Skip to 0 minutes and 8 secondsPricing strategy is a method used by businesses to price your products and services. One of them is a cost plus pricing strategy, and this is a fairly simple strategy whereby you identify the cost of your products and you mark it up. You add your profit to it. Another pricing strategy is competition-based pricing strategies. And this is where you are following along your competitor's line. So quite often the grocery industry is very competitor-based. So as a consumer, you might realise if you go and look at one item in one store, it's quite often the same price as another. There are two customer-based pricing strategies-- penetration pricing, and price skimming.

Skip to 0 minutes and 58 secondsPenetration pricing is when you come in at a low introductory offer on your pricing to try and grab the market and to dominate and get as many customers as you can. Price skimming is the opposite to penetration pricing. This is where are we go in with a higher price. We obviously need to know that our product is of good quality, high standard. And we go in at the highest possible price that we think that our customers are willing to pay. I think you should consider with regards to pricing strategies, know your market. You need to do research, you need to know your customers, you need to know your competitors, and you need to know your costs.

Skip to 1 minute and 45 secondsAlso too, there are numerous, various different pricing strategies that are available, and you may use different pricing strategies for different products within your business as well.

Product pricing: Get Strategic

Knowing who your competitors are, and what they are offering, can help you to make your products, services and marketing stand out.

It will enable you to set your prices competitively and help you to respond to rival marketing campaigns with your own initiatives.

  • Cost-plus pricing:
  • Competition-based
  • Customer-based

Cost-plus pricing

Cost-plus pricing is calculating all your costs and then adding your profit.

In calculating your costs you need to consider both your variable costs and fixed costs. Be sure to check your calculations and have your accountant double-check the calculations.

Let’s look at a business.

The business owner has determined that his total costs for a product, including delivery and overheads, is $30. A profit margin of 40% is desired. Therefore the calculation for cost-plus profit is $30 x 1.4 = $42, which would generate a 40% margin.

This strategy ensures that you cover your costs and a bit more (your profit), however it does not necessarily determine what your price should be. Cost-plus pricing will determine your costs, however you may be constrained on pricing this way due to your competition and customer expectations.

Competition-based

Competition based pricing strategy is when you set your price based on your competitor’s pricing. This strategy is used when selling similar products.

This strategy can be a safe approach for small business, as it can often be difficult to compete on price with dominant competitors; this strategy is useful when there is/are clear leaders in the market - the going rate. But take care to cover your costs.

To think about competition-based pricing in action, think about how airlines compete on price: often you will see one airline reduce their ticket cost, which is soon followed by the closest competitor. Another example is petrol (gas) stations and the cost of fuel for your car. Often you will see your local petrol (gas) station offer a price that closely mimics that of the nearest geographical competitor.

Customer-based

Value-based pricing

This strategy considers what your customer thinks your product or service is worth, rather than the actual costs. Market testing can be used to help determine a price based on value. Customers may value your product or service higher if they see a benefit i.e., saving them time and you can price accordingly.

Premium Pricing

Is your product prestigious, luxurious or exclusive? This strategy is based on high value products or services where a high value can be placed on your product or service.

Penetration Pricing

This high volume / low margin strategy is used to generate greater sales or to gain market share. Competitors may be deterred by the lower profit margin, but it also may affect your success. One way to offset lower margins is to establish better relationships with customers who may also buy other higher-margin products.


Discussion

What strategy do you think you will use for your business and why? Post your ideas to the Comments area and discuss this with other learners.


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This video is from the free online course:

Online Business: Pricing for Success

RMIT University