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Pricing your products is an important aspect of having a business. More so than ever with the advent of online shopping and online businesses. Pricing is very important due to the aggressive and competitive online landscape. Large companies fall because they cannot compete with the aggressive pricing of new entrants into the market, especially online disruptors. This also applies to small businesses. It is actually more competitive in the small business markets. For products that are relatively cheap, consumers will prefer stores that sell the same goods for a marginally cheaper price. The obvious way to solve this would be lowering your price, however, this doesn’t always work. There are other effective pricing strategies as well that do not involve lowering your prices.

Pricing and the Consumer

The relationship between prices and the consumers used to be simple when commerce itself was simple. Back then people would buy what they can use the money they have. But in the modern age, people have more income, access to credit, and many more forms of payment. This means that the prices of goods have to match the changing consumer value. The most common way to set your price is to simply put a small profit margin on your products. So if you bought your products at $5 then you should add 20-30% as your profit margin. Keep in mind that the profits have to cover your additional expenses and the product cost. So make sure you still have a net profit when setting a profit margin. Too low of a margin can hinder your business because the growth is too low. But setting the price too high will lead to fewer purchases.

With the rise of online shopping, many businesses have to adapt to new changes. In terms of pricing strategies, people have more references to compare pricing when they purchase. Back then people have to compare prices between offline stores to find the best prices. But now there are online stores that make things more complicated. This reference price situation has made some big changes in the business world. The research found that reference pricing or comparison pricing has made online stores significantly more competitive. The advantage that most online stores have is a lower operating cost compared to offline retailers. This means the pricing strategies is one of the most important things to consider in online businesses because people expect the prices to be lower or more competitive online.

Pricing Strategies

Now, these are the pricing strategies that you can use. However, these strategies will not work for every type of business or product. But they can all help you in creating a pricing strategy for your online business. Be sure to determine which strategies are great for your business and which are not really fitting. Every one of these pricing strategies has its drawbacks and benefits, so be prepared to face them.

1 Using the MSRP(Manufacturer Suggested Retail Price)

This strategy is the simplest out of everything we have. When you buy from manufacturers or distributors, they would typically have a suggested price for retailers. This is what is commonly called MSRP. Although it doesn’t seem like a good idea to compete, it has its advantages. Most retailers will commonly sell their products above MSRP to gain better margins. However, the manufacturers tend to market their products using the MSRP. So when consumers buy from you with MSRP pricing they would feel that your store has better prices and is more trustworthy.

2 Bundle Pricing

Instead of changing the pricing strategy of a particular product, you can bundle products instead. Bundle pricing will usually create more perceived value for the consumers. Because they would see that they will pay less for each individual product compared to buying them one by one. This doesn’t always work since consumers may only need one of the items or have different preferences. However, this usually works for more common products. Research also suggests that the additional products cannot be free and has to still be shown as having value. So freebies can be a bad idea in terms of bundling because they decrease willingness to pay.

The reason why bundling is effective in attracting consumers and pushing them to buy is because of variety. Researchers found that most people are variety seeking and will choose products that offer variety. This is usually because of stores providing more options and choices. So be sure you offer many choices and varieties when it comes to pricing your products.

3 Penetration and Discount Pricing

If you are a new entrant in a market, it would be pretty useful to be able to penetrate the market. The price you use can be set using very low margins or even at a loss. The aim of penetration pricing is to gain footing in the market and be present in consumer’s minds. However, this pricing strategy was never meant to be long-term or even permanent. This strategy is only temporary and you should slowly raise your prices into one where you can at least make a proper profit.

There was research done about the effects of different discount tactics. There are 2 common discount tactics. The first is to have a low but frequent and scheduled discount. The second is to have a large discount but less frequent and unpredictable. The research found that most people will choose to buy from stores that have frequent but low discounts. This was because customers have a preference for things that are certain to give value.

4 Use psychology in your pricing

What many people overlook in pricing is the psychology behind it. Prices are often attributed to economics and finances. These fields typically assume consumers are rational and will make decisions using rational reasoning. However, this is not the case and there are more nuances to it. For example, setting your price at $24.99 instead of $25 will change consumer perceptions. This is because people tend to look at the front numbers and not the decimal. Using pleasing numbers like 8 or 5 is also good compared to using 6 or 9. There are many sources for this and you can utilize them in your business.

There was research done to see how symbolism affects pricing perception. This research found that the sound of saying the prices and the perceived size is connected. Consumers will have different reactions to displayed prices and how they are portrayed. A good example is also how putting products at the bottom right of a picture makes it seem bigger. So you guys can do research on the many symbolisms you can do with pricing and use it in your strategy.

5 Portray higher prices as upgrades

Convincing consumers to purchase high-priced products can be tricky. A great way of convincing people to pay more money is to portray or frame the increase in price as an upgrade. Instead of just saying that there are additional benefits you get by buying the more expensive one, you can instead portray it as an upgrade. If consumers buy based on price this might not work, but if they buy more on the value they can be persuaded.

There is research to note if you want to convince people to upgrade their purchase. The research found that setting a price at just below a round number can hinder people from upgrading their purchases. This is because when it comes to upgrading, lower numbers tend to be seen badly. So having 2.99 instead of 3 as a price will make it seem that the product is of lower quality.

