Launching a new product in the beverage industry requires a well-thought-out and researched pricing strategy. Choosing the best pricing strategy will depend on a variety of factors including market saturation and demand, but more importantly, you’ll need to assess the perceived value of your beverage alcohol product to ensure profitability and growth once it hits the market. There are five basic pricing strategies that can help you determine the price point for your new alcohol brand.
5 Pricing Strategies
1. Price Maximization
This pricing strategy works to provide the company with the highest revenue possible. Brands start by identifying both fixed and variable costs, including taxes, and then working to reduce these costs in order to increase revenue. Madhavan Ramanujam, a pricing expert and author of Monetizing Innovation, argues that price maximization is the best pricing strategy for startups since it makes revenue growth the main priority.
2. Market Penetration
The goal of market penetration is to connect with a high volume of customers by pricing products lower than competitors. This can be an effective way to earn a share of the market, but it can come with an initial income drop that not every company is capable of weathering. Ideally, penetrating the market will eventually lead to growth and profitability that makes the initial risk worth it. A safer approach is to price products at the same rate as competitors since consumers will already be used to paying this amount.
3. Price Skimming
With price skimming, a product is introduced into the market at a premium price and the price is strategically lowered over time in order to expand the customer base. This approach is especially useful in the introductory phase of a product when consumers are willing to pay more to have a high quality product. This strategy would work well in today’s market as data shared by DISCUS reports consumers are purchasing premium brands more, with Super Premium accounting for 40% of revenue growth in 2020.
This strategy works particularly well for already established beverage brands releasing a new product line or for unique brands where there are few competitors or substitutes in the market. Starting with a high introductory price also allows you to quickly recoup the cost of producing and advertising the new product.
4. Psychological Pricing
Researchers understand that humans act on emotion rather than logic. That is why you will see items priced at $9.99 instead of $10. The product appears cheaper to consumers without actually affecting profitability. This strategy can be used in a variety of ways such as including a free branded item bundled with the product. For example, a whisk(e)y brand may include a “free” rocks glass with a purchase of a 750ml bottle as a reward to consumers who choose their brand over the competition.
5. Economy Pricing
Economy pricing targets price-conscious consumers who are always looking for a bargain. Brands will minimize overhead costs so that they can sell their products at a price below the market average. While this can be an effective method, it does come with some risk, especially for small businesses. Profitability relies on selling at a high volume, otherwise, economy pricing won’t drive revenue.
Best Pricing Strategy for a New Product
Choosing the best pricing strategy begins with understanding the market. In some cases, demand is elastic, meaning that demand will decrease as prices go up. However, some markets are considered inelastic, which means that consumers are not influenced by price.
We’ve seen this happen with tequila in the last five years. Although the demand for tequila has increased and the prices of agave have gone up significantly, this has not deterred consumers from buying the product. This makes the tequila market inelastic, because consumers want to have the latest and best tequila regardless of price, which is precisely why celebrities are hopping on this trend.
It is also important to remember that most pricing strategies are temporary. For any non-premium brand, it isn’t sustainable to keep prices too high or too low. Exorbitant prices can mean losing customers while low prices will eat away at profits. Adjustments will need to be made along the way. Although offering a sale price or rebate is also an option, especially when it comes to new products.
Alcohol brands can also benefit from asking customers what they are willing to pay. Focus groups and other market research tools can be used to understand consumer behavior. Don’t forget to tap into this resource when pricing new items.
Identifying the best pricing strategy based on your current resources, business goals and the market will help alcohol brands achieve success. Proper pricing is especially important when introducing a new product, so invest time in doing the necessary research. If you can land on the right approach to pricing, you can build customer loyalty and be profitable.
What are the 5 pricing strategies?
Price maximization, market penetration, price skimming, economy pricing, and psychological pricing.
What is the best pricing strategy?
The key is to find a strategy that meets your pricing objectives and encourages customers to buy without giving up too much of the profit margin.
What is the best pricing strategy for a new product?
It depends on the market and the competition. Focus groups and other research tools can help determine what customers are willing to pay.