The importance of pricing becomes critical if your company is small and newly established. A short period of disappointing sales can be lethal to fledgling business organizations because of the limited resources at their disposal.
There are many things in business that are essential, and finding the right price is no exception; you have to balance various priorities like profitability, cost, competing with the competition and, of course, attracting enough customers. Is there a way to determine what the best course of action is?
Different Types of Startup Pricing Strategy
With so many factors to keep an eye on, there is no single universal roadmap to finding the right price for businesses. Instead, there are several different types of pricing strategies in business management, each with their own strengths, weaknesses, and applicability in specific contexts. To point you in the right direction for your particular business, we’ve detailed the main points of some of the most popular below:
1. Cost-Plus Pricing
Pricing this way is one of the simplest methods. In other words, markup pricing is an insular form of pricing that focuses entirely on the costs incurred by your organization to create and sell the goods or services.
It is quite simple. You measure the cost of producing, packaging, marketing, storing, and selling a single unit, and then add a percentage to that. You will receive the extra percentage as your reward or profit for delivering the product to the customer.
2. Penetration Pricing
Penetration pricing focuses more on external factors, such as customer preferences and prices offered by competitors, making it ideal for businesses looking to expand at any cost.
The strategy compromises profitability to boost sales in the short term, so it is not optimal for long-term use; rather, it aims to catch the attention of the market with low prices. In most cases, it is used by businesses entering a new market or by existing businesses entering a new market.
The term disruptive pricing may also be used to describe this strategy. The product must offer both quality and value to the consumer in order to be truly successful. Initially loyal customers will stay loyal to you even if the price increases in the future.
3. Value-Based Pricing
Markup pricing is ineffective when businesses offer products or services that may be worth more than their operational costs. Value-based pricing is one way to focus on the customer.
In this case, you are interested in finding out how much your target customers are willing to pay for your product. Taking a look at similar products and services in the market, particularly their sales at varying price points, will help you figure this out.
To further demonstrate the value of your product or service, you need to compare it with existing similar products and services and highlight any unique features (if any) that might provide customers with value. Take into account your product’s strengths and weaknesses, and assign a percentage price to each.
In the end, figure out how much your product will cost once you add everything up. In sectors in which it is easy to differentiate products from those of your competitors, this strategy will work. You may have trouble justifying the premium to your customers if all businesses sell the same products.
4. Economy Pricing
This approach is popular among large businesses and corporations in the retail sector, but small businesses should be wary of it since it is not generally suitable for them. This pricing strategy can instead be found in major brands like Walmart, Target, and Primark.
These businesses put a heavy emphasis on cutting costs across the board, driving down the prices of most products on the shelves. The focus is on bringing the maximum number of price-conscious buyers to their stores with discounts.
5. Premium Pricing
An Businesses that have a significant advantage over their competitors use premium pricing strategy, an approach closely related to value-based pricing. You can adopt this pricing strategy if your product is clearly superior or different from those of your competitors.
The best example of a massive brand utilizing a premium pricing strategy is Apple, their products possess a unique design, cutting-edge technology, and a competitive edge that allow them to charge a premium price and still maintain massive sales.
Luxury brands are also common examples of premium pricing at work. For a small business, this approach will work only if your product is incredibly unique or innovative.
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