There are two types of retailers: leaders, or trendsetters, and followers. The first ones make the quickest and most accurate price predictions, craft a winning competitive pricing strategy and set trends for the rest of the market. The followers adjust to the market reality while at times challenging the leaders by setting lower prices.
Well-balanced pricing strategies, which allow businesses to instantly react to the market changes, factor in a variety of aspects, besides pricing per se. These include historical data, as well as promotions, stock availability, seasonality, customer behavior, and price elasticity, among other numerous parameters.
The article covers three top-notch pricing strategies which enable retailers to outsell competitors and spur revenue.
Loss Leaders Pricing
The loss leader is a product which retailers sell at a price lower than prime cost to bring customers to either their website or into a physical store. Such a product is always placed next to another one which comes with a heavy markup. Bought together, they allow breaking even or increasing revenue.
Thus, Amazon uses the same approach in its Prime membership package by offering discounts for selected products while charging more for delivery. The company also uses it to bring attention to new books by selling them at a discount and advertising other books priced with a markup on the same page.
The strategy helps to entice customers and increase profit if the loss leader is:
- a perishable product;
- sold along with products with a markup;
- a product that customers often buy.
- customers, also known as “cherry pickers,” may only purchase the loss leader product. That is why placement is crucial.
- the loss leader strategy may be less beneficial for smaller businesses since they do not have enough resources to handle potential losses.
This strategy uses the assumption that specific types of prices psychologically influence shoppers. There are several types of psychological pricing, namely the one which omits currency signs, prestige and bundle pricing, as well as a round price points pricing.
No Currency Sign
According to research by the Cornell University, the customers of St. Andrew’s Café in New York who were presented with menus lacking dollar signs spent more than those who saw the sign.
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Use competitive data to:
- find optimal price points
- calculate the price elasticity
- be updated about constantly changing pricing factors
- craft a winning pricing strategy
- build dynamic pricing
Businesses price their products as high as they can to attract consumers who have an eye for premium goods only available to a limited number of people. However, the approach has two pitfalls:
- customers expect to buy products the quality of which equals the price;
- it targets a small fraction of buyers.
Round Price Points
Retailers set prices a few cents under a round number (for example, $599 instead of $600). Such an approach stems from the idea that specific prices, or even price ranges, appeal to shoppers more than others.
However, the strategy may have a reversed effect as customers tend to equate a lower price with lower quality. Additionally, it is difficult for buyers to calculate the final price if they shop for a group of products with such prices.
Businesses sell several products or services together at a lower price than for an individual item. The strategy is beneficial for retailers willing to clean off their shelves since the offer usually includes products which are not popular among customers.
Such an approach mainly helps to attract customers. However, it is easy to lose them once the price increases.
Dynamic Competitive Pricing
Unlike static prices, which remain the same regardless of the situation, dynamic prices are flexible and allow retailers to react quickly to the market changes.
The graph below reflects the way dynamic pricing works: prices were constantly changing throughout the year in 2017 while hitting the peak during the holiday season, or the most profitable season, in December.
These are the main factors which influence pricing decisions and contribute to crafting a dynamic pricing strategy:
- customer behaviour;
- competitors’ prices;
- competitors’ inventory;
- price elasticity;
- Retailers can decrease prices for a group of products to boost their sales and clear off their shelves.
- Significantly higher competitive prices allow retailers to increase their prices and thus revenue while remaining highly competitive.
- According to Forrester Research, a dynamic pricing strategy increases profits by 25% and gross margins by 10%.
- Shoppers may divert away from retailers who change their prices too frequently.
- Potential price war.
- Retailers need to collect and process a big amount of data, which is impossible to do manually.
Retailers can use a variety of pricing strategies to reach their KPIs, be it to increase revenue, gross margin or boost sales. These include:
- Loss leader pricing, which encompasses selling a certain product at a discount along with other products with a heavy markup. Such a method is useful to entice customers.
- Psychological pricing, which covers a variety of approaches including having no currency sign before the price, prestige and bundle pricing, as well as setting prices a few points under a round number.
- Dynamic pricing, which allows retailers to quickly respond to market changes and set the optimal prices based on high-quality data about a variety of factors (seasonality, price elasticity, stock, promotions, and the market trends, among others).