When establishing a business, there are quite a significant number of things to consider and look after. While the product or service will be one of the most prominent, one thing that many entrepreneurs mightn’t put too much consideration into is pricing.
Those that do may leave it until much later than they should and may become overwhelmed at how to price their product or service. This is primarily because there can be a significant number of factors involved in a product’s price. As such, entrepreneurs will need to have a pricing strategy, although they mightn’t know what this is.
This pricing strategy can be vital to a company’s success, with this primarily being focused on how much profit a firm will be able to make with each product. There are a few notable things every business owner should know about a pricing strategy.
What Is A Pricing Strategy & Why Is It Important?
A pricing strategy is a method or model that’s used to determine what the best price for a company’s product or service will be. There are quite a significant number of reasons why this can be vital to a business, with one of the more notable being that it helps a firm to maximize its revenues.
However, there are a few other reasons why this can be vital to a company, as the price of product or service can have an impact on several other areas. Some of the largest of these include improving a firm’s market share, and much more.
There can be a variety of factors that will play a role in choosing the right pricing strategy for a specific service or product. Prominent among these are:
- Target Demographics
- Brand Positioning
- Product Features
- Revenue Goals, among others
Despite how vital a pricing strategy can be to a company, many entrepreneurs may skim over it. This shouldn’t be the case because of how much it can have on how much profit the price will generate with each unit sold.
To choose the right pricing strategy for a specific product, companies will need to look at which ones generate an appropriate amount of revenue and profit for the firm. While many companies will choose to make short-term losses for long-term gain, there are a variety of strategies that can be selected to increase and sustain profits quickly and over a long period.
28 Pricing Strategy Options For Products & Services
Many entrepreneurs may often be overwhelmed when trying to determine their product or service’s price. This could be because they mightn’t know what pricing strategy to take doing so. There are quite a large number of them to choose between, with each providing unique benefits and drawbacks.
1. Absorption Pricing
This is the method of including each of the variable costs associated with a product or service into its price, as well as a portion of its fixed costs. To determine this price, the total administrative and overhead fees associated with the product should be added to the variable expenses before.
After this, it is then divided by the total number of units produced. A mark-up is then added to create a profit.
2. Contribution Margin-Based Pricing
This pricing strategy works without mentioning any gross margin percentages. Profit with this strategy is based on the difference between the product’s price and its variable costs, which could depend on the assumption of how many units can be sold at that price.
3. Creaming Or Skimming
This is a pricing strategy where a company that sells a premium product or service at a high price but is forced to lower the cost to compete with new alternatives. The method is primarily used to recoup the cost of investment in creating the product and is commonly seen in the tech world.
4. Decoy Pricing
Decoy pricing is a method that looks to ‘force’ customers to make a decision when choosing between brands. Typically, this will mean offering a product of a slightly lower quality at a lower price. Alternatively, some companies may create a higher quality version of their product for a higher price.
Freemium is typically used in the service industry and involves providing basic services for free while offering additional extras for a fee. However, this will usually mean that a large number of customers take advantage of the product for free, which may be something that many firms may want to avoid.
6. High-Low Pricing
High-Low pricing is typically seen with sales promotions such as clearances where a company will set a higher price in the weeks leading up to the sale. During the promotion, the price will subsequently be reduced while still ensuring a certain amount of profit.
7. Keystone Pricing
Keystone pricing is a term used in retail when determining a mark-up for products. Typically, this will be used for one product or category and results in the price be double the wholesale cost of the product itself.
8. Limit Pricing
Limit pricing is a strategy that’s typically used by monopolists to discourage other companies from entering the niche. While this means that profit for these firms will be kept to a minimum, it could mean that new entries to the market will be discouraged from entering it.
9. Loss Leader
Loss leader pricing involves selling one product at below the cost it takes to produce it. This is typically done to encourage sales of a brand’s other products, with much of this being products or services that are related to the initial good being sold.
10. Marginal-Cost Pricing
Marginal-Cost pricing involves setting the price of one unit so that it’s equal to the cost of producing an additional one. This is typically done during a period of low sales to encourage more customers to buy. Usually, there’s little profit associated with this in the short-term, although there are long-term benefits.
11. Cost-Plus Pricing
Cost-Plus pricing involves adding a mark-up to the cost of producing a product or service to determine its selling price. This is one of the more common pricing strategies, although there is quite a large range of percentages that companies will choose when doing so.
12. Odd Pricing
Odd pricing is the process of maximizing profits by making a variety of micro-adjustments to the price of a product. This will typically be focused on the last digits in a price rather than the first two. Similar to cost-plus pricing, this is one of the more common pricing strategies among different industries.
13. Pay What You Want
This is also known as value-based pricing and puts the price of a product or service in the hands of the consumer. In many cases, a suggested price will be included on it’s label, and there may even be a minimum price for it.
14. Penetration Pricing
Penetration pricing is typically used by companies who are entering a new market, and is typically used to generate brand awareness. The lower pricing will help to draw customers away from competitors, with the price being raised once a foothold has been generated in the market.
15. Predatory Pricing
Predatory pricing is a short-term strategy that’s usually used to undercut competitors and drive them out of the market. While this would mean less sales for the company using the strategy, it should have a variety of long-term benefits if it’s effective.
Premium Decoy Pricing is the act of setting the price of one product much higher than normal to make another look much more cost-effective for consumers. Typically, this will be done to improve the sales of a specific good, although it will dampen the sales of the one that’s priced higher than normal.
