One of the most difficult decisions you’ll have to make as a small business owner is how to price your product or service.
When faced with a broad range of pricing strategies, how does one choose which is best for their business?
Choosing the right pricing strategy can have a big impact on your business. By appropriately setting the price, it is possible to enhance the profitability of a business and attract a fresh consumer base. If you price it incorrectly, you risk losing hard-earned sales or cash.
This article aims to examine the process of determining the most effective pricing strategy for a business.
This article will also provide insights into the significance of pricing strategies and present a comprehensive overview of 17 popular types of pricing strategies employed by business owners.
Pricing strategies refer to the deliberate and systematic approaches employed by businesses to determine the most effective price levels for their products or services. These strategies play a crucial role in the overall success and profitability of a business.
Pricing strategies encompass a variety of techniques employed by organizations to determine the best price for their goods and services. In order to choose the most suitable pricing strategy, businesses take into account various factors, such as prevailing product demand, cost of goods supplied, consumer behavior, and market conditions.
Depending on the goals of the company, there are many types of pricing strategies. There are companies that want to maximize their profit margins, whereas others aim to expand their market share and attract new customers within their geographical area. Additionally, there exist other companies that seek to get rid of outdated inventories.
Definition of a Pricing Strategy
The four Ps of the marketing mix are
.One tool that companies use just before releasing a good or service onto the market is the marketing mix. It depicts a mix of decision-making factors.
One of the top four considerations is price.
Even though you have a product, a location, and a promotion plan in place, many buyers won’t commit to a purchase unless they believe they are getting a fair value. As such, figuring out how much a good or service will cost is difficult. Customers will not buy if the price is too high; if the price is too low, the business may not recover its costs. The company must therefore have a strategy for determining prices.
A pricing strategy is necessary for every company.
In the case of any good or service, the lowest price is the one at which the business will not make money, and the highest price is the one at which consumers will not purchase the good. Businesses may set a price that falls between the lowest and highest pricing points with the aid of a pricing strategy.
The term “pricing strategy” describes all of the techniques used by companies to establish the cost of a good or service.
As you may have observed, of the four components of the marketing mix, price is the only one that brings in money; the other three are expenses.
In order to develop a relationship with customers, price is crucial. Price is therefore a strategic tool used by marketers.
The kind of business, the state of the market, and how well the strategy is implemented all affect how successful a pricing strategy is. Therefore, it is impossible to determine which strategy is the most successful.
17 Types of Pricing Strategies
Different types of pricing strategies can boost sales, expand your business, and increase profitability. As part of your overall marketing strategy, take into account these typical pricing strategies.
Pricing strategies come in various forms, with businesses selecting methods based on their specific objectives. The primary aim of pricing strategies is typically to boost profits. However, they can also serve as a deterrent against competitors seeking to gain market share or entry into new markets.
17 types of pricing strategies are:
- Customer Value-Based Pricing Strategy
- Competitive Pricing Strategy
- Cost-Based Pricing Strategies
- Market Penetration Pricing
- High-low pricing
- Price Skimming Strategy
- Premium Pricing
- Bundle Pricing
- Psychological Pricing
- Competitive pricing
- Dynamic pricing
- Freemium pricing
- Economy pricing
- Cost-plus pricing
- Loss-leader pricing
- Geographical Pricing
- Promotional Pricing
1. Customer Value-Based Pricing Strategy
This pricing approach takes into account how customers perceive the value of a product. Companies conduct extensive research to gauge customers’ willingness to pay for a product and then establish a price accordingly. After all, for a customer to make a purchase, they must perceive value in the product.
Customer value-based pricing strategies include two key methods:
1. Good-Value Pricing
Good-value pricing entails offering goods of the same quality at a lower cost or making slight quality adjustments to provide more competitive pricing. The objective of this pricing strategy is to offer products at reduced prices without compromising quality.
2. Value-Added Pricing
Businesses employing a value-added pricing strategy aim to justify higher price points for their products by incorporating additional features such as improved quality, enhanced services, and expedited delivery to enhance the perceived value for their offerings.
2. Competitive Pricing Strategy
A competitive pricing strategy is all about looking at what other companies are doing. This means checking how much they charge for similar products, what they offer, and how well they’re doing in the market.
