- Identify different strategies entrepreneurs use when pricing their products and services


[SLIDE 1]

Let's say you want to start an online luxury cupcake business. To find out how much to charge, you might start by finding out the going rate for cupcakes by checking out the competition. Don't be afraid to ask competitors about their pricing strategy; besides, making connections in this way could lead to future partnerships or collaborations.

In addition, you might want to talk to your friends and family to see how much they would pay or have paid in the past. You might even send out a survey to all contacts asking them what price they would be willing to pay for a single delicious cupcake or a box of premium cupcakes. 

You need to also think about your customers. What can they afford to pay? How can you make them come back time and time again?

Its also important to reflect on yourself. How much experience running an online cupcake company do you have? If you have none at all, you might want to consider charging lower prices to gain new clients as well as experience. However, if you have a background in bakery and catering and already have a solid customer base, you could feasibly charge higher rates.

Once you have a better idea of your competition, target market, and personal qualifications, it is time to plan your pricing strategy. There is no right way to determine this, and there is no such thing as long-term fixed pricing. As your business evolves, your prices will adjust according to demand. The best way to set a price is to base it on the information you have already gathered. Let's take a look at some of the more common pricing strategies.


[SLIDE 2]

In competition-led pricing, prices are guided by other businesses selling the same or very similar products and services. For example, for products that match those of your competitors, you can copy your competitors' pricing for your own product. However, matching a price is not generally enough to encourage customers to buy from you, especially if you're not an established brand. You need to find other ways to differentiate your product from your competitors in order to attract more customers. 


[SLIDE 3]

In customer-led pricing, you ask customers how much they are willing to pay and then offer the product at that price. This is the technique used by some airlines signed up to the service Priceline, which offers customers the chance to name their own price for flights.  Passengers make bids which can be accepted or rejected by the airline. The name your own price technique is a useful way of attracting people to your company while still allowing you a measure of control over your own pricing. 


[SLIDE 4]

A loss leader is the practice of offering a product or service at a below-cost price in an attempt to attract more customers. This involves giving special discounts and reducing prices. Loss leaders can be an effective way of competing with an established brand offering similar products and services. The approach is used by many retail stores. Discounted goods or sales attract more people to the store and help to shift merchandise. When applied by retailers, the loss leader pricing strategy also tempts the customers to look at the goods that are not on sale. For example, Walmart attracts customers by selling low-price DVDs. The loss made on these discounted goods is made up by customers purchasing the non-discounted merchandise.

However, there has to be some kind of consistency to raising and lowering prices; for example, a customer who has just bought a product at full price will not be pleased if that same good is sold at a deep discount the following day. Therefore, it is important to know how long the lower price can be sustained and when to re-adjust pricing before the business begins to lose money.


[SLIDE 5]

The idea of the introductory offer is to encourage people to try your new product by offering it for free or at a heavily discounted price for a certain number of days, or for the first, say, 100 customers. Introductory pricing is generally used for new products or services on the market. Foe example, Uber offers new customers a free ride worth $10, simply for signing up online with the car-sharing service.


[SLIDE 6]

Skimming is a form of high pricing generally used for new products or services that face very little, or even no competition. If your product is the first on the market, then you can sell it at a higher price and retain the maximum value upfront until you are forced to gradually reduce your prices when competitors launch rival products. Innovative products like the iPad and Sony PlayStation 3, which were originally priced high when they were launched, are good examples of price skimming. 


[SLIDE 7]

Customers' perceptions of price points are also important to the sale. Psychological pricing is intended to encourage customers to buy based on their belief that the product or service is cheaper than it really is. Flash sales, buy one get one free, and bundled products are all methods of psychological pricing. In addition, specific prices such as those ending in $0.99 are popular with customers, as, for example, $19.99 is a more appealing figure to most than $20. Odd as it may sound, pricing your product or service one cent lower can make a difference between selling and not selling.


[SLIDE 8]

Fair pricing is the degree to which both businesses and customers believe that the pricing is reasonable. Having done your financial homework as an entrepreneur, you might think your product or service is priced fairly, but that does not mean your customers will. Regardless of how much benefit to the customer, or how valuable you think your offering is, there are some customers  who are simply unwilling to pay the asking price for items or service that they do not perceive as being fair. This is where market testing can help to define the perception between what people perceive as a fair maximum price versus an unfair price.


[SLIDE 9]

A form of psychological pricing, bundled pricing is packaging a set of goods or services together; they are then sold for a lower price than if they were to be sold separately. The customers feel they are getting a bargain and the increased sales generate more profit for the company. Common examples of bundled pricing include fast-food value meals, prix fixe (price-fixed) meals at restaurants, cell phone packages, and cable TV packages.