The Ultimate Guide to Pricing Strategies

The Ultimate Guide to Pricing Strategies
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The prices you use to sell your products and services are a business element that can have a high business potential energy for your company. Choosing the right pricing strategies and the best price for your product or service can greatly affect the quantity of business potential energy your company will have.

Let’s explore the most common pricing strategies and how to decide which will work best for your small business.

đź“– Key takeaways

  • Different pricing strategies exist: value-based pricing, competitive pricing, penetration, economy, price skimming, cost-plus pricing, dynamic pricing, premium pricing, bundle pricing, geographic pricing, and freemium pricing.
  • Choosing the right pricing strategy is crucial for business success. The right pricing strategy can increase revenue, customer loyalty, and percentage of total sales in the market.
  • Remember that not every pricing strategy will work for your business. Before making a final decision, you must conduct research and analysis to compare costs with the price of a specific strategy.

What is a Pricing Strategy?

A pricing strategy is simply a specific method to determine the best price you will sell your product or service. It involves assessing various factors such as business goals, costs, revenue, profit, consumer behavior and demand, competition, etc., to set a price that will be attractive to customers while generating profit for your business.

There are many different types of pricing strategies that businesses can use. Each one has its advantages and disadvantages, and the best strategy for your business will depend on your specific goals and target market. Let’s look at some of the most common pricing strategies small businesses use.

How Pricing Strategies Impact Your Business Potential Energy?

If you choose pricing strategies that bring lower prices, your business potential energy will decrease because prices directly impact your cash flow. Conversely, cash is another business element that can bring potential energy to your business. More cash means better business potential energy.

You must consider your pricing strategies and their impact on your business’s potential energy.

For example, you can choose introductory prices in the startup stage but change them later, increasing the initial introductory prices. Choosing the best pricing strategies is important for you as an entrepreneur. In some cases, low introductory prices will give you a good starting point to increase the number of your customers. But you need to be aware that when you increase prices, you will probably start losing some part of those customers.

14 Different Pricing Strategies

Here are 14 different pricing strategies that you can choose for your business.

1. Cost-Plus Pricing Strategy

Cost-Plus Pricing

The traditional way to set prices is through a cost-plus pricing strategy, which calculates costs and then adds a markup as a fixed percentage. This approach involves specifying all the costs of producing a product or service, including materials, labor, and overhead costs, and then adding a markup percentage for profit.

The cost-plus pricing strategy includes direct costs (materials, labor) and indirect costs (overhead, operating expenses). For example, if the total costs per unit of sale are $100, and you want a markup of 30%, your sale price will be $130.

The biggest advantage of the cost-plus pricing is its simplicity. However, one disadvantage is that it does not consider competitors’ prices or how much the target customers are ready to pay. So, you must determine the optimal markup based on your profit goals and market conditions (competitors and customers).

2. Value-Based Pricing Strategy

Value-Based Pricing

Value-based pricing requires prices based on the customer’s perceived value of your product or service. This type of pricing also means that the price is not directly linked to production costs but rather to what customers are ready to pay for the features and benefits they receive.

The value-based pricing strategy works because it allows you to charge more for your product or service, as customers recognize the value and are willing to purchase.

However, this approach also has potential challenges. A value-based pricing strategy depends largely on accurately estimating customer perceptions, which can be difficult. Additionally, a value-based pricing strategy may require additional market research and analysis to determine the optimal price point.

So, if you want to use value-based pricing, you must first identify your product or service’s unique value proposition.

Analyze your target market to better understand your customers’ needs, problems, desires, and preferences. You can use surveys, interviews, and focus groups to collect data and insights on what customers value most in your product or service.

You can also conduct experiments where you offer different pricing options to potential customers and measure their willingness to pay for each option. This will help you determine the optimal price point that aligns with perceived value.

It is also important to consider competitor prices when implementing value-based pricing. If your competitors offer similar products or services at a lower price, it may be challenging to justify a higher price based on perceived value alone. In this case, if you still want to use value-based pricing, you may need to differentiate your product or service through additional value (features or benefits) to justify a higher price.

