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Starting a new business or launching a new product or service requires detailed thought and planning. A critical piece of that planning is deciding how you should price your products and services. The pricing strategy you choose dramatically impacts the profit margins of your business, and determines the pace at which your business can grow. Several pricing strategies exist for products and services, and choosing the best for your business depends greatly upon your overall long-term business strategy.
Competition-based pricing strategies focus solely on what the competition is charging, and strive to meet or beat those prices. Sometimes this strategy is referred to as a rock-bottom pricing strategy, or a low price leader strategy. The goal is to best your biggest competitors based on pricing alone. As Web Marketing Today exhibits, the competition-based pricing strategy is used by many large retailers on the Internet. Because the same products are available from multiple sources, the consumer buying decision is simply to select the retailer with the lowest price. This pricing strategy is a difficult one for small businesses to maintain, because it provides very narrow profit margins that make it challenging for the business to achieve enough momentum to grow.
A penetration pricing strategy is used as a loyalty-building or market-entry tool. The penetration pricing strategy offers a high-quality product at a much lower than expected price. This combination helps the business enter a new market even when strong competitors exist, and it builds loyalty with new customers from the beginning. The penetration strategy can dramatically increase the lifetime value of customers, because they're "hooked" with the outstanding first product offering and--assuming future products are just as high quality--they are more willing to buy additional products from the company long into the future.
Also known as a promotional pricing strategy, the goal of the loss leader pricing strategy is to get new customers even if you do not make a profit from the initial sale. By taking a loss on the first sale, businesses can offer related products or upsells at normal prices. Despite loosing profits on the promotional product or loss leader, enough profits are normally made from the additional regular-priced products and services to sustain the strategy for the long term. Grocery store sales utilize the loss leader pricing strategy on a regular basis. They discount one or more items on their shelves to the point of taking a loss of profit, with the intention of getting customers into their stores. Once there, the customers are likely to buy more than just those products that are on sale.
Premium pricing takes advantage of a segment of consumers who believe high quality comes at a premium price. Instead of trying to have the lowest price amongst competitors, businesses who use the premium pricing strategy attempt to price their products and services at the highest in their market. This strategy limits the customer base available to market products and services to, but also provides much higher profit margins for each sale.