Product pricing strategy is both an art and science. While under-pricing
the product can result in losses and project the brand as cheap and unreliable,
overpricing can risk the product's affordability for the target audience.
Pricing is the most challenging thing to do but determining the right price can
make the product a huge success in the market and create a foundation for a
business that will prosper. However, the correct product pricing requires
data-backed pricing strategies, identification of target consumers, competitive
mapping, and understanding of the relationship between quality and price.
Customer Segmentation
Every customer has different needs and purchasing behavior, so a single
approach cannot work for all. In this case, customer segmentation becomes a
valuable process, where an organization can closely align its strategy and
tactics by better targeting its customers. Customer segmentation can be based
upon demography, geography, psychography, and behavior.
Demographic Segmentation encompasses age, education, gender, income, religion, level of
education, occupation, and family structure. Companies reduce the risk of
running campaigns to uninterested customers with proper demographic
segmentation, while also allowing marketers to build long-lasting customer
relationships, improve their products and services, and optimize marketing
strategies. For instance, a makeup brand would target mostly females aged 18-25
who live in an urban environment with personal disposable income to spend more for
grooming purposes.
Geographic segmentation is an excellent way to group customers based on their physical
locations. Businesses that have the infrastructure to serve customers within
certain boundaries use geographic segmentation to their full advantage. For
instance, a clothing brand might target beach attire all year-round in
California and much of Florida while only promoting them for a few months in
other parts of the United States.
Psychographic Segmentation refers to selecting buyers based on their lifestyle choices,
interests, and activities. This kind of segmentation also takes into
consideration things like what your customers value in life and their pain
points. For instance, legacy luxury brand, Gucci aims for its products at upper-class
millennials and “rich” consumers with a refined taste and high personal
disposable income.
Behavioral Segmentation means the division of customers based on their behavior patterns.
This type of segmentation is based upon customer’s attitudes towards a product
or service, overall product knowledge, purchasing behavior, and tendencies. For
instance, Starbucks utilizes behavioral segmentation to target their morning
customers with an incentive so that they come back again to make another
purchase later in the day.
Competition Mapping
Some of the biggest brands and retailers reached the top because they
understood their competition and capitalized on their mistakes to grow market
share. Consumers are incredibly price-sensitive; hence, a strong competitive
pricing analysis is an absolute requirement for product success. Analyzing
competitive pricing can help identify where your product fits into the retail
landscape based on the price point as well as highlight existing pricing
strategies. You can also optimize prices by knowing what the competition is
doing and compete on the price.
For instance, an Italian food restaurant may consider looking at the
prices of other similar kinds of restaurants. If they offer lower prices than
competitors, then the restaurant could use that to their advantage while
promoting their services. They could also offer special deals such as Buy One,
Get One free to set them apart from other restaurants that charge more.
Price Positioning
Most marketers do not know where their price is positioned in the
competitive market, and it could lead to serious revenue losses. The price
positioning is the act of placing a price within a price range, which indicates
where a product stands in the market. Take an example of the biggest OTT
platform in the world, Netflix. Netflix's pricing strategy is market neutral
but somewhat close to market penetration. In the USA, cable costs about USD60-USD80,
while Netflix's subscription costs around USD9.99-USD13.99, and broadband
internet may cost around USD60-USD70. Besides, offering a Tiered
Subscription-based pricing structure facilitating multiple screen viewings and
a free trial as a strategy, the OTT platform has managed to expand its
subscriber base over the years.
Different Pricing Strategies for Consumer Products
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Value-based Pricing
Organizations that offer unique or highly valuable features or services are
better positioned to adopt a value-pricing model rather than a cost-plus
pricing model. Value-based pricing strategy is based upon the customer’s
perceived value of the product or service whereas cost-plus pricing factors the
costs of production into the pricing calculation. Generally, companies selling
commoditized items are likely to opt for “cost-plus” pricing. Value-based
pricing is the right choice for products that enhances the customer’s
self-image with the item’s possession and facilitates unparalleled life
experiences. Hence, the perceived value of the product reflects the worth of an
item that customers are willing to pay.
Have you ever thought about why Rolex watches are highly expensive when
the tangible differences between watches do not justify huge price disparity?
