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 produce a profit. But in the reality of your local Target or Safeway, 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.

TUTORIAL: Investing 101: Introduction

Prestige Pricing
Also known as "premium pricing," this method capitalizes on society's 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 auto industry is rife with examples. Nearly every major manufacturer creates a luxury line of automobiles 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. North Americans seem more likely than other nations to pay up for brand status, as Honda and Nissan do not use luxury brands to market their cars in Japan. (Find the perfect policy that suits both your coverage and budgetary needs. For more, see Beginner's Guide To Auto Insurance.)

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, Walmart occasionally sells everyday goods like toilet paper and diapers 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, cell phones and video game consoles. Companies such as Gillette, Sprint and Microsoft are happy to sell razors, cell 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.

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 value 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.

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 $829 version and feel that they are getting a good deal if they snap up a $499 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 - $199. Unless you're adverse to data plans or cell phones, it makes sense to buy an iPhone 4S and enjoy all the features of the iPod Touch, plus phone and 3G capabilities. (For related reading, see What We Can Learn From Steve Jobs.)

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.

Related Articles
  1. Mutual Funds & ETFs

    4 Mutual Funds to Consider If Interest Rates Rise

    Learn what mutual funds will perform best if interest rates rise. Interest rates can rise due to inflation or to an improving economy.
  2. Economics

    Understanding Switching Costs

    Consumers incur switching costs when they receive a monetary or other type of penalty for changing a supplier, brand or product.
  3. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  4. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  5. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  6. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
  7. Stock Analysis

    The Best Stocks to Buy for Less than $10 before Year End

    Learn about the best stocks to buy under $10. These stocks are speculative but have considerable upside given their valuation and market conditions.
  8. Investing Basics

    10 Companies That Yuppies Love

    Learn about 10 companies loved by the modern Yuppie, including how this demographic's impressive buying power has boosted these companies' earnings.
  9. Entrepreneurship

    Top 5 Startups That Emerged in Raleigh

    Learn about the startup scene in the Research Triangle hub of Raleigh, North Carolina. Discover which startups are the hottest to emerge from this tech city.
  10. Markets

    How TheSkimm Works and Makes Money

    Obtain information on the popular news digest newsletter, theSkimm, and understand how email newsletter publishers generate revenues.
  1. Substitute

    A product or service that a consumer sees as comparable. If prices ...
  2. Fast Fashion

    Definition of "fast fashion."
  3. Brand Identity

    The components of the brand are created by the business itself, ...
  4. Duty Free

    Goods that international travelers can purchase without paying ...
  5. Negative Option Deals

    A dubious business practice that involves supplying a typically ...
  6. G.19 Report

    A monthly statistical report from the U.S. Federal Reserve that ...
  1. How do businesses calculate their marginal utility?

    Strictly speaking, businesses do not experience marginal utility like individuals do. Companies are made up of people, and ... Read Full Answer >>
  2. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>
  3. How can I invest in electronic retailing (e-tailing)?

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
  4. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  5. What are some common ways product differentiation is achieved?

    There are many ways to achieve product differentiation, some more common than others. Horizontal Differentiation Horizontal ... Read Full Answer >>
  6. What economic indicators are important to consider when investing in the retail sector?

    The unemployment rate and Consumer Confidence Index (CCI) rank as two of the most important economic indicators to consider ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!