Pricing strategy is a methodology or tool used by business owners to fix prices for their products and services. Businesses consider several factors while choosing the right strategy. They include demand and supply, the economic situation in the country, marketing objectives, competitor pricing, manufacturing, and marketing costs, revenue targets, consumer income level, etc.
This article sheds some light on the importance of choosing the right pricing strategy and its types. You'll also get to know how to create a winning pricing strategy. Stay tuned!
Why is it important to have a pricing strategy?
The choice of a pricing strategy is vital for each business. It allows companies not only to forecast sales but build trustful relationships with their consumers. Product pricing is one of the main factors considered by clients when making a purchase decision, so setting a high price may scare potential customers away, while a low price can make them doubt the product quality.
Startups and new companies can use a pricing strategy to their advantage by setting lower prices than competitors. This helps them attract new customers considering the price the primary decision-making factor. At the same time, lots of consumers question the quality of the product if its price is much lower than on the market. So, product pricing delivers its value to the customers.
In addition, optimizing and changing your pricing strategy depending on the marketing trends, competitors' strategies, and clients' behavior can help you blow up sales. If you sell goods with inelastic demand such as food, life-saving drugs, fuel, cigarettes, etc, you can increase the price because its change doesn't influence the sales volume much.
So, now that you know why it's important to choose the right pricing strategy, let's consider its types for you to make the best decision.
12 Types of Pricing Strategies
We'll consider in detail 12 pricing strategies. Choose one that best suits your business.
- Cost-plus pricing. It's the most popular and easy-to-implement pricing strategy since it requires no market research and customer behavior analysis. It is also called "a markup strategy." To implement it, you need to find out the cost of producing your good, including labor costs, material expenses, and budget spent on marketing and shipping. Then add the fixed percentage to this total cost, and this will be the price of your product. For example, if it costs you $30 to produce a pair of jeans, and you decide to make a $30 profit on each deal, their price will be $60 and your markup — is 100%. You don't need to analyze customer demand or the strategies of your competitors to use this strategy. It's often used for physical products being irrelevant for SaaS since their services usually provide a great value which is higher than their expenditures.
- Competition-based pricing strategy. As the name suggests, this strategy puts the competitor's price at the center of attention. If you want to attract new potential customers considering the price the most important factor while looking for a product, analyze your competitors' prices, and set lower prices for your goods. If you sell items in high volume, you can negotiate with suppliers to have a discount which allows you to skyrocket sales and your income in a competitive market with similar products. Although if you're starting a business and don't have a big audience, low prices will mean low income for you. Hence, you won't be able to cut down the costs of production and will lose your opportunities.
- Price skimming strategy. Companies with brand-new product use this strategy. It allows them to set high prices because there are no alternatives on the market. The only thing is that producers need to demonstrate the high value of their new technology to remove customers' stress from this purchase decision. Then, business owners gradually reduce prices to let more price-sensitive audience segments buy their products.
- Dynamic pricing. This strategy allows business owners to adjust the product price to different variables such as demand, supply, and competitors' pricing. etc. This helps them blow up sales. Air conditioning systems usually cost much more in summer as well as Uber services during the rainstorm in rush hours. High demand lets businesses use this pricing strategy.
- Value-based pricing. This strategy implies setting prices based on the value the product or service provides. SaaS and subscription-based services choose this strategy since the value they provide is much higher than the costs spent on production. To implement this strategy, brands need to analyze customers' needs and demands to product highly relevant products.
- High-low pricing. With this strategy, brands set high prices initially and launch profitable promotional campaigns to blow up sales. High discounts are available during seasonal deals, markdowns, and clearance sales. This tactic enables product owners to increase their revenue, sell low-demand products, and boost their site traffic.
- Penetration pricing strategy. Brands entering a competitive or oversaturated market use this strategy to stand out from their rivals. They fix extremely low prices compared with other similar produces. This strategy allows them to build a large customer base in no time. Companies hope that price-sensitive clients will switch brands and stay loyal. Although, this strategy is beneficial only if you sell goods in high volume, otherwise, you will lose money. Besides, you risk being drawn into a price war and enrich your audience with clients always expecting low prices.
- Freemium strategy. SaaS and subscription-based services often use this pricing strategy. They provide their basic plan for free to attract new potential clients, let users evaluate the benefits of their product, collect customer feedback and improve their services. Free plans and time-limited trials enable brands to hook customers to its services and convert them into loyal clients.
- Premium strategy. Companies targeting customers with high incomes implement this strategy. Brands set high prices to demonstrate that the product is unique, luxury, and high-quality. People pay much for obtaining this special status of having a prestigious product which makes them feel the same. Starbucks uses a premium pricing strategy.
- Psychological pricing strategy. As the name suggests, marketers rely on consumer psychology. For this purpose, they need to carry out a thorough customer analysis to identify if they're inclined to make impulse purchases. Usually, people tend to consider prices with odd numbers (9) to be a good deal. That's why you often see a "$99,99" price instead of "$100" and that makes you feel that a brand does its best to help you save as much money as possible. Also, marketers place the cards with the most expensive products next to those they want to sell as soon as possible. These are the favorite tricks of marketers and the favorite promotional campaigns of consumers.
- Bundle pricing. Marketers bundle products to blow up their profits with upselling and cross-selling techniques. They allow brands to sell several complementary items together in a bundle to convince clients that they save money this way.
- Geographic pricing. With this pricing method, businesses set different prices based on the geographical location of a consumer. Marketers divide their customers by country, city, region, zip code, etc, and run targeted campaigns on social media. This allows them to maximize profits in the most promising locations.
Now that you know so many types of pricing strategies, it’s time to learn how to select the perfect one for your business.
How to choose a pricing strategy?
To select a perfect pricing strategy for your business, you need to know the real value of your good and carry out a thorough analysis of your target market. Let's consider each step in detail.
- Identify the real value of your good. Before fixing the product price, you need to take into account all the expenses such as raw materials, production materials, labor costs, operating costs, general overhead, shipping and marketing costs, etc. Other factors including your product pricing may include seasonality, demand fluctuations, your target market specifics, etc. Be careful with setting low prices as you risk having losses. Although, high-volume orders will help you negotiate with your suppliers and agree on lower prices which will provide you with higher income.
- Analyze your buyer personas. To stand out from your competitors, analyze customers' pain points and unmet needs. If your competitors provide similar goods, find their weaknesses and act on them. They may include product quality, customer service, return, and refund policy, after-sales service, etc. Provide consumers with a better product and fix higher prices accordingly. To better understand your ideal customers, you should not only create a profile with detailed information, but analyze their income level, buyer behavior, and customer lifetime value. This will provide more actionable insights and let you forecast sales.
- Adjust your prices. Mind the previous factors and consider historical data to create a winning pricing strategy. Look through the strategies that worked and failed in the past for your business and analyze your mistakes. Keep track of both your most successful deals and the churn rate. If you want to set the prices higher than your competitors do, be ready to communicate your competitive advantage and demonstrate the value of your product. If you want to set the prices lower, ensure that you can operate cost-efficiently and sell in high volumes. If you want to set the same prices as your rivals do, find your differentiating factor so that your company can stand out.
Congrats, now you know why creating a successful pricing strategy isn’t an easy task. You have some types of strategies at hand and several tips that will simplify the process.
Last Updated: 11.10.2022