No matter what type of product you sell, the price you charge your customers or clients will have a direct effect on the success of your business. Though pricing strategies can be complex, the basic rules of pricing are straightforward:
- All prices must cover costs and profits.
- The most effective way to lower prices is to lower costs.
- Review prices frequently to assure that they reflect the dynamics of cost, market demand, response to the competition, and profit objectives.
- Prices must be established to assure sales.
Pricing Strategies
Neutral Pricing
Neutral pricing, the most common pricing strategy, means that you price so that your customers are relatively indifferent between your product and your competitor's product after all features and benefits, including price, are taken into account.
Penetration Pricing
Penetration pricing means pricing more aggressively than neutral. It can be used to gain market share relative to your competition -- but be careful. This can and does start price wars. No company wants to lose market share, and if you lower your price in an effort to gain market share, your competitors are likely to lower their prices just to keep their share.
Forward Pricing
Forward pricing is another term similar to penetration pricing, but with a focus on future costs. If you're building a product and it costs $1 to make, you probably don't want to sell it for less than $1. However, if you know that once you sell a million units, your costs will go down to $0.30, you may be willing to sell at a price lower than your current costs knowing that your costs will be lower in the future.
Skimming
Skimming is the opposite of penetration pricing. Companies skim in an effort to segment the market, to get the customers who are willing to pay more to do so. The two common implementations of skimming are at new product launch and at the end of a product's life.
Value-Based Pricing
Value-based pricing, another pricing strategy, is the most important. The idea seems simple. How much is your customer willing to pay? Set the price at or just below that point.
