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As consumers, we only see prices of goods and services at face value. At the back end, the numbers we see on price tags are carefully decided by the whole company using advanced pricing strategies to achieve their short and long-term goals. Every promo, bundle, and clearance sale is affected by several factors that make the difference between luxury items and budget-friendly ones.
Though pricing strategies may differ based on varying factors, they all have a common goal - to increase company sales and income. Before you come up with an advanced pricing strategy for your business, it's best to know what strategies can be mixed up to achieve your goals.
Advanced pricing is a term used in marketing and pricing strategy development that refers to a company or organization's use of more than one pricing strategy at the same time, in order to maximize profits. The idea behind advanced pricing is that by using multiple pricing strategies, a company can:
Though pricing strategies offer a lot of benefits, changing the prices of goods and services can make or break a business. Several factors must be taken into consideration to make a more flexible advanced pricing strategy. These factors include:
Each pricing strategy has its own risks and benefits. Therefore, it is important for companies and individuals to carefully consider which ones will work best for them before implementing any changes. Learn more about each pricing strategy below so you can gauge how much risk are you willing to take to gain more customers and more profit.
Promotional pricing is a common advanced pricing strategy that involves offering discounts or reduced prices, and other incentives to customers to encourage them to purchase a product or service. Companies usually use this strategy for a limited time to:
There are several types of promotional pricing that companies can use, depending on their product supply and marketing efforts. These include:
The benefits of promotional pricing are usually heavy on brand awareness, increasing sales, and attracting new consumers. However, it also has its fair share of risks, such as:
Value-based pricing is a strategy wherein businesses set their prices based on the perceived value of their products or services. It sets a price that considers more than the cost of production and instead focuses on the following factors:
Brands usually use value-based pricing when they are trying to stand out among their competitors, as a means to increase profit, or to establish a brand image or status quo.
Though it has a promising way of increasing profits, the product or service must provide value for money that their target consumers look for to justify their prices, especially if they set it too high. Therefore, a brand must first do the groundwork to establish its name through marketing efforts to get a positive customer perception.
Companies usually use value-based pricing on goods and products that are in limited supply, a necessity, scarcely available at a certain location or time, or to promote prestige. The best example of this is the soaring prices of rubbing alcohol during the pandemic and the price of fuel due to the low supply caused by war. Other examples include:
The biggest risk with value-based pricing is when the customer perception changes about the brand, consumers may stop buying a brand’s product or services. An example of this is the extreme backlash on the brand Balenciaga in November 2022 which plummeted its sales and affected its brand image. When prices are set too high, customers may feel that they are being overcharged and may look for cheaper alternatives.
With enough groundwork on customer perception, market segmentation, and brand image, value-based pricing can be an effective way to price products or services that can set it apart from its competitors. It can help to increase profits and attract new customers while also forging strong relationships with existing customers.
Reference pricing, also known as competitor-based and market-oriented pricing, is a strategy wherein a company sets its prices based on the prices of its competitors. This pricing strategy can be used to gain a competitive advantage, as it allows a company to:
Reference pricing is one of the most popular strategies in retail and e-commerce industries. It is an efficient option if different companies are selling similar products. Three types of reference pricing allow companies to compete with their rivals, such as:
Reference pricing may be uncomplicated but it is not for every business and industry. Some high-value or unique products may benefit more from using value-based pricing due to their unusual offer or product. Some of the possible drawbacks of reference pricing are:
With both risks and benefits that come with competition-based pricing, companies or startups must decide on an advanced pricing strategy to combine it with another pricing model in case things go downhill.
Geographical pricing is an advanced pricing strategy that can be used by businesses with products or services that are sold in multiple locations. Businesses like gasoline stations, agriculture products, and logistic hubs commonly use this strategy which they also call zone strategy.
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The principle of geographical pricing is usually noticed in local produce where a banana sold near banana plantations is cheaper than those sold in big box retailers. With geographical pricing, businesses set their prices based on:
Geographical pricing provides an opportunity for businesses to tap the local market and uncover zone-specific consumer psychology. With that, they can set more accurate pricing decisions, which will eventually improve customer satisfaction and sales.
Product line pricing is a common pricing strategy in which companies price their products or services according to the type or quality of the product or service. For example, a company may charge more for its premium products than its budget products.
Product line pricing can be a useful way to segment your market and attract different types of customers. There are several advantages to using product line pricing:
Day spas usually use product line pricing by giving their customers budget-friendly massage and pampering services and premium services available for loyalty card holders or a premium package where they can experience signature offers. Another example is a smartphone series where units with more storage and unique camera features are priced at a higher price than the basic ones.
Though you're able to cater to different consumer markets at the same time, there are also some risks associated with product line pricing which include:
Overall, product line pricing can be a useful tool for companies that want to segment their market and boost their profits.
Cost-plus pricing or markup pricing is a pricing strategy where the price of a product or service is set based on the cost of producing it, plus a markup. This markup is usually a percentage of the cost, which covers things like overhead and profit.
Several advantages to using cost-plus pricing are the ease of coming up with a price. It also allows you to cover all the costs and have a rough estimate of your potential income. However, business and individuals who use this strategy require a detailed record of all the production costs to come up with an accurate cost estimate.
