Many business owners price their products without giving much thought to it.
But this mistake is likely causing them to leave money on the table. If your products or services are priced too high or too low, you could be driving customers away or limiting your profit potential.
Thankfully, if you take the time to craft an effective pricing strategy, it can be a powerful growth lever for your business.
In this guide, we’ll break down everything you need to know about optimizing your pricing strategy so you can increase revenue, improve productivity, and grow your bottom line.
What Is a Pricing Strategy?
A pricing strategy is a process you can use to establish the most optimal price for your product or service. It’s an action plan you can use to choose prices that enlarge profit margins and company value in alignment with market demand.
While pricing may seem like a simple task, if you want to be successful with it, you’ll have to put some effort in.
A successful pricing strategy can’t be determined without accounting for a few internal business factors:
- Target market
- Revenue goals
- Marketing objectives
- Product attributes
- Brand positioning
There are also a few external factors you need to consider, like:
- Market demand
- Competitor pricing
- Market trends
- Economic outlook
Business owners and marketing executives tend to skim over pricing when building a business or a new product. They’ll often spend time looking at a couple of metrics like product cost and competitor pricing and tweak pricing accordingly.
But, while product costs and competitor pricing are important, they shouldn’t be the only factors you look at.
The best pricing models will maximize revenue and profit simultaneously. It’s not about competing against the biggest competitor. It’s about creating a holistic plan that encompasses your primary business goals.
Benefits of Getting Your Pricing Strategy Right
The most successful understand that there is a real strategy behind it that can greatly impact the success of their business.
A successful pricing strategy can help you build trust with your audience, solidify your position in the marketplace, and meet your business objectives. Here are three reasons why you need to ensure you get your pricing right:
1. Increases Your Product’s Perceived Value
How you price your products will have a major impact on how consumers perceive your products and your brand overall. Think about the word “cheap.” It can have two meanings: a low price or something that’s low-quality or poorly made.
But, regardless of the quality of your products, people will often associate low-priced products with being cheap or poorly made. The higher a product is priced, the higher the perceived value is. If you believe your product is high-quality and you believe it is very valuable, you should price it accordingly.
2. Persuades People to Buy
How you price your product will be a strong determining factor on whether someone will become a customer. While a high price may lead someone to believe your product is of high value, if the price is too high for the customer to afford it, you could lose a sale.
Alternatively, if you price too low, someone looking for a high-quality product may simply pass it by, as is seen with the Payless Shoes experiment. In it, Payless opened up a fake luxury shoe store with their low-priced shoes. Shoes that were typically priced at about $30 were listed for over $600. That day, plenty of buyers came in and purchased them without question.
3. Builds Consumer Confidence in Your Brand
If you price your products just right, you will build consumer confidence in your brand. For instance, a higher price will help build the perception that your products are valuable, exclusive, and are higher quality.
But a price that’s too high or too low will cause hesitation, making consumers lose trust in your products.
Keep in mind, you’re not going to please everyone. It’s crucial you understand who your target audience is so you know how to appeal to them in pricing. Some consumers desire value while others prefer luxury and exclusivity. Know your audience and you’ll be well on your way to crafting the right pricing strategy.
1. Competitive Pricing
What Is a Competitive Pricing Strategy?
Competitive pricing is all about establishing the price of your product or service based strictly on the standard market rate for similar products or services.
This is one of the most common pricing models available, and for a good reason—your pricing is chosen for you based on your competition. By using your competitor’s pricing as a benchmark, you can establish a pricing model that can help you forecast profitability.
One advantage of using competitive pricing is that a minor tweak in the price difference of your products or services may be the deciding factor in choosing your brand over the competition.
Competitive Pricing Example
Let’s say you sell lawnmowers. The average lawnmower sells for about $265. If you decide to enter the market with your own lawnmower brand or retail shop, you know you could confidently price your lawnmowers around that $265 mark, which can help you determine your profitability.
Alternatively, you could price yours at $240 to potentially drive more sales than the competition. Or you could even price yours higher, at around $300, as a way to position yourself as a premium brand (which we’ll touch on more below under “Premium Pricing”).
Pros & Cons
- Quick and easy to determine
- Great for determining profitability
- Options to get ahead of the competition
- Could lead to price gouging or pricing wars
- Challenging to price much higher than competitors
2. Dynamic Pricing
What Is a Dynamic Pricing Strategy?
Dynamic pricing is a flexible pricing strategy where the price of your products may change based on customer demand or market trends.
This type of pricing strategy is commonly used by airlines, hotels, and event venues. These types of companies are able to implement dynamic pricing thanks to modern technology, including complex algorithms to determine the best price.
Dynamic Pricing Example
If you’re a sports fan, then you know that getting tickets to a major league sporting event can be a regular weekend purchase or a cost that sinks your bank account for a while.
Depending on when you attend an NFL, NBA, or MLB game, you will pay drastically different prices. For instance, during the Golden State Warriors regular season, you can find ticket prices for about $150. However, during the playoffs, you’re looking at over $400. Pricing for any major events can also be much higher due to holidays.
If you own a business in hospitality, travel, or events, then dynamic pricing may be the best solution for you to maximize your revenue.
Pros & Cons
- Helps you plan in advance for marketing campaigns to determine budget
- Stays in alignment with the market so you’re always offering a competitive rate
- Instability in revenue forecasting
- Market fluctuations can lead to uncertain revenue
3. Freemium Pricing
What Is a Freemium Pricing Strategy?
With freemium pricing, companies offer a basic version of their product for free with the option to upgrade to a premium version for a price.
This is one of the most popular pricing strategies for SaaS software companies to convert more users by eliminating friction to get in the door. Once they’re using the product, users are given a chance to test out the value of the product, which can then be used to convince a percentage of them to upgrade to a paid version.
Free trials and demo accounts are a great way to give consumers a sneak peek into a software’s functionality. In this sense, the company takes on the risk from the consumer, building trust with them, in hopes that a fraction of the free users will upgrade to a paid version of the product.
Freemium Pricing Example
One popular example of a company succeeding with the freemium model is Spotify. This major music streaming platform has revolutionized the entire music industry. In their free version, you can access a ton of music with ads (similar to YouTube).
In order to access the full library of songs and remove ads, you have to upgrade to a relatively cheap price ($11.99/month).
Pros & Cons
- Great way to acquire leads
- Allows more users to test the product to convince them to upgrade
- May devalue the brand
- Challenging to price paid upgrade too high ($100+)
- Generally limited to a lower price for the paid upgrade ($10-$50)
4. Cost-Plus Pricing
What Is a Cost-Plus Pricing Strategy?
Cost-plus pricing is a model that’s centered around the costs of your product. By examining your cost of goods sold (COGS), you first determine how much your product will cost you, then you decide how much you want to charge to maximize profits.
This model allows business owners to set profitability goals. It can help you manage your cash flow, bootstrap your business, and ensure you have a healthy bottom line.
Cost-Plus Pricing Example
Imagine you opened up a dog-themed coffee mug shop online. You sell a variety of mugs that only feature pretty pups on them. You want the business to succeed, and your goal is to earn a full-time income from it. But you’re not sure how much you should price your products.
By utilizing the cost-plus pricing strategy, you’ll be able to ensure that you keep your head above water in terms of your overall earnings.
Let’s say the mugs cost you a total of $12.50 to make and you want to make a profit of $10 on each mug. You could simply price them at $22.50. But, you also realize that it’s going to cost you an average of $5 to ship the mugs and $1 for packaging. Considering the total cost of goods, your expenses for each mug are $18.50, so you’ll want to price your product at $28.50.
In this scenario, your product cost is $18.50 and the final price is $28.50, which equals a markup of 54% to ensure you profit $10 on the sale of each mug.
Pros & Cons
- Certainty of your product profitability
- Doesn’t take into consideration market demand, which could lead to low sales
- Not the best model for SaaS or service-based companies
5. High-Low Pricing
What Is a High-Low Pricing Strategy?
High-low pricing prices products high, then lowers them strategically at specific times. For instance, if a product isn’t as relevant due to seasonality or sales have been lower than normal, a company can place that product in a clearance section or offer a temporary discount on it.
High-Low Pricing Example
The most common example of a high-low pricing model can be found in almost any major mall in your area. Look at the most popular clothing retailers. Think about places like GAP, Old Navy, or H&M.
Almost every time you visit these shops, you’ll find plenty of discounted items and entire clearance sections. Plus, you can guarantee that during the holidays there will be plenty of discounts.
This model works well for any company that constantly deals with tons of new SKUs like apparel, decor, or furniture.
Pros & Cons
- Great for clearing out old inventory
- Effective method for quickly generating sales
- Can devalue your products and brand
- Trains consumers to only spend during sales
6. Premium Pricing
What Is a Premium Pricing Strategy?
