strategy

Penetration Pricing
Penetration Pricing Jonathan Poland

Penetration pricing is a pricing strategy in which a company initially sets a low price for its products or services in order to quickly gain market share and attract customers. This approach is often used by businesses that are launching a new company, brand, product, service, or technology, and are looking to quickly establish themselves in the market. By offering a low price, a company can make its products or services more attractive to potential customers and can potentially increase its sales and market share. However, it is important for a company using penetration pricing to carefully plan and monitor its pricing strategy, as setting prices too low can potentially lead to lower profits or even financial losses.

Here are examples of companies using penetration pricing:

  1. A new smartphone manufacturer offering its phones at a lower price than its competitors in order to quickly gain market share
  2. A startup food delivery service offering discounted prices for its first customers in order to quickly attract a large user base
  3. A new fitness app offering a free trial period in order to encourage customers to try the app and potentially become paying subscribers
  4. A startup electric car company offering its first cars at a lower price than its competitors in order to quickly gain market share
  5. A new online retailer offering discounts to its first customers in order to quickly attract a large user base and build brand awareness
  6. A new streaming service offering a free trial period in order to encourage customers to try the service and potentially become paying subscribers
  7. A new software company offering its first products at a lower price than its competitors in order to quickly gain market share and establish itself in the market.

Premium Pricing
Premium Pricing Jonathan Poland

Premium pricing is a pricing strategy in which a company charges a high price for its products or services in order to maintain the exclusivity and perceived value of its brand, business, product, or service. The idea behind premium pricing is that by charging a high price, a company can limit the number of customers who are able to access its products or services, and can therefore maintain a certain level of exclusivity and prestige.

This approach is often used by luxury brands, which seek to preserve their high-end image by charging premium prices for their products. By charging a high price, a company can potentially increase its revenue and profits, even if its sales volumes are lower compared to companies that charge lower prices. Premium pricing can also be used to differentiate a company’s products from those of its competitors and to create a perception of value among its customers.

Some examples of premium pricing in action include:

  • A luxury car manufacturer charging a high price for its top-of-the-line model in order to maintain the exclusivity and prestige of its brand
  • A high-end fashion retailer charging a premium price for its designer clothes in order to differentiate them from lower-priced clothing sold by other retailers
  • A luxury hotel chain charging a high price for its top-level rooms and suites in order to create a perception of exclusivity and value among its customers
  • A high-end restaurant charging a premium price for its menu items in order to create a perception of exclusivity and quality
  • A luxury skincare brand charging a high price for its products in order to differentiate them from lower-priced skincare products
  • A luxury watch manufacturer charging a premium price for its watches in order to maintain brand position

In each of these cases, the company is charging a high price for its products or services in order to preserve the status and perceived value of its brand. By doing so, it can potentially increase its revenue and profits, even if its sales volumes are lower compared to companies that charge lower prices. Premium pricing can be an effective way for businesses to differentiate their products and to create a perception of value among their customers.

Subscription Model
Subscription Model Jonathan Poland

A subscription model is a pricing and revenue strategy in which customers pay a recurring fee for access to a product or service. This model is attractive to businesses because it provides a predictable stream of income and can help to increase customer lifetime value by encouraging customers to continue using the product or service over a longer period of time. Subscription models are common in a wide range of industries, including media, software, and fitness. By offering their products or services on a subscription basis, businesses can more effectively capture the value that customers derive from their products, and can potentially increase their revenue and profits.

Examples of the subscription model in action:

  • A media company offering a subscription service that gives customers access to its online content, including articles, videos, and podcasts
  • A software company offering a subscription-based service that gives customers access to its software products, including updates and new features
  • A fitness company offering a subscription service that gives customers access to its gym facilities and classes

In each of these cases, the business is offering its product or service on a subscription basis, allowing customers to pay a recurring fee in exchange for ongoing access. This model can be attractive to both businesses and customers, as it provides a predictable stream of revenue for the business and a convenient way for customers to access the product or service.

Variable Pricing
Variable Pricing Jonathan Poland

Variable pricing is a pricing strategy in which prices are set based on real-time data and can vary depending on a wide range of factors, such as market conditions, customer behavior, and competition. This approach allows businesses to quickly and accurately adjust their prices in response to changes in the market, and can help them maximize their revenue and profits. Variable pricing is the basis for a number of pricing techniques, such as revenue management, dynamic pricing, and yield management.

By using data to set fine-grained prices, businesses can more effectively respond to changes in the market and can better align their prices with customer needs and preferences. Some examples of variable pricing in action:

  • An airline using yield management to adjust the prices of its plane tickets based on factors such as the time of day, the number of seats available on a particular flight, and the historical demand for that route
  • An online retailer using dynamic pricing to adjust the prices of its products based on factors such as the competition, the availability of the product, and the customer’s purchase history
  • A ride-hailing company using algorithms to adjust the prices of its services based on factors such as the demand for rides in a particular area, the availability of drivers, and the time of day

In each of these cases, the prices of the products or services are being adjusted in real time based on data inputs, allowing the businesses to more effectively respond to changes in the market and maximize their revenue and profits. The following are common ideas on how to use variable pricing.

