Pricing Strategies

You have your offering, but you are not sure how to price it. So, what do you need to consider? Well, that depends on what your offering is, so below I run through the most frequently used pricing strategies for you to select the best one for you.

Cost plus: this is typically used with products. For example, if you are offering cookies, you will know the cost of the ingredients and the electricity plus the time you take to make them and any packaging costs. All of that added together gives you your cost. On top of that you add a margin for overheads (rental, marketing costs, accountant and so on) plus profit and that gives you a pre-VAT price. In many ways this is the easiest pricing strategy.

Value-add: this is typically used with services. Think solicitor, accountant or private medical practitioner. As well as the time being paid for there is a value for the skills, experience and qualifications built in. Hence why a paralegal would be charged at £120 an hour for example and a junior solicitor at £190, one with 5 years’ experience £250 and a partner £350. Of course, the cost of each of these is not anywhere near these figures, but the market dictates that this type of pricing is normal. A value-add price also takes into account all of those non-chargeable activities that the service provider has to do or pay someone else to do (raising invoices, attending training courses to maintain service levels and so on). For this strategy knowing the market norms is key – if you undercharge at best money is left on the table, and at worst your prospective clients think that you mustn’t be as experienced / educated in your field and therefore move on to someone who is.

Market entry and market penetration: Very often if a company is entering a market for the first time, maybe a new geographical area where competitors already exist, then a special offer to “buy” attention and market share can be useful. It is a time limited offer to induce urgency in the prospects and to encourage stockists to put stock orders into place. This can be seen from FMCG to technology. For example, an Asian company known in the market for various things was extending their offering to include document scanners. In Italy, they decided to deliver a pallet load of scanners to each major distributor free of charge and then they ran a promotion where the end customer only paid for shipping. It got a lot of free of charge PR and social media coverage. It allowed scanners to be put into the marketplace to obtain reviews and it won over the distributors too. Of course, this had a major cost, but it built market share quickly that has then been maintained and even grown further so that they now are number two in the marketplace.

Premium pricing / no frills: Where are you pitching your product / service? Is your brand persona at the premium end closer to Rolls Royce, where your clients will pay for that premium experience? Or are you at the no frills basic end closer to Skoda or Dacia where value for money is absolutely key? Your pricing should reflect where you are positioning. It may be that you have offerings at multiple levels, and if so then pricing can be an additional differentiator. It should not be the only differentiator though, else your lower offerings will cannibalise your higher offerings eroding your revenues and profitability.

Demand-based: This is frequently seen with transport or cinemas. If you book a flight well in advance then the costs are less, as it gets closer to the flight date and seats have been taken, the availability is reduced and the price is increased. With trains more is paid for the convenience of a last-minute decision. At a cinema there may be reduced fees for afternoon viewings as the audiences typically want evenings; or a lower price in the week compared to the weekends when people typically go out. In cafes in Southern Europe, a higher price is paid for being out in the sunshine, a lower price for sitting at the bar. More people want to sit outside.

Freemium: Primarily used with software type products. The basic product is free of charge and then there are in app purchases or fees for additional features to be unlocked. This means that the seller has the risk that the buyers will just use the free version, which may have then in app advertising to produce revenue. An example here is Candy Crush, when launched the player had to wait so many hours before progressing to the next level or they could pay to unlock. ITVHub is free of charge to use, but if advertising is to be removed then there is a weekly fee that can be paid.

Bundle: If you have a variety of products or services, then you may bundle them together so that the individual prices are not relevant but the package as a whole has a value for your customer. This can be a useful tool to use if in a quotation situation to avoid the end customer from selecting from various suppliers to obtain the cheapest overall cost for them. It helps to iron out profit levels.

ROI target / Price skimming: Some companies will want a specific return on investment, once that has been hit then the pricing is altered. It is very close to price skimming, typically seen in technology. The early adopters for any technology pay more then the early majority. They pay to be at the leading edge of technology. For the vendor the profits are higher at the start, to offset R&D costs, and then as economies of scale come into play, and newer versions come out, the price is reduced to maximise overall sales quantities.

Loss leader: Frequently used in supermarkets. An everyday essential is priced at or below breakeven to encourage footfall. Then when the customer is in store then they purchase other items at normal margins.

Of course, in addition to all of the above there are sales promotions that may involve price offers, but that is for another day.

If you need any advice on how to price your offering, then please get in touch