Pricing Strategies

Synopsis

Take the most advantageous pricing approach to increase the profitability of your organization. Use our customizable Pricing Strategies presentation deck to outline factors that influence your decisions and settle on the most suitable pricing options based on current market conditions.

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Slide highlights

With this slide, communicate your company's pricing policy. To create an effective policy, determine your goals, run a market pricing analysis and conduct thorough target audience analysis.

With this slide, list all price determinant factors. Include production costs, demand for product, prices of the business' competition, customers' purchasing power, legal and government regulations, objective and marketing strategy.

Use this slide to protect your initiative from failure and educate your team about the most common pricing mistakes, which are: trying to be the lowest price provider, mixing your pricing message and underestimating real costs.

Overview

There are five types of pricing strategies:

1. Cost-Plus Pricing – the process of simply calculating your costs and adding a mark-up.
2. Competitive Pricing – the process of setting a price based on what the competitors' prices.
3. Value-based Pricing – the process of setting a price based on the customer's price expectations.
4. Price Skimming – the process of setting a higher price and bringing it down as the market evolves.
5. Penetration Pricing – the process of setting a lower price to enter a competitive market and rising it with time.

One important factor to keep in mind while strategizing prices is price-sensitivity.

Price sensitivity (a.k.a. price elasticity of demand) evaluates the product's real value which, in turn, provides an insight into the shoppers' readiness to swipe their cards. Knowing the product's price sensitivity gives the power to forecast the sales volume more accurately. The high price-sensitivity signals that customers consider the product or service unreasonably overpriced. And the low price sensitivity signals that the higher price will most likely have no negative effect on shoppers' willingness to purchase the product. But most importantly, knowing the level of price sensitivity allows to set optimal prices across every category in the product line, as well as influence customer behavior through specials, discounts and other marketing techniques.

Questions and answers

What is the relationship between price sensitivity and customer readiness to make a purchase?

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Price sensitivity, also known as price elasticity of demand, is a measure of how the quantity demanded of a product changes with its price. If a product has high price sensitivity, it means customers are very responsive to changes in the product's price. If the price goes up, customers are less likely to buy the product, and if the price goes down, they are more likely to buy it. On the other hand, if a product has low price sensitivity, changes in the product's price have little effect on customers' willingness to buy it. Therefore, understanding a product's price sensitivity can help businesses predict how changes in price will affect sales volume and customer readiness to make a purchase.

How can price sensitivity be used to develop effective marketing techniques?

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Price sensitivity can be used to develop effective marketing techniques by understanding the product's real value and the customers' willingness to purchase. High price sensitivity indicates that customers may view the product as overpriced, while low price sensitivity suggests that a higher price will not negatively impact the customers' willingness to buy. This knowledge allows for the setting of optimal prices across every category in the product line and can influence customer behavior through specials, discounts, and other marketing techniques.

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Application

Shawn Dill, the author of "None of Your Business" and the CEO at Specific, recommends the three following steps in her article for "Forbes Business Council."

1. Know your market

Understand your ideal client and their spending power, Dill, writes. A costly product or service can be totally affordable as long as it's marketed to the right audience. Payment plans that allow paying in installments is also a good idea. "Pricing is largely a marketing issue, not a sales issue. Marketing creates awareness. Sales brings clients from awareness into a business relationship. A sale isn't the end of a conversation. It's the beginning of a relationship," she says.

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2. Choose premium or economy

Determine your niche early and market accordingly. Per Dill: "It's no good having a website you made yourself using a templated program, or handwritten flyers. [...] A premium brand, commanding premium prices, requires premium marketing materials."

3. Consider time-sensitive adjustments

This means considering two options: penetration pricing and price skimming. "Penetration pricing is a way to get a foothold in a market. Penetration pricing must be limited, either by cutting it off at a certain date or offering it to a limited number of people. If you get stuck on penetration pricing, you'll find yourself in no man's land. You may have plenty of clients, but they won't be paying you what you're worth. Price skimming can seem like a scary strategy. Maybe you're worried that if you try it, people will think you're overcharging and go elsewhere. That's a natural response, but if you get to market with a product that delivers great value before anyone else, it's important to remember that there is no agreed-upon fair price," Dill says.

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Case study

Starbucks

In 2020, Starbucks increased their prices by 1% (yet again). Experts from Price Intelligently analyzed the corporate giant's pricing strategy and concluded that "Starbucks is a master of employing value based pricing to maximize profits." According to the analysts, Starbucks does a great job using research and customer analysis data to determine targeted price spikes.

Questions and answers

What are some potential challenges a company might face when implementing a pricing strategy similar to Starbucks' and how can they be overcome?

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Implementing a pricing strategy similar to Starbucks' can present several challenges. Firstly, there's a risk of alienating price-sensitive customers. Secondly, the company must ensure that the quality of its products or services justifies the higher price. Lastly, the company must maintain a strong brand image that supports the premium pricing. To overcome these challenges, the company can focus on delivering exceptional quality and customer service, invest in building a strong brand, and target customers who value these aspects over price.

Are there any case studies that demonstrate the effectiveness of Starbucks' pricing strategy?

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Yes, there are several case studies that demonstrate the effectiveness of Starbucks' pricing strategy. One such example is the company's decision to increase the prices of its products instead of competing with more affordable chains. This strategy has helped Starbucks distinguish its brand and reinforce its premium perception. Despite the price hikes, Starbucks' most loyal customers, who are not price sensitive, continue to demand the company's coffee drinks. This slight increase in price has had a huge positive impact on the company's margins without affecting demand.

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Instead of trying to compete with more affordable chains, such as Dunkin, Starbucks uses price hikes to distinct its brand from others and reinforce the premium perception of it. Considering Starbucks' most loyal customers are not price sensitive, Starbucks coffee drinks remain in demand and a slight increase in price actually has a huge positive impact on the company's margins without affecting the demand.

Questions and answers

How can a company use pricing strategies to persuade customers to purchase larger sizes?

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A company can use pricing strategies to persuade customers to purchase larger sizes by implementing a technique known as versioning. This involves raising the price of smaller sizes of a product, which makes the larger sizes appear more valuable in comparison. For instance, if the price of a small size product is increased, customers may find more value in upgrading to a larger size. This strategy can lead to increased profitability as the company can enjoy a higher margin from customers who are persuaded by the price hike to purchase larger sizes.

What is the impact of versioning a product on a company's profit margin?

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Versioning a product can have a positive impact on a company's profit margin. By offering different versions of a product, a company can capture consumer surplus from customers who find more value in upgrading to a higher version. This strategy can persuade customers to purchase larger or more expensive versions, thus increasing the company's profit margin.

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The company also applies price increases to certain drinks and sizes rather than the whole product line. "By raising the price of the tall size brewed coffee exclusively, Starbucks is able to capture consumer surplus from the customers who find more value in upgrading to grande after witnessing the price of a small drip with tax climb over the $2 mark. By versioning the product in this way, the company can enjoy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes," Price Intelligently experts say.

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