Appropriately pricing your building products and materials is a powerful lever for growth and success in the home improvement industry.
It’s not a decision you want to approach passively, or you risk leaving money on the table, struggling against your competition, or missing the mark with your ideal buyer demographic. That’s why it’s important to adopt the right pricing strategy based on your industry segment, geographic area, and target customer personas.
You can work toward optimizing your retail pricing strategy by conducting custom market research and using the data and insights you gather to adopt the right strategies for your brand.
How to Price Home Improvement and Building Products
As a building products manufacturer, choosing suitable price ranges for your various product lines and specific price points for individual SKUs of building materials, products and equipment is critical, because even small variations may significantly impact unit sales and manufacturing costs.
Your task is to understand the relative value perceived by the target customer for your product feature option(s) compared to alternatives in the market. Your teams must assign each product a value that will keep it moving based on multiple indicators.
Some important questions to ask as you work on developing a pricing strategy include: How much do features impact product preference? How much would they be willing to pay for this product or feature? What is the ideal set of features to include on the product?
To get meaningful answers to these questions, you can leverage one of a few different approaches for conducting price-sensitivity-related market research:
- Conjoint Analysis for Pricing: The most widely accepted approach, Conjoint Analysis can deftly handle the necessity to compare hundreds of product feature variations. The ability to simulate the real-world competitive marketplace and capture more accurate customer intents by forcing trade-offs to be made is another reason why it’s considered preferable.
- The Van Westendorp Pricing Model: A straightforward price-sensitivity modeling tool to administer, the Van Westendorp Pricing Model asks respondents four questions to determine the “Acceptable Price Range.”
- The Gabor-Granger Approach: This method can be a preferable option for pricing research in scenarios where you’re looking to determine revenue optimizing price points. However, because the structure of the approach assumes an initial price, the results are thereby subjected to a level of anchoring, and the results tend to be biased.
In this article, we cover the pros and cons of each of these product-pricing study methodologies in greater depth.
The end goal is procuring the knowledge to price your products in such a way to motivate the right balance in volume of unit sales with the most profitable price point, thus tapping into growth potential. Pricing your retail products either too high or too low can have a negative impact. That’s mostly due to price sensitivity, or how the cost of an item influences the purchasing decisions of consumers. This is also referred to as the price elasticity of demand. In other words, the demand for a product varies in relation to the cost of said product.
Keep in Mind: Price Sensitivity is Dynamic
Price sensitivity is a dynamic concept; the degree to which consumers’ purchasing behaviors are affected by cost varies based on multiple other criteria. For example, if there are limited substitutes or alternatives for a product, companies may be able to set a higher price point without major fluctuations in unit sales, at least temporarily.
After an extended period of relatively low price sensitivity among DIYers, sensitivity has been increasing in the market among residential and commercial builders, remodelers, and general contractors. Both pro customers and homeowners alike are more inclined to shop around for alternatives than they used to be, which makes it imperative for companies to utilize strong data, over gut feelings, and take a thoughtful approach when choosing price points for products and materials.
What are the Main Pricing Strategies for Building Products?
In order to set your company up for growth, you must invest forethought and ongoing efforts into developing a pricing strategy for your products. There are numerous schools of thought regarding pricing strategies that you can take into account during this process:
1. Channel Specific Pricing Strategy
For building products companies that sell certain items exclusively through dealers for industry professionals, with other products available to general consumers, channel-specific pricing is an especially preferred strategy.
Using this approach, various channel partners and distributors are given a different price based on the attributes of the channel partner’s role; their share of the addressable market; and the costs associated with supplying inventory to the partner/distributor.
Direct-to-consumer options commonly come into consideration commonly, as companies look to reduce gain sales directly among customers while not jeopardizing existing channel relationships in the process.
2. Cost-plus Pricing Strategy
Considered one of the most straightforward pricing strategies, this approach involves starting with the production cost for an item and then adding a set percentage on top—hence, cost-plus. This approach, which is prized for simplicity, ease of use, and pricing stability, works best for physical products that can be broken down into units. However, it fails to take into account external factors, such as competitor prices, the specific distribution channel, customers’ purchase behaviors, and market demand.
3. Value-based Pricing Strategy
For value-based pricing, you start by calculating how your customers value your products. It is based on perception and having data-backed answers to the following questions:
- What are customers willing to pay for a particular building product or material?
- How does willingness to pay change if you include additional and/or specific features?
- How exactly would those extra features impact the perceived value, along with the suitable price point, for your product?
If you’re going to use this pricing strategy, you must have a clear, data-driven understanding of your customer base in order to set realistic and competitive price points that are not based on costs but based on perceived value instead.