Premium pricing is when a company prices its products higher than others in the industry in order to be perceived as higher value or exclusive.
Rather than focusing on actual production costs or intrinsic value, premium pricing focuses on perceived value. Most brands that implement a premium pricing strategy are focused on providing value through the status that is associated with their products. While the true cost of the goods may be a tiny percentage of the retail product price, the value received from the customers is the experience of its uniqueness and exclusivity.
Premium Pricing Example
Think about Dolce and Gabbana. What comes to mind when you think of the brand? Expensive? Luxurious? For rich people and celebrities?
While there’s no doubt that brands like D&G, Gucci, and Chanel offer expensive products compared to the average article of clothing, they’ve done an incredible job of creating a premium brand.
However, these luxury brands are the most extreme example of premium pricing. You don’t have to sell suits and handbags for $5,000+ to consider the premium pricing model. No matter what product or service you sell, assessing the competition and charging more is a great way to separate yourself to be perceived as a premium brand.
Pros & Cons
- Typically means higher profit margins on products
- Great way to position yourself as unique in your market
- Could mean fewer overall sales (but not always)
7. Penetration Pricing
What Is a Penetration Pricing Strategy?
Penetration pricing is a strategy where a company launches its product at a low price as a way to gain a lot of attention. In drawing tons of attention from the market, the goal is to essentially take part of the market share and also draw revenue away from high-priced competitors.
While penetration pricing isn’t sustainable long term, it can work well in the short run to gain quick attention and build up some revenue. It works best for brand-new businesses looking to break into a competitive industry. This strategy is essentially about shaking up a market and penetrating it with a low price in hopes that your initial customers stick around.
Eventually, in a proper penetration pricing strategy, the goal is to eventually raise prices.
Penetration Pricing Example
Fill in the blank: “_____ and chill.”
Everyone knows Netflix. They flipped the world of cable TV upside down.
How? They offered an alternative to paying $50-$150 per month for cable.
Instead, you could pay $7.99 per month (yes, it was really that low originally) and get all of your home entertainment covered for the month.
For basically one-tenth of the price, you could hand in your expensive cable bill for TV and get shows and movies on demand.
It didn’t take long for Netflix to dominate the industry. With $31 billion in annual recurring revenue (ARR) in 2022, there’s no doubt they’re on top of the at-home entertainment world. As they became more popular, eating up more of the market share, they began raising prices. Now, their standard plan is $15.49 – yet it’s still much cheaper than standard cable.
Pros & Cons
- Great way to grab market attention
- Can build up a nice revenue base quickly
- Have to take a loss at first
- Not sustainable long term
- Could backfire and devalue the brand
8. Skimming Pricing
What Is a Skimming Pricing Strategy?
Skimming is essentially the opposite of penetration pricing. Instead of starting low and slowly raising your prices, you launch your product at the highest price and slowly bring it down.
The goal of this strategy is to meet market demand. You start high, and as your product becomes less popular and valuable to the market, you slowly lower it to ensure you’re able to keep generating sales.
Unlike high-low pricing, which aims to discount suddenly during a specific time period, skimming gradually decreases the price over time without raising it again.
Skimming Pricing Example
Do you know how much the first flat-screen plasma TV cost?
It’s true. In 1997, Philips/Fujitsu released the first-ever Flat Plasma TV. Adjusted for inflation, that would be about $43,000 in today’s dollars—the same price as the brand-new Audi A4.
Now, you can get a flat-screen TV for a few hundred dollars.
The most common product that takes on a skimming pricing model is technology. Think about Blu-ray players, DVD players, VHS players, video game consoles, smartphones, and more. But this can also be any item that simply trends downward or loses its appeal.
Pros & Cons
- Great for recovering sunk costs
- Can continue to sell a product for years
- Can upset customers who bought at “full price” previously
- Profit margins sink over time
9. Value-Based Pricing
What Is a Value-Based Pricing Strategy?
Value-based pricing seeks to price their product based on what a customer is willing to pay. This is the most market-involved pricing strategy. It relies on looking at consumer data and interest to set the rate.
This price is essentially the “default” pricing strategy since it primarily relies on what the customer is willing to pay.
While value-based pricing strategists can often charge a higher rate and continue generating business, value-based pricing can build trust with consumers, boosting loyalty in the long run.
Value-Based Pricing Example
Have you ever been to a concert or sporting event in a major city?
