Price is a big deciding factor for whether a consumer will work with a brand or not. When a company does their pricing incorrectly, they may find sales plummet. Various factors influence a company’s revenue, but the biggest one according to QuickBooks is the pricing strategy used by that corporation.
The Use of Value-Based Pricing in Today’s Economy
Value-based pricing is one that bases the service or product price on the benefit the customer receives for purchasing the product. Today, customers look for more “bang for their buck,” therefore, they may expect higher benefits when paying more for a product.
Investopedia states that value-based pricing works better for companies that have unique or valuable services and products. Those that have products that match their competitors, on the other hand, should not use value-based pricing for their strategy.
Penetration Pricing as a Modern Marketing Practice
Another common strategy used today is the penetration pricing method. Investopedia refers to this as a marketing strategy that is used to attract customers to a company or service.
The pricing is lowered for a new product during the initial offer; then it lures customers in and away from the competition. Once the customer base is established, the company raises the price back up.
The theory behind this pricing method is that lower prices will help a customer try a new brand and become aware of their products and services they have to offer.
Penetration pricing is only effective when the company can create a high enough sales volume to offset the cost of production and potential inventory turnover. If the production costs are too high, penetration pricing will generate losses rather than profits.
Dynamic Pricing Benefits Some, Loses for Others
The use of dynamic pricing in today’s Internet-savvy economy is a slippery slope. When a company offers lower prices to some customer bases, but higher to others, the use of the Internet may yield the price fluctuations and turn a customer off from a brand.
Unfortunately, online retailers can access customer data, which lets them generate different prices for each customer based on what they are likely to pay. It is unfair to the consumer base, but some retailers feel it is the best way to keep their business profitable.
Forbes highlighted an article on pricing strategies that focused on dynamic pricing and how big retailers like Wal-Mart, Staples, and Amazon use this pricing method to increase profits and drive more sales to their locations.
Retailers know where consumers are located because of the IP address. They can track the zip code of their online shoppers and dictate pricing based on the region and the average income of that area. Retailers do this because they feel that a single price for everyone is not logical from their perspective. They feel that they should be able to maximize profits based on the consumers that are willing to pay more versus the consumers that cannot pay more.