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Different Pricing Strategies in Business Marketing You Need to Know | Money Crashers

A great business idea alone doesn’t guarantee success. To sell your product effectively, you’ve got to price it well. That means fully understanding the costs you incur to run your business, as well as the going market rate for the product or service you’re selling.

There are a variety of pricing models to choose from – flat rate, hourly charges, tiered pricing, and bundles – that may or may not be attractive to your customer and effective for your bottom line. Pricing your product right could mean earning optimal profits and repeat customers. Price it wrong, however, and you could alienate buyers – or even go out of business.

Market Considerations

You must price your product at or below what your customers are willing to pay. Knowing competitor rates and understanding your product’s price sensitivity can help you do that.

Competitor Prices

Your competitors’ prices are a good benchmark of what you can charge for a product. To price your product competitively, choose a number that’s similar to products and services that have the same quality level and value.

If your product has more functionality or a longer life than those of your competitors, you may be able to price it a bit higher. Conversely, if your competitors sell the high-end version of a product and you sell the value version, you can undercut their prices.

Price Transparency and Sensitivity

Depending on the nature of your product, you may or may not have flexibility to increase your prices from the going market rate. If product prices are transparent and your product is relatively fungible, its price should be pretty close to the going market rate. For example, according to Entrepreneur, if you own an auto shop and each of your competitors charges $100 for a replacement windshield, that’s what you should charge.

However, if you sell a product with lower price sensitivity, your exact sales price doesn’t matter as much. Price sensitivity, also known as “price elasticity of demand,” represents whether or not customers shop on price for a certain product.

Branding Strategy Insider notes that lower price sensitivity is typically attributed to services with high switching costs (the cost incurred to change to a competitor’s service), those for which average prices are not commonly known, and products with few substitutes. Additionally, it can be attributed to items and services that don’t take up much discretionary income, as well as absolute necessities.

For example, bottled water at a theme park has low price elasticity because it has few substitutes, doesn’t take much discretionary income, and it can be an absolute necessity. A unique business consulting service for which there are few competitors and prices are relatively unknown also has low price sensitivity.

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Different Pricing Strategies in Business Marketing You Need to Know.