How much were the bottles of water?
$5? $6? $7?
They definitely aren’t cheap there. Yet, if you were to walk outside your arena and head over to a local corner store or vending machine, you would probably be looking at $1-$2 for that same bottle of water.
So, what’s the difference? Demand.
The difference in price is reflected in the perceived value of the water bottle within the venue. In a place where it’s hot, crowded, and there aren’t a ton of options, shops can get away with pricing a simple bottle of water at 3-4 times the price.
Pros & Cons
- Easier than most strategies to hit the “sweet spot” to maintain high sales
- Can take advantage of surges in demand to increase profit
- Matches market demand which could lead to varying profits
- Takes some effort to adjust pricing to consumer interest
10. Project-Based Pricing
What Is a Project-Based Pricing Strategy?
Project-based pricing is a strategy for services rather than products. It’s the opposite of hourly pricing. Rather than charging an hourly rate for your services, you charge a flat fee.
This type of pricing structure is commonly used by contractors, consultants, freelancers, and other individuals that offer a service in exchange for money. The price is typically determined by the estimated value of the project.
Project-Based Pricing Example
One example of a project-based pricing model would be for someone who mows lawns. Rather than charging an hourly rate, they could assess the size and difficulty of the property and give a quote based on that.
This model would ensure that both parties know ahead of time what the end price will be, so there are no surprises. For instance, if the lawn care company ends up taking twice as long, they aren’t going to surprise the homeowner with a bill at twice the price.
It’s also beneficial for the lawn care company as he'll get paid the agreed-upon rate even if he ends up being more efficient and completes the job in half the expected time.
A lawn mowing company could also use this pricing strategy to increase revenue by heading to wealthier neighborhoods and simply charging more, taking on both a project-based pricing model and a dynamic pricing model.
Pros & Cons
- Expectations are more likely to be met than hourly for both parties
- Easier to estimate earnings from projects to better manage projects throughout the month
- The work could end up taking much longer, thus costing them more time
11. Economy Pricing
What Is an Economy Pricing Strategy?
Economy pricing is similar to the penetration pricing model in that the goal is to price a product cheaper than the competition. The only difference is that instead of eventually raising the price, you keep it low for good.
This strategy is best used in the commodity goods industry. The aim is to price low but end up profiting largely in the long run due to increased sales volume.
Economy Pricing Example
Famous YouTuber Mr. Beast recently launched a chocolate bar company called Feastables to take on big chocolate. And, he’s quickly found success with the consumable product, not by charging a premium (which he could probably get away with due to his branding), but by getting placements in 7/11s and Walmarts, among other department stores.
Pros & Cons
- Can be quite profitable with the right system and operations
- Can offer competitive rates to take market share quickly
- Need to sell high volume to be profitable
- Typically need to depend on wholesale deals with large retailers
12. Bundle Pricing
What Is a Bundle Pricing Strategy?
Bundle pricing is where you take a few complementary products you already offer and bundle them together for a single price. This model can be used for both products and services and is a great way to increase your average order value (AOV).
This model typically includes offering some savings to your customers for purchasing a few products at once.
If you have a suite of different products or services, one way to increase your revenue per customer and customer lifetime value (CLV) is to offer more with each transaction. Since there will always be a percentage of customers who want to buy more than one product at a time, or they will come back every so often to buy again, it makes sense to buy them all at once at a discount, since you’ll be buying them anyways.
Bundle Pricing Example
Do you have home insurance?
How about car insurance?
Well, with State Farm, you can get both for a cheaper price.
State Farm became popular for its witty commercials and for its home and auto insurance bundle deals. While they offer individual plans for either home or car insurance, you can save a ton by getting a quote on both.
Pros & Cons
- Helps upsell other products to your customers
- Can help increase AOV
- Can increase perceived value without having to heavily discount
- May be harder to sell bundles due to the higher price point
Stay Focused and Make Adjustments Along the Way
There’s a ton that goes into pricing effectively. Whether it’s analyzing your production costs, customer demand, competition, profit margins, or even economic trends, it can certainly make your head spin.
Thankfully, there’s an ideal pricing model you can use that aligns best with your business. Remember, it’s best to start with your end goal, whether that’s your profit margins, market share, or your ability to sustain your business for the long haul.
The most important thing is to keep in mind that pricing isn’t a set-it-and-forget-it process. Rather, it’s an ongoing function you should come back to regularly to iterate so you can optimize your business’s growth.
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