Pricing vocabulary

Pricing vocabulary

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Advertised Price

A price that is advertised by the retailer or e-commerce site in any media. There for, retail price or original price are different things. Advertised price is in most cases lower than the list price and thus is used to attract customers into stores for bargain shopping.

It is very tactical element in pricing strategy and you can often use it with products that are of less importance for you as a retailer or eCommerce site owner. The discounted pricing needs to be real, and the list price have to been real and higher earlier on in the same store, just before the campaign starts and advertised price is presented. In some cases you do not need to present the original price in the advertisement, but the original price has to been used. Also if you haven’t used the original price before, your price campaign might be illegal, at least in some countries.

This means that you must have sold products before any advertised pricing campaigns can be started. Similarly in cases you lower the advertised price, the discount of that price will be calculated from the advertised pricing instead of the original pricing.

If you use advertised pricing on a category level, you must clearly distinguish what products are discounted. Consequently it is often illegal to use advertised prices in way, that lures the customer into thinking that all of the product categories have high discounts, even though when customers visit the stores, they notice that high discount percentages only applies to a small part of the products.

Bundle-pricing

Bundle Pricing

A simple pricing technique in which you bundle products and sell those at a lower price than you would, if sold separately. The psychology behind bundle pricing is built on consumer surplus. Consumer surplus is created when a consumer is willing to buy same products with a lower price than they would be willing to pay for if they bought the products separately.

Bundle pricing is used widely for example in hamburger restaurants. It offers seller an opportunity to sell more. This is done in two ways:

1. The buyer would not necessarily buy all the items offered, if they would need to choose what items to buy

2. The buyer most likely will buy more, if they feel that the more they buy, the more they save

Businesses can simplify their processes better by bundle pricing. In many cases ordering everything separately creates thousands of variations in services, instead of three to four different bundle options, that are offered to the consumer. It also eases the buyer psychologically and simplifies buying.

Competitive-match-pricing-methodology

Competitive Match Pricing Methodology

Offering the exact same price as your competitor puts the customer to an evaluation situation. In this situation customer compares your product with your competitor´s product and probably chooses the one which gives more value for the price. Competitive match pricing methodology means changing prices according to market changes. By using competitor pricing as a basis of setting and changing pricing according to market pricing. This method keeps our prices competitive but also leaves room for error when price premium might me available.

You can also price your product below the price your competitor offers. This setting is interesting to the customer but creates risk to your business. That is why you need to be careful when pricing below competitor prices. Always evaluate the situation accordingly, because this method might bring in negative cash flow. The last thing you could do is price the product above what your competitors charge. There are two things you need to consider when implementing this method: customer probably expects more value of your product or service, since your product costs more than the one of your competitors. And you must make sure you can answer to these customer expectations, since if you don’t, you lose your customer to your competition.

Cost Pricing or Cost Plus Pricing

Cost pricing is used for pricing multiple items at the same time where conventional pricing methods will not be feasible.

To get the sale price of an item using cost plus pricing, all you must do is multiply each item’s cost with a multiplier. By knowing the cost of each of the items that you’re selling and the profit margin that you’re after, you can easily automate the entire process. Asides from retailers, many construction companies use the cost plus pricing method. After the cost of each item type is estimated, it’s multiplied by a multiplier to know the amount that the client will have to pay. Despite being seemingly simple, there are many factors that come into play when it comes to a successful cost plus pricing strategy. The amount of time required to do this and the fact that there are new products always coming in make normal pricing methods not feasible. That’s where cost plus pricing truly shines.

custom-value-in-pricing

Custom Value in Pricing

Custom value is a pricing method that´s used with customized products. Whether you´re selling cars or cakes, customization can add lots of value to a product. The reason for this is simple, customized products have a higher sentimental value

When an item is customized, there are many indirect costs that should be accounted for. Asides from the cost of the basic item, the cost of the additional customization must be added to the total price. This could include anything from the labor costs to the parts used for customizing the product. The complexity of a customization job affects the difficulty of calculating the added costs. Whether you’re selling customized shoes or cars, make sure to calculate all the costs that go into the process.

Most people are willing to pay much more to get a product that is tailored to their specific needs. That’s why the perceived value is very important when it comes to customized products. People tend to perceive custom items as much more valuable, even if the customization process itself doesn’t cost much money. To make the best use of the high perceived value of your custom products, you should find out how much are people willing to pay for them. By doing so, you’ll have an effective custom value price that ensures maximum profitability. As most people don’t know -or care- care how much a product costs, you can increase your profit margins by lowering your production costs.

When it comes to regular products, people tend to compare prices all the time. However, if you’re selling a customized product with a unique offering, people perceive it in a different way. Compared to their traditional counterparts, most customized products have a higher emotional value. Having products with high emotional value translate into bigger profit margins. Creating customized products shows your customers that you really care about them. In addition to building precious customer loyalty, you can penetrate new segments in your market. Some user groups may not become your customers in the first place if it wasn’t for you customized offering.

discount-containment

Discount Containment

When you make a discount, you have an opportunity to gain new customers, please existing ones as well as get rid of some slow-selling products. To get the most out of your discounts and make them as profitable to your business as possible, a good discount containment strategy must be used. By your lowering your price at a discount, you’re also lowering your traditional profit margins and increasing your risk. Going from selling at a small profit margin to selling at a loss can spell disaster for your business.

When creating a containment strategy for your discounts, you should always keep the following things in mind. By doing so, you’re not only lowering your risk but also making the entire process much easier:

Discounts that don’t have a target from the very beginning are a recipe for failure. If you don’t have a target to achieve by having discounted prices, you will probably end up losing money. You can also find out -after the discount is over- that it didn’t do what you originally had in mind. Before you create a discount, ask yourself why you are doing it. Are you trying to get rid of some slow-selling products? Are you trying to get customers to try more of your products? Is this a part of a seasonal sale? Are you trying to penetrate a new market? Knowing the answer before you start can help you pick a discount strategy that’ll work for your business. You’ll also be able to develop a successful price containment strategy that will protect you from loses.

To most people, all discounts are basically the same thing, which is “lower prices”. However, this is as far from the truth as it gets. There are plenty of discount strategies out there and choosing the right one is essential for success. Choosing the right discount strategy is half the work. The other half is the prices research before the discount and the results analysis after it’s over. The answer to which discount strategy should I choose question lies in your business itself. Your industry, as well as your target customers, have a direct influence on choosing a discount strategy.

dynamic-pricing

Dynamic Pricing

Dynamic Pricing means the retailer is agile to react to price changes by using price monitoring. It is in a general sense, the practice of keeping product prices flexible in accordance with the changing market conditions.

While computing dynamic prices for the commodities sold, retailers can keep the following parameters in mind:

1. Competitor monitoring 2. Supply and demand 3. Conversion rates 4. Sales objectives 5. Time
6. Traffic 7. Other internal and external market factors

The retailer can react by either setting premium prices or by adopting aggressive price cuts to compete against the competitors. The main aim of dynamic pricing is to increase profits and raise revenue levels. This is done by capitalizing on the competitor’s market stand and the prevailing conditions. Competitor availability is a key factor in dynamic reacting in pricing too. Consider an example. The absence of the competitor’s product lines in certain market segments can be seen as an opportunity to aggressively market one’s own products. This fills that gap whilst fetching great prices for the retailers. In the modern era, where e-commerce is the prevalent framework, online retailers are particularly known to adjust their prices in response to competitor pricing.

Dynamic reacting in pricing is a known phenomenon in most industries. However, it is particularly common in the electricity, entertainment, hospitality, public transport, and travel arenas. Of course, every specific industry type has its strategies of repricing their products and services, which is based on their specific needs, the market demands, and their past experience.

Evolving technologies

Price intelligence is the key technology that drives dynamic reacting in prices. For the retailer to react to the competitors, he must first monitor their market stand and behavior. Competitive price intelligence allows them to undertake this very task. This technology uses modern tools such as data mining techniques and artificial intelligence to observe competitor behavior.

exworks-pricing

Ex Works Pricing (EXW)

Ex Works Pricing is used when buyer collects the goods from the sellers warehouse. The goods are then sold without any transportation. This is often used because the buyer has more effective logistics systems, and thus can make profit by using their logistics.

