The world of pricing is more complicated than it first appears. In fact, there’s a whole strategy that goes into deciding exactly what price is right for you, your product or services and your clients. It largely depends on the current competition and what value, or perceived value, your products or services have in the market. Here are five popular pricing strategies that many businesses employ.
Commonly referred to as a cost-based pricing strategy, cost-plus simply means adding a small margin on top of the cost of the product or service. Often a percentage, this pricing method takes into account the cost of producing and distributing the product or service, GST and any other relevant taxes or fees. The trick with cost-plus pricing is adding a fair and equitable profit that also makes your offering comparable with the competition.
Charge per hour
Often more common with service based industries, the charge per house method is exactly how it sounds. A price that’s based on the hours it will take to perform a certain task, with a set cost per hour. Many law and accounting firms adopt this strategy, however it can be important not to sell yourself short. It can be hard to determine the exact timing of each job before it’s performed and you must remember to include taxes, superannuation and leave entitlements.
Value-pricing takes a different approach, setting a price based on the customer’s perceived value of the goods or services. Unlike the charge per hour method, this means there is no limit to your potential profit. It also means if you have a product or service that appears highly valuable to your customers, you can earn a tidy income, regardless of the time it takes to conduct the service or prepare the product. Many large businesses are now moving towards value pricing.
Loss leader pricing
While it may seem counterintuitive, loss leader pricing is where a product or service is offered below cost price. The main objective with loss leader pricing is to attract new customers with the low prices in order to grow your customer base. Many businesses will employ this tactic on one particular product or service to get people in the door, and then encourage them to purchase additional products or services that have a higher profit margin.
Often used for more prestige or exclusive products and services, skimming pricing is when a relatively high price is set on a new product or service. This is often implemented when the products or services are in high demand and may have had high research and development costs. Once the required profits are achieved, the cost is often lowered over time to appeal to a wider market. This strategy is often used in technology industries or for products that are very highly anticipated.