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.
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.
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.
How can Sniffie help?
If you must decide if incremental pricing revenue will help one of your products achieve its goals, you need to know the prices of the competitors. By doing so, you’ll understand where your product stands compared to theirs. Knowing this requires extensive market research which takes lots of effort and time.
By helping you find out about the prices of the competitors as well as cost issues related to your own product, Sniffie can make this process a whole lot easier.
How to use incremental pricing revenue
- Know the incremental cost of your product.
- Make sure you have existing product sales that can absorb the fixed overhead.
- Set your profit margins for that product.
- Calculate the incremental pricing revenues.
- Set the new price accordingly.
- Used to asses whether reducing the price of a product in exchange for selling more of it is worth it. This is usually associated with an offer from a customer.
- Make sure to calculate all costs related to making the product.
- Use this pricing method carefully to achieve specific goals.
- Don’t apply this pricing method to all of your products as it’ll become more difficult to absorb the fixed cost overhead.