How to Increase Profit by Maximizing Price

If the title of this article seems counterintuitive to you, don’t worry—you’re not alone. Many retailers, specifically those committed to the mindset that creative markdowns are key to increased profits, mistakenly think that maximizing prices will limit their consumer base and have the opposite effect on profits. In reality, how consumers react to markdowns has a negative long-term impact not only on profits, but also on the way retailers run their business. Businesses seeking to grow profits sustainably in today’s landscape need to be exploring alternative pricing strategies.

 

Pricing Strategies that Increase Profits

Three proven pricing strategies that can enable retailers to increase profits are value-based pricing, product versioning and price communication. Let’s take a closer look at each…

 

Value-based pricing is a unique strategy that focuses on the consumer’s perception of a product’s value. This approach can’t be measured numerically as it doesn’t factor the cost of a product or service, and its best used by companies with a unique offering that’s easily distinguishable from competition. A simple way to think of value-based pricing is by considering a celebrity-backed perfume. Because of the celebrity’s status and popularity, the item will likely be perceived as more valuable than a comparable perfume, and can thus be sold at a higher price.

In addition to an offering that can be easily differentiated from your competitions’, if you want to execute value-based pricing, you’ll need a solid method for understanding how your customers deem a certain item’s value, and real-time insight into your competitor landscape.

 

Product versioning involves developing a number of models of the same product and charging different amounts based on each item’s feature set. An example that might quickly come to mind is Apple’s iPhone 7 and iPhone 7 Plus, the company’s long-awaited 2016 smartphone release. This approach helps attract customers to the higher-priced options as these options, compared to their lower-priced counterparts, appear to be more valuable. At the same time, product versioning also equips businesses with the ability to appeal to a wider customer base through product offerings that are suitable to different price sensitivities.

 

Price communications, as the name suggests, relates to ensuring your employees and sales people are communicating about your products in the most effective ways possible. This means employees are confident in their knowledge of your products, and can clearly address any of your customers’ concerns about them in a way that eases doubts and generates excitement.

Discover how we helped a big American retailer to dramatically increase their Black Friday revenues

Profit Maximizing Formula

Now that we’ve reviewed some of today’s most effective pricing strategies, how can retailers know if new pricing strategies have worked for them? For this, a product maximizing price formula comes in very handy.

 

By using supply and demand figures, retailers can calculate the “equilibrium” price, which is where the supply of goods matches the demand. Once the equilibrium or “compromise” price for your product has been calculated, you can use the same equation with different variations to understand profit maximization levels. Remember that profit maximization = total revenue – costs. Adjusting the quantities for the number of products sold and the price per product will yield different profit maximizations.

 

Maximizing Price and Increasing Profit with Personali

Today’s leading marketers know that behavioral economics principles can be used to drive desired consumer behaviors and increase sales and profits. With an advanced Intelligent Incentive platform like Personali, companies are able to combine the power of behavioral economics with powerful pricing strategies that yield a number of positive results including increased profits, improved customer retention and more.

 

Personali’s solution gives retailers crucial insight into their customers’ desires, patterns, purchase probability and price elasticity (or their willingness to pay). By designing and delivering unique, informed and behavior-driven incentives in real-time, Personali helps organizations leverage these insights, turning them into actionable data that shed lights on the most ideal, profit-enhancing price points for each specific product.

 

Personali doesn’t only increase businesses’ profits through specific, up-to-date pricing structures that increase sales. The platform also equips businesses with the ability to intelligently address and enhance customer retention and loyalty, and increase the likelihood that shoppers will complete their purchases. This happens through personalized real-time incentives, including bundles and related products, that are specifically based on shoppers’ browsing and decision patterns.

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The thinking that markdowns are the key to increased profits is misinformed, and can quickly lead businesses into a vicious cycle where profits shrink rather than grow in the long run. Using alternative pricing structures along with insights into how your customers determine your product’s value will give you the best chances of achieving long-term profit growth. With the help of an intelligent incentive platform like Personali, you can gain the insights needed to automatically generate price points and incentives that work—ones that will attract new customers while enticing existing customers to keep choosing you over your competition.

You might be also interested in:

Psychology of retail sales

Decoy pricing

How to Use Price Elasticity in E-commerce to Improve Profit Margins

We at personali, offer you a personalized AI based platform designed to increase significantly retailers  ROI.

 

To read more about the relation between behavioral economics and marketing,
and demonstrate how creative marketing organizations can leverage the fundamentals of behavioral economics
download our eBook: Behavioral Economics as a Key Marketing Driver. Contact us, today.

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