Overview

Ex works is a term that is often associated with international trade. In fact, ex works (commonly abbreviated as EXW) is one of the standardized terms that are published by the International Chamber of Commerce. In a nutshell, ex works is a purchasing arrangement in which the buyer receives the purchased goods at the seller’s warehouse. Once the purchased goods are placed at the buyer’s disposal, they are responsible for all the risk that is associated with these goods. This includes everything from shipping costs to getting the goods through customs, if applicable. You’re probably wondering why a buyer would accept such an arrangement. This is a question that doesn’t have a short answer. There are plenty of reasons that make this arrangement favored by some buyers as well as the sellers. The reason that makes this arrangement attractive a buyer is the ability to save money, if they have a better and more efficient supply chain than the seller’s. When this is the case, they’ll be able to save money off your purchases, and this is why ex works pricing is important.

Important Considerations

For successful ex works pricing, there are things that should always be kept in mind. There are many factors that come into play in ex works pricing, which increases the overall risk of the process. By keeping an eye out for the following, they significantly lower the risk associated with this process.

Considering all risk factors

Ex works agreements has all kinds of risks involved. These include anything from a higher-than-anticipated transportation costs to damaging the goods during the transportation process. Having in-house transportation capabilities doesn’t mean that this is something that should be done. To know if an ex works agreement is feasible for your business or not, one must go deeper into the details. Asides from the direct cost of transferring the goods, do they require special handling? Is the staff qualified to do that? These are some of the questions that should be asked. Transporting the goods on their own might look cheaper on paper. Yet, they must make sure that you’re assuming a reasonable risk in order to have a positive outcome in the end. Taking the time to calculate everything thoroughly can save you lots of trouble along the way.

Considering the legalities

In ex works agreements, the legal aspects are never to be underestimated. There are lots of legal details involved in such agreements. Failing to check these thoroughly can lead to numerous problems in the long term and depending on the size of the business, can cost a small fortune. Everything from different party liabilities to custom-related details must be covered in the contract. Unless one’s well-versed in contractual laws, getting a lawyer to check things for them is the right thing to do. Saving the lawyer fees might seem like a good idea at first. However, the risk associated with going through the legal paperwork alone is definitely not worth it.

Advantages and Disadvantages

There are plenty of advantages and disadvantages that are associated with ex works agreements. Deciding whether such an agreement is right for the business or not depends on whether the advantages outweigh the disadvantages. The following are the two main advantage and disadvantage that are associated with associated work that you need to consider.

Being in Control

Being the seller, the advantages of an ex works agreement are almost too obvious to explain. With such an agreement in place, seller takes lots of hassle out of the selling process. As a buyer though, the advantage of this agreement is having a higher degree of control over the shipments. By controlling everything in the shipping process, one can be sure that the seller isn’t inflating shipment-related costs and charging more money for it. If your business is resourceful enough, ex works agreements can be advantageous.

Uncertainty and Risk

Compared to other types of shipping agreements, ex works is particularly risky to the buyer. Unlike in other agreements like FCA, where it’s guaranteed that goods will be cleared from customs and delivered to the location agree upon in the contract in good shape, one’s promised nothing with an ex works agreement. Once you take the goods from your supplier at their warehouse, they’re on their own. The seller just takes their money and all the responsibility is on your shoulders. Getting the goods in good shape to your warehouse and getting customs clearance- if needed- are things that has to be worried about.

incremental-customer-value

Incremental Customer Value

Ex Works Pricing is used when buyer collects the goods from the sellers warehouse. The goods are then sold without any transportation. This is often used because the buyer has more effective logistics systems, and thus can make profit by using their logistics.

Overview

Ex works is a term that is often associated with international trade. In fact, ex works (commonly abbreviated as EXW) is one of the standardized terms that are published by the International Chamber of Commerce. In a nutshell, ex works is a purchasing arrangement in which the buyer receives the purchased goods at the seller’s warehouse. Once the purchased goods are placed at the buyer’s disposal, they are responsible for all the risk that is associated with these goods. This includes everything from shipping costs to getting the goods through customs, if applicable. You’re probably wondering why a buyer would accept such an arrangement. This is a question that doesn’t have a short answer. There are plenty of reasons that make this arrangement favored by some buyers as well as the sellers. The reason that makes this arrangement attractive a buyer is the ability to save money, if they have a better and more efficient supply chain than the seller’s. When this is the case, they’ll be able to save money off your purchases, and this is why ex works pricing is important.

Important Considerations

For successful ex works pricing, there are things that should always be kept in mind. There are many factors that come into play in ex works pricing, which increases the overall risk of the process. By keeping an eye out for the following, they significantly lower the risk associated with this process.

Considering all risk factors

Ex works agreements has all kinds of risks involved. These include anything from a higher-than-anticipated transportation costs to damaging the goods during the transportation process. Having in-house transportation capabilities doesn’t mean that this is something that should be done. To know if an ex works agreement is feasible for your business or not, one must go deeper into the details. Asides from the direct cost of transferring the goods, do they require special handling? Is the staff qualified to do that? These are some of the questions that should be asked. Transporting the goods on their own might look cheaper on paper. Yet, they must make sure that you’re assuming a reasonable risk in order to have a positive outcome in the end. Taking the time to calculate everything thoroughly can save you lots of trouble along the way.

Considering the legalities

In ex works agreements, the legal aspects are never to be underestimated. There are lots of legal details involved in such agreements. Failing to check these thoroughly can lead to numerous problems in the long term and depending on the size of the business, can cost a small fortune. Everything from different party liabilities to custom-related details must be covered in the contract. Unless one’s well-versed in contractual laws, getting a lawyer to check things for them is the right thing to do. Saving the lawyer fees might seem like a good idea at first. However, the risk associated with going through the legal paperwork alone is definitely not worth it.

Advantages and Disadvantages

There are plenty of advantages and disadvantages that are associated with ex works agreements. Deciding whether such an agreement is right for the business or not depends on whether the advantages outweigh the disadvantages. The following are the two main advantage and disadvantage that are associated with associated work that you need to consider.

Being in Control

Being the seller, the advantages of an ex works agreement are almost too obvious to explain. With such an agreement in place, seller takes lots of hassle out of the selling process. As a buyer though, the advantage of this agreement is having a higher degree of control over the shipments. By controlling everything in the shipping process, one can be sure that the seller isn’t inflating shipment-related costs and charging more money for it. If your business is resourceful enough, ex works agreements can be advantageous.

Uncertainty and Risk

Compared to other types of shipping agreements, ex works is particularly risky to the buyer. Unlike in other agreements like FCA, where it’s guaranteed that goods will be cleared from customs and delivered to the location agree upon in the contract in good shape, one’s promised nothing with an ex works agreement. Once you take the goods from your supplier at their warehouse, they’re on their own. The seller just takes their money and all the responsibility is on your shoulders. Getting the goods in good shape to your warehouse and getting customs clearance- if needed- are things that has to be worried about.

Sniffie pricing matrix

Incremental Pricing Revenue

The Incremental Pricing Revenue is the increased revenue resulted by the price increase for any given reason. Incremental pricing is a pricing method that helps you decide the feasibility of lowering the price of one of your products in exchange for being able to sell more of it.

Overview

This pricing strategy is usually associated with assessing a client’s offer to buy products at a bulk price or trying to lower the prices to penetrate a new marker. If you produce multiple products, the incremental pricing revenue methods include distributing some of the overhead cost of a product over your other products. This makes it possible to sell that product at a reduced price. Like any pricing method, incremental pricing has its own pros and cons. If you know how to use it properly, it can help you sell more of your products and penetrate new markets. If you overuse this technique without being aware of the consequences, it can make you lose money or in some extreme cases, put you out of business. In this article, we cover some of the most important considerations for this pricing method as well as its key pros and cons that you should be aware of.

Important Considerations

There are many factors that come into play when it comes to positive incremental pricing revenue. Being aware of these factors will help you understand how to make the most out of it. The following are some of the most important things to keep an eye out for to make the most out of incremental pricing and to lower the risk as much as possible.

