9 Approaches to Pricing Strategy: How to Price a Product

9 Approaches to Pricing Strategy: How to Price a Product

Appropriately pricing your building products and materials is a powerful lever for growth and success in the home improvement industry. 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 exploring different approaches and conducting market research. 

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 exploring different approaches and conducting market research

How to Price Home Improvement and Building Products

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 of your business.

Your task? Understand the relative value perceived by the target customer for your product option(s) compared to alternatives on the market. Your teams are tasked with assigning products a value that will keep it moving based on multiple indicators. 

In order to get these answers, you can leverage one of a few different approaches for conducting price sensitivity related market research:

  1. Conjoint Analysis for Pricing
  2. The Van Westendorp Pricing Model
  3. The Gabor-Granger Approach

Here, we cover the Pros and Cons of each of these product pricing study methodologies in greater depth.

The end goal is having 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. 

Remember, 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.

However, DIYers, residential and commercial builders, remodelers, and general contractors are becoming more price sensitive in the current market and 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

Especially for building products companies that sell certain products exclusively through dealers for Pros with other products available to general consumers, channel specific pricing is a commonly preferred strategy.

With 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 come into consideration commonly, as companies look to reduce gain sales directly among consumers 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. It works best for physical products that can be broken down into units, but 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, the approach is to calculate 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, specific, features? 
  • How exactly would those extra features impact the perceived value, and 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. It 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 of one of the most popular retail pricing strategies is based primarily on 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 that 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 buyer.

Again, you’ll want to do market research to get meaningful insight into a particular market and the average price range of a product before setting your own price points so that they’re competitive. This strategy is often deployed 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

Also often deployed for new products entering existing markets is a penetration pricing strategy. 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. 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. 

The mindset behind skimming pricing strategies and value based pricing strategies as discussed above shares similarities.

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. In order to compensate for lower prices, companies focus on increasing their volume.

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.

Using Market Research for Pricing Building Products and Materials

Each pricing strategy has its pros and cons, and there are certain circumstances where one is preferable to the others, which also varies for different building product categories. 

Further, your pricing strategy can evolve over time as you learn more from custom market research about your customers, about progress made over time to improve your brand health, and about current market forces.

Consider doing a price sensitivity analysis for your market and developing customer profiles for the individuals you’re targeting with your products—whether they’re certain segments of construction professionals, bureaucratic buyers like schools and municipalities, or DIY homeowners.

Additionally, when developing new building products or enhancing existing products, market research should also be conducted 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, A/B Testing 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 at The Farnsworth Group have been providing, exclusively for building product manufacturers, retailers, and industry stakeholders, for over 30 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. 

Simply schedule a consultation to learn more about the answers you would be able to get to your specific customer, product, and market related questions.

Learn more about the various custom market research services you can pursue with our team as well: