Not sure how to get pricing right? This article will teach you everything you need to know.
Table of Contents:
- Making sure the price is right for your products or services takes more than a guess
- What is a pricing strategy?
- Benefits of a pricing strategy
- 7 best pricing strategy examples
- Attributes of a good pricing strategy for small businesses
- Pricing Strategy FAQs
- Steps to choosing a winning strategy
- Nail the right price
Making sure the price is right for your products or services takes more than a guess
No matter what you’re selling, the price you set for your product or service can make or break your company’s financial goals. Of course, the right price won’t just come to you overnight. A thorough pricing strategy is a must when you want your customers to buy, without sacrificing a great profit margin.
There’s no universal answer for how high your markup should be. Some companies make millions charging mere dollars, while others may find success with grossly inflated prices. In the end, consumers will only choose the products or services with prices that match their perceived value.
So how do you determine the actual value of what you’re selling, beyond production costs? With the right pricing strategy, you’ll be able to account for all the factors that impact a shopper’s willingness to buy.
What is a pricing strategy?
The term “pricing strategy” encompasses all the methods that a business owner uses to determine how much to charge for a product or service. In order to put a great strategy into action, you’ll typically end up doing some math, performing market research, or collecting consumer insights first.
Of course, not every pricing strategy is thorough. Some business owners prefer to keep it simple by using set markups (sometimes known as cost-plus pricing) or manufacturer suggested retail prices (MSRPs). If you use any consistent process to set your prices, you already have a pricing strategy in place. However, when you build a strategy that better accounts for market conditions and other factors that impact consumer behavior, you’ll be able to take the competitive advantage in your industry.
Benefits of a pricing strategy
For consumers, having the ability to compare different prices is the second most important benefit of purchasing online. As e-commerce continues to grow, price comparison is becoming easier by the day, which means consumers will increasingly seek the best value they can find.
Having a strong pricing strategy in place can help you better meet customer expectations by putting reason behind your higher or lower prices. Your strategy will create a repeatable process that encourages you to consider how your target audience—and perhaps even your competitors—will react to your pricing decisions. As you refine your tactics, you’ll be able to convert even the most price-sensitive shoppers.
Paired with a great marketing strategy, your pricing strategy may even help you transform the perceived value of your products or services in the long run.
7 best pricing strategy examples
By learning about the pricing strategies that other business owners are using today, you can start brainstorming how you can use price to increase your market share. Below, we’ll share seven pricing methods you may use to capture and convert more leads.
As you read through these examples, keep in mind that you’re never limited to a single pricing strategy in the long term. Many business owners will rotate strategies over time or blend different tactics together. Sometimes, one product or service will call for a different pricing strategy than another. All it takes is a little experimentation with the following tactics before you know exactly what works for your business.
1. Price skimming
When you use a price skimming strategy, you’re launching a new product or service at a high price point, before gradually lowering your prices over time. This is a great way to attract consumers—especially high-income shoppers—who consider themselves early adopters or trendsetters.
From a business owner’s perspective, price skimming can be extremely helpful in helping you break even faster. This strategy provides an ample amount of security—granted that your initial price isn’t too extreme—before making your product or service more accessible to the greater market. As long as you’re keeping up with your online reputation management during the initial release period, the greater market will be keeping an eye out for lower prices.
Price skimming can be particularly useful for business-to-consumer (B2C) brands that rely on fast-moving trends. Think about how fashion retailers almost always launch product lines at a higher price, then put them on sale as soon as new, trendier clothes come in. Electronics retailers also frequently use price skimming, starting with premium pricing when phones or laptops with new features launch.
2. Penetration pricing
A penetration pricing strategy is the opposite of price skimming. Instead of starting with high prices, you start with low prices and gradually increase them as they gain traction. While this does put you at risk for limited or zero profit in the beginning, depending on how low you actually go, it also quickly converts. In the same way that a free sample can encourage a customer to make a purchase, you’re providing a discounted experience to create customer loyalty.
Penetration pricing is designed to put the spotlight on your brand. Because of this, your prices will always start lower than what your competitors are charging. Once you’ve successfully achieved market penetration, you can rise to an equivalent price or even higher, depending on how positive your customer feedback is.
3. Competitive pricing
Competitive pricing is extremely similar to penetration pricing in that your goal is to drive your target audience away from your competitors and toward your brand. However, instead of making price increases later on, you’ll continue to track what your competitors are charging and beat them out. Many stores, like Walmart and Dick’s Sporting Goods, will even offer price matching to ensure they never miss a beat.
Although this strategy can be hard to sustain—hence why many business owners stick with a penetration pricing strategy—competitive pricing can be useful if limiting production costs is one of your strengths. It will keep price-sensitive customers loyal to your brand for reliably helping them stay within budget.
Closely related to competitive pricing is economy pricing, which relies on low production costs to keep consistently low prices, regardless of what competitors are charging.
4. Premium pricing
Low prices aren’t always the most attractive offer. When your target audience seeks quality over a good deal, you need to demonstrate the advantages that your brand can provide. A premium pricing strategy can help you build the perceived value of your product or service, straight from your initial launch. Your prices may drop slightly over time, but they should still give your buyers a feeling of exclusivity and, in many cases, luxury.
Still, while the idea of premium prices is often associated with luxury brands like Fendi and Mercedes-Benz, any brand can take this approach. For example, Advil always sets a premium price for its products, even when generic pain relievers are equally as effective. As a result, many consumers choose to purchase Advil—and may even think it works better—when they’re really just paying more for a trusted brand name.
5. Loss leader pricing
Many retailers, both online and offline, attract customers by offering one major discounted product or product line while encouraging them to purchase more. The end result is greater profit for your business per transaction.