3. Competitive Pricing Strategy

Competitive Pricing Strategy

Another common pricing strategy is competitive pricing, where you set prices based on competitors’ charges. Because of that, sometimes, this strategy is called competition-based pricing.

The competitor pricing model is reactive and based on the idea that the business charges more, the same, or lower than the competition.

Competitive pricing can be effective if you have a similar product or service as your competitors and want to stay competitive in the market.

When using competition-based pricing, it’s important to regularly monitor and adjust your prices according to changes in the market and your competitors’ pricing strategies. You may also need to differentiate your offering through additional features or benefits to justify higher prices than your competitors.

The trick is identifying the right price points. The benefit of competitive pricing is that it carries little to no risk for the business. It is done considering that most prices are at equilibrium, and therefore, the business avoids trial and error costs.

Unfortunately, different companies incur different costs. Therefore, charging lower prices might not work for a competitor who incurs low costs in producing their goods.

Here are some steps you can conduct to implement this pricing strategy:

1. Analyze your direct and indirect competitors’ prices

The first step is to research your direct and indirect competitors’ pricing strategies and identify gaps in the market. Look at their pricing structures, discounts if they offer them, and promotions to better understand how they are positioning themselves in the market. This will give you an idea of the price range for similar products or services.

2. Identify your unique selling proposition.

Next, compare your product or service to your competitors’ offerings. Identify any unique features or benefits that may justify higher price points.

You may also want to consider conducting surveys, interviews, or focus groups with customers to get feedback on what they value and what they are willing to pay for.

3. Adjust your pricing accordingly

Once you have gathered enough information about your competitors’ pricing strategies and identified ways to differentiate yourself, it’s time to adjust your prices accordingly. This could mean lowering your prices if you find that your competitors are offering similar products at lower prices,

4. Penetration Pricing Strategy

Penetration Pricing Model

Another pricing strategy to consider is a penetration pricing strategy, which involves initially setting lower prices to enter a new market for your company and attract customers to gain market share. Most startups prefer this strategy.

It is a temporary price that allows businesses to establish themselves in the market. This pricing strategy consists of charging lower prices than the competition. However, as the business gets customers’ attention, its prices will gradually increase.

When discussing penetration pricing, it is important to carefully monitor your costs and ensure that you can maintain lower prices in the long run.

The advantage of a penetration pricing strategy is the ability to quickly attract new customers and create a perception of affordability and value for your products or services.

However, penetration pricing also has risks. One major concern is that customers may become accustomed to the lower prices and not want to pay higher prices when they increase. This can lead to decreased profit margins and potential financial difficulties for the business.

Additionally, this penetration pricing model may attract price-sensitive customers who are mainly looking for a good deal rather than being loyal to a particular brand. This can make it difficult to establish brand loyalty in the long term.

To mitigate these risks, it is important for businesses using penetration pricing to have a solid plan in place for

5. Economy Pricing Strategy

Economy pricing is a strategy focusing on offering products or services at the lowest possible price to target price-sensitive customers. This can appeal to budget-conscious consumers and help you gain market share by undercutting competitors’ prices. Economy pricing is the best way to go if you sell generic products.

To implement an economy pricing strategy, you must have efficient cost structures and be able to sell your products or services in high volumes. Therefore, you must find a way to minimize sales, marketing, and production costs while maintaining low prices.

However, economy pricing is not ideal for businesses with high production costs or relying heavily on profit margins.

How to target price-sensitive customers

The first step in using this pricing method is to identify the right customer segments that prioritize price over value or other factors. When you find such a market niche, conduct market research to ensure it is big enough to attract customers.

Then, based on the results from your research, you can offer affordable options to attract these customers.

6. Loss leader strategy

Loss leader strategy

This strategy involves selling some items below cost to attract more customers and increase your company’s market share. Once you achieve these objectives, the price will be increased to the normal price. This strategy is usually used to increase sales of specific types of products and services.

