Blog Post

Pricing Models as a Marketing Strategy

  • By W. Gray
  • •
  • 15 May, 2019
  • •
Marketing your products and services is a in depth exercise that includes many aspects beyond advertising and packaging. For this reason, it is essential to gain a better understanding of all of the components in the marketing mix: from the think tank to production line, and beyond. An important - but often overlooked - aspect of the marketing mix is the pricing model you choose for developing price points for your products and services. 
Pricing models are the way that you convey the value of your company’s products and services to your prospective customers. Setting the right price for each of your products and/or services will help you to nab sale after sale and secure repeat business. Before you pull out the calculator and mark your price tags, here are some important details to consider when incorporating pricing models as part of your pricing strategy. 

What does a pricing model do?

A pricing model is the end result of the hard work that your team puts in to bring a product to the market. Whether you’re offering a physical widget or an online service like consultation or design services, your products need an accurate price that both accounts for the resources the product consumes and a profit for feeding your bottom line. Businesses exist to make a profit, so ensuring that your company gets its due from selling the products and service that you offer is the name of the game. 

A pricing model is a streamlined way to view and value the products that your company offers. Before settling on one, you must consider some of the following questions: 

  • What are costs (fixed + variable)?
  • Where are my customers currently fulfilling the void that my product/service will fill
  • What are my competitors selling similar items for?
  • Are my customers looking for a bargain buy or a luxury services?
  • How many sales can I expect make in a week/month/year?

Develop a Pricing Strategy

Pricing strategies inform your marketing team about how to value products/services and how to set the prices for these items. Some popular pricing strategies include
  • Cost-plus pricing - This pricing model focuses on the cost of materials and labor that go into bringing a product or service to market, adds a percentage to cover fixed business expenses (rent, copyrights, etc.), plus a fixed percentage of total cost to act as profit. Cost-plus pricing is easy to calculate and provides guaranteed profit per sale. 

  • Penetration pricing - This pricing model works by setting a price low in order to attract customers, then raising the price as product acceptance catches on. For new products and services, penetration pricing can be an attractive low-risk option for testing the waters of your preferred niche. 

  • Price skimming - Another popular pricing strategy, price skimming involves selling a small number of products or service units at a very high price, in order to capture higher profits from each sale. As a result, fewer sales deliver high profitability, making it easier to break into a market without the pressure to sell hundreds or thousands of units before gaining credibility. 
  • Psychological pricing - This pricing strategy incorporates using numbers that end in the numeral “9” to encourage more sales. Studies done on the impact of psychological pricing and 9-ending prices show an increase in sales of 9-ending prices over comparatively non-9-ending price points - even when the non-9-ending prices were lower than the 9-ending prices. 


Anchoring

The concept of anchoring involves setting a specific idea of price and value in customers’ minds before they themselves have had an opportunity to personally value the product or service that you offer. Though at first glance it may seem a bit like a shell game, price anchoring is actually a very important marketing concept - especially for niche products and businesses looking to establish themselves in the hyper-competitive online market place. 

 Anchoring works by displaying your product next to a similar product that sells for a significantly higher price. When your $100/hour consulting service is shown next to an ad for a similar service that costs five times the price, all of the sudden you’ve got your visitors’ attention. In contrast to a significantly more expensive product or service, your company’s offering becomes anchored as the better priced alternative and can drive business to your company. 

 

There are many ways that you can use to allow your pricing model to add value to your company’s products and services. Do your homework to learn everything that you can about your audience and those who are most likely to purchase your company’s offerings.  

 Armed with this knowledge and information, you can work to establish competitive prices that drive business to your company again and again. Pricing models require time and attention to work effectively however, they are more than worth the effort it takes to iron out the details before promoting your promoting your products and services.



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