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If you have decided to, or are still considering whether or not to become a professional Forex trader, you’re probably asking yourself questions such as ‘How much money do you need to start Forex trading?’ or ‘What is the minimum amount required for Forex trading?’
This article will address such questions and more by providing you with a starting point for how to trade Forex, through establishing which types of accounts you should consider, how these accounts differ, and then of course: How much do you need to trade Forex?
Where To Start With Forex Trading
There are a dizzying array of questions and variables to consider when you begin trading. Will you be a fundamental or a technical trader? Or perhaps, a combination of both? Also, will you trade short term or long term? Will you trade rigidly based on the rules of a particular Forex system? Will you take a more discretionary approach? The questions are endless, but ultimately they determine what you achieve in the market, and how you do it. But you can also break them down into even more specific directions.
First of all, how much money do you need to trade Forex? Also, how large should you make each trade? The answer may be smaller than you think – it’s actually zero. A Demo trading account allows you to experience the live Forex markets without risking any money, by enabling you to trade with virtual currency. Admiral Markets offers clients the ability to trade virtual funds of up to $10,000 in their Forex demo account.
This also applies if you want to start using an expert dealing platform such as MetaTrader 4 Supreme Edition. By mixing usage of a demo account and a live account, you can test your strategies within a risk free environment first, before you move onto the live markets. If you are a novice, a demo account is the ideal way to dip your toes in the water.
After all, part of learning is making mistakes – but you don’t have to lose capital by doing so. Another important thing to consider when you start trading is how to implement risk management into your trading. Doing so will enable you to manage the risks effectively, so you’re aware of them, and you know how to reduce the level of risks you face.
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The Forex Market: A Market For Everyone
Let’s consider the Forex market for a moment. Much is made of the vast size of the FX market, but its egalitarian accessibility is often overlooked. Small players happily play alongside the largest participants. There is a place at the table for everyone because of the surprisingly low barriers to entry. High levels of leverage allow small deposits to command sizable positions.
In short, this means you can make trades without tying up a lot of your cash. Obviously, you should never trade beyond your means, but leverage offers a very convenient way of trading.
How Much Money Do I Need To Open A Forex Account?
It depends on the type of account. Because different account types offer a variety of services and generally require different starting sums. But for the most part, you can open an account with a small deposit. For example, to open the an Trade.MT4 account, you need a minimum deposit of $200 (or a similar size in other currencies).
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This account offers low spreads and highly competitive leverage. Once you have built up your confidence, you might want to open the Zero.MT4 account with a minimum deposit of $1000. This account offers institutional-grade speed of execution with ultra-low spreads, and is well suited for high frequency traders. The point is, the account specs will almost certainly answer your deposit question.
Depicted: MetaTrader 4 Supreme Edition AUDUSD – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
From a position-sizing standpoint, don’t trade more than you can afford to lose. When considering how much to start Forex trading with, it is very much an issue of your own personal finances, and your own attitude to risk. Trading can often be a nerve-wracking and pressure-filled experience. One simple way to ease this is to trade conservatively. This will help you cope with adverse conditions.
Let’s look at an example to get a feel for how much we are talking about. A sensible rule of thumb is that you shouldn’t be risking more than 1% or 2% of your risk capital per trade. For the sake of convenience, let’s use 1%.
The minimum trade size with an Trade.MT4 account is 0.01 lots. A lot is a standard transaction size for each currency pair. Let’s say you decide to buy 0.01 lots of EURUSD. This is a position that means you make or lose 0.1 USD for every pip movement. The margin for a position this small would be covered by your minimum deposit.
Here’s the kicker – quantifying the risk attached to an individual trade is a tricky business. We can broadly say that the risk is the amount of loss you would be willing to withstand before closing the position. However, this likely underestimates the risk because you may subsequently change your mind and tolerate a greater loss. There may also be times when a market moves faster than you can react.