Though this pricing strategy is often associated with promotional pricing, which utilizes short-term sales, it can be long-term. Long-term loss leader pricing is often seen in the form of bundle pricing, in which you offer greater savings when consumers buy more. Although offering discounts for bundling won’t increase your profit margin immediately, the idea is that you’ll get more consistent sales, which eventually surpass what you would have sold by only pricing items individually.
6. Psychological pricing
The numbers you see can influence you more than you think. Instead of changing consumer perceptions about a product, psychological pricing uniquely aims to change perceptions about what the price even is in the first place. A few common examples of this strategy that are proven to work include:
- Ending a price with an odd number to make a customer feel like they’re spending much less ($5.99 instead of $6, or 97 cents instead of $1). This is often known as charm pricing.
- Using larger font sizes for dollar amounts and smaller font sizes for cents. Paired with charm pricing, you can further emphasize a customer’s feelings that they’re paying significantly less.
- Placing an original price next to a sale price to show customers how much they’re saving. This is sometimes known as anchor pricing.
A psychological pricing strategy is best used for brands that are targeting price-sensitive customers, as it provides a perceived deal that customers with an affinity for luxury may not want.
7. Value pricing
Value pricing is perhaps the most important pricing strategy of all. This takes into account how beneficial, high-quality, and important your customers believe your products or services to be. Value pricing is what makes a wedding dress worth thousands more than a prom dress and what makes high-end salon haircuts worth more than speedy Great Clips services.
In order to set value-based prices, you must have a deep understanding of your target audience’s needs, pain points, and motivations, as well as your brand’s own reputation. You’ll also need to take into account how the state of the market affects how people perceive value. For example, the value of a non-necessity like a Netflix subscription may decrease during a recession.
While we are highlighting value pricing as its own strategy, we always recommend taking value into account, even if it’s not the primary method you’re using. This can help you decrease risk by ensuring your don’t start with a price that’s too high when price skimming or undersell yourself with competitive pricing.
Real life examples of pricing strategies
So, what do different pricing strategies look like in the real world? Here are a few examples.
Examples of premium pricing: Car companies like Tesla or designer brands like Gucci use a premium pricing strategy.
Examples of promotional pricing: Take a look at just about any retail store on Black Friday—that’s promotional pricing at its finest.
Dynamic pricing: Dynamic pricing is when a company charges different prices depending on the timing of the purchase or demand for that product. The perfect example of this is Ticketmaster charging different prices for concert tickets depending on the demand for specific dates/seats.
Competitive pricing: Have you ever noticed that Amazon always seems to offer the lowest price for just about any product? That’s because they use a competitive pricing strategy.
Attributes of a good pricing strategy for small businesses
So, what makes a pricing strategy good or bad? Here are a few basics.
A winning pricing strategy:
- Portrays value
- Convinces customers to buy
- Gives your customers confidence in your product
A weak pricing strategy:
- Doesn’t accurately portray the value of your product
- Makes customers feel uncertain about buying
- Targets the wrong customers
Pricing strategy FAQs
Which pricing strategy is best? There isn’t a one-size-fits-all solution to pricing. Different strategies will work better for different businesses. That being said, competitive pricing and value pricing are two common ones you might try if you’re just starting out.
How do you determine the selling prices of a product? This depends on the pricing strategy you use. The most important thing to ensure is that you’re charging customers more than what you’re paying to produce a product.
What is the simplest pricing strategy? Cost-plus pricing is a simple pricing strategy that involves calculating the cost it takes to make your product and adding a flat percentage on top of that.
Can you combine pricing strategies? Yes! As we’ve already mentioned, there is no one-size-fits-all solution to pricing. Don’t be afraid to experiment with a few strategies to see what works best for you.
How does pricing strategy fit into your marketing strategy? If low pricing is going to be a main selling point in your marketing campaigns, it’s important to choose a pricing strategy that allows for competitive pricing. It’s also important to mention that your pricing strategy can greatly impact the buyer’s journey.
Should I charge more or less than my competitors? Again, since there isn’t a one-size-fits-all solution when it comes to pricing, this depends. If you offer the exact same product as your competitors, it’s good to aim for pricing in a similar range. If your product is more premium or offers additional features, charging more might make sense.
What is a pricing curve? A pricing curve or a cost curve is a graphical representation of the relationship between your output and the cost measures involved in producing that output.
Steps to choosing a winning strategy
Feeling overwhelmed? Don’t worry, you’ve got this. Here are a few best practices and steps to follow to ensure you pick the right strategy.
- Keep your business goals in mind. Are you trying to sell a certain number of products or reach a certain amount in revenue? Make sure to factor that information into your decision.
- Conduct a thorough market analysis. Even if you don’t plan to use a competitive pricing strategy, it’s still good to know what your competitors are charging.
- Consider your target audience. Make sure you’re not charging more than they’re willing to pay.
- Know your options. Don’t just choose the first pricing strategy you learn about. Make sure to do your research and understand what the different strategy options are.
- Test and adjust. If you don’t nail it on your first try, don’t be afraid to make some adjustments and try something else. Eventually, you’ll figure out what works for your business.
Nail the right price
When you use a pricing strategy that’s well-tailored to your business, you can rest assured that you’re setting prices your customers want to see. Using a logical approach to set the price of a product or service will help you maximize your profits and your sales volume all at once.
As you consider the prices that customers are willing to pay for your brand, remember that opinions can change over time. Learn how to build a customer experience strategy that increases perceived value so you can up your prices and profit even more. Next, offer convenient payment options, so you can get paid faster.