When people decide if a product is priced fairly, they often look at how it compares to what other companies are charging for similar stuff. If customers think a product is too expensive compared to similar ones from other brands, the company might need to lower its price or make the product even better to change what customers think.
3. Cost-Based Pricing Strategies
In a cost-based pricing strategy, a company determines the base price of a product by aggregating all incurred costs. This approach establishes a price floor, representing the minimum amount a company must charge to cover its costs.
target profit pricing
Some companies employ another cost-based pricing method known as target profit pricing. In this method, companies set a profit objective and perform a break-even analysis.
As you may be aware, break-even analysis helps estimate the quantity of goods or services that must be sold to cover costs. Once the company has calculated its costs and target profit, it can then determine the product’s price and the quantity required to achieve the desired revenue.
example of Cost-Based Pricing
A chocolate manufacturer assesses its total costs at $100,000. The manufacturer aims for a profit of $50,000. Through market analysis, the manufacturer predicts that approximately 30,000 chocolate bars will be sold.
Consequently, the manufacturer should set the price of each chocolate bar at approximately $5. Here, $5 exemplifies target profit pricing, as the price is calculated based on the target profit.
4. Market Penetration pricing
Market penetration pricing is a pricing method that companies might use when launching a new product. In a market penetration strategy, companies establish an initially low price. The objective of low pricing is to attract a large number of customers in the short term.
It’s important to note that market penetration pricing is most effective in price-sensitive markets where production and distribution costs decrease as production scales up. To avoid short-term profitability and maintain this pricing approach, the company must be capable of sustaining low prices over an extended period.
Setting a price significantly lower than competitors in order to generate initial sales is the penetration pricing strategy. These cheap costs have the potential to take revenue from rivals and bring in new customers.
This isn’t a long-term growth strategy; it’s just supposed to boost sales. At first, you can experience a financial loss in return for increased sales volume and increased brand recognition. As you gradually raise your prices to more closely match the market, expect customers to go as they continue to seek the cheapest option.
By implementing strategies that convert new customers into loyal customers, you may prevent the loss of customers early on. You can easily get new customers and enter the market at a lower cost than if you entered at a moderate price.
It is not long-term sustainable and should only be used as a short-term pricing strategy.
Example of Market Penetration pricing
A brand-new café in the town offers coffee at a 40% discount compared to other cafés nearby. They also put a lot of emphasis on providing outstanding customer service and run a reward program that gives away a free coffee every tenth.
The café gradually raises the price of coffee to a more profitable level as client demand increases. As they go towards earning their free tenth cup, consumers can do this to develop a taste for the coffee and other products and to take advantage of the excellent service.
As the price goes up, some of them may continue to be loyal customers and keep coming back.
5. High-low pricing
Skimming and high-low pricing are similar, but the rate of decrease in prices is different. When a product is priced using the high-low pricing method, its price decreases dramatically all at once, as opposed to gradually.
Retailers who deal in seasonal goods usually use a high-low strategy, often making an offer to get rid of stock that won’t be able to be sold for very long.
- By offering them on sale and at a discount, businesses can get rid of outdated products from their inventory.
- Rather of paying full price, customers might decide to wait for upcoming sales.
Example of High-low pricing
During the summer, a boutique clothing business charges a premium price for women’s sundresses, but when October approaches, it puts them on sale.
6. Price Skimming Strategy
The skimming pricing strategy is employed when a company intends to introduce a new product or service to the market. Companies following a skimming pricing strategy launch a product or service at a higher initial price to maximize early profits.
The company gradually reduces the product’s price to align with competitors’ pricing.
Companies that use a price skimming strategy charge the highest prices possible for new products and then progressively lower the price over time. Prices under this pricing strategy decrease when products reach the end of their life cycle and lose significance. Companies that offer novelty or technological products typically use price skimming.
In price skimming, companies may compensate for production costs and increase new product profits.
Con: Customers may become dissatisfied because they paid a higher price and then watched the price progressively fall.
A skimming pricing strategy depends a lot on the specific market conditions, and before using it, a company should make sure of the following:
- There is a substantial customer base willing to pay a premium price.
- It’s not probable that competitors will disturb or shake up the market.
- Production costs for lower-volume sales are manageable.
Example of Skimming pricing
A home entertainment store begins charging significantly more than retail for the newest, most advanced television. Then, as newer products hit the market, prices progressively dropped over the course of the year.
