How do businesses do this?
How do they find the ‘sweet spot’ for their pricing that will attract enough customers, who will want to keep coming back?
There a variety ways of doing it.
Essentially it comes down to supply and demand. When you have more customers than you currently provide of your product or service (demand) then you can raise your prices. When you have more product/service you can provide than the amount of customers you have (supply) you have to lower your prices in order to sell more.
- Full cost pricing - calculate your total cost of materials required to make your product / service, and add a % on the top for profit.
- Perishable pricing - if a product is near its sell by date, or point of not being usable (eg. an empty seat on a plane), then reduce it to get some income back (rather than none).
- Psychological pricing – uses customer’s emotional response to encourage sales by understanding human reactions to certain numbers ... Is £99.99 better than £100, this lowers the perceived value over the item’s true cost.
- Competitor pricing - you price according to what competitors do - this makes market sense, but can you always afford to do it? Is your cost base the same as competitors? Are you really comparing like with like?
- Value-based pricing - What customers are prepared to pay because of the value they feel the product/service brings them, for e.g a business consultant would charge their customer a rate depending on the benefits they generated for to their clients.
- Loss Leading pricing – selling at a special offer, where the product/service is sold below its full cost value for a short period in order to introduce a new business to the market.
- Bulk Discount pricing - if somebody offers to place a very large order, you may give a volume discount.
- End of Line sales pricing – offering a cheaper price in order to dispose of old stock, and to create a positive cash flow.
- Return on Investment pricing - pricing strategy that delivers the level of profit that investors expect.
- Predatory pricing - setting low prices to try to drive competitors out of business, hoping that you will then pick up these customers.
- Auction pricing - now more common on places like ebay, where a price is determined by what a buyer will pay. Auction rooms are the same.
- MARGINAL pricing – setting a price that is equal to just slightly higher than the variable cost of producing one product/service offering.