Product pricing is a complex and intricate process involving calculations, research, risk-taking, and understanding of the market and consumers. The company’s management considers various factors, including product segment, consumer affordability, market conditions, competitor actions, production, raw material costs, and profit margins. These factors are referred to as “pricing strategies.”
If your price offer is too low, you may leave money on the table. Meanwhile, overpricing can lead to missed sales that could have significantly improved your year. The most effective pricing strategy is determined by selecting one that is suitable for your company’s specific circumstances.
Thankfully, there are numerous pricing models and strategies available to help you determine the optimal pricing for your audience and revenue objectives. That’s why we’ve created this guide.
This guide offers strategies and tactics for both business beginners and pricing professionals to help them become comfortable with product pricing and determine the most suitable pricing strategy for their business.
Let’s get started!
Definition of Terms
What is Pricing?
Pricing is the second P in the marketing mix, followed by place, promotion, packaging, positioning, and people. It refers to the process of determining the value of a product or service before it is purchased.
Many companies fail to seriously consider their pricing strategy, leading to potential financial losses. Correctly setting product prices can significantly boost revenue by increasing customer willingness to pay higher prices.
Your price should effectively convey your commitment to your brand, product, and customers to potential customers. A precise estimate is crucial for consumers when deciding whether to purchase goods or services, as it is one of the first factors they consider.
Understanding Pricing Strategy:
Pricing strategies are the methods employed by companies to determine the rates they charge for their products and services. Pricing refers to the price you charge for your products, while the pricing strategy is the method used to determine the price.
A pricing strategy aims to set a competitive price for a product or service. This strategy is integrated with other marketing pricing strategies, including the 4P strategy (products, price, place, and promotion). Considering economic patterns, competition, market demand, manufacturing and distribution expenses, variable costs, product characteristics, etc.
The marketing mix’s key strategy focuses on generating and increasing revenue for an organization, ultimately leading to a company’s profit. Understanding market conditions, consumers’ unmet desires and their willingness to pay for these desires is crucial for successful pricing strategies for products or services.
Note: The company’s ultimate goal is to maximize profit by maintaining a competitive market, but selecting the right pricing strategy is crucial for customer retention. Implementing the appropriate strategy is vital for an organization to attain its objectives.
Read Also: Cost-plus Pricing Strategies: Formula and Examples
Types of Pricing Strategies:
Various pricing strategies can enhance business growth, increase sales, and maximize profits. Here is a list of common pricing strategies that can be considered as part of a broader marketing strategy:
#1. Competition-Based Pricing Strategy:
Competitive pricing, also known as competitor-based pricing, is a pricing strategy that focuses on the current market rate of a company’s product or service without considering the cost or consumer demand.
A competition-based pricing strategy uses competitors’ prices as a benchmark. Businesses in a saturated market may opt for this strategy due to potential customer decision-making based on slight price differences. This pricing strategy allows you to set prices slightly below, equal to, or above your competition.
In marketing, consumers seek the best value, not the lowest price. Competitive pricing of products and services can enhance the brand position and win customer business. Competitive pricing is effective when your business provides unique advantages like exceptional customer service, a generous return policy, or exclusive loyalty benefits.
#2. Value-Based Pricing Strategy:
A value-based pricing strategy involves companies setting prices based on customer interest and data, even if they can charge more for a product. Value-based pricing can enhance customer sentiment and loyalty, enabling businesses to prioritize their customers in marketing and service if used correctly.
Value-based pricing necessitates constant monitoring of diverse customer profiles and buyer personas, potentially adjusting prices accordingly.
In marketing, a value-based pricing model can enhance the demand for your products and services by promoting marketing to customers with value. Ensure your audiences are distinct in their willingness to pay, so as to avoid potential issues by charging more or less based on off-limits criteria.
#3. Cost-Plus Pricing Strategy:
A cost-plus pricing strategy, also known as markup pricing, is a pricing strategy where businesses mark up their products based on their desired profit margin. It involves adding a fixed percentage to the product production cost.
For instance, if you want to earn a 25% profit on each sale of shoes made at $25, you would set a 100% markup price of $50. Cost-plus pricing is commonly used by retailers selling physical products, but not ideal for service-based or SaaS companies, as their products typically offer greater value than the cost.
In marketing, Cost-plus pricing is effective when competitors are using the same pricing model, but it won’t attract new customers if competition focuses on customer acquisition rather than profit growth. To ensure the effectiveness of this strategy, it is recommended to conduct a thorough pricing analysis, considering your closest competitors.
#4. Penetration Pricing Strategy:
This pricing strategy is not sustainable in the long run. Penetration pricing strategy involves companies entering the market at a low price, drawing attention and revenue away from higher-priced competitors.
A penetration pricing strategy is ideal for emerging businesses seeking customers. In marketing, penetration pricing, and freemium pricing both have implications. Penetration focuses on promoting the value of products with price serving as a secondary factor to generate revenue and expand business.
