Pricing strategies are an essential part of demand forecasting as prices directly influence demand. All too often companies settle for benchmarking prices, when they actually should benchmark pricing strategies. Therefore, we have extended our knowledge base with a new collection of articles about the most popular pricing methods used in retail.

Pricing concepts

At Lokad we believe in optimizing pricing strategies instead of raw prices. By ‘pricing strategies’, we are referring here to the method of computing optimized prices given the available data and the market conditions. In order to assess the quality of a pricing strategy one might refer to the price elasticity of demand, which is a popular method. However, price elasticity can be misleading as it is a [limited indicator of demand](/blog/2015/9/28/price-elasticity-is-a-poor-angle-for-demand-planning/).

Depending on the type of the market, retailers can choose to make short or long-time pricing strategies. A high price maximizes short-term profit, but will result in a loss of market share. A low price maximizes long-term profit because it allows a firm to gain market share. In both cases the prices are best when frequently re-evaluated. Repricing software, such as Lokad, aid in this re-evaluation by automatically recomputing prices depending on market conditions.

In order to affect the buying behavior, retailers can choose from a vast range of pricing strategies. For instance one may want to increase the willingness to pay by creating product packets and using bundle pricing; or use the same prices as one’s competitors with competitive pricing; or set the prices based on the production costs and the desired level of mark-up with cost-plus pricing.

The decoy pricing method can be applied when one wishes to influence the customer with either a slightly lower product price but with a much lower quality product, or on the contrary, a much higher price with a slightly higher quality product.

One widely used method is odd pricing, which aims to maximize profit by making micro-adjustments in the pricing structure. For example, this could mean setting a price at $17,99 instead of $17. In addition to the price structure, a retailer may want to also optimize the style of the prices. For some types of markets, price skimming can be a good option. This method consists of applying a very high price at first for the “early adopters” and then gradually decreasing the price over time. The opposite way of pricing is the penetration method. This quite aggressive type of pricing means setting the price at a very low level in order to increase the demand, and then later raising it up.