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Discover the perfect pricing strategy

Setting the wrong price can be costly. Follow our tips and techniques to get your pricing strategy just right.

It can be very difficult for a start-up business to get its pricing right. The right price starts with the right pricing strategy. Adopt a flexible approach that will help you define your pricing day by day and help you grow your business and sell at a profit. Here’s an insight into some of the most popular strategies, including knowing when to lower your price and when to raise it.

Understand your place

Knowing where you fit into the local market

You’ll know your target market, and whether you want to aim for top-end luxury or cheap and cheerful. But you’ll need to look at the finer detail to see how you compare to the rest of the marketplace.

It’s true that no price exists in isolation. You need to know what your competitors’ prices are now, and what they’ve been in the past. What are customer perceptions of what’s on offer?

Many purchases that we make are based on emotional reasons as well as financial ones. If a customer has felt ripped off in the past, that can have big implications for your pricing decisions. Make sure you compare qualitative as well as quantitative factors. If a competitor seems more expensive but offers more features and benefits, you’ll need to take that into account.

Do your research

Getting your research right, in terms of pricing, is absolutely essential. You could pay a research company, or spend the time yourself online. However you do your research, you need to know:

  • Who seems to offer the best value, and who actually does
  • Who the successful traders are
  • What customer perceptions are of the general price bracket
  • If there’s a standard market price and, if so, is it ready for reinvention

Once you know the market and how you fit into it, you can start to develop your business pricing strategy.

Choosing a pricing strategy

Most customers will know if a price is fair or not. It’s easy to compare prices using the internet, and they may even know the figures better than you do. They also discuss prices with their friends and family, in person and online.

When you’re setting your own prices, or analysing the prices charged by your competitors, here are some general pricing strategies to consider:

  • Cost plus pricing – the basic cost of supply plus whatever you need to make a profit
  • Volume pricing – your costs decrease when a customer buys more, so volume pricing passes that saving on with bulk orders (for example, £1.25 each or five for £5)
  • Competition matching – when you charge the same as your closest competitor — effective if your product or packaging is significantly better
  • Penetration – a lower price will help you bulk up sales figures, get your name known and grow your market share by ‘penetrating’ into it
  • Milking – this is a more sophisticated pricing strategy. It involves creating a premium price at first, then when exclusivity with that market is exhausted, lower it for a mid-level audience, and so on, lowering the price as you go. This is common in sporting goods industries

Giving perceived value

Different markets often have very different customer mind-sets, but there are often similarities in the way they perceive value. Here’s an introduction to some of the more sophisticated psychological methods used to appeal to a customer’s sense of a bargain. You’ll probably recognise from your own shopping experiences.

  • Psychological savings – this is basically reducing the price by a small amount to increase perceived value, for example a pen for £1.99 or a car for £24,950
  • Optional extras – giving your customer optional items or features they can add on as they go. This means you can offer a low starting price.
  • Price differentials – where you create a range of levels within your pricing strategy. This means you could offer a budget version, a mid-level option and a premium option. It could be the same product and different levels of service, or a different product altogether
  • Bundle – bundling products together and offering a saving can make a purchasing decision simpler
Changing your costs

It’s good practice to review your prices – it shows you what the industry is doing and can show if you need to renegotiate with your suppliers. By benchmarking your prices to competitors you can gain a better idea of the effectiveness of your business as a whole. If you discover that your margins are low but your prices are similar, or higher, than your competitors, your costs are too high.

Discounting

This is a common short-term pricing strategy. However, many business advisers will warn against it. It’s normally undertaken aggressively by well-established businesses that can afford to take the hit or even pass the hit onto one of their suppliers. Price wars can hurt, and often leave the customer as the only winner. But there are ways that work to get rid of older stock and increase sales.

Raising prices

You shouldn’t be afraid to raise prices. Your target market might be less price sensitive than you think. And good customers will appreciate good service and understand what you’re doing, as long as you explain to them up front what you’re doing. Make sure you explain you value their custom and that it’s their choice to keep buying from you.

Often inflation can creep into your margins and erode profits. So make sure your price rises at least match the rate of inflation.

Remember: your strategy is all important

Most companies worry about changing their prices. But it’s far better to change than to trade at the wrong price. The best products and services deserve to be rewarded, so don’t feel embarrassed about aiming high. Your customers will tell you if you get it wrong. Always be flexible and remember that the strategy is more important than an individual price.


This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.

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