Having a Valid Reason for Using Incremental Pricing

Incremental pricing is a good way to lower the price of a product. However, doing this without having a good reason can result in long-term losses for your business. Before you decide to use this pricing method for one of your products, you must have a valid reason for doing so. This reason might be fulfilling a large order that you got from a client, which involves buying large quantities of a product at a reduced price. In that case, using this pricing method can help you determine whether accepting this offer is good for your business or not. Another reason for using this pricing method is to lower the price of a product to increase your market penetration. This can be a new product that you’re launching or an existing product that you want to capture a bigger market share with. In either of these cases, incremental pricing can help. What you shouldn’t do is using this pricing method without having a clear goal in mind as it has its own risks. Without a valid reason, taking these risks is just not worth it.

Understand the possible market reactions

Another important thing to keep in mind when using the incremental pricing method is the fact that your products aren’t alone in the market. You have competitors who will be reacting to your new prices. If your incremental pricing will affect the price at which your product is being sold to the consumer, this is something that you must anticipate. If you use this method to lower your prices and your competitors follow suit, incremental pricing might be the new norm for your market. Whether this is a good thing or not for your business is something that you must decide before resorting to this option. Remember that what might benefit your business in the short term might not be so great in the long-term and could end up doing more harm than good.

Incremental Pricing: Advantages and Disadvantages

Like any other pricing method, incremental pricing has its own pros and cons. Deciding whether this method is right for your business depends on whether the advantages outweigh the disadvantages.

Creating Higher Revenues

If applied properly, incremental pricing can result in higher revenues for your business. In some cases, being able to produce more of an item in exchange for selling it at a lower price is more profitable. High incremental pricing revenues are associated with products that benefit significantly from mass production. By utilizing this method, you can grow the overall revenues of your company while reducing the cost of a specific product.

Associated Risks

Incremental pricing isn’t a risk-free method. Whenever you use it, there are many things that at stake. Extensive use is one of the risks associated with this pricing method. If your company ends up applying this pricing method to too many products, you might end up in a situation where the other products that are priced differently aren’t able to absorb the fixed cost overhead. As reverting to higher prices is difficult, misusing this method can place your company in a difficult situation.

initial-markup

Initial Markup or IMU

The initial markup is a term used to describe the markup percentage you are using when pricing your products. Also known as IMU- is a pricing method that is considered one of the cost-plus pricing techniques. When used properly, initial markup makes pricing multiple products easier and more time-efficient.

Overview

To calculate the initial markup for a product that you’re pricing, you need to know the cost and the selling price of that product. The difference between these two is the initial markup.

Selling Price – Product Costs = Initial Markup

For example, if you’re selling a product for $100 and it has a total cost of $50, the markup value $50. When expressed as a percentage, the initial markup value for this product is %100.

It’s true that this pricing technique has been around for a long time and is being used by many businesses. However, initial markup has its downsides. If you’re aware of these downsides when using this technique, you’ll be able to make the most out of it.

Important Considerations

Despite being seemingly simple, there are multiple factors that come into play when calculating the IMU. Disregarding some of these points can result in an inaccurate calculation, which can have serious consequences on the bottom line of your business.

The following are the most important considerations to keep in mind when using the initial markup pricing method. Being aware of these factors will help you reap the benefits of IMU while mitigating the downsides.

Markdown Costs

If you’re in retail, you probably already know that markdowns are the biggest cost for retailers. Nobody likes to sell their products at reduced prices, however, this is something that has to be done.

Sales and discounts allow you to get rid of slow-selling products without taking a loss. One common mistake when using the initial markup technique is not factoring the markdown prices into the calculations.

If you do this, you’ll find out that your profit margins have dropped significantly when selling the products at discounted prices. In addition to the lowered profitability, you won’t be able to wow your customers with a big sale.

Having one of these big %50-off sales requires that you price your products with such sales in mind in the first place. If you don’t do this, you’ll find yourself stuck with products that you’re not able to sell. Unless you run a business that’s never on sale, this is something that you should always pay attention to.

Hidden Operating Costs

Miscalculating the actual cost of a product when using IMU is pretty common. This is especially true when using the same initial markup for different products or even for a single product that’s being sold in different stores.

The reason for this miscalculation is simple, which is the hidden operating costs. When you’re manufacturing your product in a single place, the manufacturing cost for the product is the same. What isn’t the same though, is the operational cost of different stores, which add up to the overall cost of a product.

Let’s say that you have a store in Helsinki with a product that costs $5 to make and you’re selling it for $15. The markup here is %200 percent which is $10 per item. When you sell that item in a more expensive city like London -which is %30 more expensive on average, the profit for selling the same product with the same markup will be significantly lower.

When calculating your IMU, make sure to take the different operating conditions of each store into consideration and adjust your prices accordingly.

Initial Markup: Advantages and Disadvantages

Initial markup is a powerful pricing method that has its own pros and cons. Whether it’s right for your business or not is something that only you can decide. The following are the major advantage and disadvantage of using this technique.

Making Sales and Profits Calculations Easier

Simple all pricing-related calculations are a major advantage that’s associated with the initial markup technique. By having an IMU formula, you can price many products and calculate profits with ease. All you have to do is fill in the blanks of your IMU pricing formula and you get the price for any of your products.

Since percentages are used with this method, seeing the big picture becomes easier and requires less work.

Inaccurate Calculations

The major disadvantage of using initial markup when pricing your products is directly related to its advantage, which is having the same formula used for multiple products. When this is the case, some products might end up with a pricing that’s less than the optimal.

Whether this is acceptable for your business or not depends on things like the size of your business as well as the number of products that you’re selling. In some cases, this is a negligible disadvantage while in others it can be a huge deal.

Key-basket-in-pricing

Key basket in Pricing

Key basket in pricing is a group of important products that are chosen to represent market in some way. Key basket in pricing is often used to monitor price changes in total or in average. Key basket companies can use it to monitor market changes happening from the consumer perspective, such as average price level, cost of normal purchasing basket or a category price.

Overview

Pricing your products can be a tricky thing to do. At least efficiently. When it comes to successful product pricing, there are many factors that come into play. Asides from having decent profit margins for your company, you need to position your products in a way that allows them to compete in the market. That’s where key basket in pricing truly shines. This pricing technique creates a “basket” of product that would act as a compass when pricing your products. Whenever you’re pricing a product, the basket of existing products that you’ve created will help you know where you stand from a customer’s perspective. In addition to helping you meet your clients’ expectations, this technique helps you make sure that your products are competitive with what already exists in your market. If you’re serious about your products achieve their intended goals, this is a pricing technique that can help.

Important Considerations

Key basket pricing is one of these pricing techniques that are deceptively simple. With multiple products in every basket that are constantly changing, staying on top of things takes lots of effort.

The following the key points that you need to consider when using the key basket in pricing technique. Being aware of these factors will help you make the most out of key basket pricing and price your products as efficiently as possible.

Monitoring the Right Products

A compass can only help find your way if it’s working properly. The same thing applies to the key basket pricing technique. If your key basket products are chosen properly, you’ll have a clear guide to pricing your products efficiently. If the products in your key basket aren’t an accurate representation of your market, they’ll end up doing the complete opposite.

The one thing that’s worse than not having a clear guide for pricing your products is having a bad guide. To make the most out of key basket pricing, you must choose the products groups carefully. Choosing products that are like yours will help you avoid a skewed perspective of the market norms.

A product might look like yours but after further inspection, you might find out that it’s a much more luxurious version that’s targeting a completely different user group. Having such irrelevant products in your basket is something that you should aware of.

Tracking Changes Constantly

Market prices are constantly changing. If you plan on using the key pricing technique to price your products once and for all, you’ll find out that these prices will soon become irrelevant. The true potential of key basket pricing is not in pricing products for the first time, it’s in being a great way to track market changes.

Tracking the prices changes of the key market products in your basket will help you adjust your prices whenever the market norms change. By doing so, your offering will stay relevant and efficient no matter how the market changes.

When you have different baskets for different products, tracking them all is lots of work. Using the full potential of this pricing technique is the best way to make sure that these efforts are worth it.

