Price strategies

Entrepreneurs can apply high prices, discount prices or even slash their prices. But make sure not to take too many risks. 

To beat its competitors, the American online giant Amazon sells at a loss, even if this means making practically no profits. Depending on the growth strategy applied, the type of products offered or the volume, entrepreneurs have a choice of various price policies. 

High price strategy

Customers are often prepared to pay more in certain circumstances. Irrational criteria, such as prestige or the need to boost their profile, frequently prevail when it comes to the purchase decision. If the consumer thinks a product will bring them certain benefits, they will be prepared to spend more. The high price then becomes a sales argument in itself (the snob effect) – customers buy expensive products to get themselves noticed for their extravagant consumption.

Similarly, a rare product, unique in its sector or of exceptional quality, can be sold at a higher price than on a market saturated with similar goods.

But entrepreneurs must take care that the customer does not get the impression that prices are too high. If they do, they will not make a purchase, or will make a purchase but get the feeling that they have been had, and will not come back. They may also give the company bad publicity by complaining about its prices. 

Discount price strategy

If you offer a reduced stock selection, decide not to offer related services or if the customer can easily get the product elsewhere, prices need to be low. The entrepreneur then relies on economies of scale and a quantity effect: the margin made on each product will be small but they will sell a lot of the product.

There are several ways of pushing down prices, minimizing the impact on the entrepreneur. You can offer discounts on quantity (“three for the price of two”), special offers during slack periods (“30% off in July and August”), or offer several prices for the same product or service (with or without delivery, with or without warranty, etc.) or several similar products with different prices (consumers tend to choose the second least expensive product when there are three products, but the least expensive product when there are only two).

However, you must make sure that you do not set your prices too low. If you do, the revenue made will not be enough to cover your costs. Also, the customer may well distrust a very cheap product and perceive that it is of lower quality. 

Slashed price strategy

Anyone displaying slashed prices must keep their costs extremely low. But this is a risky strategy... Sooner or later, price increases become unavoidable, which irritates customers. Slashing prices can even be counterproductive, as customers think that anything which is too cheap is no good.

Slashing prices also encourages the competition to take defensive measures. You should always remember that customers are loyal only until someone else becomes even cheaper.

Source: Small Business Marketing Kit For Dummies, Barbara Findlay Schenck, John Wiley & Sons Inc., 2012.

Last modification 07.08.2018

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