A pricing strategy is a plan for how to make money from products or services and how to establish a successful business. We’ll go through different pricing strategies, so you can choose the right one for your business.
It might seem like a no-brainer that you should charge more for your goods and services than you spend to produce or provide them. But are there any other factors you should consider? Yes! Let’s take a look.
This article is part of our pricing series
Make sure to check out these articles too:
What are pricing strategies?
Pricing strategies don’t just take into account how much you need to earn to make a profit, but also factors such as competitor pricing, the expectations of your target audience, the long-term strategies of your business and more.
This means, for example, that you can adopt a pricing strategy that isn’t profitable—at least for a short period—or that makes you less profit than you were expecting, because doing so will have long-term benefits for your business. It also means that you can double down on pricing strategies that are profitable, because they aligns with your business goals.
A pricing strategy is, in other words, a plan for how to establish yourself in a market and ensure that your business survives long-term, in accordance with your business model and your business plan.
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A business model is a one-page plan that shows how your business is going to make money. It helps organize your ideas, get employees and partners onboard, and uncover potential pitfalls. You can easily make a business model with a free template.
Why pricing strategies are important
There are many reasons to adopt a pricing strategy:
- If you’re new in the market, a good pricing strategy can help you attract clients, stand out from the competition and create a memorable brand for your business.
- If there’s a lot of competition in your market—for example if new competitors pop up—you can use a pricing strategies to differentiate yourself from competitors. A pricing strategy isn’t the only way to do this, but it can be one of the most effective ways.
- If you’re establishing an upmarket brand, part of your marketing strategy can be to charge the same, or maybe even more, for your products or services than your competitors. This pricing strategy is risky, but it can make your brand appear more exclusive.
- If you want to attract a lot of clients that you can later convert to paying customers, you could consider a freemium pricing strategy, where you offer parts of your products or services free of charge.
- If you want to make a lot of sales so you can get testimonials or customer success stories or just make a splash, you can adopt a cheaper pricing strategy at the start.
These are just some examples of how the right pricing strategy can help your business.
The most common pricing strategies
1. Cost-plus pricing
Cost-plus pricing means that you sell your products or services for what it costs to produce or provide them plus a markup. The markup is sometimes referred to as a profit margin. This is one of the most common pricing strategies.
This pricing strategy is very straightforward, and it ensures that you’re running a profitable business. The downside can be that you might not get a large client base from the get-go, and you might need to tinker with the markup to find a percentage that’s doable for both you and your customers.
This is how to figure out the cost-plus pricing of your product or the cost-plus pricing of your service.
2. Penetration pricing
Penetration pricing is a strategy where you charge low prices at the start simply to establish yourself in the market. This can help your business grow quickly and gain a large client base.
The downside of this pricing strategy is that this can drive down the price of your competitors and force you to lower your prices even more to be the price leading alternative.
Choosing this pricing strategy also means that you’ll have to sell more products or services to earn your ideal salary. Additionally, if your prices are too low, you risk not being taken seriously by potential clients or partners, and basing your strategy solely on price can have long-term consequences for your brand.
3. Competitive pricing
Competitive pricing means doing a thorough evaluation of your competitors so that you can offer services at a competitive price.
This can draw a lot of clients to your company, especially if you have a good marketing campaign to get their attention.
However, it might not be sustainable for your business in the long run. It can also cause price wars between you and your competitors, where eventually no one is making a good profit.
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4. Value-based pricing
If you have a strong brand, you might be able to charge more than your clients because your brand adds value. You’ll have to spend a lot on marketing to establish your brand, and you’ll have to get to a level where you’re well-known enough to sustain value-based pricing.
However, if you can make value-based pricing work, there can be a lot of profit in it for you.
Examples of businesses that use value-based pricing are luxury goods, such as clothing brands or watches. Another example is art, where the artist’s name is a big selling point.
5. Freemium pricing
You can offer certain services for free simply to get lots of clients onboard. The goal in this case is to convert these freemium users to paying customers over time, either by limiting the freemium product or service, or by introducing paid alternatives on top of the freemium product.
Converting freemium users can be difficult—the solution is to do enough market research and user research so that you can make your product or service worth paying for. In short, it needs to add a lot of value to convince customers to upgrade.
You should also keep in mind, once you’ve established yourself as a free brand it can be difficult to shake the freemium associations moving forward.
6. Bundle pricing
Bundle pricing is when you bundle your products or services to sell them at a slightly lower cost than the customer would have to pay for each separate product or service.
Bundle pricing can help you increase sales, and convince more customers to purchase from you. The drawbacks are that this strategy will make a slight dent in your profit margin. You also have to make sure that you’ve done your due diligence when creating these bundles. All the products have to provide value to your customer; if you sell them 1 service they need and 3 they don’t, they probably won’t appreciate the discount.
7. Dynamic pricing
Dynamic pricing is a strategy where your business adjusts prices based on what’s happening in the market. For example, if there’s a lot of demand for what you provide, you can increase the prices. Or if your competitors announce a price cut, you can do the same.
This is a flexible pricing model, which allows you to maximize your profit while staying competitive in the market. However, customers can react negatively if they find out they had to pay more than other customers, and they can also feel pressured to buy things that they don’t need in order to capitalize on a good offer. Long term, this pricing strategy can have a negative impact on your brand.
8. Price skimming
Price skimming is a strategy that relies on early adopters who are willing to pay more for novelty products and services.
With price skimming, your business initially charges a high price for a new product, then lowers the price as demand decreases or competitors flood the market. The goal is to make as much of a profit as possible, by first charging more from customers who want the product or service early, then less to attract more buyers once the initial shine wears off. This type of pricing can establish your brand as innovative and exclusive.
Examples of this include technology, phones, gaming consoles, and fashion.
The downside of this method is that you might anger early adopters, who paid more than your current customers. This strategy also might not work if there are already a lot of competitors in the market.
9. Tiered pricing
Tiered pricing is when you offer different pricing levels for your products or services. Examples of tiered services include software-as-a-service (SaaS), like invoicing and accounting software, or streaming services like Netflix and Spotify.
With tiered pricing you can attract a much larger customer base, since you can offer not only a range of prices, but also likely a wider range of features. One of the downsides of tiered pricing is that there are more products and services to juggle as part of your customer relationship management (CRM). Customers might also be confused or overwhelmed by the amount of options available.
10. Discount pricing
Discount pricing is a pricing strategy where you temporarily sell products or services at a lower rate. With discount pricing, you can sell more, attract new customers, or simply get rid of old inventory.
Discount pricing is a common strategy for businesses that want to boost sales. The drawback is that it obviously will reduce your profit margin, so you need to carefully evaluate the duration and the size of the discount. Additionally, discount pricing will impact how customers view your brand.
In the end, only you can decide on the right strategy for your business, and you might have to try different ones to really nail your market approach.
Good luck finding the right pricing strategy—or combination of pricing strategies—for your business!
