Last week, I read a few articles written by Paul Hunt on pricing strategies for companies. His view on pricing is interesting and I found some points that may be helpful for your business.
Most companies have yearly growth ambitions. Lets say your goal in 2011 is to increase profits by 12.5%. Now, where do you start? How will you achieve this goal? Most managers and business owners will begin by looking at cost cutting strategies and use it as a primary tactic to increase profits. But few look at increasing prices as a way to generate more profits. Hunt states that “if the average company captured 1% more in price, without any change in volume and costs, profit would climb by 12.5%.” But the question is, is there room to increase prices without negatively affecting sales? It can’t be that simple right?
Before you start tinkering with price increases take a look at your own pricing strategy, if you even have one. Most managers and business owners set prices at levels comparable to competitor prices. That may be the extent of your pricing strategy research. Think about it, why is your product/service priced where it is? How price sensitive are your consumers? Have you ever conducted any research on product pricing?
Many variables will factor into whether price changes benefit your company or not. And it’s understandable if you think your business has little control over prices. But there are more variables involved than you might be aware of. Research shows that once you reach certain pricing thresholds, slight increases in price will not lower sales. For example, a consumer-packaged-goods study showed that demand for a product was higher at $1.09 than it was at $1.05. Furthermore, demand remained the same when prices were increased to $1.19, and $1.29. These consumers were indifferent between paying $1.09 or $1.29 and actually purchased more goods when the price was increased from $1.05 to $1.09. So, it’s important to understand that pricing threshold levels exist because you might be missing out on extra cash. But there are two sides to this coin. What I didn’t mention first is that, in this study, when prices were initially increased above 99 cents demand plummeted by 300%. 99 cents was the first threshold level for consumers and a slight increase in price was detrimental to sales.
Research also shows that prices ending in nine positively influence sales. According to Dr Vinay Kanetkar, “prices ending in nine make a positive difference to sales in many situations. In fact, in North America, research has found that prices ending in nine generate 12% more sales on average than a price that ends in either eight or zero.” However, there are notable exceptions. Walmart, widely known for its success with low cost products, often ends it prices with sevens. I would assume that Walmart has conducted thorough research on pricing strategies so seven may be a number to use. Keep in mind that cultural differences also play a role in pricing strategies. For example, in China, there is a preference for numbers ending in eight.
So where does this leave us? End your prices in nines or sevens and find your pricing threshold level? Easier said than done right. I think the first step is to research your market. Psychology plays a great role in consumer purchasing patterns so learn more about your clientele. Play with promotional pricing strategies with different client groups and see what works and what doesn’t. Research pricing strategies and see what the experts have to say. Your business may have room to increase prices and capture that extra revenue, but make your decision based on knowledge and solid reasoning. I hope this helps. Happy pricing!