Ten Top Tips On Pricing

By Jeremy Thorn

Build your pricing strategy into your core business, sales, marketing and finance plans. They all need to interact to produce the model you are most happy with. A plan will not only help you to see other options and choose the best, it will also help you track your progress and identify any areas of possible weakness that may need to be addressed as you proceed. It is a cliché, but if you fail to plan, you plan to fail.
Consider a market skimming strategy, with a high, premium price. This may require a new and innovative, high quality product or service, and possibly heavy promotion, branding and support, which will emphasize the value rather than the cost to buyer. It can be an excellent strategy if your product or service is special enough. But note two downsides. It may attract new competition to your market who may spy ‘rich pickings’, and naturally it will discourage some buyers who are more price-sensitive.
Tap into successive layers of demand, as an alternative. Start with the highest price possible, to attract only the most discerning customers, then offer phased reductions in price as time goes by to attract more. Video camcorders, mobile telephones and lap-top computers have all been good examples of this in their time.
Choose a more competitive strategy of market penetration with very low prices, to secure bulk sales in fast-growing markets where low price is key. Many suppliers who choose this strategy first establish the price required and then work back to the costs needed to make a profit. Its dangers are that it may offer only a very slow pay-back of investment capital and it can degrade the available market's profit potential. It is also a strategy with little room for error or flexibility. But it can freeze out new potential entrants very effectively. Be warned, however, this strategy may require substantial funds.
Go for a more gentle market penetration strategy as an alternative, to capture and hold market share, through low(ish) prices and other benefits which are valued. These might be superior service or greater ease of making the purchase. This is a widely used strategy as it can offer excellent profits while still being less likely to attract new competitors. The secret is to 'break the mould' of past business practice, by offering something special which others do not.
Make an introductory, promotional offer, to launch a new product or service at an initially low price to tempt new customers. But be careful, make sure you specify a time-limit to this offer. Otherwise, your customers may resist your attempts to raise the price later - and feel cheated if you do.
Use psychological price points if you think they are important to your customers. eg £7.99, not £8.00. Some businesses find that the number 7 is a psychological price point. If this applies to your markets, try pricing at £7.97, or even £7.77, rather than at £8.00.
Know that raising prices is usually difficult. So be very wary of adopting an initial low-entry price strategy, for all its apparent appeal. It could be that you may never manage to raise your prices to the level you hoped for later on.
Time your price changes carefully. When you change your prices, most buyers will check what they paid previously, test the general market price and take a new view on what is a 'fair' price. So aim to raise your prices when other key suppliers are raising theirs too.
Raise prices in small steps, rather than large ones, neither too rarely, nor too frequently. Large or infrequent changes inevitably produce panic reactions in some buyers.

Jeremy Thorn is the author of the tips booklet ‘115 Essential Tips on Pricing’ and a frequent public speaker and workshop presenter on business topics to a wide range of organisations internationally. He is also the prize-winning author of ‘The First Time Sales Manager’, Mercury Books, ISBN 1-85252-397-2, ‘How to Negotiate Better Deals’, Management Books 2000, ISBN 1-85252-381-6 and ‘Developing Your Career in Management’, Mercury Books, ISBN 1-85252-167-7.