If you’re a business owner and you sell a product, from rocketships to lemonade at a stand – you understand the uncertainty that comes with choosing a price. You don’t want to undermine your product and rob yourself of your hard-earned profits, but you also don’t want your potential customers to roll your eyes at you as soon as they see your prices.
The end goal is to confidently state the prices of your products and know that they will sell. To do that, you will need to adjust your basic prices to account for differences in customers, market developments, and specific situations, which is done with price adjustment strategies.
The 5 Key Price Adjustment Strategies
While many business owners choose their prices like throwing darts blindfolded, finding the best-fitting price will help you hit the bullseye with every product. The best-fitting strategy depends on your specific market, the customers you’re selling to, and the economic situation. Let’s go through each of the seven strategies to adjust prices effectively and maximize revenue.
The first price adjustment strategy is one you probably see each time you turn your head. Most companies will give you a discount to reward you for early payments, buying large amounts of their product, or off-season buying.
Whenever you enter a supermarket and see a “Buy one get one free” offer, know that discount pricing is being used.
Another example is a cash discount to buyers who pay their bills promptly. Typical payment terms look like this: “2/10, net 30”, meaning that payment is due within 30 days, but the buyer can deduct 2 percent if the bill is paid within 10 days.
Also, you can use a quantity discount. This is a price reduction for buyers who buy large quantities of a product. If you sell ski equipment during the summer, you might want to consider a seasonal discount. A seasonal discount is a price reduction for buyers who buy merchandise or services out of season.
Allowances refer to another type of price reduction. For instance, trade-in allowances are price reductions you get for turning in an old item when buying a new one. For example, getting a discount on a new car upon returning your old one. Promotional allowances refer to money that a product manufacturer or service provider pays to a retailer to help advertise their product.
The primary goal of the promotional strategy is to create urgency and build loyalty.
Urgency
If you want to fill the customers up with excitement, promotional pricing can be a great asset. It refers to briefly discounting the products, sometimes even below cost to increase sales. If you’ve ever been tempted to buy new shoes or courses because a once-in-a-lifetime-limited-time offer came about, you know how well this strategy works.
Additionally, you can use special event pricing in certain seasons to draw more customers. Remember how tempted you were to buy the tickets to a concert because the early bird prices were still available?
Urgency makes customers stop being rational and start thinking with their hearts. People will rather make a quick decision than regret having missed your deal.
Loyalty
To build loyalty, you can use a very subtle mechanism called “reciprocity”. When you give people a great deal, they feel like treating you well too. This feeling of wanting to do good for your brand is what makes them more loyal.
More examples of building loyalty through promotions are brands that make you feel smarter than a nuclear physicist. Many companies offer promo codes and coupons that are very easy to google. Why do you think they do it? Why wouldn’t they just put those discounts on their website? Clients become more loyal after doing even a minimal action such as: searching for a coupon, entering a code, getting a discount – And feeling like a superhero.
Drawbacks and Considerations
However, if you use promotional pricing too frequently, you might create an army of customers who only buy from you when you have a sale going on. Also, they might see you are desperate. So your brand’s value and credibility can be reduced in the eyes of the customers.
Think about Hermès. The reason the company can sell its bags from $8,500 to an astounding $2,000,000 is that the bags are viewed as extremely exclusive and prestigious. What would a promotion do to that image?
Now that we got the dangers out of the way, how much discount should you apply? 5%? 15%? Maybe 60%? Well, as always, it depends.
- How much do you currently pay to your current marketing channels to attract 1 paying customer? The more you pay, the less you can discount your products.
- Your customer’s “lifetime value”- How much money an average customer will bring you through their whole lifetime. The more money a customer brings, the bigger the discount you can give them.
- How ready are you to burn profits? If you’re trying to claim the throne in a new market and can afford short-term losses, you can even spend more to win a customer than their lifetime value. If you want to stay profitable – Make sure that the customer pays you more money than it costs to win them over.
Segmented Pricing
In your business, would tailoring your price to a specific group of people draw them to your product? If the answer is yes, you might want to try segmented pricing.
In short, segmented pricing refers to adjusting prices for different customer “sub-groups”. Thus, the company sells a product or service at different prices for specific groups of people.
- Under customer-segment pricing, different customers pay different prices for the same product or service. For instance, museums and theatres may charge a lower admission for students and older citizens, as their willingness to spend money is lower.
- Under product-form pricing, different versions of the same product are priced differently and the difference is again not due to cost differences. To give an example, look at a bottle of Evian mineral water. It may sell for €1 at the local supermarket. But if you buy a 150ml aerosol can of Evian Brumisateur Water Spray, you will pay more than €8 in beauty boutiques and spas. The content is the same, only in a different product form.
- Under location-based pricing, different prices are charged for different locations. For instance, in the USA, state universities charge higher tuition fees for out-of-state students, and theatres vary their seat prices because of audience preferences for certain locations.
