Explore different pricing strategies, what they offer buyers and sellers, and the steps to making the best pricing decision for your business, products, and brand.
Price, one of the 4Ps of marketing, refers to how much is charged for a product or service. A pricing strategy is the process and methodology used to determine prices for products and services.
As we’ll explore in this article, different pricing strategies work for different products and business models. The right pricing strategy can enable several things for a business:
Convey value to customers.
Inspire customer trust and confidence.
Improve profit margins.
There are several common pricing strategies to choose from to price products and services, from value-based pricing to price skimming. The first step in choosing a pricing strategy is to examine the different types, review pricing strategy examples, and understand how they differ.
|Pricing strategy||Pricing strategy definition||Pricing strategy example|
|Skimming pricing strategy (also called pricing skimming or skim pricing)||Setting new product prices high and subsequently lowering the price as competitors enter the market||Innovative electronics sold initially at high prices to attract early adopters and later sold at lower prices|
|Competitive pricing strategy||Pricing products based on the price of competitive products, rather than cost or target profit; usually cheaper than competitors||Rental properties that lower the rental price to match or beat a competitor’s price and gain market share|
|Dynamic pricing strategy||Pricing that varies based on marketing and customer demand||Rideshare services with price surges during periods of peak usage|
|Value-based pricing strategy||Pricing a product based on how much the customer believes it’s worth||A coffee company with strong brand loyalty among its customer base pricing coffee higher than competitors|
|Penetration pricing strategy||Entering a market at a low price and increasing prices over time||A media streaming service that offers a low starting subscription price|
|Economy pricing strategy||Pricing a product low because of low costs of production, marketing, and advertising, and relying on high sales volume to generate profit||Airlines that offer economy seating at the lowest price tier|
|Premium pricing strategy||Pricing a product deliberately high to encourage favorable perceptions of the brand based on the price||Designer eyewear sold at a premium price that's much higher than competitors|
|Cost plus pricing strategy||Adding a fixed percentage on top of the cost of producing a product, regardless of consumer demand or competitors’ pricing||Clothing brands that sell garments for 50 percent more than what it costs to manufacture them|
|Freemium pricing strategy||Offering a product for free alongside paid versions with more features||Software as a service (Saas) and file hosting apps that offer free (basic) and paid (premium) versions|
|Project based pricing strategy||Pricing each finite service or project on a case-by-case basis according to the value of the outcome instead of on the time spent to complete it||Wedding and party planners who quote prices based on the details of individual events|
Now that you know the different types of pricing strategies, your next step is to choose one for your business. Streamline your process and make an empowered decision with our pricing strategy guide.
A value metric refers to how a company determines the value of one product unit for sale. For example, if you sell footwear, then you would determine the value of one pair of shoes. If you sell a monthly service subscription, then you would determine the value of the services and features that a customer can access during a one-month period.
To establish your value metric, identify the basic unit of the product or service you sell. If you were to sell just one unit of your product or service to one customer, what would this be?
Pricing potential refers to the approximate price you can charge for your product or service. To evaluate the pricing potential for your product or service, consider factors such as your operating costs, consumer demand, and competitive products.
Another important consideration when it comes to pricing strategy is how your current customer base has responded to prices thus far. How much have they been willing to pay for products and services? Have any changes in price discouraged or boosted sales?
Use these insights to refine your buyer personas.
Price range refers to prices for a product or service that fall within what a customer and seller find appropriate. To determine price range, ask yourself these questions:
What is the minimum price you can charge for a product or service and still make a profit, based on the cost of production, marketing, and advertising?
What is the maximum price you can charge for a product or service without alienating your target customers?
Another factor in pricing your offerings effectively is competitors’ pricing. Make a list of competitive products and how they are priced. Then, decide whether you want to beat competitors’ prices (set your products at a lower price) or communicate more value than competitors and price your products higher.
Different pricing strategies work for different industries, so it’s a good idea to investigate the most common ones used in your industry. For example:
In the SaaS industry, freemium pricing with different price tiers to purchase more features is a common strategy to offer customers a path to upgrade as their software needs increase.
In the restaurant industry, luxury brands might use premium pricing to create an image of higher quality.
In the service provider industry, designers, consultants, and other service providers might use project-based pricing to customize the service outcomes and the price for individual customers.
In addition to your industry, your brand and business model are important factors in pricing your offerings. A brand identity can affect consumers’ perception of the brand and quality of the offerings, so make sure your pricing strategy corresponds to the brand.
For example, a brand that focuses on affordability could choose economy pricing, while a brand that offers innovative products could succeed with a price skimming strategy.
If you are still working to build brand equity, penetration pricing could make it easier to enter a market and build a customer base.
When considering how to price an existing or new product, customer feedback can be invaluable. Survey current and potential customers with questions such as:
What do you think is an appropriate price for this product?
How much would you be willing to pay for this product?
If this product were on sale for [example price], how likely would you be to buy it?
At what point would you think the price is so low you’d question its value?
At what point would you consider the price too expensive?
Conduct a few live experiments to gather data on how your products will perform at different prices. For example, you could A/B test—introduce a product at two different prices to separate audiences—to find out which price is favored. You could also position your products next to competitive products in your marketing messaging, to find out how consumers respond.
Live experiment results combined with feedback from customers can supply you with insights for successful product launches. You may even be able to reduce the trial and error that often comes with introducing offers to the marketplace.
As you get closer to selecting a pricing strategy, it’s a good idea to review possible pros and cons of your top pricing strategies. For example, cost plus pricing can offer simplicity in that you are marking up a price after factoring in the cost of production, but can mean ignoring how customers actually respond to the price.
You may find that combining pricing strategies brings you closer to one that works for your business.
To learn more about pricing your products, watch the following video from IE Business School’s Marketing Mix Implementation Specialization.
Taking online courses can be a great way to learn more about pricing strategies, marketing, business operations, and career opportunities. Explore the options below:
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