7. Premium pricing
Premium pricing happens when a company sets prices higher than its competitors to make customers perceive their products as having greater value, quality, or luxury.
You may frequently charge a premium for your high-quality, branded products if your business enjoys a strong brand reputation and loyal customers.
If early adopters who enjoy being ahead of the competition are part of your target audience, this pricing strategy works exceptionally well for them. A premium pricing strategy is frequently employed by businesses that sell high-tech, exclusive, or luxury goods, particularly in the IT or fashion industry.
This strategy is adopted by businesses targeting high-income individuals. Customers pay a premium price for goods not only for their intrinsic value but also for the associated brand image. Customers often feel a sense of exclusivity and belonging to an elite group when they own such products.
Since companies may charge a lot more than their production costs, their profit margins are higher.
This kind of pricing strategy is only effective if buyers think the company’s product is premium.
Example of Premium pricing
A beauty salon charges 40% more for its services than its competitors and establishes reputation in the market through word-of-mouth and internet reviews.
8. Bundle pricing
When two or more similar products or services are offered together for one price, this is known as bundle pricing. Bundling is a useful strategy for upselling clients on additional products or adding value to their purchases.
This strategy involves bundling products together and selling them at a lower price than the total cost of each individual item in the bundle. It helps sellers’ clear inventory quickly and generate profits from products that might otherwise have low sales.
Retail stores, restaurants, and beauty parlors are just a few of the many businesses using this kind of pricing strategy.
Consumers may decide to repurchase new products they discovered and weren’t originally planning to buy.
Example of Bundle pricing
A taco cantina sells tacos, tortilla chips, and salsa separately but gives a discount if consumers purchase a whole meal that includes all of these products.
9. Psychological pricing
Psychological pricing strategies affect consumer psychology by changing the price, product location, or product packaging to some extent.
Offering a “buy two, get one half off” promotion or putting the price at $19.99 instead of $20 (thinking, “well, it’s cheaper than $20, isn’t it?”) are two examples of psychological pricing methods.
Additionally, some companies use artificial time constraints, such as one-day or limited-time sales, to draw in customers into their stores.
This strategy may be used by almost any kind of business, but restaurants and retail businesses use it the most because it gives customers the impression that they are getting a bargain.
This strategy triggers emotional responses in customers to encourage product purchases. Many stores price items at, for example, $99.99 instead of $100 to create a psychological impact.
Companies can increase sales without sacrificing profitability by making small adjustments to their sales methods.
It could come off to certain customers as shady or pushy, which could damage your brand or result in lost purchases.
Example of Psychological pricing
A restaurant may set the price of a gourmet hamburger at $14.95 in order to persuade customers to purchase at a perceived lesser price than $15.
10. Competitive pricing
Your products or services are priced according to the going rate in the market when you use a competitive pricing strategy. If your business is in a saturated sector, your pricing will be determined by all other products in your industry, which helps you stay competitive.
As long as the price you choose for your goods stays within the range established by all of your industry’s competitors, you are free to set it higher or lower than the going rate.
Competitive pricing strategy takes into account competitors’ market share, pricing strategies, and the value they provide in order to determine a product’s price. Consumers generally set a product’s price by observing the prices of similar products offered by competitors. If consumers perceive a product’s costs as higher than those of competitors, the company may need to reduce the price or enhance the product’s value to alter consumers’ perceptions.
With the introduction of e-commerce, it is now simple to compare prices before making a purchase—something that 96% of consumers do. This presents a chance for you to attract customers by offering a pricing that is marginally less than the market average.
Example of Competitive pricing
A landscaping business comparing prices with nearby rivals. In order to draw in customers who are price conscious, it then sets the cost of its most popular service, a lawn maintenance package, lower than the market average.
11. Dynamic pricing
Dynamic pricing adjusts prices to a product’s current market demand. This pricing strategy, sometimes referred to as demand pricing, is particularly common when the product in hand experiences daily or even hourly fluctuations. Businesses that aim to maximize earnings, such as hotels, airlines, and event venues, use this strategy to set different prices every day.
This involves adjusting the prices of goods and services based on customer behavior and market conditions. For instance, hotel room rates may increase during holiday seasons, while flight ticket prices may decrease if few tickets are sold. Loyalty program members often receive special offers and discounts.