- Finally, under time-based pricing, the firm varies its price by the season, the month, the day, or even the hour. For example, if you book a hotel two months in advance, it might be cheaper than booking it the week before.
Check two conditions to make this strategy work:
- The market needs to clearly have different segments and they must show different demands. You have to dig deep into market research to see if your market meets these conditions.
- In addition, the cost of segmenting and reaching the sub-groups cannot exceed the extra revenue you get from reducing a price.
The most important factor for deciding whether you want to use segmented pricing – The segmented prices must reflect real differences in how the customers view the product’s value.
Psychological Pricing
Experts spent countless hours researching how different prices can maximize revenue by playing with your customers’ brains. This is psychological pricing. It refers to pricing that considers how prices affect the way the customer views the product. It’s true, people judge a book by its cover (or the product by its price).
Quality and Price
For instance, many consumers use price to judge quality. A €100 bottle of perfume may contain only €3 worth of scent, but people will be willing to pay €100 because the high price indicates that the product is something special.
However, this does not work forever. When consumers can judge the quality of a product by examining it firsthand or by reading a review, price is used to judge quality much less. In other words, if the consumers can tell the product is not worth the price, this strategy becomes less useful.
But when they cannot judge quality, price becomes an important signal. For example, You have a very important legal issue and two different lawyers approach you. One who charges €50 per hour and one who charges €500 per hour. Who is the better lawyer? Who will you choose? It would need a lot of research and experience to answer this question objectively. Most of us would simply assume that the higher-priced lawyer is the better one.
Reference Pricing
Another popular tactic to increase your product’s perceived value is price anchoring. Anchoring uses the fact that we humans rely too heavily on the first piece of information we see. If you sell TVs, placing a $1,500 one at the entrance will make all the $300 TVs look like a steal.
Feel free to read more about reference-based pricing.
For most purchases, consumers buy emotionally, instead of logically. They simply do not have all the skills or information they need to work out whether they are paying a good price. Therefore, if correctly used, psychological pricing may be the most powerful price adjustment strategy you can use.
Also, read our complete guide on measuring monetary and psychological value.
Geographical and International Pricing
The next one of the price adjustment strategies is geographical pricing. With geographical pricing, you can set different prices depending on the location of the buyer.
Let’s say you live in the USA and your client is from Europe. Should you risk losing the business of the distant customer by charging them higher prices to cover the additional shipping costs? Or should you charge them the same price that you would charge a client from the USA?
There are five types of geographical pricing:
- Free on-board-origin pricing: goods are placed free on board a carrier, and the customer pays for the transport of the freight from the factory to the destination. The farther the destination is, the higher the cost.
- Uniform-delivered pricing: the company charges the same price of transport of the freight to all customers, regardless of their location. Thus, there are no geographical price differences.
- Zone pricing: the company sets up two or more zones. All customers within a zone pay the same total price, the more distant the zone, the higher the price.
- Basepoint pricing: the seller designates a city as a base point and charges all customers the freight cost from that city to the customer. Assuming that a central base point is selected, the price differences will be leveled.
- Freight absorption pricing: the seller pays for all or part of the freight charges to get the desired business, which eliminates price differences. “Free shipping” is an example of this pricing model.
Factors in Geographical and International Pricing
How far the customer is from a factory isn’t the only thing you should consider when selling to far-off places.If you sell your product in the USA, selling it at the same price in the Philippines might be challenging, as the economies are different.
Other factors that you can think about when choosing a price for different countries are competitive situations, laws, and regulations. Remember that the value of your products might be perceived differently in a different culture and you might have to adjust your price.
Also, your company might have different marketing objectives in different markets, which require changes in pricing strategy.
The costs you set play an important role when selling internationally. Higher costs of selling in another country, lower buying power, or even factors such as the exchange-rate currency may create a need to charge different prices in the various markets.
Dynamic Pricing
If you look back in history, everyone used dynamic pricing. Buyers and sellers normally negotiate and adjust prices to the specific situation. Instead of using fixed prices, prices were adjusted on a day-by-day or even hour-by-hour basis, taking many variables into account.
So, dynamic pricing refers to adjusting prices based on the specific situation or customer.
One example of this can be found at gas stations: here, gas prices are adjusted sometimes several times per hour to reflect the current crude oil prices, demand, and other factors.
In your business, if you could get your customers to outbid each other for your product, you would be using dynamic pricing. eBay does this with their online auction sites.
Takeaways
We’ve discussed 5 price adjustment strategies. How you use them depends on your business model and the specific situation you’re in. They all hold great power, but you must be careful not to damage your business by applying a non-fitting pricing model. Therefore, it’s crucial to prepare, analyze, and execute the strategy well. Only after weighing in all the factors will the price adjustment strategies you choose lead to a short- and long-term increase in sales.
