PRICING - 07.07.2020

Should you try teaser pricing?

Big decision

One of the most important decisions you make is the price you set for your products or services. However, it’s far from easy: not only do you need to calculate the margin you can make, but assess what competitors offer and analyse how price sensitive consumers are. So what’s the best strategy? There are several pricing strategies falling under four general umbrellas:

• cost-based, e.g. cost-plus pricing
• value-based, e.g. premium pricing for exclusive products
• strategic, e.g. predatory pricing to drive competitors out of the market with low prices
• teaser, e.g. loss leader.

Be a tease

In the current climate you are thinking about implementing a loss leader teaser strategy. This involves offering special deals on a few items with all other prices at market rates. Supermarkets have long used this tactic. The aim is to sell a few products at a loss in order to encourage spending on additional items. The trick is to ensure this leads to an overall profit in the basket of goods or services. Example. Imagine a customer shopping for a roast dinner. The loss leaders are carrots and potatoes, however this is more than made up for by the other ingredients. This is then multiplied thousands of times.

How to do it?

Start by collecting a pricing data bank. For each of your products or services this should include: the current price, cost and sales volumes, the price history and historic sales volumes and the prices offered by your main competitors. This information should help you to work out what happened to sales volumes when prices changed.

Demand

Now that you’ve collected the base data, consider the impact of the revised prices on demand. The purpose of loss leader teaser pricing is to influence sales volumes of the item being priced as a loss leader and generate increased sales volumes of all the other items. You will therefore need to open a workbook in your pricing databank to handle the impact on sales volumes of different prices. For each item, you will need to deal with two variables: price and volume. The volume response to price changes will need to be based on a set of assumptions, which will come from sales and marketing data. Make sure these are realistic. Trap.  The analysis is going to be complex.

Tip.  Create three worksheets, one for the assumptions, one for the data and a third for the outputs. The assumption worksheet should include at least two assumptions: (1) the assumed prices of each item under each pricing scenario you are considering; and (2) the percentage change in volume of each item in response to the changes in the price of the loss leader. The output sheet should show the sales totals per product in the different scenarios. Tip. Don’t forget that as volumes change, costs will also change, so include a costing section in the output sheet to calculate profits. Which should be the loss leader? The one showing the greatest profit.

For an example loss leader, visit http://tipsandadvice-business.co.uk/download (CD 21.20.04).