June 3, 2023

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How to Create a Pricing Strategy for Driving Sales?

5 min read
5 Easy Steps to Creating the Right Pricing Strategy | Inc.com

It might be challenging to set prices for your goods and services. If you set your prices too high, you will lose profitable sales, and you’ll lose out on potential earnings if you set them too low. Lacking a price optimization plan can be problematic because your rivals may already have a successful one.

Pricing doesn’t have to be a compromise or a guess. Numerous pricing models and techniques exist that can aid in your understanding of how to choose the appropriate prices for your target market and financial objectives. You must choose the best pricing plan if you want to succeed.

But what precisely are pricing strategies, and how do they operate? Which price optimization model is ideal for your company out of the many options available?

What Is a Pricing Strategy?

A pricing strategy or price optimization is a technique for determining the best price to charge for a good or service. Pricing strategies are created to maximize sales and profitability while considering the market and customer demand.

Numerous aspects of your organization, including revenue targets, marketing goals, target market, brand positioning, and product features, are taken into account by pricing strategies. Additionally, they are impacted by outside variables like market and economic changes, competitive prices, and consumer demand.

It’s not uncommon for entrepreneurs and business owners to skim over pricing. They frequently examine the cost of their goods sold (COGS), consider their rivals’ prices, and alter their selling price. Even if they are significant, your COGS and competition shouldn’t be the focus of your price strategy.

Different Pricing Strategies for Your Business

  1. Cost-Plus Pricing Strategy

The simplest method to price your offers is via a cost-plus pricing model.

This is how it goes: the cost of goods sold, often known as the entire cost of manufacturing and selling your goods or services, would be the first thing you would determine (COGS). This covers the costs of product sourcing, packing, shipping, storage, marketing, administrative expenses, and any other expenses necessary to create and market the good or service.

You would add a fixed percentage once you had established the COGS to acquire a profit. For this reason, the cost-plus pricing approach is often known as “markup pricing.”

  1. Psychological Pricing Strategy

If you’ve ever entered a bargain store, you’ve had firsthand experience with psychological pricing.

The main goal of this price optimization approach is to boost sales by utilizing human psychology concepts. When a price ends with 9, 99, or 95 to make it seem cheaper than it is, is a typical strategy and is known as ‘charm pricing’. This works because the number seems smaller when people read from left to right.

Price anchoring is another psychological pricing strategy. In order to make the price appear to be a good deal, the price is first anchored high and then a lower price is offered.

  1. Competitive Pricing Strategy

Competitive price optimization reflects the rate for a good or service in the market. When employing this pricing technique, you would look into the prices put forward by your primary rivals and set your prices accordingly. Pricing your goods similarly to, slightly higher than, or slightly lower than your rivals is an option.

This pricing strategy performs best in a crowded market because customers might prefer one similar item over another due to a little lower cost. Just be careful not to get caught up in a “race to the bottom,” where companies continuously undercut one another to acquire more business but unintentionally lower earnings for everyone.

This pricing technique also works well if you can price your good or service similar to that of your rivals while simultaneously providing extra features, bonuses, or advantages that they don’t.

  1. Value-Based Pricing Strategy

Value-based pricing is straightforward in theory but difficult in practice.

Simply base your price decisions on what your target market is prepared to pay. To do this, you must, however, have a solid understanding of your target market and your rivals’ pricing.

This pricing strategy may be effective for services that offer a disproportionate amount of value compared to COGS.

  1. Freemium Pricing Strategy

Firms sometimes offer a free version of their primary offering to entice customers to use the product or service. The business then tries to upsell them on a more valuable premium version of the good or service that costs money.

Making your freemium offer truly valuable is the key to this price optimization plan.

  1. Penetration Pricing Strategy

Large businesses with the resources to break even or temporarily lose money choose to adopt penetration pricing. As a result, they can offer extremely low pricing to draw clients and steal them from rival businesses.

Once the business is well-established, it will progressively raise the price to turn a healthy profit.

  1. High-Low Pricing Strategy

The antithesis of a penetration strategy is a high-low price optimization approach. Businesses offer things initially for a high price and then reduce the price as the product loses market demand, relevance, or novelty, as opposed to starting with a cheap price and raising it over time.

The high-low pricing strategy is always in operation when you visit a business with a sizable discount section. Most retailers with seasonal products, like fashion and outdoor stores, employ this pricing approach.

As consumer demand waxes and wanes, high-low pricing might help you maintain sales.

About the Company

Fountain9 is a Y Combinator-backed company which offers predictive inventory planning and price optimization software for e-commerce, DTC, and retail companies.

Their flagship product, Kronoscope, uses AI to accurately predict future inventory imbalances that lead to out-of-stock situations or wastage and recommends the best ways to minimize their impact.

Kronoscope is powered by state of the art demand sensing and pricing engine which considers several factors like historical sales trends, seasonality, holidays, markdown events and pricing changes to predict future inventory requirements and optimize prices. Predicted inventory demand is also aligned with supply-side data to identify ideal suppliers and replenishment quantities that minimize chances of stockouts or inventory wastage.

To learn more, visit: www.fountain9.com

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