4. Price skimming
Price skimming is a type of dynamic pricing strategy that is designed to help businesses maximize sales on new products and services. This involves setting rates high during the initial phase of a product, then gradually lowering prices as competitor goods appear on the market.
Best for: Small businesses that have products that are in high demand, like tech companies
- Allows businesses to maximize profits through early adopters
- Helps small businesses recoup development costs
- Creates an illusion of exclusivity and quality
- Excess inventory may occur if this strategy fails
- The quality of the new service or product must justify the higher cost to be effective
- Won’t work if your competitors are creating similar products
Price skimming examples
An example of price skimming strategy is seen with tech companies with the introduction of new technology. An 8K TV would benefit from a higher marked price when only 4K TVs and HDTVs currently exist on the market.
This also works well with iPhones—the expected sales volume and speed of developing new products is so high that lowering prices throughout the skimming cycle will have very minimal effects on overall sales volume.
5. Psychological pricing
Psychological pricing refers to techniques that marketers use to encourage customers to respond based on emotional impulses, rather than logical ones.
One explanation for this strategy is that consumers tend to give more attention to the first number on a price tag than the last. The goal of psychology pricing is to increase demand by creating an illusion of enhanced value for the consumer.
Best for: Small businesses aiming toward short-term goals and quick wins
- May offer a high return on investment
- Allows for cost transparency
- Simplifies the decision-making process for customers
- Could cause customers to feel as though they’re being manipulated
- Doesn’t set you apart from competitors since it’s a popular strategy
- Requires consistent demand for your product
Psychological pricing example
Psychological pricing is often seen in retail. For example, setting the price of a watch at $199 is likely to attract more new customers than setting it at $200, even though the actual price difference is quite small.
Other tactics retailers use is the use of “buy one get one free” language versus “50% off two items.” This strategy relies on the customer favoring one wording over another even though they’re the exact same deal.
6. Bundle pricing
With bundle pricing, small businesses sell multiple products for a lower rate than selling each item individually.
Customers feel as though they’re receiving more bang for their buck. Many small businesses choose to implement this strategy at the end of a product’s life cycle, especially if the product is slow-selling.
Small business owners should keep in mind that the profits they earn on the higher-value items must make up for the losses they take on the lower-value product. They should also consider how much they’ll save in overhead and storage space by pushing out older products.
Best for: Small businesses that want to create large margins while offering a lower price than competitors
- Increases the value perception in the eyes of your customers
- An effective way to reduce inventory
- Lowers marketing and selling costs
- May affect products that may be selling better than the other if they’re bundled (product cannibalization)
- Some customers may not want all products offered in the bundle, resulting in an unwanted or unused product
- May cause a negative perception of the brand due to customers assuming the product is of lower quality since it’s bundled
Bundle pricing examples
An example of bundle pricing occurs at your local fast food restaurant where it’s cheaper to buy a meal than it is to buy each item individually.
Internet service providers will also use this strategy and take advantage of cable TV packages and bundled mobile plans.
7. Geographical pricing
Geographical pricing involves setting a price point based on the location where a product or service is sold. Factors for the changes in prices include:
- Shipping costs
- Location-specific rent
- Supply and demand
If you expand your business across state or international lines, you’ll need to consider geographical pricing.
Best for: Small businesses that have markets in many different locations
- Allows you to gain local appeal
- Can boost perceived value in certain locations
- Local regulations need to be considered, such as pricing laws
- Accounting and bookkeeping can become more complicated since there are different regions to be accounted for
Geographical pricing example
Geographical pricing applies to retailers or service providers who charge different prices in different states. For example, a gym may charge a higher price for membership in California than they would at the same location in Louisiana.
8. Promotional pricing
Promotional pricing is another competitive pricing strategy that involves offering discounts on a particular product. These strategies are often run during a holiday, like Memorial Day weekend. By offering these deals as short-term offers, business owners can generate buzz and excitement about a product.
Promotional pricing campaigns often consist of short-term efforts and incentivizes customers to act now before it’s too late. This pricing strategy plays to a consumer’s fear of missing out.
Best for: Small businesses that want to generate quick demand for their products or services
- Increases sales volume in the short term
- Increased inventory turnover
- Promotions can build customer loyalty
- More calculations are required to ensure the sales volume compensates for the discounted prices
- Lowered perception by customers due to “cheaper” prices
- Customers may be reluctant to purchase again if you don’t keep offering promotions
Promotional pricing examples
An example of promotional pricing can apply to a retail store that implements a “Buy One Get One” campaign during a holiday weekend, like Black Friday or Cyber Monday. Loyalty programs also apply here as well—retailers will offer rewards to their loyal customers for a limited time.
9. Value pricing
Value pricing is a way of setting your prices based on your customer’s perceived value of what you’re offering. This occurs when external factors, like a sharp increase in competition or a recession, encourage the small business to further provide additional value to its customers to maintain sales.
This pricing strategy works because customers feel as though they are receiving an excellent value for the good or service. The approach recognizes that customers don’t care how much a product costs a company to make, so long as the consumer feels they’re getting an excellent value by purchasing it.
Best for: Small businesses that specialize in SaaS or subscriptions
- Potential for high profit margins
- Increased perceived value in your brand and services
- Increased customer loyalty
- Requires additional market research to determine what is of value to your audience
- Markets that work well with this strategy tend to be very niche since they’re high-end
- Goods will cost more to produce
Value pricing examples
An example of value pricing can be seen in the fashion industry. A company may produce a product line of high-end dresses that they sell for $1,000. They then make umbrellas that they sell for $100.
The umbrellas may cost more than the dresses to make. However, the dresses are set at a higher price point because customers feel as though they are receiving much more value for the product. Would you pay $1,000 for an umbrella? Probably not. Thus, external factors like customer perceptions guide the value pricing strategy.