When demand is rising, you can raise pricing to boost overall income.
Example of Dynamic pricing
Due to a well-known summer festival in the area, a boutique hotel decides to temporarily increase its room rates.
12. Freemium pricing
Freemium pricing provides a minimum product or service and encourages users to upgrade to the premium version for additional features or options. Potential customers learn more about your business and get a taste of what the good or service can do for them. Software companies and membership-based organizations frequently employ this strategy.
Companies are educating prospective buyers about their product and building trust. In order to maintain interaction via email marketing, companies can also receive their contact information.
Example of Freemium pricing
A software provider provides free virus protection with the ability to upgrade to multiple tiers of ever-higher online security.
13. Economy pricing
Economy pricing continuously undercuts competitors in an effort to turn a profit from large sales volumes. Low production costs are typically associated with this kind of pricing strategy. Businesses like as Costco and Walmart use it, and it performs well in the commodity goods industry.
A lot of products are probably going to be sold by a company.
Example of Economy pricing
A superstore charges 5% less for a generic brand of tea than its nearby grocery store competitors.
14. Cost-plus pricing
With cost-plus pricing, the final price is determined by adding a certain percentage to the amount you paid for making the goods. You can calculate your markup % backwards by first determining how much profit you want to make on each product sold.
Since markup price is defined at a percentage, profits are more predictable.
Example of Cost-plus pricing
A pizza shop determines the pricing of a pizza based on the labor and ingredient costs, plus a 30% profit margin.
15. Loss-leader pricing
Customers who see a product at a significant discount (the loss leader) are drawn to your store by loss-leader pricing. The possibility exists that they may purchase other full-price products while they’re there, which should more than make up for the loss of the original product.
By using this pricing strategy, companies can draw in customers who might not have otherwise visited their store and introduce them to their entire product line.
Example of Loss-leader pricing
A supermarket draws customers on Fridays by offering bread at low prices encouraging them to do all of their weekly shopping at that time.
16. Geographical Pricing
Geographical pricing entails offering different prices based on location. Factors such as taxes, shipping costs, supply and demand, and regional economic conditions can influence pricing. Businesses engaged in international trade must consider geographical pricing.
17. Promotional Pricing
This approach entails offering discounts to attract more customers. Businesses often employ promotions during festivals or holidays by providing significant discounts on their products. The primary concern with this strategy is that if the business discontinues promotions, consumers may lose interest in the products.
Examples of Pricing Strategies
Determining the prices for goods and services is often a complex process.
Let’s explore some businesses and their successful pricing strategies:
1. Tesco Pricing Strategy
Tesco, one of Europe’s largest grocery retailers, focuses on providing low-cost products to customers. Tesco utilizes a cost-based pricing strategy and works to reduce production and transportation expenses through economies of scale.
The company also employs dynamic pricing through its membership program, offering discounted prices to members who earn points while shopping. Tesco positions itself as a cost leader through these strategies.
2. Gucci Pricing Strategy
Gucci adopts a premium pricing strategy. Gucci’s products are of exceptional quality and designed by globally renowned fashion designers. The brand deliberately produces limited quantities of stock, fostering high demand due to its exclusivity.
In addition to quality, Gucci has established itself as a symbol of status. Individuals owning Gucci products take pride in their association with the brand. Gucci rarely offers discounts, except in outlet stores, and even during the pandemic, it maintained its pricing. Retailers selling Gucci products may provide limited discounts but at the cost of their own profits.
3. Zara Pricing Strategy
Zara, a renowned fashion retailer with a global presence, employs a value-based pricing strategy.
Zara assesses customer perceptions of pricing and offers trendy fashion clothing at affordable rates. It emphasizes fast fashion and maintains lower prices compared to high-end brands like Gucci and Louis Vuitton. Zara also employs promotional strategies, often resulting in long queues at its stores during events like Black Friday or summer sales.
These are just a few examples, as pricing strategies vary across industries and products. For instance, the pricing of imported tropical fruits like mangoes in the UK may command premium rates. Fuel prices in any country are influenced by international price fluctuations and currency exchange rates. It’s evident that there is not universally “best” pricing strategy, and each business must continually optimize and refine its marketing mix based on its unique circumstances.