Premium pricing is a strategy that’s taken to make a product look as high-quality as possible, as well as ensure that it has a certain image among consumers. This will typically only be effective in specific demographics and will need a high-quality product to back up the price.
18. Price Discrimination
Price Discrimination involves charging different customers various prices based on what companies believe they can justify selling them for. Typically, this will involve charging various demographics the maximum price that a seller will be able to charge for a product.
19. Price Leadership
This is a strategy that’s typically used by a select few companies in a niche, with these usually being the leaders of the industry. In the majority of cases, these businesses will set a price for their product with other firms then following suit.
20. Psychological Pricing
Psychological pricing is quite common across the majority of industries, with companies typically setting their prices lower than rounded numbers. This will usually be done in the belief that customers wouldn’t round up the numbers and will subsequently believe that they’re getting more value for money.
21. Target Pricing Business
Target pricing is the strategy of estimating a competitive price in the market and applying the firm’s standard profit margin to come to a price. Following this, the company’s design team will create a product with the required features to provide a certain amount of value for this cost.
22. Time-Based Pricing
Time-based pricing is a strategy that’s typically used to capitalize on specific events or occasions. Usually, this involves reducing the price to bring in new customers. Some of the more common examples of this include holiday sales, among others.
23. Value-Based Pricing
Value-based pricing involves determining how much value a potential customer will place on a product and set the price accordingly. While this may take a certain amount of time to discover, it can reap a variety of dividends, with the most notable being helping to maximize sales.
24. Yield Management Strategies
This is a variable pricing strategy that focuses on anticipating and influencing customer behavior to help maximize sales for a time-sensitive product or service. This will typically involve the strategic control of inventory to ensure that the right customer purchases the product at the right time.
25. Congestion Pricing
Congestion pricing is a strategy that focuses on increasing prices during periods of high demand to maximize profits. Once this period has finished, it’s not uncommon for the cost of the product or service to come back down.
26. Variable Pricing Strategies
Variable pricing is an approach that’s typically used to optimize the price of a product to achieve optimal sales goals and income generated per unit. As such, this is something that will take a certain amount of time to determine and may involve readjusting the cost of a product several times over time.
27. Real-Time Variable Pricing
As the name would suggest, this involves changing the price of a product in real-time based on demand. There are a variety of products or services that can benefit from this, with the majority of this being seen in e-commerce.
28. Scaled Pricing
Scaled pricing is an approach that’s usually taken to maximize profits depending on a variety of factors. Typically, this will focus on the customers that a business is looking to capture. Some of the primary factors that will affect this include where the product is being sold, and much more.
5 Easy Steps To Creating The Right Pricing Strategy
With the volume of pricing strategies that companies can choose between, it can often be challenging to find one that suits your product or service. However, there are a few specific steps that you can take to choose the appropriate strategy for your business. By following them, you should be able to maximize your profits in the long-term.
Define Your Goals
The first of these is to determine what your goals are in both the short- and long-term. This is something that many business owners may overlook but can have quite a large impact on their success. There are a variety of goals which could have a large role in what the price of a good or service is. Some of the more notable of these include:
- Market Penetration
- Increased Revenue Per Customer
- Increased Profitability
- Higher Conversion Rates
- New Product Introduction, among many others
Next, you’ll need to conduct an in-depth market pricing analysis to determine how your estimated price competes against other companies in the niche. When doing so, you should focus on what the more successful firms are charging and whether you’ll be able to match them while still achieving a profit.
Analyze Your Audience
Thirdly, you’ll have to analyze your audience to determine how much they’ll be willing to pay for a product while figuring out what drives them to purchase it. By doing so, you’ll not only be able to determine what price range you’ll be able to set, but also help achieve as large of a conversion rate as possible. This research should also be beneficial for other areas of your company.
While competitor research will be one step, developing a competitive landscape profile will be quite another. To take advantage of this step effectively, you’ll need to analyze some of your closest competitors do determine how they price their goods or services.
Alongside this, you should also factor in any alternatives that customers may have when choosing whether or not to buy. What many business owners may not factor in is the choice not to buy any of them. There may also be a variety of indirect competitors that could have an impact on this.
Bringing It Together
All of this should play quite a significant role in your pricing strategy, as it will help you price your product or service competitively while providing an appropriate amount of profit. The last step you’ll need to take during this process is to choose your pricing strategy and to develop an execution plan.
To do so, you’ll need to base your decision on the information and results that you’ve received from each of the previous steps. However, this doesn’t mean that you’ll need to stick to this strategy long-term. Instead, you’ll be able to adjust your pricing strategy going forward based on the results you see at a specific price range.
Stay Flexible and Agile
As such, you should remain flexible with your plan. By doing so, you should be able to determine what price customers are willing to pay and ensure that you’re achieving an appropriate sales volume and profit margin for your product.
While this may be a long-term approach, it’s something that could have a large impact on your profit margins during this time.
There can be quite a significant number of factors that will affect how you price your product or service. As such, you’ll need to spend a large amount of time determining how you should do so. With the variety of strategies that a company can take advantage of, ensuring that you spend this time effectively can be vital.
While profit will be one of the largest aspects of this, it can often be recommended to make short-term losses for long-term gains. Much of this can be seen in creating a large market for the product, which can then mean that a firm will be able to adjust its price to make more of a customer base in the long-term.