One kind of strategy is just matching your competitors’ prices, and it’s one that a lot of FBA sellers use. Automatic repricing software can carry this strategy out effectively without your even needing to think about it.
But there are other kinds of pricing strategy that work, too. Each strategy can work for particular types of product and in particular situations, so we’re going to talk you through the different strategies and where they fit.
Premium pricing means you will always be a bit more expensive than your competitors. Does that sound stupid? Will anyone buy your product if it costs more than the alternative?
It works for luxury products. Louis Vuitton, Burberry, Chanel, Mercedes all use premium pricing. It also works where your product is clearly the best. For instance, if you sell a ruggedized computer that can deal with being used in sub-zero temperatures or in a desert sandstorm, can be dropped two meters without breaking, and is waterproof, you can charge three times what most laptops cost and still have buyers beating a path to your door.
Premium pricing works for brands which have taken the time to establish themselves as thoroughly reliable. If you want to get there, you will need to put a lot of work into it, but it can be a very profitable strategy.
Value-based pricing looks at your buyer’s needs and the way they assess the value of your product, and works backwards from there.
To do value-based pricing properly you need to look at one particular segment of the market, look at what your product does that the next best alternative doesn’t, and then think about how much customers might pay for that function. For instance, if you have a self-emptying cat litter tray, you want to focus on apartment dwellers with indoors cats, who need the function most; and you want to think what premium they will pay to have a completely clean apartment with no unpleasant odors or spilled litter.
Sometimes you might start by looking at what customers can afford to pay. If Ford wanted to introduce an e-car for lower income households, it would probably start by setting a price that would be attractive, and then try to design the car to fit.
Price skimming is a pricing policy that suits fashion products and tech life-cycle products. When you introduce a new product, you price it at a premium at first, and then you lower the price little by little to make the product available to other customers and more competitive. You’ll also probably be lowering the price as your competitors catch up with you, or new competitors enter the market.
The opposite is penetration pricing. You need to price low to start with to gain a market, if, for instance, you have an untested and innovative product. Once it’s become mainstream, you can increase the price.
You could also use mark-up or cost-plus pricing, and simply aim to charge double what you paid for an item. The difficulty with this is that customers really don’t care what you paid for your inventory; they only care about value, or about the comparison with other products. While you need to have a way of ensuring each product you sell is profitable, as a pricing strategy, this doesn’t work that well.
Competitor matching is a strategy that can do well. Some retailers will offer to match any competitor’s price, though you shouldn’t do that unless you’re certain that in 99 percent of cases you have got the best price. Go a little further, if you want to gain market share fast, and you could adopt a strategy of undercutting. However, the problem with that strategy is that you may end up never being able to raise your prices, and unless you are really smart with your sourcing, you could end up with low profit margins.
Whichever strategy you choose, you’ll also need pricing tactics for the short term. For instance, you might discount for the holiday season to expand your customer base, or to accompany a major ad campaign. Get the strategy right, though, and the rest will follow.
