Choosing the right pricing strategy is one of the most important things any business owner can do. It sets you on the right path to coping with uncertain economic times and changing customer needs. The key is to be data-driven and agile in your approach.
Read on to find a cheat sheet to help you find the right pricing strategy for your business.
What is a pricing strategy?
A pricing strategy is a method of changing prices by taking a number of factors into account such as market conditions, how competitors are behaving, your profit margins and costs to produce or buy raw products.
The most effective pricing strategy for you depends on your business model. Here are some of the options available:
- Competitor-based pricing: Where your pricing strategy is based on what your competitors are charging for a similar product but doesn’t take into account production costs.
- Cost-plus pricing: Based on the cost of producing your product and then adding an additional amount for profit.
- Dynamic pricing: Where your pricing changes based on demand - airlines and hotels often do this depending on availability.
- Premium pricing: This relates more to how a company wants its products to be perceived rather than their actual cost of production.
- Bundle pricing: Where you offer more than one product for a specific, and often lower, price. A good example would be a supermarket "meal deal."
- Geographic pricing: If you sell in different markets, you may price your product differently in each region, depending on local competition and transportation costs.
Choosing a pricing strategy using data
Your existing clients and previous sales data provide a useful starting point when deciding on the most effective pricing strategy for your business. Use existing records cross-referenced with stock rotations to analyse what has sold well and when, and what impact discounts or promotions had on sales at various times.
Free online calculators and templates from HubSpot or Zibbet can help take the guesswork out of planning your pricing approach with formulas to calculate your expenses and the right retail mark up for your customers and industry.
How one business came up with the right pricing strategy
On-Group, a company that specialises in beauty and sports products, took the opportunity to rebrand the sports side of its business this year to specifically target consumers instead of its originally focus on B2B.
“We made the decision to go full-steam ahead [with our B2C rebrand] and we have seen turnover increase nearly ten-fold,” says James Greenwell, owner.
Using a discounted subscription model
On-Group’s key pricing strategy following the rebrand has been to offer a 20% subscription discount for its U Perform products as an incentive to sign up. The discount is ongoing and applies to anyone who subscribes.
This discount was calculated based on two factors – competition data from like-for-like brands and market analysis.
Competitor analysis is essential
Greenwell used software that showed competitor marketing spend and where they are advertising.
"We analysed the data against the percentage of turnover that is required for running costs so we could see the price point of the product in the market, but also clearly understand our own margins,” he says. “For example, this year our running costs were sitting too high as a percentage of turnover at 42%.”
"We understand what our minimum required margin is and take into account the discounts we may give to trade, ambassadors and distributors, which helps us understand the required end price."
Reducing churn and improving customer retention
The subscription system has helped with customer retention and allowed Greenwell to build a closer and more informed relationship with subscription clients.
"The churn rate is approximately 9-10%, this means for every 10 people we bring on we lose one person,” he says. “The lifetime of the customer is around 77 days, which seems to be improving thanks to our subscription model and loyalty pricing strategy. This could include a free gift with purchase, discounts, product videos or birthday bonuses."
Predicting inventory needs
Greenwell has found the subscription model to be a great way of seeing off unexpected economic disruptions by making it easier to predict when he needs to do a product run, meaning fewer unnecessary funds tied up in unused stock.
It allows very clear predictions as to growth and production timelines. He’s able to predict almost to the day when a new delivery of stock is required, which makes managing cash flow much easier.
If you’re looking for additional ways to manage your cash flow, an
American Express® Business Gold Card can help. It gives you greater control over your cash flow with a 54 day payment period¹ – allowing you the time to use data-led insights to refine your approach to pricing for success.
On top of that, you can earn Membership Rewards® points² with every pound you spend, and they can be leveraged to grow your business further.
- The maximum payment period on purchases is 54 calendar days on Gold & Platinum Business Charge Cards and 42 calendar days on the Basic Business Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
- If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Basic Card.
