What Is a Pricing Strategy? + How To Choose One for Your Business

Written by Coursera • Updated on

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.

[Featured image] Five coworkers discuss pricing strategy.

What is a pricing strategy?

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.

  • Attract customers.

  • Inspire customer trust and confidence. 

  • Boost sales. 

  • Increase revenue.

  • Improve profit margins.

Types of pricing strategies 

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 strategyPricing strategy definitionPricing 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 marketInnovative electronics sold initially at high prices to attract early adopters and later sold at lower prices
Competitive pricing strategyPricing products based on the price of competitive products, rather than cost or target profit; usually cheaper than competitorsRental properties that lower the rental price to match or beat a competitor’s price and gain market share
Dynamic pricing strategyPricing that varies based on marketing and customer demandRideshare services with price surges during periods of peak usage
Value-based pricing strategyPricing a product based on how much the customer believes it’s worthA coffee company with strong brand loyalty among its customer base pricing coffee higher than competitors
Penetration pricing strategyEntering a market at a low price and increasing prices over timeA media streaming service that offers a low starting subscription price
Economy pricing strategyPricing a product low because of low costs of production, marketing, and advertising, and relying on high sales volume to generate profitAirlines that offer economy seating at the lowest price tier
Premium pricing strategyPricing a product deliberately high to encourage favorable perceptions of the brand based on the priceDesigner eyewear sold at a premium price that's much higher than competitors
Cost plus pricing strategyAdding a fixed percentage on top of the cost of producing a product, regardless of consumer demand or competitors’ pricingClothing brands that sell garments for 50 percent more than what it costs to manufacture them
Freemium pricing strategyOffering a product for free alongside paid versions with more featuresSoftware as a service (Saas) and file hosting apps that offer free (basic) and paid (premium) versions
Project based pricing strategyPricing 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 itWedding and party planners who quote prices based on the details of individual events

Read more: What Is Skim Pricing? And Is it Right For Your Business?

How to choose your pricing strategy 

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. 

1. Determine your value metric.

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? 

2. Evaluate pricing potential.

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. 

3. Review your customer base.

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. 

4. Determine a price range.  

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? 

5. Review competitors’ pricing.

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. 

6. Consider your industry.

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.  

7. Consider your brand.

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. 

8. Gather feedback from customers.

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? 

9. Experiment with pricing. 

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. 

10. Consider pros and cons of different pricing strategies. 

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.

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How to use a product's demand curve to determine the optimal selling price

Improve your pricing strategy with Coursera 

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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Written by Coursera • Updated on

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