What is a loss leader pricing strategy? What is marketing's relationship to pricing? How does product life-cycle impact pricing? Use marketing insight tactics to determine the best pricing technique for your products or services.
For example, in a consumer environment, the business might price a product at below cost in order to attract interest, customers and traffic to the store. The goal is to have buyers come to the store for the low priced item and then stay to buy a number of other items.
In a business to business environment, this strategy works very much the same: a low price attracts potential buyers, and then since the customer is attracted, the business also promotes other products or services. The goal here is to gain the customer's attention (if price is a determining buying factor) and then sell other products or services as well.
What it is: Low pricing (often pricing at cost or below cost) on a product or number of products to bring customers to the storefront (physical or digital). These customers often buy on price alone.
The pricing strategy assumption is that while the customer is in the store to buy the very low-priced product, they will look around and will likely buy other products at regular or higher prices (you can make up the loss on the low pricing with higher pricing on other items).
For a business-to-business product, you might sell one of your mature or declining products (in your product life cycle) at a loss leader price and expect that customers will buy other products or services.
For example, if you are a graphic designer specializing in web site design, you might offer a below cost price on the website banner design and then expect to receive a higher price for some of your other services, such as special interactive form design.
Why and When to use it: Use this strategy when you have products in the mature or declining stage of their product life cycle and when you want to stimulate a renewed interest in that product. This strategy can also be used if you have high inventory of a product that you want to move quickly.
When NOT to use it: Do not use this strategy if the product will go dramatically up in price next week or next month - at least don't do this unless you have made it very clear in all of your promotional efforts that this is a very special low price (because you have excess inventory, the product has a short shelf life (e.g. fresh fruits, vegetables, etc.); that you will be discontinuing the product; or it's a seasonal product, etc.).
Do not use this strategy if you are in the introductory or growth stages of your product's life-cycle. Why? Because by selling at a low price you are setting a new low expectation - customers will expect that that low price is where that product should be priced and they will not want to buy at a higher price.
When you select your best fit pricing from the list of pricing strategies or from the discussion on pricing method or competitive strategies available on this site, you always need to keep in mind what the reaction of your competition in business will be.
Understanding what is marketing, and marketing's relationship to the product life-cycle, is of key importance. Use marketing insight tactics, competitive intelligence and/or market research to clearly understand the potential impact of competitive pricing activity.
Be prepared to counter competitive offensive or defensive moves. Make sure that you analyze your competition and assess their strengths and weaknesses (through competitive intelligence) before you price your product.
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Pricing is the foundation of your business success.
Interestingly many businesses focus on either building their price structure by using costs as the basis OR by using market information (that is, what the market will pay).
The reality is that the price needs to be constructed with both costs and market forces as part of the consideration. Additionally, the product or service value (ranging from commodity to luxury) plays a role in price strategy.
Building a strong pricing program is part of your marketing mix activities (product or service; promotion; place or location; and price). Many businesses focus most of the marketing attention on developing the product or service program and then promoting it; make sure you give price the time and attention it needs.
Businesses need to be more aware of the power of competitive and comparative markets than ever before.
Because technology and the internet makes pricing information available 24 hours a day, 7 days a week.
Customers use their mobile phones, laptops and even desktops to price check and compare.
The speed of pricing changes makes this an urgent action item for all businesses.