It’s all about evoking sentiments that customers associate when they purchase
expensive materials. Rolex is included among the most powerful brands in the
world. Its premium pricing strategy has introduced whole new price ceilings and
accelerated the acceptance of luxury brands. However, luxury pricing has a lot
to do with brand imaging and provenance, which adds authenticity to luxurious
items. By buying prized possessions, customers want to believe that they belong
to a small and elite group for which they are willing to pay for the status
that exclusivity brings with it.
Apple has mastered the art of value-based building customer confidence
for its technology. The company has the most loyal customer base globally,
built up through purchases over the years. Apple’s original strategy was to
offer a small number of products, focus on the high end, prioritize profits
over market share, and create a halo effect that makes people want Apple
products. The unique pricing strategy and brand loyalty allows Apple to have
power over pricing.
- Pricing based on Customer Psychology
Psychological pricing takes advantage of the customer’s emotional
response to specific price points utilizing odd pricing conventions. The
purpose of psychological pricing is to make the price of products or services
look cheaper. With marginal price reductions in costs, sellers can improve
their sale prospects. Ending the product’s price with the number 9 is one of
the oldest pricing methods that genuinely works. For instance, if we compare
two price tags, USD100 and USD99, the product with the second price tag will
outperform the first one as it breaks the customer’s mental barrier of favoring
a two-digit price. A slight difference of dollar determines the sale and a
no-sale of the product in question.
Sometimes the primary strategy of marketers is to price products in
direct comparison to competitor’s products. While setting a cheap price may
drive sales of the product, sometimes the comparative strategy may backfire as
customers think a lower price means lower quality. Whereas marketers can set a
higher price in comparison to competitor’s products by selling them using words
like “value” or convince customers that a higher-priced product is worth it.
Top global companies like Amazon, Hershey, Motorola, Apple, and Costco adapt
psychological pricing strategies.
Walmart, the biggest retailer in America, uses psychological pricing
tactics to get customers to spend more money than they initially intended.
Instead of pricing an electronic item for USD200, the retailer may mark the
item at USD199 so that people pay more attention to the first number in the
price and purchase it.
- Cost-Plus Pricing Strategy
The cost-plus pricing model is a tested strategy for multiple
industries, based upon just two things: cost of production and desired profit
margin. To determine the selling price of the product, all you need to do is
add a markup to the product’s original unit cost. Thus, every sold unit would
provide the same revenue to cover costs and increase profit margin. Generally,
the cost-plus pricing model works best for industries where defined costs are
involved in products or product is utilitarian in nature. With a cost-plus
pricing model, the marketer can predict profits and cover production costs. The
price is easy to justify to customers and the marketers do not need to use
fancy terms to sell the product.
The main aim of cost-plus pricing is to charge as little as possible to
attract the largest number of potential customers. The pricing approach can be
commonly seen at dollar stores or chain supermarkets. The profit margins are
usually lower in this kind of pricing approach as the manufacturer is required to
keep lower operating and production costs as much as possible.
In a market heavily driven by customer trust and brand loyalty,
businesses utilize a penetration pricing model to introduce potential customers
to a new product and turn them into loyal customers. With penetration pricing,
the marketers aim to create brand loyalty and get customers to love their
product to the point that they show a willingness to spend more in the future
and invest in long-term profit. For instance, if your competitor is selling a
product at USD100, you can choose to sell the product at USD97 to offer low
prices to the buyer and increase brand awareness.
Gillette adopted a penetration pricing strategy to build its brand
value. Offering razors at lower prices than its competitor brands, Gillette has
retained its position as a market leader. Gillette compensates its marginal
losses by selling additional accessories with the razor, such as blades,
attachments, and other accessories priced at a premium rate.
A price skimming strategy is when companies charge the highest possible
price for a new product and then incrementally lower prices as the product
becomes less and less exclusive and popular. The pricing strategy helps to
recover sunk costs and maximize the revenue of individual product lines. Price
skimming strategy is usually employed for new technologies. For instance, when
Samsung Galaxy S8 came out in 2017, it was priced at USD750, but now the same
product is available at USD175 on Amazon. Price skimming is also pretty evident
at clothing stores, where the older designs become available at low prices when
new designs move to the racks.
Conclusion
Pricing is highly customer centric. A pricing strategy that might work
brilliantly at one point and time for a segment may fail for a completely
different set of consumers at a different point in time. Therefore, the right
pricing strategy must follow a balanced approach between four aspects, pricing
principle, price positioning, price structure, and price tactics.