Advantages and Disadvantages

Like any other pricing technique, key basket pricing has its own pros and cons. Deciding whether this technique is right for a business depends on whether the pros outweigh the cons for that business. Down below I’ll list couple of the major advantages and disadvantages that are associated with this pricing technique.

Dynamic Wat to Track Market Changes

Key basket pricing is a great way to track market changes. Using the right tool, you’ll be able to constantly track where you stand compared to your competitors. Unlike most other pricing techniques, key basket pricing can help you keep up with an ever-changing market.

If you’re in a market with frequent price changes, this is a great way to keep up.

Hard to Scale Without the Proper Tools

The major disadvantage of using the key basket pricing technique is the fact that it can be hard to scale without the right tools. If you have multiple products and different key baskets, tracking everything can be a headache.

Deciding whether this technique is right for your business is something that only you can decide. If you’re in a market with constant changes then using this technique for all your products is an initial effort that’ll pay off. Before you commit to using this technique, make sure it’s the right choice for your business.

Key-value-items

Key Value Items (KVI)

Key value items are products that make a significant contribution to the overall sales of a business. In most cases, there are one or more products that make up most of a company’s sales. In most cases, there are one or more products that make up most of a company’s sales.

Overview

If you look at a well-known company like Apple, for example, you’ll notice that the iPhone alone generates a significant portion of the company’s profits. This was up to a staggering two thirds back in 2013.

And this case isn’t an exception. All businesses have products that are more important than others. That’s the case whether you’re a local hardware store or a tech giant like Apple. What differentiates one from another is how the key value items contribute to their overall sales. Sometimes, the key value item contributes to the sales volume by being the most sold product. In the case of the iPhone, it’s just the most popular product that Apple makes. That’s what makes it their key value item. In other cases, the key value items are important because they help the store sell other products. For example, in most hardware stores, lumber helps the business sell numerous other related goods and services. The profits from these things combined can be more than the profit from the lumber itself. However, the lumber would be the key value item for this store because it’s what drive most sales.

Important Considerations

The following are the most important considerations that you should keep in mind when choosing your key value items and pricing other products accordingly. By doing so, you’ll be able to make the most out of your key value items and choose a pricing strategy that’s right for your business.

Different key value item types

As we’ve already mentioned, there are different types of KVI’s. How a specific key value item will affect your business model and pricing strategy depends on the type of the item and the industry that you’re in.

There are four distinct types of key value items. These are: perceived value drivers, traffic drivers, basket drivers and drivers of assortment perception. Each type of these key value items is important for a different reason. Understanding the effect that each of them has will help you make better business decisions and set more effective prices.

Key value items need to be updated

While some businesses might have the same key value item for years, others might have them change more often. There is no fixed rule for when you need to update your key value items. That’s why you should keep checking frequently.

It might seem like lots of work but keeping your key value items updated will help you maximize your profits and make your business more competitive. Basing your pricing strategy on a wrong key value item will do your business more harm than good, so make sure to keep it updated as often as you can.

Key value items: Advantages and Disadvantages

The following are the main advantages and disadvantages that are associated with the key value items when pricing your products. Knowing these will help you evaluate whether this technique is right for your business.

Makes your pricing more effective

Taking the key value items into consideration is one of the most effective things that you can do when setting your pricing strategy. By doing so, you’ll be able to price your products in a way that increases your sales and your customer delight.

The reason for this is that you’ll be setting your prices while you know what your customers like most. By creating your deal that appeals to your customers and is profitable to your business at the same time.

Requires constant modifications

Having your key value items guide your pricing strategy is always great. In some industries, however, your key value items can change rapidly. It’s easy to know your key value item when you’re selling five different products. When you’re selling 500 products, that’s a different story.

When this is the case, keeping track of your key value items will require lots of work. Being in an industry in a which your key value items change regularly will make this process even more difficult. That’s why you should use an automated way to keep track of these items, which will make the process more feasible.

keystone-pricing

Keystone Pricing

Keystone Pricing is a method where every distribution level doubles the price of a product. If you’re in retail, keystone pricing is a pricing technique that you should be familiar with. When pricing your merchandise with the keystone pricing technique, you double the wholesale price of that product.

Overview

For example, if you’re pricing a product with a total cost of $50 using the keystone pricing technique, the retail price of that product would be $100. This %50 markup allows for an excellent profit margin and makes having big discounts easier.

In addition to that, this technique makes pricing multiple products easier and more time efficient. Instead of pricing each product separately, you just double the cost of everything to get your retail price. Despite having many advantages, keystone pricing isn’t the best choice for all product types. While it works perfectly for some products, it’s a poor pricing method for others, which is something that you should always keep in mind when assessing its suitability for your business model.

Important Considerations

Most people get the impression that keystone markup is a one-size-fits-all solution that works for everything when they first hear about it. However, there are many factors that you must consider when using this pricing strategy.

The following are the most important considerations that are associated with the keystone pricing technique. Being aware of these things will help you make the most out of this technique and utilize it to achieve your business goals.

The Perceived Value of Your Products

Selling a product for double the cost might sound good. Who doesn’t like doubling their money? In some cases, however, this is not true. While this technique might work exceptionally well for some products, it can be disastrous for others because of their perceived value.

If you’re selling high-end products that people don’t buy that often, setting your prices at double the cost is just too low. People are willing to pay more for your products and that is what you should be charging. When you’re not doing that, you’re lowering your profit margins while you don’t have to.

In other cases, things are quite the opposite. If people only buy your products because they’re cheaper than the alternatives, keystone markup can cause your sales to plummet. When your prices are higher, people will just find a cheaper alternative.

Before you decide to use keystone pricing, make sure that this pricing technique is the best option for your business.

Using Keystone Pricing for the Right Departments

Large retail stores have different departments with different products. When it comes to pricing these products, the rule of thumb is that what works for one department won’t necessarily work for the other.

For example, keystone pricing might work well in a department such as gifts, when people are looking for something they like, and the products can vary significantly from one store to the other. Using keystone pricing in this scenario makes perfect sense.

In another department in the same store, keystone pricing won’t make much sense. These are usually the departments from which people buy everyday goods that can be found elsewhere. For similar products, the competition is usually fierce, and the price is a major factor a purchase decision.

The takeaway here is that you don’t have to apply keystone pricing to every product in your store. Analyze each department separately and apply this technique only where it makes sense.

Keystone Pricing: Advantages and Disadvantages

Keystone pricing has its unique pros and cons, which make it an excellent choice in some situations and a poor choice in others. Whether you should use this technique or not depends on the nature of your business. If the pros outweigh the cons for your business, you should consider it.

The following are the major advantages and disadvantages that are associated with this pricing technique.

Advantage: An Easy-to-Apply Rule of Thumb

Keystone pricing is by far one of the easiest pricing techniques to use. Applying this method to multiple products is fast and easy, which makes it an excellent choice for most retailers.

If the products that you’re pricing are suitable for this pricing method based on the criteria that we’ve previously mentioned, it’ll make your process faster and easier.

Disadvantage: Can Make Your Products Too Expensive

When used with the wrong products, keystone pricing can make your products too expensive compared to your competitors. In price-sensitive markets, this can cause your business to rapidly lose customers and hurt the bottom line of your business.

Whether this advantage is applicable to your business or not depends on the market that you’re in. In markets where low prices are everything, this is a pricing technique that you better avoid. If that’s not the case, you should use it, provided that your customers aren’t willing to pay more for your products.

list-price

List Price

The list price is a retail price that is suggested by the product manufacturer. This price -which is also known as the manufacturer’s suggested retail price (MSRP)- takes into consideration the different costs that are added to the products’ total cost.

Overview

Most of the time, the list price is the maximum price that the product can be sold for. Due to competition-related reasons, adhering to the manufacturer’s suggested retail price can be difficult. In most situations, products end up being sold for less than the price suggested by the manufacturer.

In some rare situations, retailers might need to go above the suggested price. However, since the retail prices are usually 2.5 – 3 times the wholesale price, this is uncommon. What makes the manufacturer’s suggested retail price so helpful is that it gives you a good idea about a product’s price, without having to do any pricing-related work.

