In marketing and retail, the price of a product is often the most important factor in determining the product's success. Sure, quality and appearance play a large role in a customer's decision, but shoppers are being manipulated by the pricing, and they're often not even aware of it.
Ideally, every retailer would determine their costs to provide goods or services, and then tack on a modest surcharge to those goods or services to make a profit. But in the reality of your local Tesco or Morrisons, shopping is not that simple.
Finding the true cost or value of an item is muddled in rewards programs, rebates, discounts on multiple items, etc. More than ever before, retailers and service providers understand that a mix of the following pricing strategies will ultimately produce more profits than selling exclusively with a variable cost-plus pricing method.
Prestige pricing
Also known as "premium pricing," this method capitalises on societies' generally accepted belief that the higher the price paid, the greater the quality received in return. Most often, the premium price is accompanied by other suggestions of superiority to justify the inflated sticker price.
The car industry is ripe with examples. Nearly every major manufacturer creates a luxury line of cars that are founded on the same chassis and engine as lesser-priced models. Nissan uses the Infiniti badge to put a refined touch on mainstream models such as the Pathfinder, and Honda created the Acura label to change the perceptions of standbys such as the Civic.
Loss leader
This strategy seemingly undermines the moneymaking goals of every businessperson, as it dictates that you sell an item at an unprofitable price. However, the reason for making the item so affordable is that the sale of that item will lead to the sale of other high-profit items. Retailers will often create loss leaders to get customers into the store.
For example, supermarkets occasionally sell everyday goods like toilet paper and nappies at unbeatable prices because they know that customers are likely to buy other items that will produce a profit, and it gives them an opportunity to gain future business from those customers.
The shrewdest loss leaders are products like razors, mobile phones and video game consoles. Companies such as Gillette, Vodafone and Microsoft are happy to sell razors, phones and gaming devices, respectively, at or below cost because each company knows that customers will continually buy highly profitable razor-blade refills, data plans and video games.
Bundling
This pricing strategy involves grouping goods or services together to sell them at one price. For the most part, bundling is used either to attract customers by providing a truly discounted offer over the regular cost, or to confuse the customer so that it's hard to determine the true value of the bundle.
An example of a true money-saving bundle might include combining your internet and cable with one provider for a discount. If the combined rate offers identical service to what you were getting with two separate companies, and it does it at a discount, common sense dictates that you sign on for the bundled discount.
However, bundling is often used to create a false sense of value, such as when infomercials will proudly announce, "But just wait, there's more!" and begin to toss in "bonus" items with the featured product and then announce an inflated retail price that you of course will only have to pay a fraction of … if you act NOW!
Even if the advertised retail value is an accurate reflection of the bundled items' value, you need to value or have use for everything in the bundle. As with any purchase, if your perceived value doesn't reflect the price you paid, you will feel ripped off.
Decoys
This tactic succeeds because it reduces a customer's ability to use logic when making a purchase. Product decoys are meant to promote the purchase of the product the retailer actually wants you to buy.
So, when Apple offers the new iPad in six different formats and price points, it isn't to satisfy lovers of 32GB tech as well as 64GB fanboys. Customers see the £608 version and feel that they are getting a good deal if they snap up a £368 version with less than half the memory and no 3G capabilities. In addition, you could argue that the entire line of iPod Touches is a decoy to sell more iPhones, as the lowest end iPod Touch retails for the same price as the new iPhone 4S - £169.
Unless you're adverse to data plans or mobile phones, it makes sense to buy an iPhone 4S and enjoy all the features of the iPod Touch, plus phone and 3G capabilities.
The bottom line
The competition for your money is hotter than ever, and in light of the current economy, your willingness to part with your cash likely hasn't been lower. With that in mind, it's understandable that companies are working hard to employ every retail trick they can imagine.
To keep as much of your money as possible, while ensuring as much purchase satisfaction as possible, you need the ability to spot a pricing strategy and assess whether you are truly saving money or just being duped into unnecessary spending.
More from Investopedia.com
5 avoidable shopping mistakes
Comparing online and in-store prices
Why are consumers paying the same for smaller portions?
297 comments