One way to try to draw a line under the position and quantify the risk is to use a stop-loss. But be aware that a conventional stop order is not guaranteed. A stop order becomes an order to deal on the market once its level has been hit. In the event of a fast-moving or gapping market, this means it may be subject to slippage. Slippage is the number of points that your position is filled away from the level of your stop order.
In short, stops do not mean any maximum loss is set in stone, but they do give you a rough and useful idea of your risk for normal conditions. Let’s say you placed your stop 80 pips away. For our rough estimation, we could say that the theoretical risk is 80 pips x 0.1 USD per pip = $8.
If we are assigning a theoretical risk of $8 to this trade, and we are also saying one trade is 1% of our total risk capital, then the total risk capital must be $8 x 100 = $800. This is because the minimum transaction sizes are so small, you only need a small amount to start trading Forex. These are just some sample numbers, of course.
If you worked with tighter stops, your risk capital would be even smaller. If you worked with wider stops and/or a larger transaction size, you would need more risk capital. Here’s another way of considering the question – successful trading is about winning in the long run. To win in the long run, you must not be wiped out in the short run.
Still want to know how much money you need for Forex trading? Put simply, you need enough to avoid blowing up. Look at price catastrophes that have occurred historically in your chosen currency pair. Think about what such movements would mean to you with your average trading size. Make sure that your risk capital is large enough to withstand such price shocks.
Once you’re up and running, and in a position to make steady returns, it might be time to consider how much money you need to trade Forex full-time. If you are trying to find out what realistic monthly returns for a trader are, you are going to be trading in sizes that are much larger than usual minimums. Therefore, your risk capital will have to be larger as well.
If you start conservatively and use sensible money management, you do not need a large amount of money to trade Forex. It is possible to start trading with only a few hundred Euros, provided your trading sizes are small. If you are willing to put in the preparatory leg work, you should be able to discover a trading approach that works for you.
There’s one more thing to consider – people who succeed at trading, work hard at it. The more effort you put in, the more likely you are to succeed. So, when facing a new, challenging venture, the only correct option is to learn more about what you are getting into. If you would like to learn more about Forex, or trading in general, why not check out range of articles and tutorials?
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
Martingale as the basis for a long-term trading strategy
The martingale is a well known trading system. It has many advantages: ease of use, no need to use tight Stop Loss, which reduces psychological pressure, a relatively small amount of time which the user needs to invest in trading.
Of course, the system also has huge drawbacks. The most important of them is the high probability of losing the entire deposit. This fact must be taken into account, if you decide to trade using the martingale technique. This means that you should limit the maximum number of position averaging operations.
Basics of the classical martingale strategy
According to the classical martingale system, the next deal volume should be doubled if the previous ones was closed with a loss. In this case, the profit of the double-volume deal can cover the previous loss. The system is based on the idea that you should finally get lucky. Even if the market does not reverse to take the desired direction, you can benefit from a correction. From this point of view, this should work according to the theory of probability.
In this form, martingale can be combined with any trading system. For example, in level based trading you can open a double-volume deal after having a losing trade. Moreover, since Take Profit in level trading is normally three or more times larger than Stop Loss, you don’t have to increase the deal volume after each loss. This can be done after two or three losses, or the deal volume can be multiplied by 1.1 or any preferred value rather than doubling it. The main idea is that the resulting profit should fully cover the preceding losing chain.
The martingale can also be used for increasing position volume in parts. First, we open a small volume position. If the price goes in the opposite direction, we open one or several more positions with the remaining volume and thus we get a lower average price.
As for position holding, martingale provides additional opening of a position with the same or increased volume in the same direction, if the market moves opposite to your initial position. This type of martingale will be discussed in this article.
For example, if you open a long position and the market starts falling, then you do not close this position, but open another long one – this time the position is opened at a better price. If the market continues falling, another long position can be opened at a new better price. Continue opening positions until the price turns in the right direction or until you reach a certain maximum number of positions.
