How To Set Prices For Your Services.
[vc_row][vc_column][vc_column_text]A Pricing strategy is the method companies use to price their products or services. Almost all companies, large or small, base the price of their products and services from the cost of producing and designing the product, the cost of distributing the product, and the cost for promoting the product. The main pricing strategies are:
- Predatory - This is where a company prices its product at very low margin, or even at cost* in order to gain entry into a new market. Over time, as the company establishes a more dominant share position, it increases prices to be more in line with its target brand position. This often used where a new entrant is seeking entry into an existing market with established competition. Predatory pricing is not without its pitfalls including:
- Sending the wrong positioning signal to the market
- Difficulty in raising prices due to customer backlash
- Sacrificing negotiating room
- Leaving money on the table
- Difficulty in covering costs
- Skimming - At the opposite end of the spectrum, this is where a company prices at a premium to capture the high end segments first. Then as it saturates a buyer segment, it drops prices to appeal to new buyer segments. This strategy requires that some meaningful differentiation exists to support a premium price segment. Skimming also has its pitfalls including:
- Increases sales resistance, lowers demand, and slows sales adoption
- Creates an umbrella for competitive entry
- Creates customer "ill will"
- Gives customers an incentive to search for alternatives
- Bundling - This is an intermediate strategy where a company groups together different products and features in such a way that it can offer variations at different prices. This gives the company great flexibility to offer a combination of features that appeals most to different buyer segments while maximizing the profitability of the various offerings. An example of this is the automobile industry where the variety of packages can be overwhelming. By bundling together desirable but costly features (e.g. automotive transmission) with less desirable but more profitable features (e.g. "all weather" package), the overall profitability of the car can be optimized.
- Multi-tier - This is another intermediate strategy where the company offers distinct product categories at different price segments to appeal to different buyers. Again, an example from the auto industry is Toyota used to offer a mainstream (Toyota) and luxury (Lexus) model under different brands for substantially the same car (Camry vs. ES300). Another example would be the freemium model practiced by the SaaS industry where it is common to offer both a basic free version and a premium paid version.
Put some thought into which pricing strategy will work best for your business model.[/vc_column_text][vc_text_separator title="VIDEOS"][/vc_column][/vc_row][vc_row][vc_column width="1/3"][vc_video link="https://www.youtube.com/watch?v=VcGR5dPpeME"][/vc_column][vc_column width="1/3"][vc_video link="https://www.youtube.com/watch?v=0U_6Huw2gFo"][/vc_column][vc_column width="1/3"][vc_video link="https://www.youtube.com/watch?v=DGTR-9v4UBQ"][/vc_column][/vc_row][vc_row][vc_column][vc_text_separator title="Additional Pricing Strategies"][vc_column_text]
|Product Line Pricing||Pricing different products within the same product range at different price points.||An example would be a DVD manufacturer offering different DVD recorders with different features at different prices eg A HD and non HD version.. The greater the features and the benefit obtained the greater the consumer will pay. This form of price discrimination assists the company in maximising turnover and profits.|
|Psychological Pricing||The seller here will consider the psychology of price and the positioning of price within the market place||The seller will therefore charge 99p instead £1 or $199 instead of $200. The reason why this methods work, is because buyers will still say they purchased their product under £200 pounds or dollars, even thought it was a pound or dollar away. My favourite pricing strategy.|
|Premium Pricing||The price set is high to reflect the exclusiveness of the product.||An example of products using this strategy would be Harrods, first class airline services, Porsche etc.|
|Optional Pricing||The organization sells optional extras along with the product to maximise its turnover. T||This strategy is used commonly within the car industry as i found out when purchasing my car.|
|Cost Based Pricing||The firms takes into account the cost of production and distribution, they then decide on a mark up which they would like for profit to come to their final pricing decision.||If a firm operates in a very volatile industry, where costs are changing regularly no set price can be set, therefore the firm will decide on their mark up to confirm their pricing decision.|
|Cost Plus Pricing||Here the firm add a percentage to costs as profit margin to come to their final pricing decisions.||For example it may cost £100 to produce a widget and the firm add 20% as a profit margin so the selling price would be £120.00|
[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width="1/2"][vc_column_text]For a more in-depth understanding of how to develop a successful pricing strategy, check out the book, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably by Thomas Nagle. (listed on amazon for $66.55)
If you prefer tweets instead of chapters, then follow The Pricing Wire on Twitter![/vc_column_text][/vc_column][vc_column width="1/2"][vc_single_image image="2932" img_size="medium"][/vc_column][/vc_row]