than the costs of goods sold. It can also trigger a price war, which is unfavourable in the long run.
For example, when European supermarket Aldi entered a new market, they often price their products lower than their competitor Tesco, in order to grab the market share.
High-low pricing (for promotional period)
High low pricing is most commonly used by small retail businesses for products which are a fad or seasonal. This refers to setting the price highly at first when the product is popular and then reduces the price through promotion or through clearance sales when the fad is over.
This strategy is often used by clothing retailers such as Uniqlo, especially for UT series. Prices are often reduced after 2 months of initial launch in order to clear stocks.
Price skimming refers to setting the highest price when introducing a new product and then reducing the price gradually. This is mainly used for products with a short product life cycle. For example, electronic gadgets such as iPad and Nintendo Switch have the highest price when they are first introduced and then the price lowers as time passes.
With this information, you will now have a rough idea about what pricing strategies might be suitable for your business. To achieve successful pricing, you will typically need to use a combination of strategies.
The most popular strategy people start with is Competitive pricing, as its somewhat easy to do, and has a pretty low risk. However, it can be rather challenging for small businesses to track competitors’ prices as it requires a lot of time and resources. A typical online store selling commodities changes its prices several times a week. At peak seasons, it can even change every day in order to maximize revenue.
We at Konigle built a free price monitoring and repricing solution in our app that not only allows you to track competitors’ pricing as well as their stock level. Firstly, the basic tier allows you to track up to 100 product URLs across all popular ecommerce platforms for free. Secondly Konigle also allows you to monitor your internal pricing and audit MAP pricing across all your ecommerce channels. Thirdly, by combining both competitor pricing and internal sales performance, Konigle can help you find the sweet-spot pricing that will maximize your revenue.
Using Data to optimize your pricing strategies
Konigle therefore provides you the insights required to develop multiple pricing strategies:
- It analyzes your internal sales for seasonality. This can be used for high-low pricing strategies
- It analyzes how your competitor’s pricing changes over time. This can be used for both competitive pricing and penetration pricing
- It analyzes the distribution of how your industry’s products are priced, across different channels. By making it easier to monitor multiple competitors at once, you can hone down on a strategic value proposition that you can use to differentiate yourself. This then becomes a value-based pricing strategy
We believe successful pricing is attainable for all businesses with the right tool, so long as its made to be accessible. Give Konigle a try today
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