Strategy of the Pricing Puzzle

In tough economic times, it’s natural to wonder if you should cut prices. But what if we told you that if you were to increase your pricing by 1%, your profitability would skyrocket. Just 1%!

Of course, before you even think about raising prices, you need to think sales. Do you have a sales force that can sell a 1% increase? What differentiates you from your competition? Does your shop sell on price? Do you do know how to cross sell?

1% reduction in fixed costs improves profitability by 2.3%
BUT
1% increase in pricing can boost profitability 11%

How have you determined your pricing strategy? Can you define it? Or is it like looking into a crystal ball hoping the answer will become clear?

Developing your product or service offering requires detailed thought and planning. A critical piece of that planning is deciding how you should price your products and services. The pricing strategy you choose can dramatically impact the profit margins of your business. What equipment do you have, what are your capabilities, what do you pay for the equipment and what do you pay your employees. Are you too high, too low, what does the competition look like? Have all the hundreds of variables been accounted for?

Pricing is the only part of the marketing mix that is revenue generating. What’s the right approach for your product?

Here are six different pricing strategies. Does your company embrace one of these or multiple? Oftentimes, the product or service you’re offering will determine which strategy you use.

The six strategies for pricing

1.   Competition Based

2.   Loss Leader

3.   Penetration Strategy

4.   Premium/High End

5.   Cost-plus

6.   Predatory

This can be a slippery slope in our business. It is challenging to for a small business to maintain because it provides very narrow profit margins that make it hard for the business to achieve enough momentum to grow. Think of this strategy as rock-bottom pricing.

Competition Based

Striving to meet and or beat the prices your competitor is charging.

A competition based pricing strategy focuses solely on what the competition is charging. 

It is:

•challenging for a small business to maintain

•provides very narrow profit margins.

Think of this strategy as rock-bottom pricing.

Loss Leader

Give it away to get more in the future

Historically, printers have done “pro-bono work” to win customers. Make sure you look at the entire picture, before aligning yourself with a freebie client. Remember all of your competition has been asked to do the work for free also.

Penetration Strategy

Increasing the value to your customers, build loyalty and enter the market.

What else can you offer your customer? Value-added services can help secure the relationship and build your brand loyalty – think storefronts, fulfillment, promotional premiums and database management.

Unless you are “blood brothers” with your customers, loyalty in the business is a very difficult thing capture.

Offering value-added services can help secure the relationship and build your brand loyalty – storefronts, fulfillment, promotional premiums or database management.

Premium – High End

Having buyers know that your expensive product or service warrants the additional cost associated can be accomplished, but takes time and lots of marketing.

Exceptional reputation, quality, and distinction. In order for you to implement this type of pricing strategy, you must have built your brand recognition to a high end, premium level.

“Cost plus” strategy:  Full cost and Direct cost

Two types of “cost plus” pricing:

Full cost pricing includes both variable and fixed costs and adds a % markup.

Direct cost pricing uses the variable costs plus a % markup. Usually only used when competition is high as it usually leads to a loss over time.

The “cost plus” pricing strategy basically takes your costs and adds an amount of markup to it. There are two types of “cost plus” pricing:  full cost pricing and direct cost pricing.

Predatory

A carnivorous cousin, Deinonychus, about the size of a man, leaped on its prey, wrapped its long arms and three-fingered hands around it, and kicked it to the death with sickle-shaped toenails.

When tailoring the strategy you choose, keep in mind all of these the influences that will affect your bottom line and pricing strategy. A lot of these circles can influence both each other as well as pricing.

A puzzle is not complete without all the parts. Be systematic and strategic in your decisions.

Do not set the pricing and then just forget it. All pricing strategies can make sense one time or another (except predatory!), but none alone are always sufficient.

Your goal must be to stay one step ahead of your competition.

Your pricing decision doesn’t have to be all of one type, none of the others. And, it should change and evolve over time, as your competition and market conditions change. The pricing of your products should be something you continually evaluate and regularly address.