Price Discrimination

Price discrimination is any pricing strategy that attempts to sell both to customers who are price sensitive and those who are relatively insensitive to price. For example, a manufacturer of sunglasses may set a low price for unpopular colors. Customers who are price sensitive may be tempted to buy a color that is on sale. Customers who aren’t price sensitive will buy the color they prefer.

Inventory

Lowering a price based on inventory levels to clear items. Alternatively, a price may go up when an item is selling fast and you’ll soon run out of stock.

Competition

Basing prices on competitive intelligence. For example, lowering a price when a competitor launches a new product that is a threat to your market position.

Forecasting

Setting prices based on supply & demand forecasts. This can be done at a fine-grained level such as a seat on a flight. If you forecast that a particular seat might not sell you might offer it at a low price.

Dynamic Pricing

Dynamic pricing is a term for variable pricing that occurs in real time. For example, an ecommerce site that uses algorithms to set prices based on data such as inventory levels.

Peak Pricing

Setting higher prices during peak hours for infrastructure with fixed capacity such as roads.

Sustainability

Pricing can be used by cities and nations to meet sustainability goals such as air quality levels. For example, vehicle registration and license fees based on the emissions of the vehicle.

Yield Management

Yield management is the science of pricing inventory that occurs at a point in time such as a seat on a flight or a hotel room. Such inventory is limited in supply and may generate high prices when demand is high. Alternatively, such inventory goes to waste if it is not sold and is often discounted.

Value Pricing
Value Pricing Jonathan Poland

Value pricing is a pricing strategy in which a company sets its prices based on the perceived value that its products or services offer to customers, rather than on the prices of competitors or the company’s own costs. This approach involves estimating how valuable a product or service is to a customer and then setting the price based on that estimate. Value pricing is based on the idea that customers are willing to pay more for products or services that they perceive as being valuable, and that the value of a product or service is not determined solely by its cost or the prices set by competitors. By focusing on the value that its products or services offer to customers, a company can set prices that are more in line with customer needs and preferences, and that can potentially maximize its revenue and profits.

Services

A restaurant prices all appetizers below $10, including those that contain more expensive ingredients than several main dishes that cost $25. This is done because in the restaurant’s experience, customers value appetizers less than main dishes and are unwilling to pay more than $10.

Fast Moving Consumer Goods

A fast moving consumer goods firm prices hair treatment higher than hair conditioner despite the costs of the two being more or less the same.

Art

Art is typically priced based on its perceived value.

Capital Goods

A capital good such as an industrial robot may be priced based on its ability to generate revenue for customers. For example, if an industrial robot can improve customer profits by $1,000,000 a price of $500,000 would allow the customer to achieve a return on investment of 100%.

Niche Markets

A book is of very high value to geologists but of little interest to anyone else. In this case, the author has incentive to charge an unusually high price because the few people who want it place a high value on it.

Consulting

A highly specialized IT consultant finds that clients often have big problems when they need her services. As such, they are generally willing to pay high prices.

Medicine

People value their lives and are often willing to pay a high price for medical treatments far beyond their cost. This can raise situations whereby a high price is charged for a treatment that has a low cost. In many cases, a public healthcare system prevents this type of pricing.

Superior Goods

Luxury items such as a fashion brand with high social status may price items based on customer perceptions of value. For example, a particular brand may find that they can charge $500 for shoes but can’t charge more than $100 for an umbrella. In theory, the umbrella could be more expensive to manufacture.

Veblen Goods

Veblen goods are products and services such as a wedding where people feel they should spend a high price and may actively avoid lower cost options. For example, a wedding venue may charge a similar price for seafood, meat and vegetarian selections despite large differences in cost.

Price Umbrella
Price Umbrella Jonathan Poland

A price umbrella is a pricing strategy in which a company sets a high price for a premium product or service, and then uses that high price as a reference point to offer lower prices for other, less expensive products or services. The idea is that the high price of the premium offering creates a “price umbrella” that makes the lower prices for the other products or services seem more appealing by comparison. For example, a luxury car manufacturer might set a high price for its top-of-the-line model, and then use that high price as a reference point to offer lower prices for its other models, making them seem like a better value by comparison. This strategy can be effective in helping a company differentiate its products and create a perception of value among its customers.

