Yield management (YM) is a technique that encourages ‘flexible’ pricing by dividing your market into different segments and charging each segment differently. It’s an undeniably powerful way of improving margins, but it’s not always appropriate and it is certainly not the only approach to pricing your products. Here are seven more ways that canny businesses approach pricing:
- Premium Pricing
This involves charging much more than your rivals. It’s a great short-term strategy when there is something unique about your product and it’s hard for others to copy or enter your market. - Economy Pricing
This is the no frills low price. All costs are kept to a minimum. It’s not the pricing strategy anyone would positively want. But it can highly effective in very competitive markets where you are leaner than your rivals. - Penetration Pricing
You set your prices artificially low in order to win market share. Once achieved, you increase your price. This is particularly effective when customers are price sensitive and economies of scale can be exploited. - Price Skimming
This is the opposite of penetration pricing. You charge a high price because you have a substantial competitive advantage – with some innovation or technical advance. This inevitably attracts competitors and the price falls. - Psychological/Price-Point Pricing.
Some markets have conventions, such as “No one will pay more than a fiver for this.” This approach is used when you want your consumer to respond on an emotional, rather than rational basis. In this case £4.99 appeals more than £5. - Captive product pricing
This is a variant on penetration pricing. You sell a piece of hardware – a printer, razor or vacuum cleaner – at rock bottom price in the knowledge that customers will now be locked into buying your ink cartridges/blades or cleaner bags – on which you will recoup your loss. - Bundle Pricing
Price competition is usually destructive. A good way round it is to combine several products in the same package, which makes price comparison almost impossible. It’s particularly applicable when your prices are actually higher and you have surplus or old stock to throw in to make up the package.
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