Cost-plus pricing is usually used in made-for-you products like clothing brands, groceries and merchandise, baked goods, and custom-made products. Manufacturers and business owners usually aim, for around 30% to 50% markup on their goods to meet their respective profit margins.
While cost-plus pricing is a common way to come up with an asking price, it also comes with possible risks and benefits. Some companies use it as a competitive advantage in the form of transparency with their cost estimates and markup which makes them cheaper than their competitors.
The risks in cost-plus pricing come into play when a product requires high-quality materials that drive its production costs and lead to overpricing. Therefore, it is a pricing strategy that may not work for some business models.
Psychological pricing, or charm pricing, is a strategy based on theories that the numbers on a price tag can trigger a psychological response in consumers that makes them likely to purchase a product. The main principle of this is giving the consumer a sense of fulfillment in paying less than the average market price of products.
Psychological pricing is usually used in the retail and retail industry that caters to price-sensitive markets. Types of psychological pricing include:
Premium pricing uses reverse psychology where products are set at a high price to drive their perceived value. With proper marketing strategies doing the groundwork, consumers will see the products as high-value and will likely buy them regardless of the price.
In some cases, products are not made of high-quality materials but the marketing drives their perceived value to a point that people start buying them at a steep price. Several factors are considered in the premium pricing strategy, such as:
Premium pricing is a strategy that can establish a brand that is a high-quality product in the public eye, whether it’s true or not. Though it may promise a good income flow, it is not designed for every business. Most business that fits this strategy include:
One example of a premium pricing strategy is the brand Nike where there are limited edition shoes sought after by shoe enthusiasts and sneakerheads, like their Air Jordan line. The most expensive shoe ever sold by Nike is their Solid Gold Ovo Air Jordan sold at $2 million to the Canadian rapper Drake.
Pricing strategies for service providers and those in the gig economy like freelancers and professionals are different from the way companies price their products and services. They are more geared towards the price traded for the time and expertise of an individual in a specific line of work or industry.
Hourly pricing is a strategy wherein the time of a freelancer or consultant is traded with the time they spend working with a client. It is an agreement where a client or a business will pay you a fixed amount for a specific amount of time for a certain project.
Charging by the hour is the most common pricing strategy in remote working environments utilized by small to medium enterprises since it promoted cost-savings to employers. Its benefits include:
The only caveat in the hourly pricing strategy lies in the efficiency of the service provider within the time they’ve worked on a project. Common problems of clients or employers is when the expected output does not equate to the number of hours worked for the project.
Project-based pricing is a strategy where individuals and professionals price their products or services by projects. It is usually calculated based on the value of the services or products produced or the time it will take to complete a project. It uses a flat fee paid by the client upfront or at the completion of the project.
The benefit of project-based pricing is the security it gives to employers or clients in having the time and expertise of the service provider until the end of the project. Both client and the service provider will no longer need to track time and the client also knows what to expect out of the project.
The best example of services that use project-based pricing is website design. Both ends of the transaction will agree on the coverage of the services needed and the rate for the whole project
Bundle pricing is a strategy where products and services are bundled at a discounted price than the sum of individual products. The discounts on the bundled offer usually attract customers who want to have a great deal and buy items for less.
Two types of bundle pricing are same-price bundling and varied-price bundling.
Freemium pricing is a pricing strategy where the products or services are free but the add-ons or other features are paid. This is a strategy where a majority of the product or services are used by the public and only a fraction is intended for paid users.
Common to software products, almost most of us are attracted to services with freemium pricing. The best example of freemium pricing would be Facebook wherein it is free to use for everyone. However, the ads and other enhanced features require a certain fee.
Advanced pricing can be a great way to increase profits and gain a competitive edge, but it can also be a risky proposition. If not done correctly, advanced pricing strategies implemented by companies can lead to:
On the other hand, the benefits of advanced pricing staretgies are many and varied, but can be broadly divided into two main categories: increased profits and increased customer satisfaction.
When it comes to increased profits, businesses that utilise advanced pricing strategies are able to better control their pricing power. This, in turn, allows them to charge more for their products and services, leading to increased revenue. In addition, businesses are often able to capture a larger share of the market, as they are able to offer prices that are more competitive than those of their rivals.
As for increased customer satisfaction, businesses that use advanced pricing strategies are often able to offer customers a better deal. This is because they are able to better match their prices to the specific needs and wants of their target market. They can also build stronger relationships with their customers, as they are seen as being more trustworthy.
When it comes to pricing your product or service, there is no one-size-fits-all solution. The key is to find the right pricing strategy for your business, based on your products, your customers, and your overall business goals.
It's important to weigh the risks and benefits of each pricing strategy before implementing it. Some pricing strategies, like reference pricing, can be risky if not done correctly. Others, like cost-plus pricing, may not be as profitable as other options. Aside from planning and careful decision-making, it also pays to hone your skills in marketing using today's advanced technologies.
At Vexpower, we offer simulation-based courses on Marketing Mix Modeling (MMM) which will not bore you with theories but teach you by experience. Our seasoned founders, James and Mike, have been in the industry for 10 years and worked with several brands that helped them meet and surpass their sales and revenue goals.
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