Pricing Strategy Essentials

By April 2, 2019 May 6th, 2019 No Comments

Pricing strategy essentials – Finding the balance between pricing for profit while remaining competitive. Poor pricing strategies can damage performance and bottom line. Not only do many businesses have the opportunity to increase their profits simply by adjusting their pricing strategy, but poor pricing strategies can actually damage a business’s opportunity for a prosperous future. With pricing such a huge factor in the success of your business, but with no one-size-fits-all pricing strategy available, how do you know which pricing strategy to choose?

Tailoring Strategies to Maximise Returns

To raise your profit margin and increase sales, your pricing strategy must be tailored carefully to maximise returns. There are a number of different pricing strategies you can use when deciding on the best price for your product or service in the market, and each strategy is most useful under certain circumstances. We recently wrote about various pricing strategies that businesses can use, including premium pricing, penetration pricing, economy pricing, price skimming, psychology pricing, bundle pricing, life cycle pricing, competitive-based pricing and temporary discount pricing.

But knowing which strategy or strategies will best suit your business’s product or service can be difficult.


Pricing strategy essentials - Finding the balance between pricing for profit while remaining competitive

When businesses decide on their products’ or services’ prices, they usually take one of three routes to setting a price:

  • the cost of producing the goods or providing the services plus the profit;
  • whatever customers are willing to pay; or
  • what the competitors are doing.

But instead of focusing on just one of these factors to set your price, we believe it is much smarter to take a holistic approach and look at all three elements.

Features of your products and business

Working out how to set your break-even point (how many sales you have to make before you make a profit), your margins and your markup will depend a lot on your costs of producing your product or providing your service.

William Advisory Group - Pricing Strategy Essentials

But you’ll also be looking at questions such as: at what stage of the life-cycle is your product at (introduction, growth, maturity, decline)? Different pricing strategies suit different product lifecycle stages best. For example, with “price skimming”, you set your prices higher during the product’s introductory period, and as competition grows, slowly lower the price.

Product Life-cycle Pricing

And “product life-cycle pricing” is a strategy in itself. This is where your price fluctuates depending on which stage of the cycle your product is at: for example, during an introduction phase, sales are often high, so prices are high.

You’ll also need to critically assess your products’ quality. Are they of the high quality necessary to create a value perception in the consumer’s mind, if you would like to to employ pricing strategies like “premium pricing”?

Do you have a group of products you could bundle to sell together? If so, “bundle pricing” is a good strategy to consider. Or, if your products or services are dependent to some extent on seasonal fluctuations or peak/off peak times, you might employ “temporary discount pricing” to provide discounts to encourage slower sales periods.

Apart from your products and services, you also need to critically assess your business itself.  For example, if you decide to use “penetration pricing” as a strategy, you’ll need to assess whether your business can survive the initial loss of income which is to be recuperated later.

Raise profit margin and increase sales


Features of your customers and the market

Who are your customers and what are they prepared to pay? Your market research is invaluable here, because your pricing strategies will vary according to the type of customer you are seeking. And learning what customers genuinely value will go a long way towards helping you set an achievable, truly profitable price.

Are your customers bargain hunters or are they looking for premium quality? If you wish to appeal to a price-conscious market, “penetration pricing” or “economy pricing” can both work well. For those customers searching for the best quality products or services, “premium pricing” is a better choice.

Or are your customers early adopters who will often pay more to be one of the first to own your product? When products are rare (or perceived as rare), “price skimming” is a good strategy.

Sometimes, customers will be prepared to pay much more than your costs—so you need to work out what they think they should be paying.

If your products or services are too expensive, your customers won’t buy. On the other hand, price your goods or services too low and you could be missing out on profits you could easily be receiving.

Features of your competitors

Here you’ll be considering questions such as: where are you in relation to your competitors? Are there many similar products or services on the market already? If it’s a crowded market, have you already penetrated it or are you a total newcomer?

To get noticed in a crowded marketplace, businesses often turn to “penetration pricing” to increase market share. But when you have good market share in a market with little product differentiation, rather than risk losing your share, you might consider using “competitive-based pricing” as a strategy. You may even considering creating demand by using “psychology pricing” techniques.

Are you aware of how your competition is pricing similar products? Can you deduce the reasons behind their pricing strategy? (You can also use the ATO’s app to get a sense of what others are charging for similar products: click here for info. Remember that you should never assume your competitors have the pricing right. Instead, ensure you follow your own procedures to determine what an appropriate price should be—and then judge whether your competitors are getting it right. If your prices are very different to theirs, make sure to communicate the reasons for this to your customers through your marketing—perhaps it’s the difference in quality, value for money, after sales service, and so on).

To determine which pricing strategies are going to be most suitable and effective for your business, it’s really best to get professional advice from an experienced business adviser with a deep understanding of pricing strategy.  Here at William Advisory Group we will analyse your business, products, industry, market and customers to ascertain which pricing strategy will work best for you. Please contact us on the website or give us a call on 02 9660 7061 to discuss your business’s needs with one of our friendly consultants today.

Jake Elliott

About Jake Elliott

Jake Elliott is a Chartered Accountant with extensive experience offering Outsourced CFO and other consulting services to businesses. His background working "in-business" allows him to provide clients with insights into their operational and financial performance beyond the capabilities of their accountant/bookkeepers.