#5. Skimming Pricing Strategy:
Skimming pricing is a strategy where companies initially charge the highest price for a new product, then gradually lower it as the product becomes less popular. In the Skimming pricing strategy, prices are gradually reduced over time.
Technology products like DVD players, video game consoles, and smartphones are typically priced using this strategy as they become less relevant over time. Skimming pricing strategy recovers costs and sells products beyond novelty, but can annoy consumers and attract competitors who recognize the “fake” pricing margin.
In marketing, a skimming pricing strategy is effective for selling products with varying life cycle lengths. Quick popularity can shorten profits while longer life cycles can maintain higher prices. This allows for effective marketing without constant price adjustments across products.
#6. Dynamic Pricing Strategy:
This pricing strategy is also known as surge, demand, or time-based pricing. It is a flexible pricing strategy where prices fluctuate based on market and customer demand.
Hotels, airlines, event venues, and utility companies utilize dynamic pricing algorithms that consider competitor pricing, demand, and other factors to adjust prices based on customer preferences.
In marketing, Dynamic pricing optimizes marketing plans by allowing teams to plan promotions in advance, configure pricing algorithms, and conduct real-time A/B testing to maximize profits.
#7. High-Low Pricing Strategy:
A high-low pricing strategy involves a company initially selling a product at a high price, and then lowering it when the product’s novelty or relevance decreases. This pricing strategy involves discounts, clearance sections, and year-end sales, demonstrating the effectiveness of this strategy in action.
High-low pricing is popular among retail firms selling seasonal items like clothing, decor, and furniture. This is due to consumers’ anticipation of sales and discounts, attracting Black Friday and other universal discount days.
In marketing, a high-low pricing strategy can help maintain steady foot traffic in stores throughout the year. By assessing product popularity during specific periods of the year, you can use low pricing strategies to boost sales during slow months.
#8. Geographic Pricing Strategy:
Geographic pricing refers to the pricing of products or services based on their location or market. This strategy is suitable for international customers or when there are economic or wage inequalities between the seller’s location and the buyer’s location.
In marketing, paid social media advertising simplifies marketing geographically priced products or services by segmenting using zip code, city, or region at a low cost with accurate results. Your pricing model remains consistent even when customers move or travel, ensuring you can maintain your marketing costs.
#9. Psychological Pricing Strategy:
Psychological pricing is a strategy that focuses on enhancing sales by analyzing human psychology. For instance, The “9-digit effect” suggests that customers may perceive a product as a good deal despite its lower price of $99.99.
Again, psychological pricing involves placing expensive items next to focused ones, offering deals like “buy one, get one 50% off” or free, making customers feel good about the deal.
Finally, various studies have shown that altering the font, size, and color of pricing information on and around products can significantly increase sales.
In marketing, psychological pricing strategy involves understanding the target market’s psychological needs, such as discounts and coupons, to effectively market products and meet their psychological need for cost savings. Your pricing and marketing should appeal to customer motivations, ensuring quality is prioritized over price, to effectively reach sales goals.
Freemium pricing, a combination of “free” and “premium,” is when companies offer a basic version of their product, expecting users to eventually upgrade or access additional features. The pricing structure offers free basic services and premium options, attracting potential clients by offering some services for free, while additional features require a fee.
The freemium pricing model is commonly used by SaaS and software companies for free trials and limited memberships, allowing customers to preview software functionality and build trust before purchasing.
In marketing, Freemium pricing may not yield significant profits on initial customer acquisition, but it provides valuable access to the customer. By obtaining their email inboxes, phone numbers, and other contact information in exchange for a free product, you can cultivate a brand-loyal advocate with a worthwhile LTV.
This is a strategy where companies price their products high to create the impression of high-value, luxury, or premium. Prestige pricing is a strategy that emphasizes the perceived value of a product over its actual value or production cost.
Prestige pricing, influenced by brand awareness and perception, is often used in fashion and technology to market products as luxurious, exclusive, and rare.
In marketing, Premium pricing is influenced by market perception and can be achieved through influencer marketing, supply control, and increased demand.
#12. Subscription Pricing:
Subscription pricing is a common pricing model used by SaaS companies, online retailers, and agencies that offer subscription packages for their services. Offering flat rate or tiered subscriptions has numerous benefits. They include guaranteed monthly and yearly recurring revenue, simplifying profit calculations, and potentially increasing customer lifetime values.
Subscription pricing should be cautious due to the high risk of customer churn, necessitating a customer retention strategy to maintain active subscriptions.
In marketing, creating buyer personas for each tier is crucial for marketing subscription products, as a general subscription that doesn’t appeal to everyone won’t attract any customers. Even Amazon’s Prime subscription, which offers flat-rate pricing, includes a student membership, enhancing its marketing effectiveness by creating a sense of differentiation.
#13. Bundle Pricing:
Bundle pricing involves offering multiple complementary products or services at a single price, either as part of a bundle or as individual components. Offering multiple products upfront can enhance value for customers willing to pay extra and increase product adoption speed.
