Pricing it Right: Knowing the Pricing Strategies in Business
Your pricing affects the way consumers perceive your products. In this article, learn which of the pricing strategies in business apply to your brand.
What is a pricing strategy?
A pricing strategy is a process of setting up the best price for your products or services. It takes into account the input costs, value-adding benefits, product features, market conditions, target customer base, positioning strategy, revenue goals, and competitor offerings, among others.
The nature of the product and type of industry also plays a key role in determining your pricing strategy. For example, digital products are priced differently than basic necessities, just as how private corporations and not-for-profit businesses follow a distinct cost structure.
Why is pricing strategy important in business?
Choosing a pricing strategy is important because pricing has the greatest and fastest impact on maximizing your business’ profitability. It’s a major deciding factor that encourages customers to buy your product or return it to the cold, lifeless shelf. This happens because pricing creates a psychological and economical effect on your buyers.
The right price should fall close to the value of what you’re selling: the midpoint of your cost and the value it provides to your customers. Set it too low, and they’ll underestimate the quality of the product, plus it compromises your profitability. Set it too high, and you’ll lose valuable sales. Thus, a strong pricing strategy helps you meet customer expectations by letting them understand the reason behind your prices.
Types of pricing strategies
There are various pricing strategies available for businesses. Its usage depends on your objectives. You can use it as a standalone strategy or you can mix and match two or more strategies to cater to your consumer base better while maximizing your profits.
Despite their differences, all pricing strategies should be grounded in their prime element — that is, the equivalent or perceived value of your products or services.
Here’s the list of the common cost pricing strategies in business:
The combination of your total production costs plus the “markup” or the amount added to the base price to cover overhead and profit. This is considered the basic pricing strategy and is often used in selling physical retail products.
Using your competitors’ prices as the basis of pricing your goods. You can either price your products slightly lower, equal, or slightly higher than your competitions. You can use this if you’re competing in a highly saturated market because a slight change in prices can affect your customers’ purchasing decisions.
This strategy lets you set high prices for a new product then lowering it over time as the product loses its popularity. It is common for technology (e.g., new smartphone models), fashion products, and other business-to-consumer brands that rely on fast-moving trends. You can use this in targeting high-income shoppers or trendsetters.
Like price skimming, high-low pricing also allows you to charge high prices and gradually lower them through clearance sales, discounts, promotions, year-end sales, or markdowns. Its main goal is to encourage consumer purchases through a set period. With this strategy, you can alternate the prices of your products between high and low.
It occurs when you offer your goods for an extremely low price and then raise it once you achieve your target market share. It should be only used for a short run to prevent hurting your bottom line. You can use this if you’re offering an entirely new product or you’re a new business that’s trying to break into a competitive market.
Loss leader pricing
Ideal for retailers, loss leader pricing is about advertising low-priced items to attract shoppers into buying other higher-priced products.
It’s about setting your prices based on the perceived value of the item instead of its actual cost. It takes into account the usefulness of the products, their quality, and the willingness of your customers to pay.
Standing for “free” and “premium”, freemium pricing takes place when you offer a free version of your product with the hopes that your users will purchase its paid version. Through this, your customers can have a first-hand experience with your brand. Some of its popular examples are the free use of the basic version, free trials, and limited memberships. This strategy is commonly used for software or application products.
Premium pricing is setting lofty prices to project the product as luxurious, premium, exclusive, or rare. It focuses on the perceived value and the status it gives to the buyer rather than the actual production costs. This is common for high-end brands or high-quality items or services that exude a deluxe aura.
Dynamic pricing involves the constant adjustment of prices to meet the current needs and demands of the market. It usually applies to hotels, airlines, and utility companies.
Intended for price-conscious consumers, economy pricing aims to minimize production costs to sell products lower than the market average.
Bundle pricing means selling complementary products together for a rate lower than their individual prices.
This cost pricing strategy targets human psychology to increase sales. For example, pricing a product for $9.99 instead of $10 looks more appealing and “cheap” to most customers. Buy one, get one promo or get 50% off for the second item are some of its examples.
This is preferable for businesses with a presence in various geographical locations. It works by setting different prices based on economic factors such as the standard of living or wages.