Some examples of the price umbrella strategy in action include:

  • A high-end clothing retailer offering a $1,000 designer dress and then using that high price as a reference point to offer a $200 blouse and a $100 pair of jeans, making them seem like a better value by comparison
  • A luxury hotel chain offering a suite with a starting price of $1,000 per night and then using that high price as a reference point to offer standard rooms for $200 per night, making them seem like a better value by comparison
  • A premium smartphone manufacturer offering a top-of-the-line model for $1,000 and then using that high price as a reference point to offer lower-priced models for $500 and $300, making them seem like a better value by comparison

In each of these cases, the high price of the premium offering serves as a reference point that makes the lower prices for the other products or services seem more attractive by comparison. This can help the company differentiate its products and create a perception of value among its customers.

Channel Pricing
Channel Pricing Jonathan Poland

Channel pricing refers to the practice of setting different prices for a product or service depending on the sales channel through which it is sold. For example, a business might set a higher price for a product when it is sold through a brick-and-mortar retail store compared to when it is sold online through the company’s website. Channel pricing can be a useful way for businesses to differentiate their products and to adjust their prices to reflect the costs and benefits of different sales channels. For example, a company might set higher prices for products sold through brick-and-mortar stores to reflect the higher overhead costs associated with operating a physical retail location.

Some examples of channel pricing in action include:

  • A clothing manufacturer setting higher prices for its products when they are sold in department stores compared to when they are sold in the company’s own outlet stores
  • A software company offering a lower price for its products when they are purchased through its website compared to when they are purchased through a third-party retailer
  • A restaurant offering different prices for its menu items depending on whether they are ordered in the restaurant, for takeout, or for delivery

In each of these cases, the business is using different prices to reflect the differences in the costs and benefits associated with different sales channels. By doing so, they can better align their pricing with their overall business objectives and can potentially maximize their revenue and profits.

Algorithmic Pricing
Algorithmic Pricing Jonathan Poland

Algorithmic pricing involves using automation to set prices dynamically based on a variety of factors, such as customer behavior, market conditions, and competition. This practice has been used extensively in the airline industry, where it is known as yield management, and is also common in other highly competitive industries such as travel and software. Algorithmic pricing can be implemented using a wide range of algorithms, from simple rules-based systems to complex machine learning models that are continually optimized through a/b testing. By using automation to adjust prices in real time, businesses can more effectively respond to changes in demand and competition, and can potentially improve their revenue and profits.

Some examples of algorithmic pricing in action include:

  • Airlines using yield management systems to adjust ticket prices based on factors such as the number of seats available on a particular flight, the time until the flight departs, and the historical demand for that route
  • Online retailers using pricing algorithms to adjust the prices of products in their catalogs based on factors such as the competition, the availability of the product, and the customer’s purchase history
  • Ride-hailing companies using algorithms to adjust the prices of their services based on factors such as the demand for rides in a particular area, the availability of drivers, and the time of day

In each of these cases, the pricing algorithms are able to automatically adjust prices in real time based on data inputs, allowing the businesses to more effectively respond to changes in the market and maximize their revenue.

Algorithmic pricing may be unpopular with customers as people tend to value stability and fairness. Price changes based on everything a customer clicks tends to result in a schizophrenic customer experience. As such, brands that ambitiously optimize metrics such as conversion rate using pricing algorithms may miss big picture issues related to reputation, experience and loyalty. Aggressive price changes may also attract regulatory attention as an unfair business practice depending on the factors that are used in pricing. For example, changing the price could potentially be viewed as false advertising.

Dynamic Pricing
Dynamic Pricing Jonathan Poland

Dynamic pricing refers to the practice of changing prices in real time in response to changes in market conditions or other factors. This is typically done using automation, such as algorithms or artificial intelligence, which can quickly and accurately adjust prices based on data inputs. Dynamic pricing allows businesses to respond quickly to changes in demand or competition, and can help them maximize their revenue and profits. However, it can also be complex and requires careful planning and monitoring in order to avoid potential pitfalls, such as alienating customers or setting prices that are too low or too high. The following are common types of dynamic pricing.

Revenue Management

Setting prices at a finely grained level based on data related to competition, demand and inventory levels. For example, airlines may set prices at the seat level and use a variety of sales channels and policies to optimize revenue using data such as demand forecasts.

Supply & Demand

Estimating supply and demand in real time to set prices. In some cases, this can be unpopular with customers or be prohibited by law. For example, raising prices during a natural disaster is typically considered price gouging.

Sustainability

Dynamic pricing may be used to manage cities to improve quality of life or the environment. For example, tolls for emitting air pollution that go up when air quality drops.

Competition

Adjusting prices in response to competition in real time. Common in highly competitive market places long before automation existed.

Inventory

Adjusting prices in response to low or high inventory levels. Common in industries where inventory occurs at a point in time such as an airline seat or a hotel room.

Price Sensitivity

Algorithms that detect price sensitivities in real time. This requires careful attention to laws, regulations, business ethics, reputational issues and customer experience. Generally speaking, customers want pricing to be equitable, transparent and predictable.

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