Important Considerations

It’s true that the manufacturer’s suggested retail price is helpful when pricing your products. However, to make the most out of this suggested price, there are important points that you need to consider.

Keeping these things in mind when assessing a suggested retail price will help you make a sound judgement.

Do You Buy the Products in Bulk?

Buying a product in bulk helps you get a better price per product. When it comes to assessing the profitability of a list price, this is a major factor.

If you buy your products in bulk, the profit margin that you get for selling a product for the list price is higher than another merchant who buys the product in small quantities. Whether you should keep the higher profit margin or lower your prices depends on the market that you’re in. In case of a product that competes mainly with its price, getting a lower price per product allows you to outsell your competition while maintaining a solid profit margin. If that’s not the case, you can use the recommended price while having a higher profit margin, which is also great for your long-term business success.

Does Your Business Incur Additional Expenses?

The retail price that the manufacturer suggests takes additional costs that the retailers incur into consideration. This, however, is calculated based on the average. Since expenses can vary significantly from one business to the other, this isn’t always as accurate as it should be.

In some cases, your business might incur additional expenses that aren’t applicable to most other merchants, which is something that you must pay close attention to. Additional costs mean that the MSRP gives you a lower profit margin than your competitors. Additional costs might be due to having a store in a location that’s substantially more expensive or having to pay higher taxes. When assessing the list price that’s proposed by a manufacturer, make sure to calculate all of your costs carefully.

List Price: Advantages and Disadvantages

Despite not being a pricing “method” in itself, the list price is a key piece of information when you’re pricing a product.

Easier Pricing

One of the great things about the list price is that it doesn’t let you start your pricing process from scratch. You already have a suggested price that’s based on the research done by the manufacturer.

After you price your products, you can compare them to the MSRP to make sure that they’re relevant. Having a profitable price that’s lower than the manufacturer’s suggested price is a good thing to remain competitive in your market.

Less-Than-Optimal Pricess

While not that common, some retailers apply the MSRPs directly without proper assessment. Doing so have a major downside, which is poor prices. This can be either because the price that you’ve set is much higher than your competitor’s so you can’t compete or substantially lower, which leaves you with smaller profit margins.

In both cases, it’s bad for your business. The only way to make sure this doesn’t happen is to asses your prices compared to your competitors’ and to the list price with a tool like Sniffie.

Manufacturer’s-Suggested-Retail-Price

Manufacturer´s Suggested Retail Price

Manufacturer’s Suggested Retail Price is a price the manufactures believe that the products should be sold for. In this amount, the manufacturer has considered the production costs and other variables, such as the merchandise’s supply and demand. The MSRP is usually 2-3 times the cost of production. The MSRP consists of cost price, manufacturers profit margin and the retailers profit margin.

Overview

Manufacturers are finicky about the price at which their products are sold in the market. This is why they recommend or suggest prices to retailers to sell their product at a certain price. This price is known as manufacturer’s suggested retail price or MSRP. Often you will find the MSRP listed on the product you pick up from the stores, on both large and small items. Retailers are not bound to sell the product at MSRP since they can sell it at lower prices ( discounts and sales) or even sell it at a higher price ( in case of shortage or high demand). MSRP is calculated after the manufacturer takes into the account all the costs of production that went into the creating the product along with a profit margin for themselves and their distribution channel.

Composition

With MSRP, a manufacturer has to take care of everyone involved before the product reaches the consumer. This means everyone from the manufacturing process to sale cycle – an average margin for retailers is also added into the MSRP. What this means is that apart from the manufacturer, the wholesalers and retailers also make a profit if they stick with MSRP.

For instance, a television manufacturer wants to create a new model of television – they would first analyze the cost of production, then add in their profit margin. For instance if a single unit cost them $50, they can sell it at $125, giving themselves a $25 profit per unit and $50 as a markup for retailers and wholesalers, allowing them to make a profit.

MSRP is also used by manufacturer to create a premium brand –like what Apple Inc. does with iPhone. Apple Inc. announces the prices of their phones during a key note event which is then followed by retailers across the globe. This creates not only a strong impression of a quality product that is priced at $999. This helps in creating price stability, meaning no one offers discounted or cheaper prices.

Manufacturer’s Suggested Retail Price is listed on almost every retail product – you can pick up a wrapper of any product and you will find the MSRP listed on it. For some products, MSRP is always listed and followed closely like cars or expensive electronic goods. The idea is that since the price is recommended by the manufacturer. The price should be same across all the stores selling the product.

Difference between MSRP and MAP

If you know your pricing terminology, you might be wondering what is the difference between MSRP and minimum advertised pricing or MAP. These both stem from a manufacturer telling retailers about their product prices but are still different things.

As we covered MSRP, let’s talk about MAP. MAP is the basically the price that manufacturers tell retailers to advertise their products at. It’s perfectly legal since it doesn’t stop the retailers to sell it below any minimum price.

So what’s the difference between the two? If a product is priced at $50 MSRP, then the retailers can sell it at $45 or $55. What if they sell it really cheap to undercut their competition? For instance the same product is sold at $25. This would create a price war which would hurt the market, small businesses and also the manufacturer. With an MAP, manufacturer can come into a formal agreement with its retail partners to advertise the product price at a certain level. This is done to ensure no price war happens in the market.

How does MSRP help manufacturers and retailers?

Retailers are not bound by MSRP and can actually sell lower or higher than the recommended price. For instance if a retailer is new in a region, it can offer discounts on products to gain customers. In case of supplies running out, retailers can hike up the price.

Do keep in mind that there is a sizable portion for retailers as well, which allows them to enjoy flexibility in reducing or increasing the price. Manufacturers cannot legally bind retailers to MSRP. Though they do have the right to refuse selling their products to retailers if they want to. This usually happens only if the retailers pricing practices are hurting the brand equity in the market. 

Increasing Prices above MSRP

Since MSRP contains a markup for retailers, they don’t usually need to increase the prices. This however doesn’t mean that they are not going to. To maximize profits, they can decide to hike up the price. Especially in cases when they know that the product is in high demand. When they do this, the Manufacturer’s Suggested Retail Price is not advertised and new prices are used in advertising. This is where MAP comes into play, because manufacturers don’t want their products being sold at an incredibly high price. Generally it is not wise to promote prices higher than MSRP, since not all retailers do it. Most of the time MSRP is widely promoted. This means that the buyers would know that they are paying a higher price and can go to the retailer’s competitors. For instance, if the MSRP of a laptop is set at $1200 but a retailer is selling it at $1500, the consumers would know since other retailers might be selling it at $1200 or maybe even lower.

Pricing products below MSRP

In eCommerce age, we all know that if something is priced below the normal. People respond to it and with MSRP, retailers can reduce the price and still earn a profit.

But major concern is: how do you promote the new price? Regulations prohibit false advertising a sale. If a MAP agreement has been made with the retailer, then retailers can’t really promote a lower price than what was agreed upon.

For instance, if the MAP price for a laptop was $1150 and its MSRP is $1200, then advertisers can promote it on $1175 but not below $1150.

With MSRP, retailers know exactly what amount they can charge without losing their profits. If there was no MSRP in place, consumers would find every retailer offering their own prices and there would be no bargains for anyone.

Manufacturer’s Suggested Retail Price is a standard pricing model that helps everyone – manufacturer, distributors, wholesalers and retailers to earn a profit.

market-pricing

Market Pricing

Market pricing correctly is vital because customers are always looking for the best bargains. Competitive price is done by finding the exact price values so that you keep the prices high enough to earn maximum profits and low enough to attract customers. Even though price monitoring is often overlooked, it is important. To secure good margins, companies have dedicated teams and software to monitor competitor pricing. They are investing money and resources to get an optimized competitive price.

Overview

Finding the right products for monitoring is the initial step of the Competitor Pricing Strategy. This might usually be a certain category that you are strong in the market. Choosing a wrong product category and putting your resources in that will lead you nowhere. You must know the precise market segment you are in.

Finding the Right Competitor

The business scale: global or local audience and company’s outreach all the factors come into play when choosing your competitors for the price monitoring. This helps in finding the precise data you need to monitor competitive pricing.

