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Pricing Strategies

December 6, 2016

Pricing strategies need to vary based upon what is being sold.

Products sold range from commodities all the way to highly customized products or services. Factors determining the pricing and value to the customer, are the product and its classification, the perception of use and value, the impact of branding in creating the quality, ease of availability or degree of scarcity, how delivered and timing and cost of delivery, volume and frequency of orders, inventory needs and type of customer. Cost is also a factor in the pricing, but it is unrelated to the value to the customer, but no business can sustain itself if the pricing does not permit a profit.

There are many ways prices are set. For retail sales it has become de rigueur to post “list” prices and then offer discounts. This makes people think they are getting a bargain. Examples are cars, books, department stores, warehouse clubs, and massage and restaurant gift cards with bonus dollars. Some prices are low ball come-ons to get people into the store or to call a call center that will try to trade you up, or get critical mass, or to get you to become a customer and buy refills such as low cost printers where the ink costs more than the printer. That’s how I got started with razor blades.

Another way is to offer subscription or monthly services and deliveries or membership fees. Dynamic pricing is becoming more popular. The airlines do it, so do some major retail chains and I believe Amazon also is doing it across product lines. Bundled packages are another way. You can get the Bronze, Gold or Platinum service or product line. Also being done is expanding the size of the packages. Instead of a six pack many places are now offering ten packs. The unit price might even be greater is a larger size but the appearance is that a bargain is being provided and so is convenience. The airlines offer First Class, Business Class, Coach and now Coach Plus and No Frills Coach. The toothpaste tubes I use weight less and less but the box size doesn’t change. The same for my soap and some other products I regularly use. Those are stealth increases.

Convenience pricing disregards the actual product and prices the availability. This is common at train stations, airports or sports stadiums for bottles of water. The same for a small coffee which is labeled “tall” at coffee shops that let you sit for as long as you want. Are you buying the coffee or a way of life or self-image?

In some cases a higher price signifies quality or a snobbishness that appeals to some people. Some companies create a less expensive product line. Almost every product at “outlet” malls is lesser quality with similar but slightly different logos. It is also common for a logo to be posted on many of the clothes we wear – shirts, jackets, pants, socks and sneakers with each placement making a statement.

Every item purchased is done so for the value it confers and conveys. Sellers try to capture as much of that value as possible with their branding, packaging, merchandising and pricing. We are in a world of instant information, big data and algorithms. Profits and sustainability and predictability of cash flow start with up to date and meaningful pricing strategies.

One Comment leave one →
  1. 6hawthorne permalink
    December 6, 2016 4:26 pm

    Good article Bob

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