Pricing tactics that pay big dividends
Recently, I was shopping at a Nashville airport store where I found a $450 handbag alongside a matching roll-top bag — three times the size — costing $477. I asked the clerk why the smaller bag was priced so high, and she said it had more “bling” on it. She looked up the price, said it was correct and couldn’t give me any reason other than, “It just is!”
Obviously, this is not the way to price merchandise. It would have been smarter to increase the price of the roll bag to bring it more in line with the bag’s pricing. This fits with the idea of ’value-based’ pricing.
Unfortunately, most retailers are working on what they call a standard price increase: buy it for $5 and sell it for $10, if you can. The problem with this method is that it leaves out the customer’s perception of the product. Smart retailers know their customers and spend time buying products that are profitable and eliminate those that are not. If the customer is willing to pay more, why not ask for more? You don’t make money by selling cheaply; even the Dollar Store had to raise prices to stay in business.
This is called “demand pricing” and consists of three elements: value-based pricing, penetration pricing and skimming. Value-based pricing assumes that customers will pay more for a product if they believe it is worth more. Toyota Motor Corporation makes Lexus and many of the core components are interchangeable. The concept of value-based pricing is based on customer perception and is designed to improve customer self-esteem.
If you want to use economical prices, you need to have a luxurious looking showroom, both products and sellers. If you’re promoting a high-end image, it’s about how you engage with the customer, your policies, and the appearance of your staff. This is how you promote prestigious products and exclusivity.
Penetration prices are when you go to market with a cheaper product and undercut its value, starting low. When we opened our stores, we undercut our competitors, making them look like they were overpriced. We were able to attract their customers and in the end we increased our prices. We have also stopped transporting the same products. This is a great way to enter a new market: steal your competitor’s customers and build loyalty.
Skim pricing, also known as price skimming, is a pricing strategy that sets the prices of new products high and then lowers them when competitors enter the market. Skim pricing is the opposite of penetration pricing.
Then there is yield management pricing, which means that prices are determined based on demand. For example, the longer you wait to buy a plane ticket, the more it costs.
How can specialist flooring retailers leverage some of these principles? One way is to increase your installation costs during the holidays or peak periods for people who want the work done right away. Conversely, a flooring retailer could promote entry-level products (known as “loss leaders”) as a means of getting more traffic into the store, or they could consistently market more expensive products to generate better margins and a more luxurious serve customer base.
Which job are you going to take?
Lisbeth Calandrino has been promoting retail strategies for 20 years. Contact her at email@example.com to have her speak at your company or to schedule a consultation.
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