As a business person, you are required to be constantly learning. Because your approach to work is always holistic, you have to know how one decision affects everything else. Add pricing strategies to that.
Pricing strategies help you minimize working capital problems. They also enable you better fit your marketing activities to suit your business goals. You have to choose which strategy to go for. So which is which? And what small businesses use them so you can learn?
This is common and simple. All you need to do is compare your prices with those of your competition. You can them determine whether to set higher, lower or similar to them. As stated, it doesn’t involve much work. Its disadvantage is that you always have to respond to changes your competition makes. This, while not understanding why they have changed price and at the expense of your own goals.
Example: stalls in the Nairobi CBD usually have similar pricing for their products
We once touched on it when discussing retail business ideas in Kenya. Selling at low prices sets you apart to attract the most price-conscious customers. The people who demand for matatus to drop fare even though they are private businesses. Low price means higher demand. But it also means low profit margin and, generally, a negative perception of quality.
Example: a market like Gikomba fits the bill, I don’t know why they make you bargain and waste time
Setting prices based on cost is all about introspection. It’s a smart way to set a fixed target of what should be profit above your cost. This is the markup. It can help you measure performance and work on making your operations more efficient. The advantage is that you have all the information you need. Unfortunately, profit based on cost is lower than that set on sales as is commonly done.
Example: the businesses /workshops making furniture set their price on cost, also new businesses
This is probably a favorite of pricing strategies but it’s not for everybody. The message of premium pricing is of how exclusive a product or service is. The product/service is typically of higher quality as well. This way a business can set a high price relative to others in the industry. Premium pricing results in the highest margin. It’s really not possible, though, if you don’t have the type of product or service for it.
Example: cosmetic businesses usually get away with this
You definitely try your best when sales are slow or just not happening. A cheap alternative you may not have considered is bundle pricing. You sell two or more products on one price. It can also increase average spending per customer, leaving you to focus on increasing number of customers. The one problem with bundle pricing is that if you don’t do the math properly, one product’s cost will eat into another’s revenue. This will leave you worse off. Be careful.
Example: chips + soda + kuku quarter at one price, that’s not a bad deal
Some businesses start by offering low prices, at the expense of profit. They hope to attract customers, once this goal is established they will fit in with the market price. It’s a very short walk to predatory pricing (pricing below your cost to kill competition), which is illegal I believe. Penetration pricing is clever but will leave you to work on your excuses of increasing prices in future.
Example: Vegetable and fruit wholesalers resort to doing this, it’s the way to get past competition and cartels
This is the opposite of penetration pricing. Skimming is about starting with high prices, to take advantage of those who can afford to pay. Gradually, the prices go down to a common market standard. It allows you to make money when there is money. You then look good by, relatively, reducing prices.
Example: this is how your once cool joint got invaded by university students (what’s your problem with university students anyway?)0