According to the classical martingale technique, each new position should be opened with a double volume. But this is not necessary. If you use double volume, you can achieve the total profit of all positions faster, provided that the price started moving in the favorable direction. In this case, you do not have to wait until the price reaches your first open position in order to have the profit. So, losses on all positions can be covered even if there is price correction, without the full reversal.
Also, you can keep the previously opened position open or close it. However, if you decide to close it, the new position must necessarily have an increased volume.
Does martingale work?
I do not claim to be a martingale expert. Let us reason together. Can this trading system show acceptable results?
Any movement in the market has a wavy character. A strong movement in one direction is almost always followed by a corrective pullback in the opposite direction. According to this regularity, martingale based systems can work. If you can predict the pullback beginning and preform an appropriate buy or sell trade at the appropriate time, you can cover losses or even make profit. If the market turns in your direction instead of the pullback, you can earn a good profit.
However, sometimes strong price movements occur with almost no pullback. The only thing we can do in this case is wait and hope that the deposit will be enough to bear losses until the price finds the bottom and starts reversing.
Choose the market
Martingale operation may differ in different markets. Therefore, if possible, it is better to choose the market, which is the most suitable for this trading strategy.
Forex is considered to be a ranging market. Stock market is considered to be a trend one. Due to this Forex can be more preferable for martingale techniques.
The use of this strategy in stock markets is associated with a lot of dangers. The most important of them is that a stock price can be equal to zero. That is why long trading using the martingale technique can be very dangerous on the stock market. Short trading can be even more dangerous, because the stock price can soar to an unexpectedly high level.
Currency quotes in the Forex market cannot be equal to zero. For a currency rate to skyrocket, something incredible must happen. The rate is normally moving inside a certain range. How can we benefit from this?
As an example, let us view the monthly charts of Forex symbol quotes. Let’s begin with USDJPY:
As for other markets, they can also be suitable for martingale techniques.
For example, let us have a look at the cocoa bean market:
Here is the Brent market:
Or the soybean market:
The martingale technique is better suitable for financial instruments, which are in a certain range on any of the timeframes (for trading the range borders). Another acceptable option is to trade symbols which have been moving in one direction for many months, without significant rollbacks (trade in the direction of this movement).
Choose a direction
If you are going to use the martingale technique, make sure all factors are favorable for you. We have analyzed the markets. Now we need to select the right direction.
Stock market. The right direction may not always be found on the stock market.
When trading in the long direction, swap is acting against you. This means you have to pay for moving a position to the next day. The sum which you are charged can be so large, that swaps for several months that you hold a position can be comparable with the expected Take Profit of this position.
Although, some brokers offer long spread much lower than short spread. This swap amount can be small enough if compared with the Take Profit value. In this case buying of shares is preferable.
When trading short, you are also charged swaps (depending on your broker) or can lose on dividends. For short positions, you are charged dividends, not paid. Therefore, when trading short, it is recommended to select the shares without dividends, or enter a position after this payment of related dividends.
Another reason why time before the payment of dividends is unfavorable for short positions is that many traders will buy a share to earn dividends. This means that there is a probability for the stock price to increase.
Other markets. In other markets, it is recommended to chose a favorable directions. That is the direction with positive swap. In this case, you will be paid for each position holding day.
However, there is no unified list of such symbols. Some brokers pay positive swaps for short positions of certain instruments. Other brokers provide negative short swap for the same symbols.
Therefore, before using the martingale strategy, make sure that your broker provides positive swap in the direction you are going to trade.
To check the swap open the Symbols window of your terminal (Ctrl+U). After that select the desired symbol and find Long swap and Short swap in its settings:
But checking all symbols manually is not convenient. Therefore, let us revise the symbol selection and navigation utility, which was discussed in the following articles:
Let us add a new enum type input Hide if the swap is negative, with the values of Do not hide, Long and Short:
To enable the use of this parameter, let us add the following symbol filtering code in the skip_symbol function:
This revised utility version is attached below.