Be careful with this strategy. Once you have decreased prices, it is more difficult to increase them.

The advantage of a loss leader strategy is that it can help you earn loyal customers who will probably continue to purchase even after the prices have increased.

However, this strategy has a drawback: It can result in lower profit margins in the short term. Therefore, it’s important to carefully consider your pricing and costs before implementing a loss leader strategy.

7. Price Skimming Strategy

Price Skimming Strategy

With the price skimming pricing strategy, you will set a higher initial price. After some time with this pricing strategy, you will start slowly on a gradual level to decrease the initial high price. Usually, it is used by businesses that introduce unique high-tech products on the market and target high-end customers willing to pay higher prices.

After a while, when competition starts to increase in such a market, these companies can benefit from cheaper prices.

The advantage of a price skimming strategy is that it allows companies to capitalize on early adopters’ willingness to pay a premium for new products or services. This can result in higher profit margins in the short term.

However, there are some potential downsides to this price-skimming pricing strategy. As the selling price is gradually lowered, it may lead to dissatisfied customers who purchase at the higher price points, feeling like they have overpaid. Additionally, as competition increases and similar products or services enter the market, customers may opt for cheaper alternatives rather than

8. Dynamic Pricing Strategy

Dynamic Pricing Strategy

Dynamic pricing strategy, demand-based pricing, or flexible pricing strategy involves adjusting prices according to market demand and other external factors. These may include time of day, seasonality, or even competitor pricing. So, a dynamic pricing strategy requires constant monitoring and analysis of market trends and customer behavior to balance selling prices according to customer demand and market conditions.

For example, suppose the demand for your products or services is seasonal. In that case, this can be the best pricing strategy for your business model because you can offer a lower selling price when demand is low and a higher selling price when demand is high.

One of the main benefits of dynamic pricing is its ability to increase sales and revenue. Adjusting selling prices according to demand can attract customers and capture revenue opportunities in real-time while also maximize profits when demand is high. This helps you stay competitive and maintain a steady cash flow.

Another advantage of dynamic pricing is its ability to improve customer perception. By offering a lower price during times of low demand, your customers may feel like they are getting a good deal and are more likely to make a purchase. On the other hand, when prices are higher due to high demand, customers may perceive the product or service as more valuable.

9. Bundle Pricing Strategy

Bundle Pricing Strategy

Bundle pricing is a specific marketing strategy for grouping different products and services and selling them for less than the amount of each purchased separately. With this strategy, you want to increase the average sales volume from an average customer. It can be used periodically to increase your company’s sales volume, increase your profits, and attract new customers.

If you have Đ° a large range of products with different sales prices, this can be the best pricing strategy for you that can be used periodically.

One of the key benefits of using a bundle pricing strategy is that it allows you to offer value to your customers by offering them more products or services for a lower price. This can be especially attractive to budget-conscious consumers who are looking for ways to save money. By bundling complementary products or services together, you can create a perceived sense of added value for the customer.

10. Premium Pricing Strategy

Premium Pricing Strategy

Premium pricing means charging premium prices or setting prices higher than the direct competition. In most cases, customers believe that high-priced goods are high quality. Moreover, businesses use this pricing model to change or shift perceptions among buyers. For example, Rolex’s prices are higher than those of other brands like Timex. Rolex banks on the idea that customers believe their product’s quality is higher, thus the higher price.

Before setting a premium price, you must think about the following:

  • Target customers that are willing to pay more for superior quality and that prioritize quality over price.
  • Provide customers with premium products that justify premium pricing.
  • Define value to the potential buyers
  • Offer premium customer service
  • Don’t drop prices even when times are hard.

This strategy means that you will set higher prices because of the uniqueness of your products or services. You can set high prices if your products or services are unique enough.

