Base
on your chopstick product, provide 5 pricing strategies that would be effective
for your product and why you have chosen them.
What
is price?
Price is the amount of money charged for a product
or service.
Price is the only element of the Marketing Mix that produces revenue. Prices
can be changed. A small change in price can really affect profitability.
Price plays a key role in creating customer value and building customer
relations.
When customers buy a product, they exchange something of value ($) to get something
of value (benefits of product or services).
Pricing Strategy:
1.- Cost-Plus Pricing (Mark-up Pricing)
Markup pricing is a widely used
strategy in retail and ecommerce businesses for determining prices by adding a
percentage to the cost of a product. By carefully considering
costs and market factors, businesses can use this method to set prices that
cover costs and generate profit.
E.g. you buy a flash drive for $20 mark up to sell at $30. This is a 50%
mark-up on cost. Profit margin is $10.
$30 - $20 = 10 divided by 20 = .5 = 50% Mark up cost
2.- Break-Even Pricing
In manufacturing, the break-even price is the price at
which the cost to manufacture a product is equal to its sale price.
Break-even pricing is often used as a competitive strategy to gain market
share, but a break-even price strategy can lead to the perception that a
product is of low quality.
E.g. T-shirts – need to sell volume at some point in order to
break even.
t-shirts buy $32 sell $40
40 – 32= 8 divided by 32 =.25 = 25% at
some point after 50 shirts sold you will break even.
4.- Retail Price:
Many retailers benchmark their pricing decisions using keystone pricing, which
is essentially doubling the cost of the product to set a healthy profit margin.
However, in many instances, you’ll want to mark up your products higher or
lower, depending on your specific situation.
Here's an easy formula to help you calculate your retail price:
Retail price = [(Cost of item) divided by (100 – markup percentage)] x 100
For example, you want to price a product that costs you $15 at a 45% markup
instead of the usual 50%.
Here’s how you would calculate your retail price:
Retail price = [(15) divided by (100 - 45)] x 100
Retail price = [(15 divided by 55)] x 100 = 27
While this is a relatively simply markup formula, this pricing strategy doesn’t
work for every product in every retail business. Because every retailer is
unique, we’ve rounded up ten common pricing strategies and weighed the advantages
and disadvantages of each to make your decision-making simpler.
5.- Manufacturer suggested retail price: What is MSRP?
As the name suggests (no pun intended), the MSRP is the price a
manufacturer recommends retailers use when selling a product. Manufacturers
first started using MSRPs to help standardize different prices of products
across multiple locations and retailers. E.g. CARS
Retailers often use the MSRP with highly standardized products (i.e., consumer electronics
and appliances).
Pros: As a retailer you can save yourself some time simply by using
the MSRP when pricing your products.
6.- Keystone pricing: A simple markup formula
This is a pricing strategy that retailers use as an easy rule of
thumb. Essentially, its when a retailer would simply double the wholesale cost
they paid for a product to determine the retail price. Now, there are a number
of scenarios in which the price or a product using keystone pricing may be too
low, too high, or just right for your business.
If you have products that have a slow turnover, have substantial
shipping and handling costs, and are unique or scares in some sense, then you
might be selling yourself short with keystone pricing. In any of these cases, a
retailer could likely use a higher markup formula to increase the retail price
for these in-demand products.
On the other hand, if your products are highly commoditized and
easily available elsewhere, using keystone pricing can be harder to pull off.
Pros: The keystone pricing strategy works as a quick-and easy rule of
thumb that ensures and ample profit margin.
Cons: Depending on the availability and the demand for a particular
product, it might be unreasonable for a retailer to markup a product that high.
7.- Multiple pricing: The pros and cons of bundle pricing
We’ve all seen this pricing strategy in grocery stores, but it’s
common for apparel as well, especially for socks, underwear, and t-shirts. With
the multiple pricing strategy, retailers sell more than one product for a single
price, a tactic alternatively known as a product bundle pricing.
For example, a study looking at the effect of bundling products
found in the early days of Nintendo’s Game boy handheld console, it sold the
most products when the devices where bundled with a game rather than individual
products alone.
Pros: Retailers use this strategy to create a higher perceived value
for a lower cost—which can ultimately leas to driving larger volume purchases.
Cons: When you bundle products up for a low cost, you’ll have trouble trying
to sell them individually at a higher cost, creating cognitive dissonance for consumers.
8.- Penetration pricing and discount pricing
It’s no secret that shoppers love sales, coupons, rebates,
seasonal pricing, and other related markdowns. That’s why discounting is a top
pricing method for retailers across all sectors, used by 97% of survey
respondents in a study from Software Advice.
There are several benefits to leaning on discount pricing. The
more apparent ones include increasing foot traffic to your store, offloading
unsold inventory, and attracting a more price-conscious group of customers.