Now we can easily see the list of symbols, for which the broker provides positive long or short swap.
As an example, let us compare lists of instruments having positive swap, offered by three different brokers.
- The first broker; positive or zero Long swap: USDJPY, SurveyMonkey (zero Long swap for stocks, which is a very rare case), XMRBTC, ZECBTC.
- The second broker; positive or zero Long swap: AUDCAD, AUDCHF, AUDJPY, CADCHF, CADJPY, GBPCHF, NZDCAD, NZDCHF, NZDJPY, USDCHF, USDDKK, USDNOK, USDSEK.
- The third broker; positive or zero Long swap: AUDCAD, AUDCHF, AUDJPY, AUDUSD, CADJPY, NZDCAD, NZDCHF, NZDJPY, NZDUSD, USDJPY.
- The first broker; positive or zero Short swap: EURMXN, USDMXN, XAGUSD, XAUUSD, BRN, CL, HO, WT, cryptocurrencies and stocks.
- The second broker; positive or zero Short swap: EURAUD, EURNZD, EURRUR, GBPAUD, GBPNZD, GOLD, SILVER, USDRUR, USDZAR, GBPUSD, EURUSD.
- The third broker; positive or zero Short swap: EURAUD, EURNZD, EURPLN, GBPAUD, GBPNZD, GBPUSD, USDPLN, USDRUB.
As you can see, the lists do not match.
Choosing symbols for trading extremes
We have defined two factors to pay attention to when selecting a symbol for martingale trading.
The first factor is the market. Forex is the most suitable market for the martingale strategy, therefore we will work with Forex symbols.
Another aspect is the positive swap in the desired direction. Since we open a position for an indefinite time, it is important to have the time favorable for us.
Since different brokers provide different sets of symbols having positive swap, we will choose the instruments which have positive swap with one of the above brokers.
There is one more aspect to be taken into account. This is the current symbol price. If the current symbol trading time is close to the historic minimum, opening long-term short positions wouldn’t be reasonable.
Short positions can be opened if an instrument price is in the middle of the price range, in which it is traded 90% of time, or is above this middle.
To trade long, the instrument should be below the middle of this range.
Let us view a few examples.
One of them is the USDJPY chart, which was mentioned above. The price is about the middle of the range. One of the brokers provides a positive long swap. So, we can try to trade long using the martingale system. If the price were at least one square lower, that would be even better:
EURAUD is also about the middle of its movement range, straight below a strong resistance level. Let us try short trading, since many brokers offer positive spread for that direction. We can start right now or wait for the price to move a square upwards.
EURPLN is above the range middle and has positive short swap with some brokers:
The price position of USDPLN is even better than that of EURPLN. We can trade short:
USDRUB, also short:
Some brokers offer positive long swap for AUDCHF, while the price is near the range minimum:
Next let us consider some other trading possibilities.
Creating a grid
The next step to do is to determine the following:
- our funds;
- the amount used for the first deal;
- when to open further deals if the price goes in the unfavorable direction;
- the maximum number of trades.
When using the martingale system, we should always be prepared for the situation when the price moves in the unfavorable direction. In this case, the volume of the next increase step should not be less than the previous one. Bearing this in mind, as well as based on the maximum number of position increase steps, we will calculate the first deal volume. Do not forget about the maintenance margin, which is frozen on the account for trading operations. Make sure to have extra free balance at the last increase step, for an unforeseen event. It is more preferable to have the free balance enough for one more martingale chain, in case the current one ends up with a Stop Loss.
As a rule, the Take Profit value is equal to Stop Loss in martingale trading. It can also be place at a distance equal to 1 up to 2 Stop Loss values. Taking into account the Take Profit, you can select the position increase volume so that it would allow to cover losses in case of market correction or reversal. The greater the volume of the follow-up deals, the earlier you will cover losses. But larger volumes require larger balance. Moreover, your loss in case of the continued movement in the wrong direction will be higher.
