The Art of Pricing: Strategies to Maximise Profits Without Alienating Customers

Pricing your products or services can be hard. If you price your offerings too low, your profits will suffer for it. If your offerings are too high, you can put people off of what you’re selling completely. Luckily for you, we’ve created a short and simple guide running you through different pricing strategies and how you can implement them to increase your sales without alienating your customers. Let’s get started.

• Dynamic pricing
• Psychological pricing
• Tiered pricing
• Promotional pricing
• Pricing intelligence

Dynamic pricing

Dynamic pricing optimisation is a cutting-edge strategy for setting prices based on real-time market conditions, competitor actions, historical data, and other relevant factors. It involves constantly adjusting prices to maximise a specific business goal, such as revenue, profit margin, or market share. 

Imagine prices that adjust in real-time based on self-learning algorithms that take numerous different factors into account. It combines data science, economics, and technology to continuously find the ‘sweet spot’ for your prices, so you can stay competitive whilst maximising your revenue. 

Many dynamic pricing software solutions can feature AI-solutions, too, which allows them to learn over time. This means that you can rely on it to work as an automated system that continuously learns and develops over time by analysing the outcomes of pricing decisions it has made in the past.

Here’s how it works:

• Data input: The algorithm will price everything you want it to, based on the aforementioned factors, using your data. It uses historical sales data, analyses current market trends, and even looks at customer behaviour patterns. This data can be obtained from numerous sources, such as internal sources, like a point-of-sale system, market reports, and real-time analytics which will all fuel the algorithm’s understanding of what makes prices tick.
• Data processing: Dynamic pricing algorithms use machine learning to analyse the numbers you provide and discern insights from that data. Using complex models and techniques, sometimes including AI, the algorithm will produce prices based on seasonal data, supply and demand fluctuations, market trends, and more.
• Pricing adjustments: Prices are produced and adjusted in real-time based on the algorithm’s output. This allows for price increases during peak demand periods, price reductions during slower periods, and even adjustments to competitor pricings so you stay relevant, competitive, and profitable. 

When you look ‘under the hood’ of dynamic pricing, and machine learning, it can all look quite complicated. But, the good thing is that you won’t need to worry about any of that. Dynamic pricing software can take out the hard work for you so you can make informed decisions when pricing your products or services.

Dynamic pricing isn’t something you can set up and forget about, though. You need to ensure that you’re regularly staying up to date with the latest sales figures, profits, and customer feedback. If your prices are upsetting people and driving down sales, then you’ll need to adjust. If your prices are agreeable to your customers and are helping to maximise profitability, then you’re on the right track.

Ethical concerns with dynamic pricing

There’s one thing to consider before you make the plunge into purchasing dynamic pricing software (if you so choose). Some consider it to be a form of ‘price gouging’. Price gouging, in essence, is the practice of sharply raising prices, beyond reasonable limits, in line with customer demand. 

Small increases are fine, so long as they are competitive and fair. However, dramatic price increases can alienate your customer base by making them think your business is out to overcharge them in any way they can. You will have the final decision on your prices. While you should listen to the algorithm, try to make sure you don’t get too carried away when you set your final prices. 

Psychological pricing

Psychological pricing is a strategy to influence customer spending habits to spend more money. This pricing strategy uses different techniques, whether that is getting the best price point, getting the best quality, or getting a ‘good deal’, to influence and nudge customers to believe they need to buy something. In order for psychological pricing to work, the customer needs to feel as though they have been ‘successful’ with their purchase. 

After reading that, your next question might be: “Well, how does someone know they’re getting a good deal?” We’ve all walked away from purchasing something at one point or another with a smug grin on our faces feeling as though we’ve gamed the system, but why is that? It’s because we have a basis of comparison based on what we think we ‘should’ have paid. 

What we ‘think’ we should have paid can vary depending on certain psychological pricing strategies that companies can use to make you feel you’ve grabbed a bargain. Ultimately, consumers rarely know how much something ‘should’ cost, we just think we’ve gotten a good deal because we compare it to similar products in a similar category. We’ll walk you through some easy-to-implement common psychological pricing strategies.

Price anchoring

Price anchoring is a strategy that uses an initial reference price to influence how customers perceive the value of other prices. Here’s how it works: 

• You set an initial price for an item, let’s say a large cup of coffee, for £6. This is your anchor price that all other prices will be compared to. 
• You then set your price for a medium cup of coffee for £3.50. This is your target price, i.e., the item you want people to buy. 
• People will compare the initial medium price compared to the large price, and, through comparison, feel like the medium cup of coffee is a better deal.

Compare this to say if you had listed the medium cup of coffee at £3.50 with one small difference: there was no large coffee available on the menu, or it wasn’t as expensive, let’s say £4.50. Customers will see the medium cup of coffee as less of a ‘deal’ in contrast to a large cup. 

Price anchoring exploits the human tendency to rely on initial information (the anchor) when making decisions, even if that information is inflated, arbitrary, or unrelated to the true value of the product or service.

Charm pricing

Charm pricing, also known as just-below pricing, is a pricing strategy where prices are set just below a whole number often ending in ‘9’ (e.g., £9.99 instead of £10.00). This strategy relies on the “left-digit bias” customers have when purchasing something, whereby they focus on, and are subsequently more influenced by, the leftmost digit of a price. 

If something is listed for £9.99 instead of £10.00, a customer will more likely round down the price than round up, so they’ll perceive the product or service as being closer to £9 than £10. 

Decoy pricing

Decoy pricing is a pricing strategy that involves presenting customers with a third, less desirable option (this is the ‘decoy’) alongside two other options. The idea is that the decoy is intentionally priced in a way that makes one of the other two options look more desirable by comparison (as they are perceived to be better value for money). 

