How to choose your pricing strategy
Setting up your pricing is one of the trickiest parts of running a business. While you want a price that’s attractive enough to bring in the sales, it also has to be enough revenue to keep you running. Pricing fairly while also making enough to keep you afloat is particularly sensitive at the moment, given the current economic climate.
Fortunately, there are seven main strategies when getting started on your pricing strategy. Deciding on the best pricing strategy for your business is no small task, so we’ll look at all seven options to help you make the right choice for you.
Firstly, why are product pricing strategies important?
While most business advice leads with the product being the most important thing, that’s slightly misleading. Even fantastic products can fail if the price isn’t right. It’s not just the price to manufacture the product to take into account, it’s taxes, employee costs, and other expenditures.
So, if you price a product too low, you might make a good margin on the manufacturing costs, but fall short in other areas. Either way, undercut pricing will take a hit on your profit margins. If your pricing is too high for the consumer base, they’ll look elsewhere for cheaper alternatives, and you’ll lose sales. It’s not always as simple as profit margins, though – under-pricing your product could tell potential customers that it’s not of good quality or it’s not a desirable product. Finding that sweet spot is contingent on a number of factors – take a look at the seven main pricing strategies to help you make the right choice.
Seven main strategies
Value-based pricing is fairly self-explanatory – you price your products based on what consumers think the product is worth. This strategy isn’t about undercutting your competitors, it’s about what the perceived value of the product really is. If that’s a higher price, then it sends a message that your product is worth the extra cash. The product must have a significant impact on your customer’s lives that makes them want to buy it, and you must know exactly how it can impact their lives to sell it to them. If it goes right, then great news – you have higher profits. However, it does take up a lot of time and requires a lot of market research. It’s a good choice for SaaS business as well as luxury goods.
When businesses use a competitive pricing strategy, they set up prices based on what competitors are charging. If you’re a business that’s just starting out, then this is a good option. But you need to have a solid plan for growing beyond this, as it can lead to stagnancy. It’s also the preferred option for products that are in a saturated market – if tonnes of other businesses are selling products very similar to yours, why would they pay more? If this is the case, then you also need to implement creative marketing techniques that tells customers that despite there being other similar products, they should buy from you. Keep a close eye on competitors, using tracking systems that alert you to when their prices change, when they’re having a sale, when they’ve got a deal on, etc.
Price skimming can be a very strong pricing strategy, but it’s one that requires detailed caution. It’s about setting prices as high as the market will allow, capitalising on consumer demand and buzz, then skimming it over time. It’s risky, but it works best for products that are innovative, highly anticipated, or exclusive. The biggest market for price skimming is premium electronics and gaming.
New Apple products, particularly iPhones, are usually highly anticipated. When they release a new product, it’s priced at a minimum. The price goes down over time, usually when there’s a new model about to be released and the old model becomes less desirable. Businesses must create that buzz and feel of exclusivity to encourage consumers to pay the premium in the first place. Most consumers won’t think “I’ll buy this in a few years when the price has gone down”, they think “I want to buy this now because it’s new, fresh, and popular”.
This is one of the more simple pricing strategies. It’s also one of the most used strategies. The idea behind cost-plus pricing is to take the production cost and add a certain percentage to it, depending on how much profit you want to make. While the strategy is simple, and a good way of ensuring you’re going to make a profit, it only really works for physical products. It’s great for small businesses that can’t spend a lot on market research as well as common products that are usually found in supermarkets or department stores. However, you might be surprised by hidden production costs and how much they can eat away at your earnings. Be sure to know the exact cost of making each unit, as well as labour costs, how much it costs to rent the factory or production, and other expenditures.
When a business enters a highly competitive market, they might find it difficult to get a look in. In this case, the most successful strategy is to penetrate the market by undercutting your competitors. It’s essentially the opposite of price skimming. The idea is that by offering a much lower price point than competitors, businesses can create a strong enough customer base that will continue buying from them when the prices are increased.
This does require attracting and maintaining a very loyal customer base – incentives, exclusive offers, and personalised deals are good ways of doing this. It’s a popular pricing strategy for online subscriptions whereby customers might be offered the first month for free.
Economy pricing is a no-frills strategy that essentially keeps costs as low as possible. The production cost is low so in turn the selling price of the product is lower than their competitors. It’s a good choice for products that are manufactured on a large scale and are expected to have high sale volumes. Supermarkets running their own brand of products (usually marketed as ‘basics’ or ‘value’) is a good example of this – there are always going to be customers searching for a good deal or who are trying to cut back on spending. This is especially true now with the rise in inflation when one in three homes are cutting back on household spending.
In some markets, businesses can get away with changing their prices to match with the current demand of the item. It’s a complex strategy that has several risks. It takes up a lot of resource and can be costly, with plenty of market research under your belt. Uber is a good example of dynamic pricing – two trips are rarely the same price, even if the driver takes the exact same route. Artificial intelligence detects traffic, weather conditions, city-wide events, and other factors that contribute to the surge price. This AI, of course, does not come cheap, and you run the risk of deterring customers who don’t like to feel ripped off.
Three real-world examples of pricing strategies done well
Apple: Value-based pricing and price skimming
Apple do several pricing strategies very well. The technology company delivers a masterclass in value-based pricing, having been charging a higher price than fair value for decades. And because they’ve cultivated such a loyal customer base, they can generate buzz for upcoming releases that allow them to put it on the market for a high price, implementing the price skimming strategy and lowering it over time.
Streaming services: Competitive pricing
Gone are the days when Netflix was the only streaming service you subscribed to. Disney+, Paramount+, Hulu, Apple TV, and more, have entered the streaming service world. It’s a satured market but paying for several streaming services doesn’t seem too bad when they’re all roughly the same price.
Grocery delivery services: Penetration pricing
We’ve seen penetration pricing a lot with online grocery delivery services in recent years. There was a sudden influx of grocery delivery services, which were completely new to the market, and all of them offered super attractive deals. They were particularly popular during the pandemic, demonstrating how to react to the market.
Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.