When talking about Stop Loss, here we mean opening a new position without closing an old one. So the actual Stop Loss is not performed until we reach the maximum number of steps.
All our considerations are theoretical without testing. However, let us set the maximum number of deals in a chain to 7. It means that we are ready to open 7 deals, expecting that the price will eventually turn in the favorable direction.
The Take Profit size will be equal to Stop Loss. TheStop Loss will be set to 1 dollar. For convenience, the first deal volume will be equal to 1 lot.
Now let us try to create a table of minimum deal volumes, which would allow us to take a total profit of 1 dollar from all open position if the price moves in the favorable direction. Here we do not consider profit from swap. It will be a nice bonus.
|Step||Lot||Gross loss||Profit, 1 to 1|
|1||1||-1 $||1 $|
|2||1||-3 $||1 $|
|3||2||-7 $||1 $|
|4||4||-15 $||1 $|
|5||8||-31 $||1 $|
|6||16||-63 $||1 $|
|7||32||– 127 $||1 $|
Here is a geometric progression in the minimum lot size, which must be additionally bought in relation to the starting lot. At the 7th step, we lose 127 times more than we can earn. As you can see, the use of the classical martingale can lead to complete deposit loss.
If we set Take Profit 2, 3 or more times larger than the Stop Loss size, follow-up deals can be much smaller, so the total loss on the entire chain will be reduced. However, this would not allows us to profit from corrections. In this case we would have to wait for market reversals, which may not happen in some cases.
As an example, let us consider the minimum necessary deal volumes, if the Take Profit is twice as large as Stop Losses.
|Step||Lot||Gross loss||Profit, 2 to 1|
|1||1||-1 $||2 $|
|2||1||-3 $||3 $|
|3||1||-6 $||3 $|
|4||1||-10 $||2 $|
|5||2||-16 $||2 $|
|6||3||-25 $||2 $|
|7||4||-38 $||1 $|
The difference is striking. Instead of the ratio of 127 to 1, we get a much smaller ratio of 38 to 2 (on average). However, the chances of hitting Stop Loss are higher in this case.
If Take Profit is 3 times larger than Stop Loss, the total profit is reduced further and is equal to about 29 to 4.
|Step||Lot||Gross loss||Profit, 3 to 1|
|1||1||-1 $||3 $|
|2||1||-3 $||5 $|
|3||1||-6 $||6 $|
|4||1||-10 $||6 $|
|5||1||-15 $||5 $|
|6||1||-21 $||3 $|
|7||2||-29 $||3 $|
As you can see, by setting a larger Take Profit, we can reduce the chances of losing the entire deposit. But in this case, a deal should be entered when you have every reason to believe that the price will move in the desired direction now or in the near future. It means that the Take Profit to Stop Loss ratio of greater than 2 to 1, is better suitable for trading in the trend direction or from the range borders towards its middle.
Distance between positions. Another yet unanswered question is the distance for opening a new deal if the price goes in the unfavorable direction. The right way would be to use levels, which were previously formed on the chart. But in this case distances between trades will not be equal and it will be much more difficult to calculate the new deal volume.
Therefore it is better to use equal intervals between deals, as it was done in the above tables. To avoid complicated calculations, distance can be determined by the chart grid. If you look closer, you can see that the range boundaries are often located just at the borders of the squares.
Parameters of instruments for which you can open long-term positions
Let us try to find symbol charts, where we can open positions with the minimum risk right now or a bit later. And after that we will plot on the charts possible points for additional buy deals.
AUDCHF long trading. There is enough space for only 4 buy deals. But if the price moves even lower, more deals can be added. Although the chart is pointed downwards, with the profit to loss ratio equal to 1:1 the price can go the necessary distance on the first of further deals.
CADCHF long trading. The situation is similar, but the price is even lower than that of AUDCHF.
GBPCHF long trading. Here the price is very close to the minimum.
CADJPY long trading. In this case it is better to wait till the price moves one square down, and then to try to perform a buy operation.
