Five good pricing strategy examples and how to benefit from ...

1. Competition-based pricing · 2. Cost-plus pricing · 3. Dynamic pricing · 4. Penetration pricing · 5. Price skimming. Fivegoodpricingstrategyexamplesandhowtobenefitfromthem JonasTimonen April19,2021 Apricingstrategyisthemaindriverhowyoumakeprofitinanybusiness.ItisespeciallyimportantinEcommercewherepriceisthenumber1purchasedecisionmakingdriverinmanycategories.Turnthequestionaroundanditissimplyaquestion:howdoyoudelivervalueasacompany?Areyousellingwithcheappricesorarepeoplewillingtopaypremiumonyourproducts.Thatsaid,pricingstrategycannotbeinfullyexecutedinisolationfromthebroadermarketingstrategy.Thisarticleexamines5bestpricingstrategyexamplesthataresimpletofollowandexecute.SoletsassumeyouareaEcommercecompanythathasdecidedtheirpositiononthemarket.Nowyouhaveconsidersometacticstomakeyourstrategywork.Thingslikecompetitoractions,marketconditions,consumertrends,andothervariablesincludingproductscoststoaccountforthepricingmodelofyourgoods.Itisvital,andsomething,thatwehaveseenmultipletimes:Stickingtoasimplestrategyworksbest.Tryingtooutmanoeuvreyourcompetitionwithtoocomplexstrategiesoftenendsupintimeconsumingandunprofitablepricingdecisions.Asaretailerorane-commerceplayeryoumustdecideonapricingstrategy,beforeadvertisingproductstocustomers.Inthislist,wewillreviewthefivemostcommonlyusedapproachestopricinganddecidewhatfitsyourbusinessneeds. 1.Competition-basedpricingCompetitionbasedpricing utilizescompetitor’spricingdataforsimilarproductstosetabasepricefortheirownproducts.Ratherthanfocusingonproductioncostsorthevalueoftheitem,thispricingmethodreliesheavilyon marketdata.Thinkofitinthisway.Youhavefivecompetitorswhosellthesameproductasyou,andyoucategorizethemfromthemosthigh-endbrandtotheaffordablebrands.Then,youdecidewhereyoufitin.Whatistheidealsituationforusingcompetition-basedpricing?Thereasoncompaniesrelyoncompetition-basedpricingissimple.Itiseasy,andyouhavecompletecontroloveryourmarketposition. Marketinformationgathered oncompetitorscangivemoreinsightsthanjustpricing,whichyoucanimplementinyourbrandtoreplicatesimilarresults.Thedisadvantagesarethatitishardforcompaniestosustainonlyoncompetitivepricingiftheyarenotactivelyaddingvaluetocustomer’slivesanddon’thaveaqualityproduct.Also,oneofthemajorpitfallsisthatsellingsolelybasedonacompetitor’spricingcanundermineyourproductandcostyourevenue.Competitivepricingisahighlyusefultoolforretailersandsmallbusinesses,especiallyineCommerce. Downloadfreeebookonprofitablepricinginecommerce 2.Cost-pluspricingCost-pluspricing isabasicstrategythatworksbyconsideringthetotalcostofmakingaproductandaddingamarkuptothattodeterminethepriceofaproduct.Thisisagoodstrategyinthelongterm.Abusinessownerneedstofirstunderstandthecostsinvolvedinproduction:material,labor,warehousing,machinery,utilitiesandsuch.Themarkuppricethatisaddedtothetopofproductioncostiswhatthecompanymakesinprofit.Here’showcost-pluspricingworks:Step1:calculatethecompleteproductioncostforxunitsofproduct.Step2:dividethecostbyxunitstogetunitcost.Step3:multiplyunitcostbymarkuppercentage.Ifunitcostis$10andmarkuppercentageis20,thentheprofitmarginis$10X20/100=$2.Thepriceoftheproductis$12. Itisidealforretailcompanies.Basedontheproductofferingtheycanchargedifferentmarkups.However,thisisnotidealforsoftwareservicecompanies,musicproducers,andthelikebecausethepriceoftheproductismuchhigherthantheproductcost. 3.DynamicpricingThemostbasicwayofdescribingdynamicpricingisthatyourpriceisnotstaticandinsteadchangesbasedonotherfactors.Thesefactorscanbeforexamplesegmentsortime.Dynamicpricinginsegments.Companiesusealgorithmstoderivethepricingfordifferentgroupsbasedonstatistics.Say,youownacarrentalcompanyandyourAIisspecializedtohikeuppricesatlocationswithlotsofpubsandbars.Ifthissoundshighlyillegalandimpractical,wecanassureyouitisnot.WearejustdescribingUber.DynamicpricingbytimeThiskindofpricingisoftenseenatsales-basedcompanies,likecarorinsurancedealershipswherethereisahugerushtoclosedealsattheendofthemonth.Thisiswhendealersoffercheaperpricesonproductstomatchthesalesquota,ascomparedtothestartofthemonth.Intherealworld,weseethisallthetime.Amazon,Uber,flightcompanies–theyallusedynamicmarketingbasedonsupplyanddemand. 4.PenetrationpricingPenetrationpricing isastrategythatisusedtocapturemarketsharebysettingproductpricesatabelow-marketleveltogaincustomers.Oncethecompanygetsasizablemarketshare,theyreadjustthepricingaccordingly.Here’showpenetrationpricingworksConsidercompanyX,whichisasmalltomedium-sizedsoapmakerandsellslavendersoapbarsat$10.AninternationalcompanyYwhichhasamuchhigherproductioncapacity,entersthemarketandbeginssellingasimilarlavendersoapbarat$5.Thisistheprimeexampleofpenetrationpricing.ThegoalofYhereistorunthesmall-sizedcompetitorXoutofbusinessasevenif,at$5,companyYmakesaveryminimalprofit,theyareconfidentcompanyXcannotmatchtheirprices.AndascustomersbeginbuyingfromY,Xwilleventuallyrunoutofbusiness.Thisextremeformofpenetrativepricingisalsooftentermedaspredatorypricing.World-renownedWalmarthasbeenpracticingthisfordecadesandhasbeenthebaneofsmallerlocalbusinessesduetotheirunmatchableprices. 5.PriceskimmingChargingahigherpriceforaproductwhenithasbeennewlylaunched,leveragingmarketdemand,andthenloweringorreadjustingpricebasedondemandatalaterpointisknownasskimmingpricing.Weseethisoftenatthelaunchofcelebrityproductlinesornewproductlaunchesfromareputedbrand.Earlyadoptersarecustomerswhoarewillingtopayamuchhigherpriceforaproductwhetherthatpricereflectsthetruevalueoftheproductornot,tohaveitwhenthedemandishigh,usuallyatthelaunch.Thepricesoftheseproductsarethenloweredtoattractmoreprice-sensitivecustomers.Therefore,foreachcustomersegment,thecompanyischargingthemaximumamountbyskimmingoffthetopofthesecustomersegments.WhetheritisRihanna’sFentyBeauty,Kanye’snewclothingline,orthenewestPlaystation,businessesuseskimmingpricingtoleveragewillingcustomerswhoarenotonlypayingfortheproductbuttheprivilegeofbeingthefirstinlinetobeabletousethatproduct.Inafewmonths,thepricesoftheseproductsusuallygodown. 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