Pros: The discount pricing strategy is effective for attracting a
larger amount of foot traffic to your store and getting rid of out-of season or
old inventory.
Cons: If used too often, it could give you a reputation of being a
bargain retailer and could hinder consumers from purchasing your products for
regular prices.
Penetration pricing is also a marketing strategy that’s useful
for new brands. Essentially, a lower price is temporarily used to introduce a
new product in order to gain market share. The tradeoff of additional profit
for customer awareness is one of many new brands that are willing to make in
order to get their foot in the door.
9.- Loss-leading pricing: Increasing the average transaction
value
We’ve all done this. We walk into a store lured by the promise
of a discount on a hot-ticket product. But instead of walking away with only
that product in hand, you ended up purchasing several others as well.
If, so, you’ve gotten a taste of the loss leader pricing strategy.
With this strategy, retailers attract customers with a desirable discounted product
and then encourage shoppers to buy additional items.
A prime example of this strategy is a grocer that discounts the
price on peanut butter and promotes complementary products like loaves of
bread, jelly and jam, and honey. The grocer might offer a special bundle price
to encourage customers to buy these complementary products together rather than
simply selling a single jar of peanut butter.
While the original item might be sold at a loss, the retailer
benefits from the other products customers purchase while in-store.
Pros: This tactic can work wonders for retailers. Encouraging
shoppers to buy multiple items in a single transaction not only boosts overall
sales per customer but can cover any profit loss from cutting the price on the
original product.
Cons: Similar to the effect of using discount pricing to often, when
you overuse loss-leading prices, customers come to expect bargains and will be
hesitant to pay the full retail price.
10.- Psychological pricing: Use charm pricing to sell more with
odd numbers.
Studies have shown that when merchants spend money, they’re experiencing pain
or loss. So, it’s up to retailers to help minimize this pain, which can
increase the likelihood that customers will make a purchase. Traditionally,
merchants have accomplished this with prices ending in an odd number like 5, 7 or
9. For example, a retailer would price a product at $8.99 instead of $9.
In William Poundstone’s book Priceless, he picks apart eight studies on the use
of charm prices (i.e. those ending in an odd number), and found
that they increased sales by 24% on average when compared to their nearby, ‘rounded’
price points.
But how do you choose which odd number to use in your pricing
strategy? The number 9 reigns supreme when it comes to many retail pricing
strategies. Researchers at MIT and the University of Chicago ran an experiment on
a standard women’s clothing item with the following prices $34, $39, and $44.
Guess which one sold the most?
That’s right-pricing the item at $39 even outsold its cheaper counterpart
price of $34.
Pros: Charm pricing allows retailers to trigger impulse purchasing.
Ending prices with an odd number gives shoppers the perception that they’re
getting a deal-and that can be tough to resist.
Cons: When you’re selling luxury goods, lowering your price from a
whole number like $1,000 to % 999.99 can actually hurt your brand’s perception.
This pricing strategy can give luxury customers the impression that the
products are defective or are market down for a similar reason.
11.- Competitive pricing: Beating out the competition
As the name of pricing strategy suggests, comparative pricing refers to using
competitor pricing data as a benchmark and consciously pricing your products
below theirs.
Outpricing your competitors can influence price-conscious
customers to purchase your products over similar ones. However, this “race to
the bottom” from a pricing perspective isn’t always the best strategy for every
business and product.
Here’s how we sum up the advantages and drawbacks:
Pros: This strategy can be effective if you can negotiate with your
suppliers to obtain a lower cost per unit while cutting costs and actively
promoting your special pricing.
Cons: This can be difficult to sustain when you’re a smaller retailer.
Lower prices mean lower profit margins, and so you’ll have to sell higher
volume than competitors. And, depending on the products you’re selling,
customers may not always reach for the lowest-priced item on a shelf.
12.- Premium pricing: Above competition pricing
Here, you take the pricing strategy from above and go to the other
end of the spectrum. Brands benchmark their competition but consciously price
products above theirs and brand themselves as more luxurious, prestigious. Or exclusive.
For example, a premium price works in Starbucks’ favor when
people pick them over a lower-priced competitor like Dunkin’ Donuts.
A study from economist Richar Thaler looked at people hanging
out on a beach wishing for a cold beer to drink. They’re offered two options in
this scenario: purchasing a beer at either at a run-down grocery store or a nearby
resort hotel. The results found that people were far more willing to pay higher
prices at the hotel for the same beer. Sounds crazy, right? Well, that’s the
power of context and marketing your brand as high-end.
Pros: This pricing strategy can work its “halo effect” on your
business and products. Consumers perceive that your products are better quality
and more premium due to the higher price compared to competitors.
Cons: This pricing strategy can be difficult to implement, depending
on your stores’ physical locations and target customers. If customers are
price-sensitive and have several other options to purchase similar products,
the strategy won’t be effective. This is why it’s crucial to understand your
target customers and do market research.
