Merchandising: Four Pricing Strategies and When to Use Them
Although factors such as margin and competition within a vertical market can make product pricing difficult to manage, pricing is one of the key components of a merchant’s offering. If for no other reason, it helps customers determine the value of that offering. Many pricing models exist, and in their book “Marketing in a Nutshell: Key Concepts for Non-specialists” (Butterworth-Heinemann, $32.95), authors Mike Meldrum and Malcolm McDonald offer the following four strategies and when to use each.
* Market skimming: Used when you find yourself targeting a niche for which the benefits of a product have a high value, market skimming prices a product at the top of the market against your competitors. Or if there are no competitors for this product, then a skimming strategy “suggests a price at which only a small number of the potential customers for a product will be prepared to buy,” the authors write. This works best when a product is highly unique and not easily reproduced. Further, since this strategy ultimately means that fewer units will be sold, it should be used on products with a high margin.
* Market penetration: The opposite of market skimming, a market penetration strategy sets a low price to build high sales volume and increase market share. “The price, however, must not be so low that it becomes indicative of poor quality or unacceptable performance,” the authors point out. This can be used either as an entry strategy for products that are new to your catalog, but for which a market already exists, or as a way to increase your share of market for product categories you’d like to expand.
* Floor pricing: If you’re attempting to appeal to a price-conscious consumer, floor pricing is the way to go. As the name implies, floor pricing keeps prices at the lower end of the price spectrum. It’s best used when there’s little differentiation between competitors for a particular product. Businesses that “can survive on low margins, whether because of high turnover, lower profit requirements, or insignificant overheads are best able to pursue this type of strategy,” the authors note.
* Competitor pricing: When trying to differentiate your merchandise from the market leader in your space, competitor pricing is the way to go. Here, you establish prices at a particular distance from your competition — either large or small, above or below its price points. How far and in which direction you price depends on how you want to be perceived in relation to your competition. This requires keeping a close eye on the competition, the authors write, as you’ll quickly need to adjust your prices to reflect any changes in their pricing.
For a copy of “Marketing in a Nutshell: Key Concepts for Non-specialists,” click here.