17 pricing strategies to increase sales volume and profit

Price is what your customer pays and/or what the end consumer pays for a product or service. In the case of products not sold directly to the end user, pricing is often described as “wholesale” and “retail.” When the distribution channel is long (such as when there is a manufacturer, distributor, retailer and end consumer), multiple mark-ups can occur.

Your optimal pricing strategy will depend on more than your costs. Forces within your business environment such as your competitors, your suppliers, the availability of substitute products, and your customers come into play as well. Positioning (how you want to be perceived by your target audience) is also a consideration. There are a variety of pricing strategies in existence. Some of the things to consider when choosing the best strategy for your situation are your costs; both short term and long term sales and profit goals; competitors’ activities; and customer lifetime value. While there are others, a few of the more popular pricing strategies are:

1) Cost plus mark-up. Here, you decide the profit you need to make before setting the price. Figure out your costs and your selling price is simply your costs plus your pre-determined profit number. This approach helps keep your profitability top-of-mind, but may also result in prices that are out-of-line with customer expectations and worth of your product or service.

2) Competitive pricing. When competitive pricing, you look at the prices different competitors are charging and use those prices as a benchmark when pricing your own products. You and your competitors’ positioning strategies will determine whether you price at par, slightly below, or slightly above the competition.

3) Contribution margin-based pricing. It maximizes the profit derived from an individual product, based on the difference between the product’s price and variable costs (the product’s contribution margin per unit), and on one’s assumptions regarding the relationship between the product’s price and the number of units that can be sold at that price. The product’s contribution to total firm profit (i.e., to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).

4) Price skimming. This technique is used when you offer a unique or scarce product with few or no substitutes. The price is set high, resulting in high margins for the seller. Buyers are those that are willing to pay the price because of the product’s prestige and/or uniqueness. In the case of a scarce but necessary product, customers pay the price because they have no choice. Often, price skimming is a short-term strategy as competitors enter with their own products, bringing prices down. In the case of scarce products, either the need passes (salt during an ice storm, for example) or the shortage is temporary. Before considering this technique, be aware that if your customers feel you have taken advantage of them, you will be building “bad will” for your business and undermining the trust customers have in your products or services.

5) Penetration pricing. This is the opposite of price skimming. Prices are set low in an effort to gain large market share. Because the penetration price does not cover costs, this is also a temporary strategy. For this strategy to be profitable, customers must be willing to pay your normal, higher price later on.

6) Loss leader. Here, you price one or more products below cost to attract customers. You hope that those customers will purchase other profitable products from you. This strategy is often implemented as part of a short-term promotion.

7) Close out. This is a tactical move to clear slow-moving or excess products out of inventory. You sell the inventory at a steep discount to avoid storing or discarding the product. End-of season merchandise, perishables that are about to expire, and prior software versions or book printings are examples of eligible closeout items.

8 ) Multiple unit pricing. Also called quantity or volume discount. The customer gets a lower price for purchasing multiple units or large quantities.

9) Membership or trade discounting. Here, some customers (those that you know are heavy or frequent purchasers) are given an elite status, which gives them the privilege of a price discount on their purchases. This elite status can be based on occupation, membership in an organization, subscription status, or some other criteria.

10) Versioning. This is offering similar products with different levels of functionality. Each level is priced differently and includes a different bundle of attributes. Software and Web hosting companies often use this pricing strategy. A trial or very basic version may be offered at low or no cost. Upgraded versions are available at higher costs.

11) Bundling. Here, several items are sold together at a price less than if they were purchased alone. By bundling a popular item with lesser-known products, you can increase your sales. Additionally, in the case of inventoried items, you may be able to avoid a closeout.

12) Price discrimination. Setting a different price for the same product in different segments to the market. For example, this can be for different ages or for different opening times, such as cinema tickets.

13) Premium pricing. The practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction.

14) Psychological pricing. Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.

15) Dynamic pricing. A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases – dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.

16) High-low pricing. Method of pricing for and organization where the goods or services offered by the organization are regularly priced high in market comparison, but through promotions, advertisements, and or coupons, lower prices are offered. The lower promotional prices are targeted to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products

17) Marginal-cost pricing. In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.

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2 Comments to "17 pricing strategies to increase sales volume and profit"

  1. I always keep these methods in mind when setting up my prices. Thanks for the overview.

  2. rizel19 says:

    I did maths tutorial 4 using guess & check not using excel solver, hope the teacher doesn’t check my work in depth 😛

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