pricing your products is a big decision that will ultimately have a large effect on your business a strong pricing strategy is a lot more than just calculating the costs and adding a markup so today i'm going to show you eight effective pricing strategies that will help you make your business more competitive and make more sales [Music] now pricing your products always starts off with math you absolutely need to know how much it costs to make a product or obtain a product and get it to market this includes your production costs business costs marketing costs and shipping and handling costs but though it always starts with simple math a pricing strategy isn't all arithmetic the reality is that humans are creatures of emotion and it's incredibly rare that we make all our decisions exclusively through the lens of logic here is a simple truth what a customer is willing to pay for a product isn't really about how much the product costs what it's actually about is how they perceive the product's value so let's get into some pricing strategies that just might change the way you think about pricing your products first let's talk about cost plus pricing cost plus pricing is by far the easiest way to think about pricing your products i'm mentioning it here first simply because it's popular not because it's the best pricing strategy cost plus pricing is exactly what it sounds like calculating the costs of your products and adding on a markup for retailers this markup is often double the wholesale price but the market percentage is variable depending on your business while this strategy does preserve a nice profit margin there are some issues because it doesn't take into account market factors like competition or demand for your product so it can actually lead to a situation where you're charging too much or too little next we have competitive pricing competitive pricing is when you check out what your competitors are charging to figure out the going rate then rather than focusing on profit margin as a starting point this pricing strategy is about making the price of your products comparative and you can do this one of two ways the first is pricing your products slightly lower than competition thereby attracting value shoppers who are price sensitive think walmart versus whole foods if you have lower costs and can actively promote your special pricing then this can communicate that your brand is economic and accessible the second is pricing your products slightly higher signaling that your product might be better in quality think starbucks versus dunkin donuts competitive pricing is often used in highly saturated markets with highly similar products where pricing can be a differentiator next we have price skimming price gaming is when a company charges the highest possible price for a product right from the outset and then decreases it over time this is a pricing strategy that apple has used for years price skimming works best when there is scarcity of a product and when new versions of that product will be rolled out in the future justifying the reduced cost of the previous generation because it's become less relevant this pricing strategy is best used by businesses that have standard products with features that other companies just can't compete with so if your business has a prestigious image and creates innovative products price skimming could be the pricing strategy for you however it's not going to work if you're in a saturated market and your product doesn't truly stand out now let's talk about penetration pricing which is when you use a low price to enter a market it's used to draw attention to your business and take away business from competitors who effectively can't match that price once you have more wallet share then you begin raising the price this pricing strategy is famously used by internet service providers like comcast who attract customers with cheap introductory prices but once the introduction is over the price of the service goes up in retail this means intentionally pricing items low for example the grocery store costco prices organic food items at lower prices than can be found elsewhere but while these prices are low now we can expect they will increase over time as they capture more of the organic food market discount pricing like coupons seasonal pricing and of course sales can all be forms of penetration pricing as well helping stores get rid of old inventory and attract some short-term traffic to the store the logic behind penetration pricing is that once the sale is over some customers will remain loyal to the brand in the long term one important thing to be aware of is that too many sales can make people weary of paying the regular price and too low prices can create a perception of bad quality products next we have value-based pricing value-based pricing is when you set the price based on how much the customer perceives your product to be worth this is done by locating data on what customers pay for comparable products then listing what makes your product different and better then you need to place a financial value on those differentiating features lastly you need to communicate that extra value your product provides to customers now value-based pricing is one of the most ideal strategies for entrepreneurs however it only works if you have a differentiated product and you are genuinely providing more value than your customers pay in price value-based pricing when done right is a great way to build customer loyalty but it demands you stay in lock step with your customers desires now let's talk about loss leader pricing loss leader pricing is a strategy where you price a product for a loss intentionally to attract customers to get them in the door or to your site where they may buy other items now while this might sound a lot like penetration pricing on the surface it's only tangentially related because the motive is entirely different the goal with loss leader pricing is to make your profit on other items not by increasing the price of the item you're taking a hit on lost leader pricing is heavily employed in the video game industry where game consoles are sometimes sold for less than the cost to build because the profit is made on video games and subscription services a loss leader strategy is best employed by larger companies who have other products they can sell to make up for the loss now let's talk about bundle pricing as the name probably implies bundle pricing is when you sell two or more complementary products together for a single price now this doesn't require much explanation but it's used by companies to add value for customers at a lower cost hopefully increase the number of sales and increase loyalty to the brands for example getting a new phone with your data and phone plan is an example of bundled pricing now let's talk about anchor pricing anchor pricing is the use of comparison and everyone knows humans love to compare things with anchor pricing a retailer lists both the discounted price and the original price right beside each other to establish the savings you'll gain from buying right now anchor pricing triggers what is known as the anchoring cognitive bias where an initial piece of information is used as the anchor by which all following judgments are made if you've ever seen a price flashed out and a discount next to it and thought i'd better take advantage of this will it lasts well you have just participated in anchor pricing now if you're looking to get started shopify is offering a free 14-day trial simply click the link above to take action to level up your ecommerce business hopefully this video has given you a broad understanding of pricing strategy and how it can be used to effectively grow your business if there are any videos you'd like to see make sure to put them in the comments and we'll make them happen also don't forget to like and subscribe for more simple actionable tips to grow your online business workshop for small business owners with big plans i've been your host tyler and i'll see you next time on learn with shopify you