Last Update: January 23, 2015
Determining the best pricing strategy for your company’s products and services can seem a bit daunting. However, your pricing strategy can ultimately determine your company’s success or fate. Therefore, it is important for small business owners to ensure profitability and longevity by paying close attention pricing techniques that can drive incremental revenue and boost their bottom line.
Here are 5 pricing techniques that have made both big and small brands profitable.
1. Individualized Variable Pricing
Charging each individual customer a different price based on their willingness to pay is every retailer’s dream. However, for some company’s it is a reality.
For instance, Priceline.com offers a unique pricing scheme for booking airline flights, hotel rooms, and rental cars that helps service providers match supply and demand and capture some profit through price discrimination. Customers can visit its website and specify the price they are prepared to pay and the acceptable range of times, days, and/or quality for a particular leisure travel service.
Although individualized variable pricing is legal and widely used in some retail sectors, such as automobile and antique dealers, it is impractical for most companies.
First, it is difficult to assess each customer’s willingness to pay; second, retailers cannot change the posted prices in stores as customers with different willingness to pay enter the store. In addition, customers might feel they are being treated unfairly if they realize that they are being charged a higher price than other customers.
2. Promotional Markdowns
Promotional markdowns can promote merchandise and increase sales by increasing customer traffic flow. Small portable appliances (such as toasters) are called traffic appliances because they can be sold at promotional or reduced prices to generate in-store traffic.
Another opportunity created by promotional markdowns is to increase the sale of complementary products. For example, a supermarket’s markdown on hot-dog buns may be offset by increased demand for hot dogs, mustard, and relish—all sold at regular prices.
3. Price Bundling
Price bundling is the practice of offering two or more different products or services for sale at one price.
For instance, McDonald’s offers a bundle of a sandwich, french fries, and a soft drink in a Value Meal at a discount compared with buying the items individually. Price bundling increases both unit and dollar sales by increasing the amount of merchandise bought during a store visit.
4. Leader Pricing
Leader pricing is pricing certain items lower than normal to increase customers’ traffic flow or boost sales of complementary products. Some retailers call these products loss leaders. In a strict sense, loss leaders are sold below cost.
The best items for leader pricing are frequently purchased products like white bread, milk, and eggs or well-known brand names like Coca-Cola and Kellogg’s Corn Flakes.
5. Odd Pricing
Odd pricing has a long history in retailing.
In the 19th and early 20th centuries, odd pricing was used to reduce losses due to employee theft. Because merchandise had an odd price, salespeople typically had to go to the cash register to give the customer change and record the sale, making it more difficult for salespeople to keep the customer’s money. The theory behind odd pricing is the assumption that shoppers don’t notice the last digit or digits of a price, so that a price of $2.99 is perceived as $2.
However it is important to remember this:
a. When customers are price sensitive, you should raise or lower prices so that they end in high numbers such as 9.
b. When price is not an important factor for customers, you should use even dollar prices and round-number endings to avoid devaluing your brand.
Learning from experienced retailers and marketers can help you review your pricing strategy from a different perspective. And if you haven’t used any of these techniques, please give it a go and let us know how it works for your small business in the comments section below.
Sachinda Jayatilleke has always had a passion for business and now puts it into practice at Franchise Sales, where he helps customers find the best business franchise for their needs. Connect with Sachinda on Twitter.