Pricing strategies are a simple and effective way of earning a profit. There are many methods available to boost your profits, and many are related to specific sales circumstances. The three main pricing strategies I will discuss in this post are price skimming, competitive-based pricing, and penetration pricing.
Depending on your business model, and the products or services you offer, having a general knowledge of different pricing strategies can greatly increase your sales and profit if used correctly.
How to use the price skimming strategy to increase profit
The price skimming strategy is the process of setting prices high to regain expenses from production, advertising, and labour as quickly as possible. With price skimming, breaking even takes significantly less sales, but higher prices.
This strategy is commonly used when introducing a new product into the market with very little competition. Price skimming is often a short-term solution as eventually competitors will be introduced into the market at a lower price.
Depending on your unique product and your competition, this method can rapidly regain expenditures, and boost your net income. It is important to keep in mind that this method can backfire if you set your price too high, or if there is already relevant competition in the market. Some important questions to think about when using price skimming are:
- Is the price I’m setting too high?
- Is there already a similar product/service in the market?
- How much are buyers willing to pay for this product/service?
- Is my product unique enough from other products in the market?
Price skimming is an excellent way to make money quick, however, it must be done correctly in order to not limit sales.
How to use the competitive-based pricing strategy to increase profit
The competitive-based pricing strategy is setting your price low based on your competitor’s prices. This method is best used when your product or service is very similar to a competitor’s product or service.
This method is different from price skimming as there are already competitors with a similar product in the market. With competitive-based pricing, you set your price lower than, the same as, or slightly higher than what other businesses in the market are selling for.
Some important questions to ask when using competitive-based pricing are:
- Is my product worth more than the competitor’s?
- How many sales will I need to break even, or make a profit if I set the same price as my competitor’s?
- Is it more important to make a profit fast, or have more sales over a longer period?
- If I were to set my price equal to my competitor’s, would I purchase my product or theirs?
With this method, it is important to compare every aspect of your product to the competitor’s and take a look at it from a buyer’s perspective. If you set your price slightly higher than the competition, and there are little to no differences in the products, then you will likely lose sales. Competitive-based pricing is a great long-term pricing strategy when there are many similar options in the market.
How to use the penetration pricing strategy to increase profit
The penetration pricing strategy is when you set your price lower than established competitors in the market. This is mainly used when you are just entering the market. For example, if you are a freelance writer getting started in a new city, and there are several freelance writers in the area charging on average £20 per page of content, you would likely charge a lower price (maybe £10 - £15 per page) in order to gain a client base.
Penetration pricing is different from competition-based pricing as you will likely set your price a significant amount lower than your competitors in order to spark potential clients’ attention. With competitive-based pricing, both the competitors and your business are already established in the market.
Some important questions to ask yourself when using penetration pricing are:
- What are my competitors charging?
- What is the lowest amount I am willing to sell my product/service for?
- How many sales will I need to start making a profit?
- At what price point would my competitor’s clients switch to my product/service?
This method is predominantly used for small businesses and freelancers who are just starting to advertise their product or service in a market. You can easily raise your price or use a different pricing strategy once your business is established and making a profit.
Setting your price using an invoicing software
An invoicing software can help you set the prices of your products or services. It will also help to see how much income you have received from a specific product or service over time, and view all relevant accounting reports such as the profit & loss statement. With Debitoor, you can change and customise your products in just a few clicks!