Real Time Monitoring

Real time market price monitoring keeps you competitive in the market. Either if it’s new products or old products with elastic prices, price monitoring helps you decide the current price of your product should be and gain the maximum profit of of it.

Price Optimization

This you do by tracking customers’ behavior toward different prices. Record the varying demands at different price levels. Deep knowledge of your products puts you a step ahead of your customer and foremost, your competitor, as you’d know how they will react if you decrease or increase a price of a certain product.

Competitor Price Analysis

Competitor Price Analysis is keeping an account of the product price history of competitor’s product and how and when they are changing their prices. For example, knowing that a competitor will release a campaign of cheap grills in spring will help you act on time and stay in the competition during this time period.

Manual as well as Automated Tracking

Using an automated price monitoring tool or software eases the workload in many ways. All the time consuming tasks are handled by the software. This is where Sniffie comes in, to ease your way to competitor price monitoring. With Sniffie, you can get real time data of the market price so that you can make changes in the price at any time to suit your profit. Check out our service page to find out how can you start pricing effectively today.

Markup-Pricing

Markup Pricing

The markup pricing is a technique that’s used by retailers to price multiple products quickly. Also known as cost-based pricing works by adding a markup to the cost of a product. The cost of a product here refers to the price the retailer pays for those products plus any other operational fees that are associated with selling it.

Overview

For example, if a product costs the retailer $10 and his markup is 20%, the selling price for this product would be $12, which is the original cost of the product plus the retailer’s markup. Most retailers have a fixed markup value that they apply to different products.

By doing so, they don’t have to price products separately. For most retailers, this would be time-consuming in a way that makes it unfeasible. That’s why the markup pricing technique is so popular. Despite being so practical for pricing multiple products quickly, the markup pricing technique isn’t perfect. There are pros and cons that are related to this technique that make it perfect in some cases and bad in others.

Important Considerations

The following are the most important considerations that you should keep in mind when using the markup pricing method. By doing so, you’ll be able to price your products in a profitable way without losing your competitive edge.

There is more than just wholesale price

This is a common mistake that’s made by retailers when using the markup pricing technique. Despite the fact that the wholesale price is what you pay to acquire the product as a retailer, this isn’t the “actual cost” of the product that you’re selling. There are other things that add up to this cost that you need to take into consideration when setting your markup price for a product. These things are often costs, that are related to shipping the products and running the store, whether directly or indirectly. In addition to that, you should also factor in the discounted prices that you’ll need to sell some of your products for. If you don’t do that, the actual profit margin of the markup price that you’ve set will turn out to be lower than what you calculated. You can even be losing money on your markup price if you’re not careful about the extra costs.

Prices must remain relevant to the competitors´

One of the best things about the markup pricing technique is that you can just set it and forget it. After calculating a profitable markup for their goods, most retailers just apply that to all new products and rarely bother to recalculate that margin.

When that’s the case, you risk having your prices become less competitive. This is particularly true if you’re in a price-sensitive market. If competitors lower their prices without you making a similar adjustment, they may end up taking your market share.

Markup Pricing: Advantages and Disadvantages

The following are the main advantage and disadvantage that are associated with the markup technique. Knowing these will help you evaluate if markup pricing is right for your business or not.

Fast and suitable for pricing multiple items

This is the major advantage that’s associated with this pricing technique. It goes without saying that markup pricing is great when used with multiple items. Instead of spending countless hours pricing every product individually, you find a markup price that works for you and apply it to everything.

In some business models where there are plenty of different products involved, this isn’t just convenient, it’s necessary. Traditional pricing methods will more likely mean that owners of similar businesses will spend most of their time pricing instead of running their business.

Less than optimum profit margins

The downside of pricing products based on their cost is that you could be losing profits from products that can be sold for more. This is a major downside of the markup pricing technique that you should consider before using it.

In some markets, products can fetch higher profit margins and are therefore worth the time spend pricing them. While in other cases, this is a time that’s entirely wasted as the lost profits from using a markup are a negligible amount compared to the time saved. Knowing this will help you decide if markup pricing is right for your business model or you’re better off with anything pricing technique.

Minimum-advertised-price

Minimum Advertised Price (MAP)

Minimum Advertised Price is a price that is given to retailers by producer of goods. MAP is the price that retailers should use when advertising their products online or offline. Using MAP strategy is legal, but it also means that although advertising prices below the MAP strategy is not allowed, it is illegal to deny retailers for selling less than MAP level. Retailers can sell at any price they see fit, when the consumer comes to their store.

Overview

The idea behind minimum advertised pricing is that producers can protect their brand image and avoid brand erosion. If product A is sold at $1000 in 9 stores and $700 in one all the time everyone understands that the nine will start lowering prices and erode the price image of that brand. Thus MAP strategies are enforced by brand owners and producers. Minimum Advertised Pricing is the lowest price that retailers can advertise the products. It is important to remember here that it’s not the lowest price that they can sell at but in fact the lowest price they can advertise.

Logic behind minimum advertised price

MAP is about protecting the value of a product or a service. Manufacturers don’t want their products to be undersold in the market.
Consider the example of laptops, if it was being advertised as $299 while its price was $499, the company behind it would be seeing its product being undervalued and its consumers will see it as a manufacturer with cheap goods. Now this will hurt the brand and the company but also those retailers that are actually following the MAP price (since customers will opt for a retailer that is advertising a lower price compared to others that advertising higher price).

Leveling the competition

With minimum advertised price, manufacturers are able to level the playing field and ensure everyone makes a profit at the same level. MAP helps in avoiding a “race to the bottom” phenomenon for retailers that may want to increase their sales by reducing the prices. For retailers that are in the eCommerce, cutting prices is one of few ways through which they try to increase sales, since with each passing day, competition is increasing online.

Isn´t it illegal?

Bear in mind that MAP isn’t restricting sellers from selling at whatever price they want – it’s restricting them from advertising a price that can harm a product or service. If the MAP price is $499, a seller can sell it at $399 if they want, they just can’t promote the price as $399. A manufacturer will be breaking the law if they restrict sellers from charging prices that they want – they can however tell them not to advertise it below a certain price.

Why do retailers follow minimum advertised price?

Retailers might not like to listen to manufacturers but in retrospect, they can really benefit from MAP policies.

Stopping price wars

Implementing MAP uniformly results in everybody being on the same price floor. This helps in stopping price wars and provides protection to smaller retailers. It’s an agreement between sellers and manufacturers that creates a partnership and trust between the two parties.

Every seller knows that they can find a sweet spot between a price they want to sell and the MAP, meaning they can earn a profit and maintain a good rapport with the manufacturers.

Your competitors might stumble

Another benefit of following the MAP policies is that you can enjoy greater market share. Products can be taken off of your competitors shelf, if the manufacturer catches them violating the MAP.

Where does this leave you? You will feel like the best way to go is to lower your prices as well, but don’t do it as it will only trigger a price war, causing you not only to take losses but also lose your manufacturer.

Minimum advertised price and manufacturers

For both the retailers and the manufacturers, following the MAP is a win – win situation. Retailers can possible form partnerships, when the manufacturers brand is left unscathed. Best part about minimum advertised price is that it creates a price floor for retailers – a boundary that separates between price wars and selling safe.

Why manufacturers follow MAP

There is a misconception that by following MAP, a retailer is actually benefiting the manufacturer. But this is not the case.  While you can choose not to follow the MAP since sellers have the freedom to choose the price they want to promote and sell at, it can hurt the manufacturers and others that are in the same market as you. Manufacturers tend to penalize  by terminating contracts and relationships with retailers, meaning your competitors will have the product and you won’t.

Protecting brick and mortar

Distribution channels can be protected using MAP policies. Using MAP greatly reduces risk of “show rooming”. Show rooming is when consumers visit brick and mortar stores to see a product but later on order it online due to discounts and offers.  So by having a restriction on what price retailers can advertise, they help vulnerable sellers and level the playing field.

Minimum-advertised-pricing-strategy

Minimum Advertised Pricing Strategy

The minimum advertised pricing strategy is a strategy where brand owner or producer keeps their end selling prices at a harmonized level. A strategy that is implemented by pricing managers and sales people together to convince the sales channel to follow the minimum advertised price and thus preserve the brand image. Often MAP strategies are followed by price monitoring and if retailers do not follow the guidelines, the contract with the retailer might be reconsidered or ended.