This is similar to what we introduced earlier, when talking about psychological pricing, about how value is relative rather than absolute. We perceive things to be a ‘good deal’ when compared to things that are not a good deal. Despite the fact that the only reason we see something as a good deal is entirely because of the comparison. Let’s use an example. Imagine you have three different cups of coffee: small, medium, and large. 

Small coffee: £2 / Medium coffee: £4 / Large coffee: £5

In this example, the medium cup of coffee is what we would consider the ‘decoy’. The medium cup is priced only slightly higher than the small coffee, but the small coffee still offers value as the cheapest option on the menu. The large cup of coffee is also considered better value for money than the medium cup of coffee as the large cup is only one pound more.

If the medium coffee was, say, £3, then it would be seen to be of good enough value on its own to incentivise people to buy it, which in turn would de-incentivise customers from choosing the large (more expensive) cup of coffee. In essence, the medium cup is a red herring; a psychological trick played on customers by selling itself as a ‘bad deal’ and the other deals as ‘good’ in comparison.

Tiered pricing

Tiered pricing is a pricing strategy where the price of a product or service is structured into different tiers. Each tier comes at a different price with different features and benefits. The more features and benefits on offer, the more expensive the tier becomes. Customers can choose which tier suits their needs and their budget.

Tiered pricing models normally have three different tiers: basic, standard, and advanced. You’ll find different words used for each, e.g. ‘advanced’ might be ‘premium’, ‘elite’, ‘platinum’, or something along those lines. Here’s a breakdown of what the different packages can looks like:

• Basic: This tier will offer the most basic level of features and benefits. The main purpose of basic tiers is to get your foot in the door with your customers through the introduction of a budget-friendly option, affordable to many, designed to attract price-sensitive customers. Or, even those that just want to trial your products or services without making a large investment.
• Standard tier: This is the middle tier, between basic and advanced, and offers a balance between affordability and added value. The main purpose of standard tiers is to appeal to the average customer and make it your most popular pricing tier. This tier will take all the features of the basic tier and, as expected, add more features to it.
• Advanced: This tier will be the most expensive tier and provides access to all available features and benefits for customers who are willing to pay more. This may include more units, dedicated support, discounts, exclusive access, and more.

Tiered pricing won’t be relevant for all businesses. However, if you’re thinking about offering a similar type of pricing model for your business, it’s a good way to structure different benefits and features you can offer whilst incentivising customers to spend more, to get more.

Promotional pricing

Promotional pricing is a marketing strategy where businesses temporarily reduce the price of their products or services to achieve specific goals. Lowering your prices for a short time can yield immediate results, as customers have a greater incentive to purchase something that is available at a certain price for a limited-time only. 

Here’s some common examples of promotional pricing strategies and discounts:

• Buy one, get one free (BOGOF): Customers purchase one item and get another for free. 
• Discounts: Fixed percentage is taken off the regular price. For example, 20% off.
• Coupons: Pieces of paper or electronic certificates redeemed for discounts. 
• Bundling: Two or more products sold together for a discounted price. For example, a four-pack of hand wash.
• Price matching: Stores guarantee to match competitor’s prices. Note: this type of strategy only works for large-scale companies with great brand awareness.
• Flash sales: Limited-time sales announced shortly beforehand where businesses can cut prices to unload excess inventory and drive more sales.

Creating a sense of scarcity and/or urgency around a product can entice customers to take action for fear of missing out on a ‘good deal’. This can help improve short-term sales and profits, acquisition of new customers, and even customer loyalty. 

However, it’s important to recognise that while effective, promotional pricing strategies only work when offered every now and then. When promotional pricing becomes overused, customers can develop a “price-oriented” mindset, waiting for the next discount before making a purchase which can disrupt regular sales and profitability in the long run. 

You will also need to consider whether this type of pricing strategy is right for your business. Will you have the capacity to support a huge uptick in foot-traffic? Can your website handle a sharp uptick in traffic? Would discounts harm your brand? These are all things you need to consider before implementing any sort of discount strategy.

Pricing intelligence

Competitive pricing intelligence is a sales strategy where businesses track competitor prices and adjust their own prices accordingly. If you want your business to remain competitive, you’ll need to take into consideration what your competitors are doing. If your customers can find something you sell, or offer, for cheaper elsewhere, they’re unlikely to purchase it from your business.

Pricing intelligence software can enable you to react quickly with price changes whenever your competitors change their pricing strategy. We’d recommend investing in pricing intelligence software if you run a medium to large sized business, or are looking to grow and scale in the future, as performing manual competitor price checks would be impossible with a large number of different products. These tools may take the form of software, web apps, or web extensions. 

Competitive intelligence tools will scrape the web and automatically scan all your competitors’ websites. They can provide insight into pricing strategies, product assortments, and inventories, too. When your competitors change their prices, you’ll be notified through an alert which can allow you to respond quickly to any changes your competitors make. These tools can help you set up automation rules so that whenever your competitor performs a specific action, or is low on stock, as an example, your prices will change automatically.

Supercharge your pricing strategy with Lightspeed

That’s about it! You should now have everything you need to accurately and competitively price your products or services without alienating any of your customers. We’ll just offer one last reminder though that whilst we have referenced different pieces of software powered by machine learning and AI that can recommend, or automatically set your prices, you are the one who is in control. You need to ensure prices are fair and reasonable. It’s absolutely fine to be competitive and try to edge out the competition but prices that are considered unfair or exploitative won’t be tolerated by your customers.

These different kinds of software often need lots of data to get started. If you’re in the market for a point-of-sale solution that can provide everything you need and more with regards to data, analytics, and insights, so you can supercharge your pricing strategy, look no further than Lightspeed Retail. Want to know more? Click here for a free demo.