11. Geographic Pricing Strategy

Geographic Pricing

Geographic pricing strategy is a pricing method that takes into account the geographical location of customers when setting prices for products or services. This strategy recognizes that different regions and countries have varying levels of purchasing power, cost of living, taxes, labor costs, and market conditions and consumer demand.

When implementing this strategy, you can charge different prices for your products in different locations based on these factors. For example, if your company sells luxury goods, you may price your products higher in wealthy areas where customers have a higher income.

With geographic pricing, you can ensure that your products are priced competitively in each market while also maximizing profits. However, it is important to carefully research and analyze each region’s economic conditions before implementing this strategy to avoid turning away customers or facing backlash for perceived pricing discrepancies.

Additionally, this strategy can also be used to target specific customer demographics. For instance, if your product is targeted towards young adults, you may choose to offer lower selling prices in college towns or cities with a high level of young people.

12. Freemium Pricing Strategy

Freemium Pricing Strategy

One popular pricing strategy used by many companies is the freemium pricing model. This approach involves offering a basic version of your product or service for free while also providing additional features or upgrades for a specific fee.

The concept behind this strategy is to attract many users with the free version and then convert them into paying customers through upselling or cross-selling techniques. This can be an effective way to quickly build a customer base and generate revenue from free and paid offerings.

For example, many SaaS and subscription businesses use different pricing tiers, starting with freemium pricing and adding two or more upgrades. This is sometimes called a tiered pricing model.

Freemium pricing can also be beneficial in terms of marketing and brand awareness. By allowing consumers to try out your product for free, you essentially allow them to become familiar with your brand without any financial risk. So, it is not a discount pricing strategy but a strategy to allow customers to check if the product or service is really for them. If they have a positive experience with the basic version of the product, they will pay for an upgrade.

13. Odd-ending strategy (psychological pricing)

psychological pricing

Psychological pricing strategy asks you to set prices with odd numbers, such as $2.99, $3.99, and so on. It is also called psychological pricing strategy because, in such a way, the prices will psychologically impact the buyer’s decisions.

In most cases, consumers don’t think a lot about prices. Businesses use the psychological pricing strategy and set prices lower than a whole number. For example, instead of $100, the business sets the price at $98. The reason is that most customers don’t round up these numbers. Therefore, psychology pricing is the best place to start if you want to price consumer goods.

14. One price for all items

One price for all items

This pricing strategy means setting all products and services at the same price. For example, everything in the store costs $5,00, which is the price that comes from this strategy. For this purpose, you must find average costs and average markup and set all items for that one price.

This can be an effective pricing strategy if you have many different low-priced products and use it as a specific market strategy to remove them from your store’s shelves.

For example, many retailers attract customers and increase sales volume by using this pricing strategy.

Choosing the Right Pricing Model

Now, when we observe the most common pricing strategies or pricing models, let’s see how you can choose the right strategy for your business.

Do you find yourself in a position where you don’t know what to do when it comes to choosing the right pricing strategy for your products and services? You probably have a lot of questions about some specific pricing method.

Choosing the best pricing strategy for your products and services or choosing the right pricing model is one of the most sensitive things you need to do in your company. It is normal to have different pricing questions you will need to answer.

If you have low prices, you will leave money on the table, and more importantly, you risk losing profitability and a better future for your company. If you use a premium price as a pricing model, you will set higher rates and probably start losing some of your current customers.

So, the pricing dilemma is always a reality. What to choose? How do you decide so as not to make a mistake?

When you find yourself in a pricing dilemma, everything you see as a possible direction for your company will seem to you to be right and wrong.

Here, I would like to share some steps to help you solve your pricing dilemma and select the most appropriate pricing model for your products.

1. Understand Your Costs

One of the most important things you must do before selecting some of the pricing models we have explained above is to understand your cost structure.

You will have two things to do:

  1. Calculate your costs per selling unit and compare them with possible pricing strategies you want to use.
  2. Carefully identify and analyze your cost structure to find improvements and opportunities to lower your costs.

