Setting the right price for your products

An integral part of any business operation is determining the right price of goods and services - too low, and you risk incurring a loss, but if your prices are too high, you risk losing out to your competitors. So what's the best pricing structure for your business?

Penetration pricing

Penetration pricing involves setting a product at a lower price (usually below market rates) for a certain period of time, attracting customers based on cost savings. It is hoped that the initial purchase will spark continued loyalty to the business even after the introductory offer wears off. This is good for firms with a fixed overhead and those with products that are less likely to garner initial demand. However, customers may not remain loyal to your brand once the introductory pricing is lifted, particularly if you don't have a unique selling point. Businesses that do well using this method are telephone, Internet and cable TV companies; as well as wholesale businesses wanting to break into new markets.

Price skimming

According to Georgetown University's School of Business, price skimming refers to setting the price relatively high, well above costs, such that only a small portion of consumers will be able to afford or are willing to pay for the product. Once the higher-end of the market is 'saturated', the price is reduced to appeal to the rest of the market. One advantage to using this method is it creates a prestige or luxury appeal, but the product in question will need to be of good quality in order to generate demand. Some examples of products that benefit from price skimming are gourmet/organic foods, electronics or new technology.

Image pricing

Queensland Business describes this method of pricing a product towards the higher-end of the market and creating an elite or prestige branding around the product. This is similar to price skimming, with the exception of the eventual price reduction. In this case, customers are willing to spend significant amounts of money if they believe they're getting excellent quality or if they're paying for the brand name. This method works for designer or luxury goods that are more about selling a lifestyle rather than just the product alone, such as Ferrari cars or Louis Vuitton handbags.

Discount pricing

As its name implies, discount pricing is achieved by consistently pricing products towards the lower end of the market. This may appeal to consumers who will pay less for goods or services that are poorer in quality, such as mass-produced apparel, groceries and electronics. This is used by businesses to sell cheap products in high quantities, which can boost your bottom line and help you stay competitive. However, you should carefully consider your marketing strategies as customers can associate low prices with low quality, and if you're competing solely on price, it's hard to build loyalty.

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