One of the most critical elements to boosting your sales is using Pricing strategies. The right strategy will help you decide the best price for your product to make profits. So, what are Pricing strategies? And how they work for your business? Today’s article will go through the most popular 5 Pricing strategies and how to use them. Let’s dive in!
What Are Pricing Strategies?
A pricing strategy is used to establish the optimum price for a product or service. Pricing strategies help you to maximize both sales and profits in the light of consumer and market demand.
5 Types of Pricing Strategies
There are many pricing strategies with their own pros and cons. But in this part, let’s take a look at the most common pricing strategies that are being used by entrepreneurs.
1. Cost-Plus Pricing Strategy
This is one of the most used and straightforward methods to price your products.
First, you need to understand the definition of direct cost which includes the cost of raw materials, the cost of packaging, shipping charges, plus direct labour costs that are incurred to produce a product. From there, you can calculate the cost of goods sold which represents the cost of producing that product. Your cost of goods sold will consist of direct cost and other costs to make a product ready for sale such as general supplies, storage or inventory cost, overheads, etc.
Once you’ve got the Cost of goods sold, you would mark up a fixed percentage profit to make your selling price. This method is also called “markup pricing”. The cost-plus pricing strategy works better for physical products than complex products or services like software or consulting services.
2. Competitive Pricing Strategy
Competitive pricing is also used commonly by entrepreneurs. It means you would research the price of your products from other competitors and price yours accordingly. You can put a slightly higher or lower price. It depends. But in this method, you will follow the market rate for your product.
One thing you should be careful when using this method is not to race to cut the price to the bottom. If everyone is trying to undercut each other to win, the profits will be decreased for all. You could use this model in a saturated niche where people will look for similar offers but at a slightly lower price. Or you could offer the same price as your competitors do but with more extra features or benefits.
3. Value-Based Pricing Strategy
In order to perform Value-based pricing, you need to understand your target market as well as your competitors. As when using this method, in theory, you will set your price based on what your buyers want to pay. This model is used best for services that can offer a much greater level of value compared to the cost of goods sold. For example, it may take a designer one week to design a logo, but this can bring a huge benefit to the company like branding, marketing, etc. So if the design is good and can prove the benefit, that person can charge a great amount.
4. Penetration Pricing Strategy
This pricing model is mostly used by large businesses who are willing to pay money or to lose money during a period to attract more customers. For example, they can lower their prices for a short time to take customers from their competitors. Then once the company got its market shares, it will increase the price again to gain profits as normal.
5. Skimming Pricing Strategy
Skimming pricing is commonly used by technology companies. It is when companies charge the highest price as they can for a new product when it is first launched. Then after some time when it becomes less popular, they will decrease the price gradually.
This pricing model is used to maximize as high profits as possible. You will see a lot of companies use this method when you look at the smartphone, computer, etc. They are at the highest price when they are new. Then when another new model comes, the older will go down in prices.
Choosing the right Pricing strategies for you may be daunting. But don’t be panic. Just start by calculating the direct cost and cost of goods sold. You can also seek help from your sourcing agent dropshipping in identifying the product cost. Consider what your product type or service is and decide which is the best method to use. You can even combine many pricing strategies if necessary. Don’t be afraid to test several methods to finally find the one for you. Hope this will help and good luck with your business.