1. Calculate costs

Calculate the total cost of producing a product or service. This includes not only the direct costs such as materials and labor, but also indirect costs like overhead expenses. These costs will determine the minimum price you need to charge to break even and once you clearly understand your costs, you can start comparing them to different pricing models to select the right strategy for your business.

If the difference between selling price and cost is according to your profit goals, then you can use that pricing strategy.

calculating costs for pricing strategy selection

2. Analyse and improve your cost structures

Because you calculate your costs in the previous step and know your cost structure, you can analyze each cost point to generate ideas for process improvement and optimization.

After analysis, you can adjust your pricing strategies based on new cost structures after implementing improvements.

2. Define Your Objectives

The pricing dilemma can often be removed if you know what you want to achieve with the specific products.

If you have prices of products and services representing your front-end product as an entry-level, you can set up low rates. With these products and services, you are attracting customers so that you can offer them high-level back-end products at a higher price.

So, here are some action steps you must conduct:

  1. Group your products and services based on goals you want to achieve with them.
  2. Set revenue goals and targets.
  3. Choose a pricing strategy that aligns with your revenue goals.

Including your objectives inside your pricing strategies will help you ensure that profitability and all efforts of your business are included inside your pricing structure.

3. Identify Your Customers

Types of Target Audiences

Do you know your target customers? Are customers from your target market people who can afford to pay higher prices for your products and services?

These questions and their answers are important in removing yourself from a position of pricing dilemma. One of the most important parts here is to define your target market and ideal customer profile or buyer persona.

Buyer Personas Example

If your target customers can’t afford high-level pricing strategies, you must consider other competitive pricing mechanisms or change your business model.

4. Find Your Value Proposition

positioning statement vs value proposition

Now, you need to consider the uniqueness level of your products and services for which you want to set prices. Look at your business model and identify all the elements that can shape this uniqueness level. Some of them are the following:

Related: 8 Reasons Why Your Small Business is Not Profitable as You Want and How to Fix It

  • The uniqueness of the problem that your products and services solve for your customers.
  • Your products and services can satisfy the uniqueness of the customer’s needs.
  • Similar solutions that currently exist in the market.
  • The level of a customer’s desire for the solutions that your products and services offer them.

If your offer’s uniqueness level is high, you can choose the premium price or high-level pricing strategies.

What do you sell to your customers? Think about this before making any other decision related to your pricing strategy and the pricing dilemma you are experiencing now.

You can choose the low-price strategy if you sell only products and services that solve basic problems without additional value-added services. However, you can consider premium pricing strategies if you sell high-level products that solve important problems for your customers, packaged with additional value-adding services and a total customer experience.

Your Pricing Strategy vs Value You Are Shipping to Your Customers

Your small business will largely depend on creating and shipping value to customers. There are really strong correlations between your ability to create and ship exceptional value to your customers and your small business’s success.

When we talk about businesses, the important thing is their pricing strategy and their ability to increase prices to ensure better profitability. Knowing and using different pricing models is not enough to ensure that your products and services will sell in enough quantity to enable your business to make maximum profit. Conversely, what strategy most applies to your small business will depend on other factors.

I want to mention some of these other things that will have a big effect on choosing and shaping the right pricing strategy for your small business.

1. More Value – Higher Rates

There is a correlation between the value you ship to your customers and the prices they pay you.

Simply, shipping more value to your customers will mean that you can ask for the higher price they will need to pay you for your products and services.

More Value – Higher Price

2. More Value – Higher Customer’s Perceived Value

There is a correlation between your real value and the value that your customers perceive about your products and services.

If you ship more value for your customers, you will ensure that your current and potential customers will perceive a higher value in your products and services.

More Value – Higher Customer’s Perceived Value

3. Higher Value Perceived by Customers – Higher Willingness to Pay More

There is a correlation between the value your customers perceive in your products and services and the price they are willing to pay you.

The more your products or services are perceived as valuable by your customers, the more willing they will be to pay you for your value.