In marketing, Bundle deals are a strategic strategy for businesses to increase product sales, upsell, and cross-sell offerings, ultimately benefiting both customers and revenue goals.
#14. Hourly Pricing:
This is a common method employed by various professionals such as consultants, freelancers, and contractors for providing business services. It involves trading time for money, which some clients may resist as it may prioritize labor over efficiency.
Hourly pricing can encourage customers to work with businesses that focus on quick, high-volume projects by offering a low price point rather than committing to expensive projects.
#15. Project-based pricing:
Project-based pricing, unlike hourly pricing, charges a flat fee per project, used by consultants, freelancers, contractors, and other business service providers. This pricing strategy estimates project deliverable value and can also create a flat fee based on project time.
In marketing, offering project-based pricing based on customer benefits can make it more appealing, as clients can work with the business until the project is completed, rather than depleting their hours.
How to Choose a Pricing Strategy.
After understanding the various pricing strategies, it’s crucial to select the one that suits your business best. This guide provides guidance on creating an effective pricing strategy:
#1. Determine your value:
A value metric is a company’s method of determining the worth of a product unit. For instance, for someone who sells footwear, you will have to determine the value of a pair of shoes. To determine your value metric, determine the basic unit of your product or service sold, such as the price per unit sold to one customer.
#2. Evaluate pricing potential:
Pricing potential is the estimated price for a product or service, influenced by factors like operating costs, consumer demand, and competition.
#3. Review your customer base:
Pricing strategy should consider customer response to prices, their willingness to pay for products and services, and whether price changes have discouraged or boosted sales.
#4. Determine a price range:
Price range refers to the prices of a product or service that are within the acceptable range of both the customer and the seller. To determine the price range, consider the following questions:
- What is the minimum price for a product or service that can still generate profit based on production, marketing, and overhead costs?
- What is the maximum price you can charge a product or service without alienating your target customers?
#5. Check your competitors:
Comparing your competitors’ pricing helps you decide whether to beat them or communicate more value by setting your products at a higher price.
#6. Consider your industry:
It’s advisable to explore the most prevalent pricing strategies within your industry to ensure effective pricing strategies as they work differently for different industries. For instance,
- The SaaS industry frequently uses freemium pricing with various tiers to provide customers with a pathway to upgrade their software as their needs grow.
- Luxury brands in the restaurant industry may employ premium pricing strategies to enhance their reputation for superior quality.
- Project-based pricing is a strategy employed by designers, consultants, and other service providers to customize service outcomes and prices for individual customers.
#7. Consider your brand:
Your brand and business model significantly influence pricing strategies, as brand identity significantly impacts consumer perception and the quality of your offerings.
For instance, brands can choose economy pricing for affordability, price-skimming for innovative products, or penetration pricing for brand equity building, enabling easier market entry and customer base growth.
#8. Get feedback from customers:
Customer feedback is crucial when pricing an existing or new product and can be obtained through surveys of current and potential customers using the following questions:
- What is your opinion on the most suitable price for this product?
- What price are you willing to pay for this specific product?
- What is the likelihood of you purchasing the product on sale at a specific price (maybe a lower or higher price)?
- What price is so low that you might question its value?
- What price is so high that you would consider it too expensive?
User research offers both quantitative and qualitative insights into customer behavior and beliefs, helping businesses understand their pricing strategies and understand their preferences.
#9. Experiment with pricing:
Live experiments, such as A/B testing and positioning products alongside competitors, can help determine consumer preferences and determine the most effective pricing strategy. The results from live experiments and customer feedback can provide valuable insights for successful product launches, potentially reducing trial and error in introducing offers to the marketplace.
The pricing strategy in marketing is crucial and must be carefully considered before pricing any product. Too low or high pricing can result in missed opportunities and potential sales loss, affecting the overall success of the business.
The company’s management must effectively price its products and services to avoid sales losses, maximize profits, and avoid losses due to high or low prices. Hence, pricing should be done intelligently and effectively, considering all aspects of the organization’s management before pricing a product.
Thank you for staying through till the end!
What is Pricing Strategies Marketing Mix?
The marketing mix consists of seven essential components: price, product, place, people, process, physical evidence, and promotion, providing a framework for marketers to differentiate new products from existing ones.
What are the 4 Cs pricing?
Pricing practitioners often use the four Cs: customer, costs, competition, and constraints to determine the price.
What are the 3 major approaches to pricing strategy?
Common pricing strategies include value-based pricing, competitor-based pricing, and cost-plus pricing, which base prices on perceived worth, competitor pricing, or the cost of goods or services plus a markup.
What are the major approaches to pricing strategy?
The four major pricing strategies are value-based, competition-based, cost-plus, and dynamic pricing, which are commonly used depending on the industry and business model.
What is the simplest pricing strategy?
Cost-plus pricing is a simple method where a firm calculates production costs, adds a profit, and then sells the product at a price.
What is a skimming pricing strategy?
A skimming pricing strategy is a strategy where new product prices are set high and then lower as competitors enter the market, contrasting with penetration pricing.
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