Regular price vs promotional price
In most categories, there is a trade-off between the number of units sold and the regular price. The regular price is the price at which your product normally sells.
Brands with higher regular price points will typically sell less units. But they will make more dollars per unit sold.
While brands with lower regular price points will sell more units. But they will make less dollars per unit sold.
As you flex your price in the market, you will typically find a sweet spot regular price. This is where your trade-off between profitability and volume delivers the best return.
However, obviously, your competitors will also flex their prices. This clearly impacts on the attractiveness of your regular price. So you will want to run sales promotions on price to give yourself the opportunity to drive short-term sales. You should look for an ideal promotional price that you offer to combat competitor promotions.
We should also mention the phenomenon of psychological pricing. This is based on observed behaviour that shoppers do not always perceive price in a totally rational way.
For example, note the widespread use of “.99” pricing. So for example where $24.99 might be the price rather than the rounded up $25.
Many studies have shown that this $0.01c saving has a great influence over the likelihood to buy. Even if logically, it would seem to make little to no difference.
This seems to be because consumers tend to process the left hand number more than the right hand number. So they give undue preference to the $24 in a $24.99 price. They feel there is a much bigger price difference than there actually is in reality.
There are many such other psychological price factors to consider. For more on the subject, we’d point you to this great summary here.
Competitor price tracking
Your second price consideration should then be how you price relative to competitors. This depends on your positioning statement and how your target audience perceives price.
For example, if you position brand as the highest quality product on the market, you may decide that you need to be the most expensive product. Consumers expect the most expensive product on the market to be the one with the highest quality.
On the other hand, if you decide that you want to appeal to the greatest number of consumers, a lower price point will support your position.
The price point you choose positions your product in the market versus your competitors. You should decide it from market research and feedback from the sales team and customers. You should also work with your finance team who can put together different financial scenarios based on volume and price forecasts.
In our hypothetical example above, we might be a #2 player in the market looking to take volume share from the #1 (Competitor A). So our price plan is to maintain a 10-15% price discount at all times.
But we also recognise that a lower quality cheaper competitor (Competitor B) might start to take volume share from us if the price gap is too wide. So we might set a cap of how much more expensive we would ever be than them. In this example, we would never be more than $10 more expensive than Competitor B.
In this case, we would also detail any additional benefits or limitations to the promotion. So, securing more in-store space when we have a promotion that will run through more units or running a specific promotion through only one channel or one customer. So, free delivery for online shopping in this case.