Having a formal, documented process for pricing products and services is critical to the success of a business. While there are many ways to do this, selecting and following one will ensure that you have consistent pricing throughout your entire business.
The pricing strategy will become a part of your branding. Consistent pricing using that strategy will dictate how your customers perceive your brand.
What Is a Pricing Strategy?
Pricing strategy is a clearly defined methodology for determining the prices for your products or services. A pricing strategy should be well documented and followed throughout the business.
Why You Need a Pricing Strategy for Your Product or Service.
Having a pricing strategy will ensure that all of your products or services are priced consistently, profitably, and in-line with your branding.
The pricing strategy will not only be used to price existing products/services, but it will also be used by the marketing team when developing new offerings. Knowing the pricing strategy before introducing a new product or service will help to determine how profitable it will be—or even whether to move forward with it.
10 Pricing Strategies to Consider.
1. Guessing Without a Defined Pricing Strategy
We often think of this as “picking a number out of thin air” without any basis for the price. Business owners often think they have an intuitive feel for what their product or service will sell for. But, it’s a guess.
One potential problem with pricing by guessing is that it can lead to prices that are either too high or too low. If prices are set too high, customers may be unwilling to pay the asking price, resulting in lower sales and reduced profitability. On the other hand, if prices are set too low, the company may not be able to cover its costs and may not achieve its desired level of profitability.
Pricing by guessing may not take into account factors such as competition and market conditions, which can impact the prices that customers are willing to pay. As a result, using this approach can lead to unpredictable and potentially unstable revenue streams.
2. Prices Based off Competitor Pricing Strategy
Competition-based pricing is a pricing strategy in which a company sets its prices based on the prices of its competitors. This approach involves researching the prices that competitors are charging for similar products or services, and then setting the company’s prices at a similar level in order to remain competitive.
The goal of competition-based pricing is to ensure that the company’s prices are in line with those of its competitors, in order to attract customers and maintain a share of the market. This approach can be useful for companies that operate in highly competitive markets, where customers have many options and are sensitive to price differences.
However, it is important for companies to carefully consider their costs and desired level of profitability when using this approach, in order to avoid setting prices that are too low and potentially damaging to the business.
When using this strategy, people tend to pick somewhere in between the highest price and lowest price. This is a safe way, but it’s also a lazy way. It doesn’t account for your costs, nor does it guarantee that you’ll be profitable.
3. Customer Polling Pricing Strategy
Asking your customers what they will pay for a product is referred to as customer polling pricing. It’s not a good pricing strategy as the customer will almost always give you a low number. Remember, they’re interested in getting the best price they can.
4. Cost-Plus Pricing Strategy
A cost-plus pricing strategy is often used for situations like government contracts as it reduces the risk to the business owner and ensures that the customer is receiving value without being overcharged.
We are now seeing this strategy being used in product pricing. A good example of this is Mark Cuban’s Cost-Plus Drugs, where they have a transparent pricing model. The generic prescription drugs can be purchased for $3.00 over their cost.
5. Target Return on Investment Pricing Strategy
A targeted ROI pricing strategy involves determining total costs, anticipated demand and then setting prices in such a way as to achieve a specific ROI.
For instance, let’s say a company determines that they need to receive a 400% mark-up from the manufacturing price in order to cover all the other costs they incur to get it to market and make the desired profit.
When a new product is considered, it will have to meet this test. If it is determined that a 400% mark-up will price that offering out of the market, then the company will decline to carry that product.
6. Penetration Pricing Strategy
The penetration pricing strategy is used to gain a foothold in a new market or with a new product. It’s intended to give you traction over existing products or services.
It keeps the price low in order to gain market share, then moves to a more profitable pricing strategy once the product or service is established and has gained momentum. This is a typical strategy of new businesses, or businesses with new products or services.
7. Premium Pricing Strategy
Premium pricing strategy is where you differentiate your product or service as something of a higher quality by pricing it higher than your competitors—often much higher.
Most businesses would love to use this pricing model, but it’s very difficult to pull off. If you use the premium pricing strategy, your product or service must be much better than your competitors. You’ll also need to back your product or service with a warranty or guarantee.
8. Loss Leader Pricing Strategy
The loss leader pricing strategy is where you sell a product at a loss hoping to get that customer to purchase something else from you—at a profit. Grocery stores employ this strategy all the time.
9. Freemium Pricing Strategy
A freemium pricing strategy is where you offer a product or service for free, then later make money either by selling the customer an upgrade, another product, or by generating income through a different channel.
For example, a software as a service (SaaS) business may give away a free version of their software with limited features, then offer a paid version with additional features.
Alternatively, that same company may give the software away for free then make money by displaying ads in the application (think Google search).
10. Bundle Pricing Strategy
A bundle pricing strategy is a great way to upsell customers by offering additional products or services at a discounted price. The customer will save money by purchasing a bundle, and the business will make more money by selling something additional to an existing customer.
This is effective because you’ve already spent money to acquire the customer, selling them additional products or services costs you less so you can sell it at a discount.
What is the Best Pricing Strategy?
The best pricing strategy depends on your business model, your products or services, and the resources you have available. Most businesses follow the targeted ROI or competitor-based pricing strategies.
In fact, many businesses find combining the two strategies can help them arrive at the optimum price for their product or service.
But for some businesses, this isn’t the best way to go. For example, if you’re a new business with access to capital, penetration pricing may be best for you. If you have a web-based application, a freemium pricing strategy may be the best for you. If you have a very high-quality product or service, and access to capital, a premium pricing model may be something you can follow (be careful with this though).
There is no one “best” pricing strategy that will work for every business in every situation. The best pricing strategy for a particular company will depend on a number of factors, including the company’s target market, the value proposition of its products or services, and the level of competition in the market.
Each method has its own strengths and weaknesses, and the best approach for a particular company will depend on its specific business goals and circumstances.