Pricing it Right: 14 Types of Pricing Strategies in Business
The price tag of your products or services has a major impact on your profitability and marketing efforts. Here’s what you need to know about the different types of pricing strategies in business and why it’s important to use the right one.
Choosing the right pricing strategy is necessary to get reasonable profits from your products. Aside from influencing buyers’ initial perception of your brand, it’s a major deciding factor for a successful purchase. And as a consumer yourself, chances are high that you’ve had a fair share of experience where you discern if the quality and value of a product justifies its price.
If this is the case, where should you draw the line between making profits and keeping your costs appealing to your target market?
Learning about the different types of pricing strategies in business and when to best use them can help you answer this question.
This article covers:
What is a pricing strategy?
A pricing strategy refers to your company’s approach to setting up the best price for your products or services.
It takes several factors into account, such as:
- input costs,
- value-adding benefits,
- product features,
- market conditions,
- target customer base,
- brand positioning,
- revenue goals, and
- competitor offerings, among others.
The price elasticity of the product or service — or how changes in price affect demand — also plays a key role in determining your pricing strategy.
Considering the factors mentioned above, all pricing strategies should be grounded in this foundational concept — that is, you must price your products or services based on their equivalent or perceived value.
Why is pricing strategy important in business?
1. Increase profits
Choosing a pricing strategy is important because it has the greatest and fastest impact on your business’s profitability. The price you associate with your products or services shows you:
- how much money you will earn when a customer buys an item,
- the number of items you need to sell to breakeven (cover the costs involved in producing the product), and
- how many additional items must you sell to make a profit.
This goes to say that an effective pricing strategy can help you increase sales volumes while improving your profit margins at the same time.
2. Drive higher market demands
Your pricing strategy can also be an effective way to attract customers. This is because pricing creates a psychological effect on buyers. It acts as a major deciding factor that encourages them to buy your products or return them to the cold, lifeless shelf.
3. Portray the value of your product
When determining the price, it is important to consider the quality of what you’re selling — be it a product or service — and the value it offers to consumers must justify the amount you’re selling them for.
This means that the right price should fall close to the value of your products or services: that is, the midpoint of your cost and the value it offers.
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.
4. Meet customer expectations
Paired with excellent marketing strategies, a strong pricing strategy helps you meet customer expectations by letting them understand the reason behind your prices and showing them your differentiation from your competitors.
In fact, more than half of the 4,000+ consumers in the US who participated in PwC’s Customer Loyalty Survey answered that getting good value for the price of a product or service is a top reason why they keep using or buying from a business.
Types of pricing strategies in business
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.
Here’s the list of the common pricing strategies in business:
1. Cost-plus pricing
The combination of your total production costs plus the “markup” or the amount added to the base price to cover overhead and make profit.
In most cases, this is considered the basic pricing strategy and is often used in selling physical retail products.
2. Competitive pricing
The competitive pricing strategy is about 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.
3. Price skimming
This strategy lets you set high prices for a new product then lower 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.
4. High-low pricing
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.
This pricing strategy is ideal when your goal is to clear out your inventory to make room for newer products.
5. Penetration pricing
It occurs when you offer your goods for an extremely low price and then raise them 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.
6. Loss leader pricing
Ideal for retailers, loss leader pricing is about advertising low-priced items to attract shoppers into buying other higher-priced products.
7. Value-based pricing
Value-based pricing is 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.
It’s a good pricing strategy for businesses with solid brand and market presence and has a well-established unique selling proposition.
8. Freemium pricing
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.
9. Premium pricing
Premium pricing is about setting high price tags to portray 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.
10. Dynamic pricing
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.
11. Economy pricing
Intended for price-conscious consumers, economy pricing aims to minimize production costs to sell products lower than the market average. It leverages economies of scale and is ideal for businesses with a huge customer base.
12. Bundle pricing
Bundle pricing means selling two or more complementary products together for a rate lower than their individual prices. This pricing strategy is common for e-commerce and retail-based businesses.
13. Psychological pricing
This cost pricing strategy targets human psychology to increase sales. It aims to influence consumer and purchasing decisions by creating perceptions of value, affordability, and urgency, to name a few.
For example, pricing a product for $9.99 instead of $10 looks more appealing and “cheap” to most customers. The same goes for ‘Buy 1, Get 1’ promo or ‘Get 50% off for the second item’. Other businesses, on the other hand, create a false sense of urgency through flash sales and limited time offers to urge consumers into making impulse purchases.
14. Geographic pricing
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.
Tips to determine the right pricing strategy
The effectiveness of a pricing strategy depends on how and when you use it. Each of the tactics listed above can drive your profit margins and attract a loyal customer base — but only when you utilize them correctly.
Consider these tips when identifying which pricing strategy to use.
1. Know your customers
If you’re just starting out, one of the most important steps you shouldn’t miss is to know who your target market is. Research about their behaviors, economic conditions, and buying triggers.
For example, if you’re an online seller, your target customers may be easily enticed with promotional discounts. In this case, psychological pricing may be an ideal choice.
2. Determine your breakeven point
Your breakeven point tells you the number of items you need to sell to cover your business costs and how much more you need to sell to make a profit. Knowing your breakeven point can be your starting point in identifying how much your goods should cost. You can also use it to see how your prices compare to your competitors.
3. Understand the price elasticity of your products or service
Understanding the price elasticity of your products or services is another key factor in determining which pricing strategy to use. Price elasticity shows how a change in price affects demand.
The demand for elastic products may drastically change with any change in price. For instance, if you have lots of competition — which gives your customers several alternatives — the demand for your goods may decline when you increase your prices.
Inelastic products, on the contrary, show little to no change in demand regardless of price changes.
4. Know your brand’s value
Always keep in mind that the price of your goods must be based on their equivalent or perceived value. This takes us back to the concept of how the quality and value it offers to your customer base must justify its price. In short, customers must get their money’s worth for their purchases.
Understanding your value — or what makes you stand out from the competition — can help you determine which pricing strategy can work for you. Along with other key decision makers, take the time to assess your key differentiation from your competitors. What are your unique selling propositions that draw your customers to do repeat business with you?
5. Check the timing
Seasonal trends may also make a pricing strategy more effective over the other. For instance, using the high-low pricing and psychological pricing strategies can drive more sales during Black Friday and end-of-year sales.
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This article was first published on 6 May 2021 and edited on 15 October 2024.
Edited and updated by: Mary Milorrie Campos