Pricing is one of the most important decisions to be made regarding a product, as it directly affects the profits of the company selling it. Prices that are too high could mean a low sales volume, while prices that are too low could mean a good sales volume but a low profit margin.

To set the price of a product, the first thing to consider are the costs associated with it; for example, if the total costs of producing and selling a product amount to €100, prices should be above that figure if a profit is to be made.

Other factors to consider are consumers' perception of the product's value (and therefore the price they would be willing to pay for it), their price sensitivity (how much they take prices into account when buying), and their purchasing power (how able they are to pay high prices).

However, today, due to the large number of products available on the market, the main factor to consider when setting prices is the market price — that is, the prices of similar products already on the market.

With market prices in mind, let us look at the main pricing strategies:

Low Prices

The low-price strategy involves setting prices below the average market price.
What is usually sought with this strategy is a good sales volume, fast market penetration, rapid product adoption, or quick brand awareness.
Setting low prices is often a good competitive approach; however, it has several disadvantages such as a low profit margin per product, it is easy for competitors to neutralise, and it is difficult to sustain over a long period — so it is recommended only when you have a broad target market made up of price-sensitive consumers, and when you can reduce costs as sales volume increases.

Average Prices

The average-price strategy involves setting prices equal to or close to the average market price.
Average prices are the easiest to manage, but they face the most competition, so it is recommended to use this strategy only when you are able to compete on the basis of product characteristics rather than price — for example, through product differentiation.

High Prices

The high-price strategy involves setting prices above the average market price.
What is usually sought with this strategy is a high profit margin per product, creating a perception of quality, status, or prestige in the product (thus attracting consumers who seek these qualities), and capitalising on novelty-driven purchases.
Setting high prices usually means a high profit margin per product but a low sales volume, so it is recommended only when the target market consists of consumers who are not price-sensitive, have sufficient purchasing power, prioritise other product characteristics over price, and the product truly delivers the quality needed to justify its price.

Price Reductions

The price-reduction strategy involves lowering prices to stimulate sales (increase the number of customers and/or purchase frequency) or gain market share — or, if prices are intentionally lowered below the competition, to block competitors and win their market share.
This strategy is typically used when sales have declined or market share has been lost; however, competing this way carries risks, so before reducing prices in such situations it is advisable to first try increasing promotion or sales points.
The disadvantages of reducing prices include a lower profit margin per product, the risk of affecting or diminishing product quality (since maintaining low prices generally requires cutting costs on materials or inputs), and the risk that competitors will do the same — so this strategy is recommended only when you have a broad target market and when it is difficult for competitors to imitate.

Price Increases

The price-increase strategy involves raising prices to increase the profit margin per product, create a perception of quality, status, or prestige, or — if prices are intentionally raised above those of the competition — to project an image of higher quality or exclusivity.
This strategy is typically used when demand has risen and you want to take advantage of that to increase profits, but also when demand has risen and you cannot keep up with it (raising prices reduces demand so you can continue doing your work well and have time to increase production capacity).
The disadvantage of raising prices is the risk of a decrease in sales volume, so it is recommended only when the market consists of price-insensitive consumers who have sufficient purchasing power to keep paying the price asked.

Discounts

Finally, discounts are generally treated as a price-reduction strategy, although they have the particular feature of being a temporary reduction, always aimed at stimulating sales.
Below are the main discount strategies:

 

  • Early-payment discount: offering a discount if the customer pays before the due date. For example, if you sell a product on credit with 30-day terms, you could offer a discount (e.g. 2%) if the customer pays early (e.g. within 10 days). This strategy also helps improve liquidity and reduce collection costs.
  • Volume discount: offering a discount if the customer buys a product in bulk (the larger the quantity, the greater the potential discount). For example, you could offer a discount if the customer buys your product by the dozen rather than individually. This strategy also encourages the customer to always buy from you and only you. If you sell to businesses, it helps them choose you as their supplier and, if possible, their exclusive one.
  • Allowance discount: offering a discount if the customer provides some kind of benefit in return. For example, you could offer a discount on your equipment if the customer trades in their old equipment.
  • Seasonal discount: reducing prices on products that are out of season. For example, you could reduce prices on out-of-season clothing, or on hotel accommodation during periods of low demand. This strategy also helps maintain a consistent business rhythm throughout the year.