How to generate more sales? That is the question. Marketing experts would suggest creating innovative products, distributing and placing them right, and promoting them via suitable channels. Yet, before making large changes in your business or paying for expensive marketing campaigns, you should consider some smart pricing strategies. But, how to boost sales through pricing?
This article provides 5 pricing strategies that can increase your sales. Of course, there are more than 5 ways to do this, and some of them you have surely heard of or experienced firsthand as a customer. Strategies such as
penetration pricing (low price to gain market share) and just-below pricing ($9.99 instead of $10) are very commonly used across different sectors and company sizes, but here, I focus on a little bit less obvious strategies.
It is worth mentioning that the 5 pricing strategies here link to the 3 ways to determine a price, which are cost-based pricing, competitive pricing, and value-based pricing. While those are, as it says, means for determining a price, the strategies discussed in this post are rather ways to deal with demand heterogeneity (different customer groups) and using the price of some products to draw more attention to other products.
The 5 strategies
Subsidizing refers to selling at cost or below cost to one group and getting a compensation from another group. This is a typical platform strategy for addressing the chicken and egg problem. It is used to attract users on the more price sensitive side to encourage users on the other side to join the platform. Ride sharing companies are a good example.
Uber passengers are often offered discounts and free rides while drivers have to pay 25% of the taxi fare to the platform. For Uber this means; the more there are passengers, the more there are drivers, and thus, the more the company makes money. Social networks such as Facebook, Instagram, and LinkedIn don’t charge their users anything for a basic account.
Loss leader pricing
Loss leader pricing works on the same assumption as subsidizing; a loss (or low profit) of Product A is compensated by the profit of Product B, but to generate sales for Product B, Product A is needed as a “leader”. A loss leader is a product that is sold at a (very) low price, at cost, or even below cost, to attract sales of other products with a high(er) margin. This strategy is common in more traditional businesses such as retail. If you have ever been in an
IKEA store, you know what this pricing method is about.
Price discrimination means that you charge different customers (segments) a different price based on what you think they are willing to pay. There are three types of price discrimination. First-degree price discrimination refers to a strategy where you charge a different price for every product you sell. In this way you try to get the maximum of each sales. This is a very common strategy in the
airline industry where each passenger on a place may have paid a different price for their ticket. Second-degree price discrimination means charging a different unit price based on the overall number of products your customers buy from you. In simple words, this refers to quantity discounts. Third-degree price discrimination refers to different customer groups that are charged a different price. For example, the price can vary based on the customer’s age, nationality, status, company size, company type etc.
Dynamic pricing implies different prices (typically) at different times of the day/week/year depending on demand or some other factor. This strategy is often used in public transport, energy supply, and travel. As you know, electricity and subway usually cost the most at peak times because demand is very high. Buying a flight ticket is supposed to be cheapest on Tuesdays, because most new flight offers are announced on Mondays and adapted to by other airlines on the following day. Hotel rooms, or any accommodation in Munich costs significantly more during the
Oktoberfest than at other times. This pricing strategy is becoming more common across a number of sectors including retail and services.
Decoy pricing refers to a strategy where customers are given three (or more) product options of which two have a similar (or even equal) price. The goal is to make customers buy the most expensive or second most expensive product instead of the cheapest one with the lowest margin.
If you offer only two product versions between which the price gap is relatively large, most customers will opt for the cheaper version. But if you introduce a third product, priced between the two, customers will more likely opt for one of the more expensive products. This is because people usually buy the median product instead of the cheapest or the most expensive ones, because it is considered a safe choice by being of better quality than the cheapest option but not including unnecessary (or fancy) features like the most expensive option might. This is something we call “extremeness aversion“.1
Premium decoy pricing refers to a strategy where the seller introduces a third option that is more expensive than the other options so that the second most expensive option now looks reasonable. Both decoy pricing strategies are illustrated below.
How can you boost your sales without spending thousands on marketing campaigns? This article elaborates on 5 pricing strategies that you can use to maximize your sales. There are more these types of strategies for different contexts, such as market entry pricing and price war strategies, but the strategies introduced here can obviously be a bit more stable elements of your company’s business and revenue model.
1Simonson I. & Tversky A. 1992. Choice in context: Tradeoff contrast and extremeness aversion. Journal of Marketing Research, 29: 281-295.