Overview

The minimum advertised pricing strategy (also known as MAP) is used by brands to prevent their retail partners from advertising their products for sale below a specific price. This technique is usually used by high-end brands to protect their brand image. Having a sale and selling products at discounted prices is a sure way to sell them. However, it also results in the products being sold looking cheap, which do some brands more harm than good in the long term. And that’s why this pricing strategy was devised. The termination of the contract can be under risk, if a retailer violates the minimum advertised price to which he agreed to. In some cases, this might have other legal complication. For brands that are serious about preserving their brand image, the minimum advertised pricing strategy is a must. Not only does it help maintain their image as premium brands, it also makes the decision of buying their products at full price easier for the consumer.

Important Considerations

If used correctly, the minimum advertised pricing strategy can be great for your brand. Not only will it help you sell your products at higher profit margins, but it’ll help you establish a reputable brand name in the long term.

To make the most out of this pricing strategy though, there are a few things that you should keep in mind.

Is Minimum Advertised Pricing Strategy Right for my Brand?

At first, the minimum advertised pricing strategy might seem like the best thing to do. After all, nobody likes selling their products at a discounted price. While this might be true in some cases, this isn’t by any means a general rule.

For some brands, lowering prices is how they can outperform their market opponents. Whether or not you should be using this pricing strategy depends mainly on the products that you’re selling.

In the case of premium brands that people buy for reasons other than the price, minimum advertised prices are recommended. Think of brands like Bose, Beats, Apple…etc. With such names, people aren’t buying the products because they are the cheapest. They just want them and are willing to pay to get them.

If you sell products that people recognize and want, this pricing strategy is one of the best ways to establish your brand image. If not, you’ll get better results from other pricing strategies.

The Minimum Advertised Pricing Strategy Works Differently Online

Ever tried buying something from an online retailer -like Amazon– and found that you couldn’t see the price until you add the product to your cart? This isn’t some glitch in the website, this is the way online retailers use to get around the minimum advertised price that’s set by the manufacturer.

As you’ve probably guessed from the name, the minimum “advertised” price is more concerned with the price that’s being advertised by the manufacturer, not how much the product is actually being sold for.

Of course, in a physical store, you can’t really sell a product without displaying the price. When selling online, however, this isn’t the case. By allowing people to see the price of a discounted product in their cart only, the vendors aren’t “advertising” the price and as a result, aren’t violating their agreements.

If you plan on using the minimum advertised pricing strategy when selling your products online, this is something that’s worth considering.

The Minimum Advertised Pricing: Advantages and Disadvantages

Like all other pricing strategies, minimum advertised pricing has its own advantages and disadvantages. The following are the major ones that you’ll probably encounter when using this strategy.

Advantage: Maintaining a Premium Brand Image

People love buying things at discounted prices. However, low prices do premium brands more harm than good. If you leave it for each retailer to advertise with the prices they want, people will lose faith in the value of your product and your overall brand image. By setting a price that all retailers must adhere to, you can maintain your premium brand image by avoiding having cheap products associated with it.

Disadvantage: Allowing Cheaper Alternatives to Penetrate Your Market

The major downside of using the minimum advertised pricing is that keeping the prices artificially inflated will allow for cheaper products to gain a foothold in the market. Since your products don’t go lower than a specific price point -when they should, cheaper models will come and fill up this gap. Some of the customers who were willing to buy your products at discounted prices will be buying these cheaper alternatives instead.

Nonlinear Pricing

A term that’s used to discount schemes where different price bundles offer higher total revenue with a lower per-unit price for the buyer. In layman terms, the seller benefits from customers buying more of his products while the customers benefit from getting the goods at a reduced price.

Overview

As sellers usually benefit from selling more of a specific product -even at a reduced price, this is pretty much a win-win situation where both the seller and the buyer get something they want.

A good example where nonlinear pricing is used is plus-size meals at restaurants. When you buy one of these plus-size meals, you save money compared to buying the same quantity with regular meals. In most cases, customers won’t consider buying more from whatever they’re buying if this pricing strategy wasn’t used. This makes the nonlinear pricing strategy exceptional good at increasing sales volume.

Important Considerations

When properly used, a nonlinear pricing strategy can dramatically boost sales. However, to make the most of this pricing strategy, there are a few things that you should keep in mind.

By doing so, you’ll be able to make the most out of it while avoiding the downsides.

The Suitability of the Nonlinear Pricing Strategy for Your Business

Despite being a great way to boost sales, nonlinear pricing isn’t right for all businesses. While it can provide exceptionally good results for some businesses, it can be totally unsuitable for others.

The reason for this is quite simple, which is the fact that not all businesses benefit that much from selling more at lower prices. That’s why you need to carefully analyze your profit margins to make sure that nonlinear pricing is something that you want to do.

Asides from the profit margins and whether the nonlinear pricing strategy will be profitable for your business or not, your brand image is another thing that you must keep in mind. In case of high-end brands that charge top dollar for their services, being able to “get more for less” is a message they don’t want to be sending to people.

Before you decide on using nonlinear pricing, always asses all the pros and cons to make sure it’s the right choice for your business.

The Long-term Impact of Using Nonlinear Pricing on Your Business

Another thing you should consider before using a nonlinear pricing strategy is the long-term impact it can have on your business. If you use this pricing strategy for a long period of time, it can change your business model for the best.

For example, let’s say that you own a fast food restaurant. After calculating the cost, you decide that you can offer a free Coke with any of your special extra-large french fries. As a result, many people who buy food from your restaurant start choosing this offer as they perceive it as a great value for money.

By selling much more French fries than you used to, you can negotiate for a better price with your potato supplier. This will allow you to have better profit margins for your French fries and make more money or even come up with more tempting offers to capture a bigger market share.

Having the big picture in mind before you start applying a nonlinear pricing strategy can help you benefit in ways you didn’t know were possible.

Nonlinear Pricing: Advantages and Disadvantages

Nonlinear pricing has its own unique advantages and disadvantages. Whether you should use this pricing strategy or not depends on your business. If the pros outweigh the cons, then this strategy is right for you. If not, there are other pricing strategies out there that are a better match for your needs.

Selling More of Your Products

As you already know, getting more for less is something that people can hardly resist. When you use a nonlinear pricing strategy, people are tempted to buy more of your products to make the most out your offers.

If your business benefits from selling more items, this is an advantage that makes this strategy worth considering.

Making Your Products Look Cheap

One major downside of using a nonlinear pricing strategy is that it makes your products look cheap. Imagine a company like Apple offering two iPhones with a 10% discount, or a fancy restaurant offering a discount on target portions.

If that happens, you’ll never see these products as “fancy”. Whether this is a big deal for you or not depends on the products that you’re selling. If your brand image is more important in the long term than selling more of your products, this is a pricing strategy that you want to stay away from.

Odd-pricing

Odd Pricing

Retailers use odd pricing to create psychological feeling that a price is lower than it actually is.

Odd pricing is a psychological pricing technique that’s used quite often, and it has become the norm in many sectors. Retailers use this technique to give their customers the impression that the products they’re buying are cheaper than they are.

Overview

Odd pricing can be spotted products ending in .99 in most retail stores. So basically, if a product is to be sold for $10.00, the vendor will price it at $9.99. By doing so, people perceive this product to be cheaper than another one that’s priced at $10.00.

Despite sounding a little bit weird when you think about it, this simple-yet-smart pricing technique is proven to boost sales significantly. The reason behind this is that most people’s minds don’t really process the entire price, especially for cheaper products. For most people, $9.99 is just $9 while $10.00 is $10, which is -in theory- more expensive than the $9.99 product. What makes this pricing technique great is that it’s easy to apply and provides guaranteed results. There aren’t many calculations to do and using the odd pricing method is straightforward. Despite being seemingly so simple to use, there are a few things that should be taken into consideration when using this pricing technique.

