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What are the Differences Between Product Pricing Methods?

20 Aug, 2020 | Business Tips

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When you’re running a business, one of the most important decisions you can make is the prices of your products. You want to ensure you’re making sufficient profits, but you also want to provide a good value to your customers without impacting your bottom line.

While there are several ways to go about pricing your products, two popular methods are tiered pricing and volume pricing. Either of these methods can be incredibly lucrative when done correctly, and they’re actually often confused since they both provide an incentive for the customer to buy more. Each method has its advantages and disadvantages, and we’ve created this guide to help you decide which is right for your company.

 

Tiered Pricing

The tiered pricing method involves defining a price per unit within a certain range, or “tier.” As the ranges go up to include more products, the price for that tier goes down.

Let’s say your customer purchases 70 units of a product. The first tier is reserved for units 1-20, and each unit costs $15. The second tier contains units 21-40 and each unit costs $12.50. Moving up to the third tier encompasses units 41-60 where each unit costs $10, and the final tier involves units 61+ where each unit costs $8.50.

So, in this case, the customer will purchase 20 units at $15 each, 20 units at $12.50 each, 20 units at $10 each, and 10 units at $8.50 each.

 

Pros and Cons of Tiered Pricing

Tiered pricing is beneficial because it allows you to offer different prices for your products. Customers who can only afford a few units are able to buy what they need, while clients with larger orders will be saving money on their bigger purchases. When a customer sees the lower-priced tiers, they will be intrigued and may be incentivized to purchase more units in the future. You’re also given the freedom to group your products however you please.

However, there is an increased complexity when you’re processing orders and calculating bill amounts. Additionally, tiered pricing isn’t the most user-friendly method out there, which might deter customers since they’re not exactly sure what they’re going to pay right away.

 

Markup Pricing

Markup pricing involves adding a percentage based markup to the cost of a product for the purpose of determining the sales price. This is a simple pricing calculation that can work for a range of businesses. With a focus on the product cost, markup pricing allows businesses to alter their pricing quickly as costs rise and decline due to various factors.

To determine markup pricing, a company will first determine its product cost, decide on the amount of profit it wishes to earn above that cost, and then add this markup to the product cost to get the final sales price.

 

Pros and Cons of Markup Pricing

The strategy of markup pricing offers numerous benefits — in terms of calculation, for instance, making it easy to determine the production cost. The other advantage is that, throughout periods of increasing cost, this method helps fight inflation effects. When costs decline, this method will also reflect the cost charges. In comparison with other sophisticated strategies, markup pricing is a fundamental approach. The business implementing this technique presumes that it can pass on all the production costs to its customers and generate a profit. It is therefore an easy notion to implement in the instance of daily products. However, there are limitations, as the demand for the product is ignored with markup pricing along with the value of the customer.

 

Volume Pricing

On the other hand, volume pricing sets one price for all units within a specified range. This method allows for bulk discounts on large orders.

Let’s use our previous example where your customer purchases 70 units. You’ve set a volume pricing model wherein, if the customer buys 30 units, each unit costs $15, but once the customer exceeds 30 units, each one costs just $12.50. In the tiered model, the price drops incrementally, but in the volume model, the total price drops once the customer reaches a certain amount.

 

Pros and Cons of Volume Pricing

Volume pricing is excellent when clients are buying in bulk. The consumer gets a lower price, and you still earn a considerable profit. This strategy can also be helpful when you’re trying to get products moving quickly, particularly when you have excess stock that you’re trying to get rid of.

The calculations for volume pricing are often more straightforward than those involved in tiered pricing, but you will certainly earn less through volume pricing. While customers might be more likely to buy because of the straightforward nature, you won’t be making as much per unit.

 

Which is Right for Me?

As we said in the beginning, either pricing model can prove lucrative if done in the correct way. Tiered pricing is better suited for products that are considered necessities. If a product isn’t a necessity and a customer can’t figure out their total right away, they’re likely to search somewhere else where they can get a price more easily. Tiered pricing also works better for items that are typically sold in bulk, so consider your product offering before adopting this method.

For volume pricing, this method works best for companies with lower marginal costs. If it doesn’t cost much for you to get your products to your customers, then you could afford to maintain a smaller profit margin through volume pricing. Volume pricing also allows for up-sell potential, allowing you to make up the difference through a more expensive product.

 

Discover the Possibilities with DEAR

No matter which pricing model you select, DEAR Systems is here to help your business run smoothly. DEAR supports simple pricing, markup pricing, custom pricing, and multicurrency that will provide you with the flexibility of choosing the right pricing strategy to benefit your business. We offer products and assistance for almost every aspect of your company, including inventory management, sales, purchasing, accounting, automation, and more.

Our team has years of experience in the industry and has helped businesses big and small, in virtually all sectors, to skyrocket their operations. We’re always available to answer any questions or address concerns. With DEAR on your side, you’ll find confidence and peace of mind that you never thought possible. Contact DEAR Systems today to discover the possibilities.

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