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Writer's pictureCamilla Gleditsch

BUSINESS INSIGHTS | How To Determine The Right Price Point?


How To Determine The Right Price Point?

It is difficult to choose the right price point for a product. Too high and potential customers will look for cheaper alternatives. Too low and you will not generate enough profit.


A thorough knowledge of the different types of pricing strategies can help you set the right price and win customers with enough profit to sustain your business.

But yes, I know, pricing is complex. While some products and services are cheap, others command a premium even when they seem the same as the cheaper versions.

However, you shouldn't think about pricing solely as a number. In fact, it's due to a combination of marketing, brand, promotion, and desirability, with customers typically making decisions based on emotion rather than a logic. As a result, your business needs to check out not only the following pricing strategy types, but keep in mind psychological factors that influence pricing as well.



In this article you will find:


8. Charm Pricing


Now, finding the right price for your products is an important decision that ultimately affects your business and developing a solid pricing strategy involves a lot more than just calculating the cost and adding a markup. Humans are creatures of emotion, and it's extremely rare that they are solely guided by logic when making decisions.

The truth is simple. Ultimately, a customer's willingness to pay isn't determined by the product's price point. In reality, it's about how they perceive the value of the product.


Before we dig in, through our blog, we are constantly creating content that will help you grow your local business. So, if you are a Small Business Owner, then you want to make sure you check them out.

Here are two from earlier this month:


Now, let's discuss a few types of pricing strategies that can impact how potential customers view your products as well as strengthen your business' profitability and competitiveness.


Up first: Cost Plus Pricing.




1. Cost Plus Pricing strategy.


What is Cost Plus Pricing?


By far, Cost Based Pricing is the easiest way to consider what to charge for your products. As its name implies, Cost Plus Pricing involves a cost + pricing strategy. It involves calculating the cost price of your products and adding a markup.



Selling price formula for a Cost Plus Pricing strategy
Selling price formula for a Cost Plus Pricing strategy

It is common for retailers to mark up wholesale prices twice, but the markup percentage varies depending on the business.

This strategy is effective for preserving profits, but it fails to consider market factors, such as competition or demand. Thus, you might end up charging too much or too little for your products.




2. Competition Based Pricing.


Definition of Competitive Pricing


The concept of competitive pricing refers to doing a competitor pricing analysis, aka check what your competitors are charging to determine the going rate.

As opposed to focusing on margins, this pricing strategy focuses on making our products more competitive, and there are two ways to do this.



Competition-Based Pricing examples.


Your first option is to price your product slightly lower than your competition, thus attracting price-sensitive shoppers as you are more competitively priced.


For example, think about Tesco versus Whole Foods.


As a result, you can now actively market your brand as affordable and accessible.



Second, you could lift your price point higher to indicate that your product is of higher quality.


This would be comparable to Starbucks versus Dunkin' Donuts.


When highly similar products are available in highly saturated markets, competitive pricing can be a differentiator. Make sure you clearly demonstrate the value and features that customers get by paying more for your product.




3. Penetration Pricing.


What is Penetration Pricing?


Let's move on to Penetration Pricing, which is when you use a low price to gain entry into a new market. You can use it to draw attention to your business and compete against competitors who are unable to match that pricing. After the competition is overcome, you can start raising the price.


Penetration pricing examples.


People who use a Penetration Pricing strategy are often software service providers and companies that are just starting out. They start by offering low introductory prices to attract customers, however, once the introductory period is over the price of the product increases.


When it comes to retail, this means deliberately pricing items low to get people in the door.


For instance, organic food items at Cosco are less expensive than at other grocery stores. As they capture more of the organic food market, we can expect their prices to rise as time goes on.


Sales, couponing, seasonal pricing, and more, can be all considered as Penetration Pricing as well, as they help retailers get rid of outdated inventory and attract new customers. Once the sale has ended, Penetration Pricing aims to retain customers who will remain loyal to the brand long term.


One important thing to keep in mind is that too many sales can cause people to avoid paying the regular prices and too low prices can create a perception that the product is of low quality.




4. Price Skimming.


What is Price Skimming?


In price skimming, companies charge the highest possible price, to begin with, and gradually decrease it over time.


Price skimming VS  Price Penetration
Price skimming VS Price Penetration

Price Skimming examples.


Apple has been using this Skimming Pricing strategy for years.



Apple Pricing strategy
Apple Pricing strategy

The most effective form of price skimming occurs when a product is scarce and a subsequent new version of that product will be launched at a reduced cost due to its less relevance in the future.


A Price Skimming strategy is best for companies with innovative products that can't be matched by the competition. If your company produces innovative products, Price Skimming might be a good pricing strategy for you. It won't work, however, if your product isn't really different and you're in a crowded market.




5. Value based pricing strategy.


What is a Value Based Pricing strategy?


When you set your price based on how much your customer perceives your product to be worth, you practice value-based pricing.


First, we do this by researching the price of comparable products and listing what makes our products better and different from them.


Secondly, you need to assign a monetary value to those differentiating features.


The last thing you need to do is communicate those extra values to the customer.

In this day and age, Value Based Pricing is one of the best options for business owners. Nonetheless, it only works if you have a differentiated product that your customers genuinely feel is of greater value than what they will pay in price.

If done right, it is an excellent way to build customer loyalty, but you must stay on top of what your customers want in order to ensure that it succeeds.