4. Dynamic Pricing Strategy
The dynamic pricing strategy, also known as variable pricing or flexible pricing, is where a company will frequently adjust the prices for their products, even multiple times per day, based on fluctuating variables, from market demand to supply conditions. Among this strategy, there are various models that you can employ: inventory-based pricing; competitive pricing; demand-based pricing; and time-based pricing. The dynamic pricing approach enables you to be more flexible and responsive to the ever-shifting market and purchasing trends, which is deployed more commonly among commodity materials.
5. Competitive Pricing Strategy
Another popular retail pricing strategy, this model primarily involves monitoring your competitors and making adjustments based on what they are charging for similar items.
There are online price-monitoring tools and retail analytics tools you can leverage to understand what other brands and products are priced at. Keep in mind that just because competitors are setting their prices at a certain amount does not necessarily mean that is the optimal amount in the mind of the customer—especially your customer.
Again, you’ll want to do market research to get meaningful insight into your particular market and the average price range of a product before setting your own price points to ensure they’re competitive. This strategy is often utilized for home improvement products deployed into existing markets with the intent to get a share of the pie, similar to penetration pricing strategies.
6. Penetration Pricing Strategy
The penetration pricing strategy is often deployed for new products entering an existing market. For a penetration pricing approach, companies offer the lowest price for a product when introducing it in a highly competitive market, essentially undercutting the competition and trying to pull their customers away. In other words, the business is able to effectively penetrate the market, create market awareness, undermine the dominance of the competition, create a strong customer base, and drive initial sales. Once they have customers attached to the product, the company will then raise the cost to a relatively normal level.
7. Skimming Pricing Strategy
The opposite of the penetration pricing strategy is the skimming pricing strategy, also known as price skimming. When companies launch a new building product, they’ll set the price at the highest tolerable level for the market, enabling them to generate a high short-term profit.
As alternatives are introduced by competitors, the company then cuts down—or skims from—their price, ensuring it is still desirable to their customer base.
Skimming pricing strategies share similar goals and perceptions as value-based pricing strategies. You can establish a premium brand image, appealing to a segment of customers who are less price-sensitive, and maximize your early profits.
8. Economy Pricing Strategy
As the name implies, the economy pricing strategy is all about offering the lowest price for a product. You’ll often see it applied to more basic or generic products, where quality and value isn’t essential. Additionally, these types of building products and materials require less marketing and advertising, helping to mitigate those costs. In order to compensate for lower prices, companies focus on increasing their volume. While you may not turn a large profit, this is often perceived as a more resilient pricing strategy, allowing brands to persist even in times of economic stagnation or decline.
9. Premium Pricing Strategy
The opposite of economy pricing, going to market with a premium pricing strategy means your brand is confident that the sub-segment of the customer base you are targeting sees the upcharge for a “premium” product to be worthwhile to their personal standards or perceived needs for the project. There’s a good chance you’ll see higher profit margins over time and cultivate a loyal customer base that isn’t price sensitive. Additionally, by establishing yourself as a premium brand, you can capture a market position that isn’t easily shaken by incoming competition.
Using Market Research for Pricing Building Products and Materials
Each pricing strategy has its pros and cons. There are certain circumstances where one is preferable to the others, which also varies for different building product categories. Furthermore, your pricing strategy can evolve over time as you learn more from custom market research about your customers, current market forces, and tailored ways to improve your brand health and awareness.
Consider doing a price-sensitivity analysis for your specific products and developing customer profiles for the individuals you’re targeting with your products—whether they’re certain segments of construction professionals; bureaucratic buyers, such as schools and municipalities; or DIY homeowners.
Additionally, when developing new building products or enhancing existing products, market research should be conducted during your later product development stage gates to give you a clear understanding of how much your customers would willingly pay for the product and to what degree certain features impact product preference and price sensitivity.
Through use of various research methods such as: Product Usage Trials, MaxDiff Scaling, or Monadic Testing, our team at The Farnsworth Group applies proven research techniques that result in clear recommendations for your most successful concept in the marketplace. You will know which concept stands out, why and what modifications will further increase adoption rates.
All of these are types of answers our market intelligence team have been providing, exclusively for building product manufacturers, retailers, and industry stakeholders for nearly 40 years. Using the most appropriate research methodologies and modeling to answer the question(s) at hand, we provide recommendations on which combinations of features are most desired and at which price points your brand will be most successful in your specific market.
Schedule a consultation to learn more about the answers you would be able to get to your specific customer, product, and market related questions.
