4.8 Pricing Strategies
Choosing the right price is an art. There are several common strategies:
Cost-Plus Pricing: Calculate your total cost (including materials, labor, overhead) and add a fixed markup for profit. For example, if a bracelet costs $10 in material and overhead, and you want a 50% margin, you’d price it at $15. This method is simple and ensures costs are covered. However, it doesn’t consider customer willingness to pay or competitors’ prices.
Value-Based Pricing: Set the price based on the perceived value to the customer. If your product solves a major problem or has unique features, customers may pay more. For instance, luxury brands or innovative tech often use this. As a marketing professor notes, “the price relates to the value a person places on the product”. The key is understanding what your target customers truly value and how much extra they’re willing to pay for it.
Competitive Pricing: Price your product in line with competitors. If you sell a commodity like bottled water or peanut butter, you might closely match the market price. You can either match, slightly undercut, or occasionally charge a premium if you have a brand advantage. A co-operative approach is to adjust your price whenever competitors change theirs.
Penetration Pricing: Introduce a new product at a low price to quickly attract customers and market share, then raise it later. For example, a new video game service might launch at a low monthly fee to build subscribers before increasing prices. This strategy can jumpstart demand but risks charging well below what some would pay.
Price Skimming: The opposite of penetration: start with a high price for a new, innovative product, then gradually lower it. Tech gadgets often do this (like first-generation smartphones). Early adopters pay more, helping recover R&D costs, and later customers can buy at lower prices as competition increases.
Each strategy has pros and cons. Cost-plus is simple but blind to market; value-based can maximize profit if you correctly gauge willingness; competitive ensures you’re “in the market range”. Many startups test different strategies or adjust over time. (For example, Amazon famously began with penetration pricing to build users and later experimented with various price points.)