Pricing strategies: Are you set up for success?

Pricing is risky. What price is too high? What price is too low? Pricing is one of the most important marketing decisions you will make. Your business model revolves around price, so finding the right price is essential. Regardless of the type of product you sell—commodity or proprietary—pricing always needs to accomplish a business objective such as:

• Acquiring a large number of new customers so you can develop life-long buyers

• Attracting early adopters and becoming the household name in your market

• Eliminating competition and converting their customers into yours

Remember that not all business objectives include making the most money possible—it’s one of many considerations. Once you know your objective, you need to decide on a pricing strategy. Here are a few basic strategies that will help you meet your business objectives. One pricing model is to penetrate a market with the goal to sell as many items as possible. Pricing to penetrate allows you to acquire market share, usually relatively quickly. In this model, you need to set your prices low. You want to find a price that balances the need to maximize profits while selling a large number of units. Some companies may even take a loss in order to penetrate a market. Why? In some cases, the lifetime value of the customer may be significantly greater than the original gain/loss on a sale. The opposite strategy of penetration pricing is top pricing, where you deliberately set prices high in order to obtain large profit margins. Many companies use this strategy when they are launching a new product that is significantly different and better from the competition. You get to market first and set significant barriers to competition. You can set your prices higher because there aren’t a lot of competitors, and it will take a long time for others to catch up. In this model, you will generally sacrifice market share in exchange for highly targeted customers, consisting of early adopters, thought leaders and visionaries—who may become your champions in the future. Large companies will often price a product at a significant loss, just to drive smaller or more threatening companies out of the market. Price-to-lose is when you don’t take a stand one way or another. Decide what you want—more market share or increased profit margins—then pick a strategy, and be sure to measure your results.


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