Important Considerations

Despite sounding like something you should be using in all situations; odd pricing isn’t always the best choice every time. In some cases, it can do more harm than good and should be avoided. By keeping the following in mind, you’ll be able to make the most out of this pricing method.

Is Odd Pricing Right for What You’re Selling?

Setting a price that people perceive as cheaper sounds like a good thing. However, the more expensive the products, the more irrelevant this pricing method becomes. If you price a $10.00 product as $9.99, this is a great thing. People don’t really think that much when buying something in this price range and they just consider the second price as the cheaper alternative. If you’re selling something as expensive as a car or real estate, the odd pricing technique just becomes really awkward. A house that’s priced at $199,999 isn’t more attractive than a house that’s priced at $200,000. People do process prices at this point and what this will do is make the price look weird for no good reason at all.

The Impact of Odd Pricing on the Perceived Product Quality

In some cases, giving the impression that you’re cheaper is all you need to do to sell your product. In other cases, this is something that will result you losing sales. As most people associate price with quality, appearing to be cheaper can make people shy away from your products when quality matters most. If you’re selling something like an electric shaver and you price it at $59.99 instead of $60.00, people might get the impression that it’s inferior to that $60.00 model that your competitor is selling. Before you use odd pricing to give your products that cheaper impression, make sure that this is what will actually get people to buy your products. If you’ve done your research and you’re sure that this is what your customers want, then you should definitely use it. If not, there are other pricing methods that’ll give you better results.

Odd Pricing: Advantages and Disadvantages

Despite being more of a “price display method” than an actual “pricing method”, the odd pricing technique can really impact. There are, however, advantages and disadvantages that are associated with using this method. Knowing them will help you decide if odd pricing is right for you.

Advantage: Makes Your Product Appear Cheaper

Having your products appear more competitive in terms of price by making a minimal price adjustment sounds too good to be true. This, however, is exactly what the odd pricing technique does. If you’re selling products that face high pricing competition, this is an advantage that makes a big difference. Also, your competitors are most probably using this technique so not doing so will put you at a huge disadvantage.

Disadvantage: Giving a Low-Quality Impression About Your Products

This is the major disadvantage that’s associated with odd pricing. When you’re using this pricing method, your products give the impression that they’re cheaper and of lower quality than more expensive alternatives. For some products, this is certainly bad for business and the negative impact of being perceived as cheap exceeds the positive one by far. When that’s the case, odd pricing should be avoided.

parallel-export

Parallel Export

Parallel export happens when a retailer buys more merchandise than they need and sell the excess merchandise to other retailers. This is a practice that’s often used in closed markets -like the EU, where open trade is a normal procedure. Retailers buy large quantities of the merchandise that they’re selling so they can get them for a lower price.

Overview

By getting the merchandise for a lower price, retailers increase their profit margins by lowering their cost. The excess merchandise is sold for other retailers with a small profit margin. Combining the profit from selling the excess products to other retailers with the higher margins from getting the products for a lower price makes parallel export a lucrative practice.

Important Considerations

Despite its advantages, parallel exports do have its disadvantages. There are many reasons why you should be careful when using this technique. Knowing more about parallel export will help you decide whether its right for your business or not. Before you start using the parallel export method for your business, you should take the following points into consideration to make sure it’s the right choice for you.

Are the Profit Margins Worth the Risk?

The risks that you might be faced with when using the parallel export practice range from not being able to sell the extra merchandise that you buy to legal and logistical issues. Fully understanding your situation and the market that you’re in will help you make a sound decision.

Remember that there are different types of risk associated with different merchandise. Make sure to take these into consideration as well to avoid making a business decision that you might later regret. Taking the time, you need to assess your situation is always the right thing to do.

Do You Have a Proper Network to Sell the Excess Merchandise?

When you’re using parallel export, you’re buying more merchandise than you can sell. That is how you can get suppliers to sell you for discounted prices and increase your profit margins.

With excess merchandise that needs to be sold, the question that you should be asking yourself is whether you have the network you need to sell the merchandise. Being able to sell the excess merchandise requires lots of market connection with vendors who are willing to buy.

If you are using parallel export without having the connections you need to sell the excess merchandise, you’re assuming a great risk. The results of not being able to sell the excess merchandise can be devastating, especially for a small business. Before you commit to the extra merchandise, be sure that you’ll be able to sell it.

Parallel Export: Advantages and Disadvantages

The parallel export practice has its own unique advantages and disadvantages. Knowing these will help you decide whether this practice is right for your business or not.

Advantage: Improving Your Profit Margins

This is the major advantage of this practice. If you’re looking for creative ways to increase your profit margins without raising your prices, parallel export is worth considering.

Being able to make more money by selling the exact same number of products to the same people means extra expenses associated with things like marketing aren’t necessary.

Disadvantage: Associated Risks

Buying merchandise and not being able to sell it is something that shouldn’t be taken lightly. When using the parallel export method, this is a risk that you must take. Even if you have a network of retailers who are willing to buy your products, you’ll find yourself stuck with the products if anything goes wrong.

If you’re able to minimize the risks associated with the partial export method, it can help you take your business to the next level and achieve great results.

Penetration-Pricing

Penetration Pricing

Penetration pricing is a pricing strategy that’s used -as the name suggests- to penetrate a new market.

Getting a foothold in a new market is never easy. This is especially true if the service/product that you’re offering is not unique. People are already buying something else. Why should they give your product a shot

Overview

Your existing competitors have a big advantage: they have been there first. Trying to capture a market share from one of those well-established competitors requires a strong incentive to their customer. That’s where penetration pricing comes into play. Using this strategy, you give potential customers a reason to try your product over others that they already know and trust.

What is the meaning of penetration pricing? In layman term, this is a pricing strategy that is used by new product services to quickly capture a share of the market. By setting a low price for your products -compared to your competitors, you get people to try them. If they like your product, there is a chance they’ll become long-term customers. Despite sounding really simple, there is more to penetration pricing than meets the eye.

Set your goals before you start

Super-low prices aren’t something that most business can sustain forever. You have set a low penetration price and have captured a large market share because of your low prices. Now what?

The problem with penetration pricing isn’t in having initial success. Most people will give high-discounted products a shot. The issue is to have them continue buying your product after the penetration price is no longer in effect. In order for a penetration pricing strategy to be successful, you have to start with an end in mind. What do you want to achieve?

The goal of a pricing strategy isn’t the initial market share, it’s to have people continue buying your products at the full price. Confusing the initial success with the real goal of this pricing strategy can lead to disastrous results. Unlike the skimming pricing strategy, penetration pricing starts to form the bottom.

If you don’t have a clear plan of how you’ll keep people continue your products, your entire efforts can be rendered useless. You came into the market with a highly-discounted price, people start buying your products like crazy, your prices went up to the original tags, people went back to buying their own products and that’s it.

Not only is this difficult to recover from, it can also you cost you lots of money along the way. Some business can offer a penetration price with no profits -or even taking a small loss- to penetrate a new market. If you want your efforts to produce results, start your penetration pricing strategy with a plan of what you’ll do next to make it succeed.

Penetration pricing: Advantages and disadvantages

When it comes to launching a new product, there are plenty of pricing strategies to choose from. Penetration pricing is just one of those strategies. Like any pricing strategy, penetration pricing has its own advantages and disadvantages. For you to decide whether this pricing strategy is right for you or not, you need to take the advantages and disadvantages into consideration.

Creating a tempting offer

If you’re selling any kind of consumer goods, penetration pricing is usually a good market entry strategy. For similar goods, the price is one of the main factors that affect people’s choices. Having an item they buy regularly at a super-discounted price is definitely tempting.

Most people will try the product so they can save money on that purchase, and they get to try something new at a discounted price. Even if it didn’t turn out to be as good as they expect, getting it a lower price makes the trial process as low-risk as possible.

A major advantage of penetration pricing is that it will get people to try the product. Whether this is a good thing or not depend on the product that you’re selling though. If you’re selling a relatively low-cost item that people buy on a regular basis, penetration pricing can be an excellent choice.

However, if you’re selling a luxury good, this strategy can make your products look cheap. Once people have this perception about your product, changing it later can be difficult. In that case, price skimming can be a strategy that works better for the pro