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Your
pricing strategy for a product or service should meet the REQUIREMENT of
both the buyer and the seller. Because when you find the
right price, profits will skyrocket; your customers will be happy; and
your business will prosper.
This is
an integral part of your Web marketing strategy that should NOT be taken
lightly.
Consider
the facts...
The buyer
determines if a price is right by looking at the benefits to them and how
your company's price compares to the competition.
As the seller,
you will set your price to MAXIMIZE profits, while considering the bigger
picture of a business model (i.e., high-price/low-volume or
low-price/high-volume).
Your company must pay for the cost of production, marketing and overhead,
and STILL produce a profit.
As the
seller, you'll also need to decide on how you want to compete. And
choosing a strategy (or model) that's right for your business objectives
is MOST important.
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This
mini-course is an overview of the different
pricing strategies, including some benefits,
examples and pitfalls. |
Also
note that in our course on Web Marketing, we talk about your
strategic options. To
review the differences between cost leadership, focus, and differentiation
strategies, Click Here.
Okay,
let's talk pricing...
Pricing
Strategy #1
Price A Product Or Service To
Penetrate The Market
One of
the most popular strategies in operation today uses a low profit margin to
penetrate the market. It is designed to help you grab market share
quickly.
Penetrating
the market with an exceptionally low-priced item allows you to create a
broad customer base. It will also provide high-value-for-the-dollar to the
customer.
Example:
The way
marketing guru Dr. Ken Evoy, who introduced his first product "Make
Your Site Sell" to the Internet in 1999, is a good
example of how to penetrate the market.
Dr.
Evoy developed a huge affiliate network of thousands of marketers by
introducing this extremely low-priced informational product about
Internet marketing. Today, his company enjoys the benefit of repeat
business because he was able to effectively penetrate the market with
this strategy.
A
word of caution!
One
major concern with this model is "customer stickiness."
Therefore, if you decide to use a penetration line of attack, you'll
basically need some kind of back-end product or service associated with
your strategy.
Additionally,
a penetration strategy sets the stage for high customer expectations.
Therefore, your repeat customers will normally expect to see the same or
better value-per-dollar in purchasing any future products or
services.
Which
really means...
If you
decide to use a penetration approach, be prepared to OVERdeliver on
the back-end.
Pricing
Strategy #2
"Skimming the Cream!"
"Skimming
the cream" is the opposite of penetration. This is a high
priced model, sometimes called "top pricing."
The
idea behind this philosophy is to give you high profits, even at the cost
of losing a large number of potential customers.
Typically,
when a company launches a new product, they charge higher prices in the
beginning to help recoup R&D expenditures quickly.
To be
successful, you must have a unique product that's in demand.
Chip
manufactures, for example, often use this methodology during the
introductory phase of a new proprietary product. You have already seen
this in action with the high cost of computer memory in the early stages
of product expansion.
Today,
you can see memory chips valued more reasonably.
Another
model that closely resembles "skimming the cream" is called
PRESTIGE PRICING.
Companies
like Mercedes-Benz or Tiffany's are good examples of this model.
Customers purchase products from them knowing they probably paid too
much.
But,
these companies have the prestigious reputation of high quality products
and exceptional customer service. That's how they maintain market share.
Here
are a couple of cautions for this pricing model...
If you
decide to have big profit margins, you run the risk of competitors
wanting-in on your market. Sometimes, look-alike products appear out of
nowhere to challenge even a small market share.
By
using what's known as price shaving -- these competitors are
willing to forego a small portion of the higher profit to lure the
unsuspecting customer to their products.
Customer
relations can also be a problem with any high-priced approach. Your
company has to insure that the customer feels good about the
purchase.
If
you want a customer to return...
The
last thing you want is for your customer to feel like they have been taken
for a ride -- especially a high-priced-ride!
Pricing
Strategy #3
"The Loss Leader!"
Want to
kill your competition? The loss leader is the way to set your
prices to get the job done.
No
matter the cost!
Even
at a loss in profits!
In its
truest form, this approach has one objective --
ELIMINATE THE COMPETITION!
The
consequences of even a slight misjudgment in using this retail pricing
strategy could be devastating to your business.
History
gives us a great example...
The
"Gasoline Price Wars" of the late 50s and early 60s started as a
result of companies using this strategy. It marked the beginning of the
end to many small, individually owned gasoline stations in the U.S.
Today,
we see a more modern version of the loss leader being used by
supermarkets and clothing store chains.
The
objective in these cases is to LURE the customer into the store with a
loss-leader. The hope is that when customers show up to buy the
"sale" item, the company will make up the loss in profits
through ADDITIONAL customer purchases.
When
used in this form, the "loss leader" is actually a variation of
"pricing to penetrate."
Let's
Take A Look At
"The Psychology of Pricing"
We're
not going to get too deep into this one.
But...
You
will need a fundamental understanding of how psychology plays with your
basic pricing strategies. How you build the perception of price and
value is where we separate the winners from the "also-rans."
The
psychology of retail pricing is probably more important than the actual
price itself.
For
example...
-
Perceived
Savings -- The idea
of not using values ending in "0" or "1" in your
price gives the customer the perception of saving. For example...
$19.99 is viewed as a greater value over a product priced at an even
$20. Logically, the customer knows the difference is not great.
But there is still that sense of saving.
-
Value
Bundling -- gives the customer the feeling of getting
"something for nothing." For example, an advertisement
might read something like...
Buy TODAY! and you get an extra widget valued at $39.95, FREE!
Actually, there was a recent ad by a well-known vacuum cleaner
manufacturer, which essentially said that if you bought the base
model vacuum, you'd get a FREE car vacuum.
And, if you bought the deluxe model,
you not only got the FREE car vacuum, but they would also add in a
FREE canister vacuum set as well.
For the person in the market for a vacuum, this "bundle"
would be hard to resist!
-
Discounting
-- 15%, 25%, 40% OFF!-- Look at how appealing a percentage off the
normal retail price could be to your customer. From the customer
viewpoint, the greater the discount, the happier they would be!
Discounting also builds loyalty.
And...
Encouraging or rewarding bulk purchases by offering 3 of an
item at a price much lower than the per unit price also increases
sales.
Solving
The Pricing Dilemma
For A Product Or Service
There
are many ways to come up with a price for your product or service. The
more popular ways include...
-
Use
your best guess! (The method of
choice by more businesses than you'll ever imagine.)
-
Check
out the competition and price
accordingly. (Probably a pretty safe bet, if you're still making a
profit.)
-
Figure
in cost and expenses and add a
mark-up percentage. (Used mostly by multi-product businesses like
grocers, bookstores, department stores, etc.)
-
Hire
a consultant. (Great, if you can
afford one.)
As
you probably already know, a lot depends on your STRATEGIC
OBJECTIVES...
But
no matter which line of attack you use, how can you be sure that you're
not leaving money on the table?
How
low is too low to penetrate the market?
How
high is too high before pricing yourself out of the market?
One way
to solve this dilemma is to download our free Pricing Masters
Course. You'll get REAL solutions to help you decide on which pricing
strategy best suits your situation. Click
here to learn more...
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information about Web marketing at this Web site. If you have any
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Skip" form and I'll personally reply with the answer
and make suggestions about how to use the Internet to benefit your
business.
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