Cost Determination: A Guide to Pricing Strategy

By QuickBooks Canada Team

2 min read

The success of your small business is determined by a variety of factors, but having an effective pricing strategy is one of the most important. Setting appropriate price points for the goods and services your company offers requires a delicate balance: The prices you establish must be low enough to be attractive to customers, but they should be high enough to guarantee your business a reasonable profit margin. To this end, choosing the most optimal pricing strategy is vital. Weigh the pros and cons of different strategies, and consider which one is likely to work the best for your specific business.

Pricing at a Premium

The strategy of pricing at a premium involves setting the costs of goods and services higher than that of your competitors. This strategy is generally more effective on new products, items that you’ve recently developed and just launched. If you run a small business that sells unique items – goods that no other companies sell – this strategy may be perfect for you. Customers are generally willing to pay more for something that they can’t get anywhere else, and sometimes attaching a higher price tag automatically communicates the notion of superior quality. However, you must ensure the higher cost appears worthwhile it to your customers. Premium-priced goods should be manufactured, marketed, and packaged in a high-quality manner. Failure to convey superior value can cause this pricing strategy to backfire and result in a disastrous downturn in sales.

Economy Pricing

The virtual opposite of pricing at a premium, economy pricing is a strategy used to target price-conscious consumers. Using this method of pricing, you minimize marketing, manufacturing, and production costs through choosing more economical packaging and minimal advertising. This pricing strategy is best suited for generic goods that your customers can pick up just about anywhere. Customers who buy economy-priced goods are not focused on the highest-quality goods, preferring instead to sacrifice in terms of quality and frills. Economy pricing is ideal if your company sells generic or non-label goods.

Price Skimming

Price skimming can be a highly effective pricing strategy, because it adapts and changes with the life of your product. Price skimming is a combination of the aforementioned strategies, where you price your products high initially and then lower the prices as your competitors produce more similar goods. Ultimately, price skimming offers a balance of pricing at a premium and economy pricing, letting your small business generate a reputation for quality and product exclusivity – and helping you recoup developmental costs while keeping products competitively priced over their lifespan.

Psychology Pricing

The psychology pricing strategy involves using techniques that lead customers to respond and buy emotionally instead of logically. For example, customers are more likely to buy a product priced at $1.99 versus the same good priced at $2, as they emotionally respond to the appearance of savings, even though the price difference is minimal. Ultimately, psychology pricing aims to boost demand for your company’s goods by creating the appearance of greater value for lower cost. The best pricing strategy for your particular small business largely depends on the types of goods or services you market, and to some extent on current marketplace conditions. You may also implement different pricing strategies for different product lines. Your pricing strategy ultimately has a substantial impact on your financial bottom line, so you should carefully consider which strategy is likely to work best for your unique business.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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