USDZAR short trading:
Using martingale in short and medium term trading
The martingale can be used not only for long-term trading. Any range in which the symbol is being traded, can be divided into similar deal levels. The possibility of earning profit remains until the symbol exits its current range. When working in short-term ranges, you can set the profit to loss ratio equal to 3:1 or more.
The number of steps is set here for demonstration purposes. You can use less steps, in which case closing of the entire chain by Stop Loss would be less crucial.
For example, if the profit to loss ratio is 3:1 and you have 4 steps in a chain, you can make 2 positive deals to cover the loss of an unsuccessful chain
If a chain has only 3 steps, losses can be covered by one profitable deal. This is the deal which first goes in the wrong direction but is eventually closed by Take Profit. The same loss can be covered by 2 deals, if they instantly go in the right direction.
Testing automated trading using RevertEA
Since the RevertEA Expert Advisor which was earlier created for testing the reversing strategy (Reversing: The holy grail or a dangerous delusion? and Reversing: Reducing maximum drawdown and testing other markets, and Reversing: Formalizing the entry point and developing a manual trading algorithm), supports trading using the martingale technique, let us try to test this trading strategy in the automated mode.
We do not set the price, above or below which the EA is allowed to enter a position. It will perform entries whenever there are no open positions for the tested symbol.
Another difference of the EA operation from the above examples, is that it will use Stop Losses. I.e. if the price goes in the wrong direction, the EA will close the previous deal and will open a new one at a better price.
Expert Advisor settings. Let us set the following parameter for the optimization of RevertEA:
- Stop Loss action: martingale (open in the same direction);
- Lot size: 0.01;
- Deal volume increase type;
- Stop Loss type: in points;
- Take Profit type: Stop Loss multiplier;
- Take profit: from 1 to 2 with an increment of 0.1;
- Max. lot multiplier during reversing and martingale: 8.
The optimization mode: M1 OHLC. After that the best testing result will be additionally tested in the Every tick based on real ticks mode. See the resulting profitability chart below.
Testing period: from year 2006.
Testing results. Testing results cannot be called impressive. Only Brent showed an interesting profit chart. In all other symbols, the use of martingale without any limitation on first position opening is not the best solution. On the other hand, we avoided total deposit loss.
USDJPY long trading, Take Profit is equal to 1.9 * Stop Loss, Stop Loss is equal to 100 points:
GBPAUD short trading, Take Profit is equal to Stop Loss, Stop Loss is equal to 120 points:
EURUSD short trading, Take Profit is equal to 1.3 * Stop Loss, Stop Loss is equal to 110 points:
EURAUD short trading, Take Profit is equal to 1.6 * Stop Loss, Stop Loss is equal to 80 points:
Finally, let us test Brent oil short trading, with the Take Profit level equal to 1.1 * Stop Loss, while Stop Loss is 200 points:
All the Strategy Tester reports, as well as SET-files with testing parameters are attached below.
Conclusion: is the Martingale technique worth using?
All considerations given in this article are theoretical. As can be seen from testing results, the automated use of martingale without appropriate rules does not always leads to good profit.
However, I believe that taking a more serious approach to developing a martingale based trading strategy, including position entering at a more appropriate price, could help to earn some profit. The advantage of such systems, is that you need to invest in trading a minimum of time, as compared with other systems which require constant monitoring.
How to choose a pricing strategy for your small business
It’s no secret that small businesses play a vital role in the US economy. However, revenue for small businesses can be scarce.
For instance, small businesses that do not have any employees average just $44,000 a year in annual revenue with two-thirds of these companies earning less than $25,000 per year. While various factors can affect a business’s revenue potential, one of the most important factors is the pricing strategy that its owners and team members utilize.
Whether your business is just getting started or you’re ready to begin advertising to drive sales, now is the time to learn what role pricing plays in the bigger picture.
Once you have a firm understanding of what a pricing strategy is, you can start reviewing the various approaches and choose the best one for your product.