6 Proper Discount Stacking

Discount stacking is essentially providing discounts on discounts. For example, you have a store-wide 30% discount on all items. But if you buy today you can get an additional 40% discount on your purchase. This means that the price would be decreased by 30% and that decreased price would decrease by 40%. Discount stacking will help push consumers to follow your purchasing prompts. However, these discounts have to be stacked properly. Usually, the lower discounts are given first before being stacked with the higher price. This would decrease your losses as well.

7 Anchor Pricing

Consumer behaviors are impacted by biases and psychology. Consumers have a bias towards anchored numbers. Anchoring means you provide a price to be used as an anchor or reference for consumer judgments. And then you would use a lower price or a better price. Providing an anchored price will make your sale price even more attractive for the consumers. These easy customers will be pushed to purchase your product since the provided deal is more attractive in their minds. 

This is actually a very famous concept in marketing and business. Anchoring judgments are one of the concepts described in legendary research in the marketing and business field. It is said that by setting a reference or anchor price, a consumer’s price perception changes. The research found that anchoring actually increases the willingness to pay for consumers.

8 Price Skimming

Price skimming is more about perception management than financial. A good benefit of price skimming is short-term profit. You can do price skimming by setting a high price at the start of a product’s sales window. Then over time, you lower the prices to a more attractive level but will still give a decent profit. It also portrays the product as cheaper since the initial price was high. Price skimming helps a lot when your product is new and you are the first one to sell it. If there are already people selling these products, price skimming may be unusable because the other stores have already lowered the prices.

9 Premium Pricing

Depending on your products, having a premium price can actually increase your brand image. This is because of what is called the Halo Effect. High prices are usually associated with great quality. By having a high price your products are seen as having higher quality. Regardless of actual quality, the Halo effect increases consumer perception and satisfaction. Just be sure to use a reasonable price when using a premium pricing strategy. An unreasonably high price means that consumers won’t buy your product. Premium pricing is about the perception of the consumers towards your product.

10 Loss-leading Pricing

Lastly, there is the loss-leading strategy. This can only work if you sell a lot of different products. The goal here is to lose money on one product so that you can sell many other products. For example, let’s use Coffee and its accessories as an example. You can sell your french press or coffee maker at a cheap price so that many people will buy it. But then you have to promote the coffee beans, grinder, cream, and more. The losses you sustain from selling the french press at a loss will be covered by the profits you gain from selling complementary products. Especially since people buy coffee often since it needs to be replenished. This pricing strategy is very common in supermarkets and stores that sell a variety of things.

So that wraps up our discussions of the various pricing strategies that you can use for your business. The world of pricing and business is very complicated because of the rise of e-commerce. But with the increasing complexity comes great opportunities for success. We hope that you guys can utilize the pricing strategies described here today and achieve success. Keep in mind that not all of these pricing strategies will work for your business. It depends on the age, model, and industry of your business. So be sure to read carefully and identify the needs of your business.

Now you know the various pricing strategies and when to use them. Your business should have a proper strategy for all aspects of the business. AsiaCommerce can help you grow faster and better with our many services. We offer services that range from export imports, procurement and sourcing, logistics, and forwarding. We can help with reselling, sourcing, and dropshipping. In addition, we offer extensive educational content that can help you develop your business skills. Check out our many services and gain many awesome benefits for your business!

References and Sources:

Keith S. Coulter, Robin A. Coulter, Small Sounds, Big Deals: Phonetic Symbolism Effects in Pricing, Journal of Consumer Research, Volume 37, Issue 2, August 2010, Pages 315–328, https://doi.org/10.1086/651241

Shai Danziger, Liat Hadar, Vicki G. Morwitz, Retailer Pricing Strategy and Consumer Choice under Price Uncertainty, Journal of Consumer Research, Volume 41, Issue 3, 1 October 2014, Pages 761–774, https://doi.org/10.1086/677313

Junha Kim, Selin A Malkoc, Joseph K Goodman, The Threshold-Crossing Effect: Just-Below Pricing Discourages Consumers to Upgrade, Journal of Consumer Research, 2021;, ucab049, https://doi.org/10.1093/jcr/ucab049

Itamar Simonson, Aimee Drolet, Anchoring Effects on Consumers’ Willingness-to-Pay and Willingness-to-Accept, Journal of Consumer Research, Volume 31, Issue 3, December 2004, Pages 681–690, https://doi.org/10.1086/425103

Ningning Wang, Ting Zhang, Xiaowei Zhu & Peimiao Li (2021) Online-offline competitive pricing with reference price effect, Journal of the Operational Research Society, 72:3, 642-653, DOI: 10.1080/01605682.2019.1696154

Mauricio Mittelman, Eduardo B. Andrade, Amitava Chattopadhyay, C. Miguel Brendl, The Offer Framing Effect: Choosing Single versus Bundled Offerings Affects Variety Seeking, Journal of Consumer Research, Volume 41, Issue 4, 1 December 2014, Pages 953–964, https://doi.org/10.1086/678193

Michael A. Kamins, Valerie S. Folkes, Alexander Fedorikhin, Promotional Bundles and Consumers’ Price Judgments: When the Best Things in Life Are Not Free, Journal of Consumer Research, Volume 36, Issue 4, December 2009, Pages 660–670, https://doi.org/10.1086/599806