How do pricing strategies affect profitability?
Tuesday, March 11, 2014
Consumers desire value in purchases. They want the price they pay for a product to be equal to or less than what they feel they get out of that product. Businesses desire profit from the services or products offered.
How can your business achieve profitability while also maintaining a satisfied customer base? Pricing strategies.
When was the last time you reviewed your pricing strategies? Have you looked at the data to determine the success of each strategy? Many companies have pricing strategies already implemented; however, they may not be the most effective.
Here are some pricing strategies to consider the next time you take a look at your plan:
Odd pricing is the most popular pricing strategy overall. Odd pricing is using prices that end in an odd number, such as five, seven or nine. Sometimes referred to as charm pricing, statistics prove that this simple strategy can increase conversions up to 34 percent. It works like a charm.
In one study by MIT and the University of Chicago, a clothing item was tested at three different price points: $34, $39 and $44. Which price was most successful? The $39 item sold the best, even though it was not the lowest price.
When implementing odd pricing, you might want to also consider the actual size of the price displayed. If you make the cents font smaller than the dollar font, it enhances the effect of odd pricing.
Prestige pricing is the opposite of odd pricing. With prestige pricing, prices should end with zero. Your business should use prestige pricing if offering a luxury good or service. Customers think of your business as a luxury, and they want that luxury to come with the expensive price tag.
At Dennard's Farm Supply, which has locations throughout North Texas, they have implemented prestige pricing on high-end products at all of the locations. A basic rule of thumb at Dennard's is to use prestige pricing on anything over $1,000, from furniture to trailers.
Other pricing strategies are used at Dennard's, but for this price level, prestige pricing has shown to be effective. And at this price level, they do not discount. This keeps the product at a luxury level in the eyes of the consumer, also increasing the effectiveness of the pricing strategy.
The prestige pricing strategy is not intended to increase sales by promoting affordability. This pricing strategy is successful based on peoples' perceptions that expensive equals good.
Anchor pricing is used to make a discounted item seem like an even better deal. Anchor pricing is setting the discounted price next to an anchor price; it's a before-and-after comparison. The anchor price enhances the value of the discount because the anchor price seems significantly higher than what the consumer will actually be paying.
The customer gets more value for their dollar then, right? This isn't always the case. With today's technology, consumers can compare anything side-by-side instantly. They can see based on other businesses' prices that your price may not be that great of a deal.
One example of successful anchor pricing is Target. Clearance items at Target stores are all marked with red stickers. The red sticker contains the original or anchor price as well as the discounted price.
There is much more to the clearance sticker, but for the customer, those are the only two parts that matter. It is a direct comparison of the prices, and the customer can easily see the value of the purchase.
Multiple pricing is a strategy that involves selling more than one product for a single price. For example, sell items at 10 for $10. This strategy is useful during sales events, but it has also shown success as part of a general pricing plan. Consumers tend to purchase more items when this pricing strategy is implemented.
It doesn't just increase sales overall. It increases individual shopping habits.
Pricing with fewer syllables
The more syllables included in a price, the more expensive that item seems. Take, for example, $1,999. A consumer might perceive this item to be more expensive than the same item sold at $1999. But that consumer might also perceive $1,999.00 to be the most expensive of all.
Some restaurants and retail establishments have even started removing the dollar sign. A menu might have a dish for 24 instead of $24.
When creating or reviewing your business's pricing strategy, you cannot just take a guess and hope it turns out well. Strategic planning is needed, and without a successful pricing strategy, your business will suffer.
Take the time to investigate, test and implement a highly successful plan. Don't get complacent, always evolve and test to find the best strategy for your business.
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