What is a pricing strategy and why is it important?
In short, a pricing strategy refers to all of the various methods that small businesses use to price their goods or services. It’s an all-encompassing term that can account for things like:
- Market conditions
- Actions that competitors take
- Account segments
- Trade margins
- Input costs
- Consumers’ ability to pay
- Production and distribution costs
- Variable costs
Pricing strategies are useful for numerous reasons, though those reasons can vary from company to company. Choosing the right price for a product will allow you to maximize profit margins if that’s what you want to do. Contrary to popular belief, pricing strategies aren’t always about profit margins. For instance, you may opt to set the cost of a good or service at a low price to maintain your hold on market share and prevent competitors from encroaching on your territory.
In these cases, you may be willing to sacrifice profit margins in order to focus on competitive pricing. But you must be careful when engaging in an action like this. Although it could be useful for your business, it also could end up crippling your company. A good rule of thumb to remember when pricing products is that your customers won’t purchase your product if you price it too high, but your business won’t be able to cover expenses if you price it too low.
10 different pricing strategies for your small business to consider
As we’ve just identified, project management and strategic, actionable decisions go into setting the price of a product. Here are ten different pricing strategies that you should consider as a small business owner.
1. Pricing for market penetration
As a small business owner, you’re likely looking for ways to enter the market so that your product becomes more well-known. Penetration strategies aim to attract buyers by offering lower prices on goods and services than competitors.
For instance, imagine a competitor sells a product for $100. You decide to sell the product for $97, even if it means you’re going to take a loss on the sale. Penetration pricing strategies draw attention away from other businesses and can help increase brand awareness and loyalty, which can then lead to long-term contracts.
Penetration pricing can also be risky because it can result in an initial loss of income for the business. Over time, however, the increase in awareness can drive profits and help small businesses stand out from the crowd. In the long run, after penetrating a market, business owners can increase prices to better reflect the state of the product’s position within the market.
2. Economy pricing
This pricing strategy is a “no-frills” approach that involves minimizing marketing and production expenses as much as possible. Used by a wide range of businesses, including generic food suppliers and discount retailers, economy pricing aims to attract the most price-conscious consumers. Because of the lower cost of expenses, companies can set a lower sales price and still turn a slight profit.
While economy pricing is incredibly useful for large companies like Walmart and Target, the technique can be dangerous for small businesses. Because small businesses lack the sales volume of larger companies, they may find it challenging to cut production costs. Additionally, as a young company, they may not have enough brand awareness to forgo custom branding.
3. Pricing at a premium
With premium pricing, businesses set costs higher because they have a unique product or brand that no one can compete with. You should consider using this strategy if you have a considerable competitive advantage and know that you can charge a higher price without being undercut by a product of similar quality.
Because customers need to perceive products as being worth the higher price tag, a business has to work hard to create a perception of value. Along with creating a high-quality product, owners should ensure that the product’s packaging, the store’s decor, and the marketing strategy associated with the product all combine to support the premium price.
An example of premium pricing is seen in the luxury car industry. Companies like Tesla can get away with higher prices because they’re offering products, like autonomous cars, that are more unique than anything else on the market.
4. Price skimming
Designed to help businesses maximize sales on new products and services, price skimming involves setting rates high during the initial phase of a product. The company then lowers prices gradually as competitor goods appear on the market. An example of this is seen with the introduction of new technology, like an 8K TV, when currently only 4K TVs and HDTVs exist on the market.
One of the benefits of price skimming is that it allows businesses to maximize profits on early adopters before dropping prices to attract more price-sensitive consumers. Not only does price skimming help a small business recoup its development costs, it also creates an illusion of quality and exclusivity when you first introduce your product to the marketplace.
5. Psychological pricing
Psychological pricing refers to techniques that marketers use to encourage customers to respond based on emotional impulses, rather than logical ones.