6. Anchor Pricing.


What is Anchor Pricing?



Anchor Pricing examples

As a result of Anchor Pricing, a process known as anchoring cognitive bias is triggered, which determines subsequent judgements by using an initial piece of information as an anchor.


If you've ever seen a price slashed out with a discount attached and thought to yourself, "I should take advantage of this while it lasts.", then you've taken advantage of Anchor Pricing.


Brace yourself. Things are about to get a little weird.




7. Loss Leader Pricing.


What is Loss Leader Pricing?


In Loss Leader Pricing, a product is priced at a loss deliberately to attract customers.


Yes, you heard that right!


It's not to make a profit, but rather to get them into your store where they may purchase other items. Interestingly, this might seem similar to Penetration Pricing, but the motives are completely different.


If you use loss leaders, your goal is not to increase the price of the item you're taking a hit on, but to make your profit on other items.



Loss Leader Pricing Examples.


It is widely used in the printer and video game industry where printers and consoles are frequently sold below their cost of construction because the profit is derived from cartridges, video games and subscriptions.

Loss Leader Pricing Examples

Companies that can make up the loss through other products are best suited to employing a Loss Leader strategy.


To use this strategy, lower the price of a product in your store to attract customers, then upsell on higher-priced complementary items.


As an example, if your store sells suits, you might try lowering the price of the trousers and the waistcoat but raising the price of the jacket.


Promote the new price on waistcoats and trousers on your social media to attract customers to your store. So, when people search for suits, your store will appear as the most affordable option. Utilize upselling techniques to sell the jacket and items like shoes and ties once they are in your store.




8. Charm Pricing.


What is Charm Pricing?


Charm Pricing

You've probably seen this everywhere, but don't know what it's called.


This easy trick, which involves ending your price with 9 or 5, is called Charm Pricing, and you can use it right away (if you aren't already).



How does Charm Pricing work?


Take €1 off your €40 price tag, and you've got a €39.99 product.


This pricing hack is highly effective at making your product seem cheaper psychologically.


The reason for this is the way our brains process numbers. At the instant you see the left-most digit, your brain calculates how big the number is.


Additionally, as part of an experiment conducted by MIT and the University of Chicago, standard women's clothing items were tested at prices of $34, $39, and $44. Researchers were surprised that the product sold best at $39, even more than its cheaper $24 price.




9. Bundle Pricing.


What is Bundle Pricing?


Bundle Pricing is an example of upselling, in which you offer customers a greater discount if they buy more than one item. As a result of this, companies can provide value to their customers at a lower cost, which will hopefully increase sales and brand loyalty.



Bundle Pricing examples.


An example of a Bundle Pricing strategy is getting a new phone and a data plan together or when your retailer offers you a discount if you buy more than 1 item.


Types of bundles:


BOGO bundles:

  • Buy A + B + C and get €100 off

  • Buy one get one FREE

  • Spend over €1000 and get product X for free

  • Spend over €500 and receive free shipping


Combo bundles:

  • Buy 3 T-Shirts at 10% off or 6 T-shirts for 15% off

  • Buy a Blazer, a Shirt, and a pair of jeans for 20%

  • Buy 2 chinos and 4 T-shirts for €100

Bundle Pricing examples


10. Additional Psychological Pricing Factors.


Play around with additional numbers. Not just your price.


In most negotiations with others, we start at a higher price than our target price so that as we negotiate we can "meet in the middle" at the price we ultimately decide to pay.


The same principle can be used if you introduce a higher price even if it is a completely different product on your sales page.


For example, a store owner can display an overcoat at a higher price beside a suit at a lower price to entice customers to buy the cheaper product.


Moreover, you can expose people to more numbers, even if the number is not a price.


This means you can display your current price next to the number of customers you've had, and watch as sales increase. It can also be the total sales this week. (See example below)

psychological pricing example
Psychological Pricing Example

The small things matter.


Psychological factors play a big role when it comes to pricing. Even a tiny detail like the font you use, whether it's on a flyer for in-store sales or on your website, matters.


By increasing the size or colour of the font, or by changing the font entirely, you trigger a subconscious response that will encourage prospects to buy.


If done right, an effective pricing strategy should allow the customer to leave your store feeling like they got good value for what they paid. Which results in greater customer loyalty and increased customer satisfaction. However, if your store is constantly faced with being unable to offer customers what they want, eg. fabric colour change or something different on the garment design, I truly recommend you to check out RJ MTM's End-to-End Apparel Retail system. Switch from pushing set styles and fixed sizes to your customers, to offering your customers the chance to get exactly what they want, how they want it, directly from your store.

With RJ MTM's simple to use in-store and on-the-go system, clothing shop owners and their sales staff can easily offer customers the option to adjust garment designs, colours, fabric weights, sizing and much more. So, interested in doubling or tripling your monthly gross revenue? Take a Visual Tour with my colleague Frank. All you need to do is to click the button "talk with a human" on our site, telling us briefly about your business and a date and time that works best for us to call you. A no strings attached chit-chat to find out how your business can be transformed into a menswear super-powered temple.

If you found this article useful, make sure you give it a thumbs up so that I know what type of content you like. Also, if there are topics you like me to cover in future articles, let me know in the comment box below.


Cheers,

Camilla



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