Higher Customers Perceived Value

4. More Customer’s Willingness to Pay You More – More Possibilities to Increase Your Prices

There is a correlation between a higher customer’s willingness to pay you more and your ability to increase your prices.

If your customers are willing to pay you more, you can easily increase your prices without fear of losing money.

Related: 10 Tips to Create Challenging Demand for Your Products

More Possibilities to Increase Your Prices

5. More Possibilities to Increase Your Prices – More Profitability for Your Small Business

There is the existence of a correlation between more possibilities to increase your prices and more profitability for your small business.

If you have more possibilities to increase the prices of your products and services, you will improve the overall profitability of your small business.

More Profitability for Your Small Business

With all these earlier-mentioned correlations, we can come to a simple but powerful formula that can bring you great success for your small business:

from pricing strategy to profitability

As you can see, your job as an entrepreneur is to continuously work on creating and shipping really great value for your customers and improving all processes in your small business that are responsible for creating and shipping that value. If you succeed in this, you can choose different pricing strategies that will help you increase profitability and build a sustainable company.

Why You Should Consider VAT in Your Product Pricing Strategy

With the advent of urbanization and globalization, entrepreneurs started sprouting across the globe. From small-scale market vendors to large multi-company conglomerates, selling has been one of the topmost business ventures of today.

Selling internationally can offer great growth potential for a start-up business and give you an edge over your competitors. It can also offer ways to diversify your business.

However, international selling can be slightly more complicated than local selling. One of the main factors to consider in selling is dealing with taxes, especially value-added taxes (VAT).

So, let’s highlight what you should know about VAT, how to price your products right with an appropriate pricing strategy, and why it is important to consider VAT in your product pricing.

What Is VAT?

As mentioned, value-added tax, or VAT, is also known as the goods and services tax. It is the amount of money added to the cost of producing the material. It depends on where you are located and what type of taxation laws are in your place.

Sales tax and VAT are closely related terms, but they are different from one another. They are similar in that they are both government revenue sources based on consumer consumption. For the rest of the world, VAT is charged and collected at each supply chain point. Thus, a startup business needs to establish a strategic tax department to oversee the assessment of tax functions or transformation.

In this way, businesses can evaluate if their pricing would be right, as well as the cost for people, machines, and processes.

Knowing the VAT laws in your area is very important since the successful navigation of international markets depends on those laws.

Importance of VAT in Product Pricing

1. VAT Determines Final Price For the Consumers

The state determines the percentage of tax to be added to a product. As the name suggests, the business adds value-added tax to the costs of services and raw materials used to create the product.

2. Two Types of Value-Added Taxation

Method of collection

VAT can be invoice- or accounts-based. When VAT is applied invoice-based, the seller of the product adds VAT to his or her output and gives the buyer an invoice that indicates the amount of VAT added to the product—that is the input tax.

When the buyer decides to sell the product, they can add additional VAT, which will be considered an output tax. Depending on the law, the government will make the distinction between the input and output taxes.

An accounts-based collection method does not require sellers to provide an invoice indicating the tax. Instead, VAT is measured as the difference between the allowable purchase and the revenue. Most countries today adopt the invoice-based collection method, while Japan uses an account-based method.

Timing Of Collection

VAT (also accounting generally) can be either cash or accrual-based.

Cash-based accounting is a simple form of accounting. In this method, revenues are recorded on the date that funds were received from the payment of products or services of a certain business. When bills need to be paid, cheques will be written, and the expenses will be recorded on the date the cheque was issued.

So, this accounting focuses on the money sent to the bank and ensuring that bills are cleared. Some effort is exerted to match revenues and expenses.

On the other hand, accrual-based accounting matches the revenue on the date payments were received and the expenses when cheques were issued. Accrual-based accounting is more complex than cash-based accounting, but the main advantage is that it provides more details and insights into your business.

This type of accounting tracks all the receivables and payables, allowing you, as the business owner, to match the revenues and expenses, leading to more detailed and substantial financial reports.