How do you set the price of a product?

If you’re a business owner and you ask yourself this question, we may have bad and good news. The bad news is that there is no magic formula to price a product. Ultimately, it’s a matter of trial and error, which means that you’ll find out whether you did it right or wrong only after you’ve tested the market. However, the good news is that you can dramatically increase your chances of nailing down the price of your product with a bit of strategy. Here’s a quick overview of the four basic pricing strategies for businesses:

Penetration Pricing

Businesses that are launching a new product can set the price low to beat the competition and gain market share. While customers might hesitate to try new brands, low prices act as a strong incentive to do so. Once the product gets more popular among customers, the price is then increased.

Characteristics: Low price, high quality

Advantages: Increased sales and market share

Disadvantages: Initial low profit margins

Economy Pricing

Economy pricing is a strategy often used when the customer doesn’t see much difference between the product and its competitors, and the business doesn’t have significant costs with the product or doesn’t want to invest in it anymore.  

Characteristics: Low price, low quality

Advantages: Maintain cash flow

Disadvantages: Low profit margins

Price Skimming

What it is: The business charges a high price for a product whose quality is not good enough to justify its price. Sometimes it works because the customer needs the product or because the company has a competitive advantage. Imagine that you’re walking in a desert. You would probably pay $15 for a bottle of water because you need it, especially if there’s only one store selling it. After a while, the price tends to drop.

Characteristics: High price, low quality

Advantages: Cover production costs, increased profit margins

Disadvantages: Reduced market share

Premium Pricing

What it is: This strategy is commonly used when a business has a unique product or when its product is perceived as high-quality. It’s not for everyone, but the customers who can afford it feel like the price is fair because they’re paying for a premium product.

Characteristics: High price, high quality

Advantages: Increased profit margins and customer loyalty

Disadvantages: Reduced market share

We hope this blog helps you set the price of your products. If you’re looking for payment solutions to maximize your revenue, increase your efficiency, and lower your costs, look no further than American Verification Processing Solutions. Contact us through our website or by calling us at (800) 719-9198 to get it started today!