What is a pricing strategy?
Price, one of the 4 Ps of marketing, refers to how much is charged for a product or service. A pricing strategy is the process and methodology used to determine prices for products and services.
As we’ll explore in this article, different pricing strategies work for different products and business models. A good pricing strategy can enable several things for a business:
- Convey value to customers
- Attract customers
- Inspire customer trust and confidence
- Boost sales
- Increase revenue
- Improve profit margins
But a bad pricing strategy can target the wrong customers, make them feel uncertain about trusting and buying your product, and inaccurately portray the value of your product. We’ll guide you through a few ways to determine your pricing strategy to inspire your approach.
Types of pricing strategies
There are several common pricing strategies to choose from to price products and services. The first step in choosing a pricing strategy is to examine the different types, review pricing strategy examples, and understand how they differ.
| Pricing strategy | Pricing strategy definition | Pricing strategy example |
|---|---|---|
| Skimming pricing strategy (also called pricing skimming or skim pricing) | Setting new product prices high and subsequently lowering the price as competitors enter the market | Innovative electronics sold initially at high prices to attract early adopters and later sold at lower prices |
| Competitive pricing strategy | Pricing products based on the price of competitive products, rather than cost or target profit; usually cheaper than competitors | Rental properties that lower the rental price to match or beat a competitor’s price and gain market share |
| Dynamic pricing strategy | Pricing that varies based on marketing and customer demand | Rideshare services with price surges during periods of peak usage |
| Value-based pricing strategy | Pricing a product based on how much the customer believes it’s worth | A coffee company with strong brand loyalty among its customer base pricing coffee higher than competitors |
| Penetration pricing strategy | Entering a market at a low price and increasing prices over time | A media streaming service that offers a low starting subscription price |
| Economy pricing strategy | Pricing a product low because of low costs of production, marketing, and advertising, and relying on high sales volume to generate profit | Airlines that offer economy seating at the lowest price tier |
| Premium pricing strategy | Pricing a product deliberately high to encourage favorable perceptions of the brand based on the price | Designer eyewear sold at a premium price that’s much higher than competitors |
| Cost plus pricing strategy | Adding a fixed percentage on top of the cost of producing a product, regardless of consumer demand or competitors’ pricing | Clothing brands that sell garments for 50 percent more than what it costs to manufacture them |
| Freemium pricing strategy | Offering a product for free alongside paid versions with more features | Software as a service (Saas) and file hosting apps that offer free (basic) and paid (premium) versions |
| Project based pricing strategy | Pricing each finite service or project on a case-by-case basis according to the value of the outcome instead of on the time spent to complete it | Wedding and party planners who quote prices based on the details of individual events |
How to choose your pricing strategy
Now that you know the different types of pricing strategies, your next step is to choose one for your business. Make an effective pricing strategy with this guide.
1. Determine your value.
A value metric refers to how a company determines the value of one product unit for sale. For example, if you sell footwear, then you would determine the value of one pair of shoes. If you sell a monthly service subscription, then you would determine the value of the services and features that a customer can access during a one-month period.
To establish your value metric, identify the basic unit of the product or service you sell. If you were to sell just one unit of your product or service to one customer, what would this be?
2. Evaluate pricing potential.
Pricing potential refers to the approximate price you can charge for your product or service. To evaluate the pricing potential for your product or service, consider factors such as your operating costs, consumer demand, and competitive products.
3. Review your customer base.
Another important consideration when it comes to pricing strategy is how your current customer base has responded to prices thus far. How much have they been willing to pay for products and services? Have any changes in price discouraged or boosted sales?
4. Determine a price range.
Price range refers to prices for a product or service that fall within what a customer and seller find appropriate. To determine price range, ask yourself these questions:
- What is the minimum price you can charge for a product or service and still make a profit based on the cost of production, marketing, and any overhead costs?
- What is the maximum price you can charge for a product or service without alienating your target customers?
5. Check out your competitors.
Another factor in pricing is taking a look at your competitors’ pricing. Make a list of competitive products and how they are priced. Then, decide whether you want to beat competitors’ prices (set your products at a lower price) or communicate more value than competitors and price your products higher.
6. Consider your industry.
Different pricing strategies work for different industries, so it’s a good idea to investigate the most common ones used in your industry. For example:
- In the SaaS industry, freemium pricing with different price tiers to purchase more features is a common strategy to offer customers a path to upgrade as their software needs increase.
- In the restaurant industry, luxury brands might use premium pricing to create an image of higher quality.
- In the service provider industry, designers, consultants, and other service providers might use project-based pricing to customize the service outcomes and the price for individual customers.
7. Consider your brand.
In addition to your industry, your brand and business model are important factors in pricing your offerings. A brand identity can affect consumers’ perception of the brand and quality of the offerings, so make sure your pricing strategy corresponds to the brand.
For example, a brand that focuses on affordability could choose economy pricing, while a brand that offers innovative products could succeed with a price-skimming strategy. If you are still working to build brand equity, penetration pricing could make it easier to enter a market and build a customer base.
8. Gather feedback from customers.
When considering how to price an existing or new product, customer feedback can be invaluable. Survey current and potential customers with questions such as:
- What do you think is an appropriate price for this product?
- How much would you be willing to pay for this product?
- If this product were on sale for [example price], how likely would you be to buy it?
- What price is so low that you’d question its value?
- What price is so high that you’d consider it too expensive?
Conducting user research can provide quantitative insights, such as what customers currently pay, but also qualitative data. You’ll be able to understand the why, such as their beliefs, opinions, and behaviors around pricing.
9. Experiment with pricing.
Conduct a few live experiments to gather data on how your products will perform at different prices. For example, you could A/B test—introduce a product at two different prices to separate audiences—to find out which price is favored. You could also position your products next to competitive products in your marketing messaging, to find out how consumers respond.
Live experiment results combined with feedback from customers can supply you with insights for successful product launches. You may even be able to reduce the trial and error that often comes with introducing offers to the marketplace.
Article by coursera