For example, setting the price of a watch at $199 is proven to attract more consumers than setting it at $200, even though the actual difference here is quite small. One explanation for this trend is that consumers tend to put more attention on the first number on a price tag than the last. The goal of psychology pricing is to increase demand by creating an illusion of enhanced value for the consumer.
6. Bundle pricing
With bundle pricing, small businesses sell multiple products for a lower rate than consumers would face if they purchased each item individually. A useful example of this occurs at your local fast food restaurant where it’s cheaper to buy a meal than it is to buy each item individually.
Not only is bundling goods an effective way to reduce inventory, it can also increase the value perception in the eyes of your customers. Customers feel as though they’re receiving more bang for their buck. Many small businesses choose to implement this strategy at the end of a product’s life cycle, especially if the product is slow selling.
Small business owners should keep in mind that the profits they earn on the higher-value items must make up for the losses they take on the lower-value product. They should also consider how much they’ll save in overhead and storage space by pushing out older products.
7. Geographical pricing
If you expand your business across state or international lines, you’ll need to consider geographical pricing. Geographical pricing involves setting a price point based on the location where it’s sold. Factors for the changes in prices include things like taxes, tariffs, shipping costs, and location-specific rent.
Another factor in geographical pricing could be basic supply and demand. For instance, imagine you sell sports performance clothing. You may choose to set a higher price point for winter clothes in your cold-climate retail stores than you do in your warm-climate stores. You know people are more likely to buy the clothes in the winter environments, so you set a higher price to take advantage of demand.
8. Promotional pricing
Promotional pricing involves offering discounts on a particular product. For instance, you can provide your customers with vouchers or coupons that entitle them to a certain percentage off the good or service. You could also entertain a “Buy One Get One” campaign, tacking on an additional product as an add-on.
Promotional pricing campaigns can be short-term efforts. For instance, you may run a promotional pricing strategy over an extended holiday, like Memorial Day Weekend. By offering these deals as short-term offers, business owners can generate buzz and excitement about a product. Promotional pricing also incentivizes customers to act now before it’s too late. This pricing strategy plays to a consumer’s fear of missing out.
9. Value pricing
If you notice that sales are declining because of external factors, you may want to consider a value pricing strategy. Value pricing occurs when external factors, like a sharp increase in competition or a recession, force the small business to provide value to its customers to maintain sales.
This pricing strategy works because customers feel as though they are receiving an excellent “value” for the good or service. The approach recognizes that customers don’t care how much a product costs a company to make, so long as the consumer feels they’re getting an excellent value by purchasing it.
This pricing strategy could cut into the bottom line, but businesses may find it beneficial to receive “some” profit rather than no profit. An example of value pricing is seen in the fashion industry. A company may produce a product line of high-end dresses that they sell for $1,000. They then make umbrellas that they sell for $100.
The umbrellas may cost more than the dresses to make. However, the dresses are set at a higher price point because customers feel as though they are receiving much better value for the product. Would you pay $1,000 for an umbrella? Probably not. Thus, external factors like customer perceptions force the value pricing strategy.
10. Captive pricing
If you have a product that customers will continually renew or update, you’ll want to consider a captive pricing strategy. A perfect example of a captive pricing strategy is seen with a company like Dollar Shave Club. With Dollar Shave Club, customers make a one-time purchase for a razor. Then, every month, they purchase new razor blades to replace the existing one on the head of the razor.
Because the customer purchased a DSC razor handle, he or she has no choice but to buy blades from the company as well. Thus, the company holds customers “captive” until they decide to break away and buy a razor handle from another company. Businesses can increase prices so long as the cost of the secondary product does not exceed the cost that customers would pay to leave for a competitor.
Keep track of business revenues
Once you determine the right pricing strategy, your profit margins could increase. You’ll want to make sure you’re using reliable accounting software to keep track of relevant data. QuickBooks makes it easy for you to monitor relevant sales data and manage cash flow in one place. This data allows you to continually evaluate your pricing method so that you can make price changes in real-time, grow your business, and improve your customer success.
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