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05 Aug 2019

How to Choose among Many Pricing Options

How do various pricing approaches influence customers? The paragraphs that follow show some options to consider, based on your overall strategy, cost analysis, pricing strategy, and pricing method.

1. LOSS LEADERS

Sometimes companies offer certain merchandise or services at an intentional loss to drive traffic to stores, service locations, and/or Internet sites so customers will come in contact with the higher-priced options in their product lines. For example, despite the exceptionally high operating cost of a burn unit, maintaining such a service would demonstrate commitment to the community firefighters and emergency personnel, and gain loyalty from such groups when it comes to choosing more profitable hospital services, such as cardiac care, general surgery, and/or maternity.

2. GEOGRAPHIC PRICING

When geography and/or cultural differences impact the economy, you may need to price based on differing sets of expectations and market capabilities. In that case, you can vary your price based on your product locations. Retail and boutique shops, for instance, generally support higher prices than outlet stores, Internet sites, and buying clubs, based on customer perceptions and expectations.

3. EXTRAS PRICING

Depending on your product or service line, you may find it advantageous to offer basic products and services at a standard rate, with an added price for upgrades. Restaurants frequently use this approach. As an alternative to the prix fixe menu, they may charge extra for salads and desserts. A hair salon may offer a low cost for a cut and blow dry, but may charge extra for hair conditioner. This strategy enables buyers to purchase from a moderately priced product line while the vendor capitalizes on profit from the sale of extras. Customers motivated by prestige are highly susceptible to extras pricing. When choosing among pricing options, make sure you understand the mindset and financial standing of your customer mix.

4. BUNDLING

If you have surplus inventory and/or carry multiple items, you may choose to package the items together. You may factor in a lower price for the inventory you most want to move and pair it with a higher priced or more desirable product as a sales incentive. You can bundle different products together or package the same item in multiples. You can also try this approach in collaboration with offers from your channel partners; for example, cable and telephone companies have turned to bundling service packages (e.g., telephone, TV, and Internet, with special monthly prices extending across a promotional time period).

5. CLOSEOUT PRICING

Another promotional pricing strategy, closeout sales, offers deep discounts in an effort to sell off stagnant inventory. This approach is typically used when new models are about to be introduced or items on the shelves have outlasted the season or are nearing expiration dates.

6. CAPTIVE PRODUCT PRICING

Some products require other products to provide ongoing value. In that case, you would probably offer the original product at a lower price. You can then earn your profit on supplies. For example, Dell offers promotional pricing on printers ordered along with computers. But, the company earns additional money over the printers lifecycle from repeated customer orders for ink and specialty paper and/or service plans.

7. PSYCHOLOGICAL PRICING

Do you believe that customers have a set price in mind? Or do you think that they are more likely to buy an item priced at 1000 naira instead of a dollar? Some companies set their prices based on their knowledge of how customers mental perceptions and beliefs impact their buying behavior.

8. PROMOTIONAL PRICING OR DISCOUNT PRICING

Promotional pricing takes multiple forms, such as special sales and seasonal pricing. You may choose to reduce prices for senior citizens, not-for-profit organizations, members of professional associations, business groups, buying groups, or channel partners. Before deciding on promotional pricing, think about what you hope it will do for your company:

Will it bring in revenue more quickly, helping you in the short term?

Will it entice new customers for the long haul?

Will it help you empty an overstocked warehouse? If so, what will that save you in space and overhead costs? Will it make room for a better seller next month?

How much will it cost you to run the promotion or discount?

How will this affect overall profitability?

How will this pricing strategy align with your overall brand positioning and business strategies?

9. REWARD PRICING

Reward pricing can take many forms. Airlines offer frequent flyer miles. American Express offers reward points for credit-card purchases. Starbucks offers punch cards entitling the bearer to a free beverage after 10 other purchases have been made. You can offer rewards for ongoing or multiple purchases. Or you can offer favorable payment terms with special purchases. Furniture stores and car dealers offer delayed payment options as well as no-interest promotions to entice and/or reward customers for doing business with them.

10. COUPONS

Coupons are a proven option for generating product interest and purchases. When offering a coupon promotion, remember that there are costs other than the discount you offer. Youll also have costs for coupon preparation and printing. You may have mailing and distribution costs, as well, and youll also have to predict and track redemption rates.

No matter which pricing option you choose, always remember to track costs and factor in a percentage of your overall business burden when calculating the true cost of your price promotion.

11. TERMS AND CONDITIONS AND PRICE ADJUSTMENTS

If your product carries a warranty or your service a special guarantee, you need to estimate the return rate and know what that will cost you. If you offer a discount based on prompt payment, you may be able to offset the discount with the fact that money will be in your hands sooner, enhancing your cash flow and enabling you to negotiate better terms with your own vendors.

12. DISCOUNTING AS A STRATEGY

You may choose to offer price adjustments for not-for-profit organizations, small disadvantaged businesses, or businesses owned by women, minorities, or veterans. If you do, calculate how much business you expect to do in each category and how those decisions will impact cash flow and profitability. After all, if you are working for one customer at a discount, you may not have time or resources to serve another client at full price.

When lowering your price, be aware that if you discount too heavily, it may be difficult to justify bringing the price back up. When one company lowers its price, and another follows, customer expectations around product pricing may adjust downward as well. Once customers learn that prices drop at certain times of year, or according to product cycles (as is the case when new technology is on the horizon), many customers will wait for sales and special deals or the marketing push to offload out of date inventory.

Every pricing decision has the potential to alter consumer behavior. Expectation of sales in retail stores, for example, have left customers with the jaded perspective that products are overpriced and, if those customers wait long enough, prices will come down. In some cases, pricing pressure may be irreversible. Marketing teams then would be challenged to introduce stronger value propositions, while R&D teams may be sent back to the drawing board to add product features that will command upward price adjustments.

Beware of the temptation to reduce pricing just because you are competing with a neighboring business. See to it that you know exactly why you are reucing your price, and be sure that the strategy will add to your long term business solvency.

Kindly read previous articles on the blog for more on pricing methods and strategies.