It might be difficult to set a price for your goods and services. Too-high pricing will cause you to lose out on significant sales. You’ll lose out on a lot of money if you set them too low. However, pricing should not be a compromise or a gamble. There are a plethora of pricing models and tactics that may assist you in better understanding how to determine the proper rates for your target audience and revenue goals.
That is why we have put together this guide. The approaches and ideas in this article will make you comfortable pricing your items, whether you’re a business novice or a seasoned veteran.
What is a Pricing Strategy
A pricing strategy is a plan or method for choosing the right price for a good or service. It assists you in determining pricing that optimizes profitability and shareholder value while taking consumer and market demand into account.
When creating price plans, a number of factors related to your business are taken into consideration, including revenue targets, marketing objectives, target market, brand positioning, and product attributes. External factors such as customer demand, competitive price, and broader market and economic developments can have an impact.
There are always cases where entrepreneurs and business owners sometimes overlook the prices. They frequently evaluate the cost of goods sold (COGS), as well as the rates of their competitors, before adjusting their own selling price. While your costs of goods sold and rivals are essential, they shouldn’t be the focus of your pricing strategy.
The most effective pricing strategy increases revenue and customer satisfaction.
Before we discuss pricing techniques, let’s go over a key pricing idea that will apply regardless of whatever strategies you choose.
Price Elasticity of Demand
The price elasticity of demand is a measurement of how a price change influences consumer demand. Consumers who continue to buy a product despite a price increase (such as gasoline) are said to be inelastic.
Elastic items, on the other hand, are subject to price swings (such as movies).
Price elasticity is a notion that might help you figure out if your product or service is price sensitive. Your product should ideally be inelastic, which means demand will stay steady even if prices vary.
Let’s look at some popular pricing techniques now. It’s worth noting that these aren’t strictly stand-alone techniques; many of them may be combined when pricing your items and services.
Let’s go into the details of each pricing scheme now.
1. A Pricing Strategy Based on Competition
Competitive pricing, or competitor-based pricing, is another name for competition-based pricing. This pricing approach focuses on a company’s product or service’s current market rate (or going rate); it ignores the cost of the product or consumer demand.
A competition-based pricing strategy, on the other hand, uses the prices of rivals as a standard. Businesses competing in a high saturated market, wherein even a small price difference can be a determining factor for their clients, are ideal to adapt this kind of pricing strategy.
With competition-based pricing, you can price your items slightly lower, the same as your competitors, or slightly more than your competitors.
2. Pricing Strategy based on Cost-Plus
The cost of manufacturing your product or service, or COGS, is the main emphasis of a cost-plus pricing approach. It’s also known as markup pricing, since companies that use it ”markup” their items according to how much profit they want to make.
You can use the cost-plus strategy by doubling your product’s production costs by a certain amount. For example, if you have a business of selling shoes and your product costs $25 to produce, you would want to make a profit of $25 on each sale following this kind of pricing strategy.
Retailers who offer tangible things generally utilize cost-plus pricing. This method isn’t ideal for service-based or SaaS businesses because their goods often provide significantly more value.
3. Dynamic Pricing Strategy
Dynamic pricing is typically referred to as surge pricing, demand pricing, and time-based pricing. It’s a pricing strategy in which costs adjust in reaction to customer and market demand.
Dynamic pricing is used by hotels, airlines, event venues, and utility businesses, which utilize algorithms that assess competition price, demand, and other variables. Companies may use these algorithms to adjust pricing to meet when and what a consumer is willing to pay at the exact time they’re ready to buy.
4. Freemium Pricing Strategy
Freemium pricing, which is a mix of the terms “free” and “premium,” is when a company offers a basic version of its product hoping that the consumers would eventually want access to more features and accordingly pay to upgrade their package. Freemium, as opposed to cost-plus, is a pricing structure employed by SaaS and other software firms. This technique is chosen by the firms because of the free trials and restricted memberships that would enable potential customers to get a feel of the full capability of the software. This would help establish the trust element with them before they decide to make a purchase of the package.
With freemium, a company’s pricing policy must be determined by the perceived value of its products. Prices should have a modest entrance barrier and gradually increase as customers are provided more options and benefits.
5. High-Low Pricing Strategy
When a corporation uses a high-low pricing strategy, it offers a product at a high price at first, then reduces the price when the product loses novelty or relevance. Discounts, clearance areas, and year-end deals are all instances of high-low pricing in action, which is why this technique is also referred to as discount pricing.
Retailers who offer seasonal items or things that often vary, such as apparel, decor, and furniture, frequently employ high-low pricing. What attracts sellers to a high/low price strategy? Black Friday and other universal discount days are popular because consumers like expecting bargains and discounts.
6. Hourly Pricing Strategy
Consultants, freelancers, contractors, and other persons or laborers that supply business services frequently employ hourly pricing, also known as rate-based pricing. Hourly pricing is simply a time-for-money exchange. Some clients are hesitant to adhere to this price structure since it can prioritize labor above efficiency.
7. Pricing Strategy for Skimming
When charging the greatest possible price for a new product and then gradually lowering the price as the product loses popularity, businesses utilize a skimming pricing strategy. The difference between skimming and high-low pricing is that prices are steadily reduced over time.
This technique is usually used for pricing technology devices such as DVD players, video game consoles, cellphones, etc., which lose their relevance or become less important over time. A skimming pricing approach can help recover sunk costs and sell things beyond their novelty, but it can also irritate customers who paid full price and attract rivals who notice the “fake” pricing margin when prices are reduced.
8. Penetration Pricing Strategy
A penetration pricing strategy, as opposed to skimming pricing, is when a company enters the market with a very low price, thereby diverting attention (and income) away from higher-priced competitors. Penetration pricing, on the other hand, isn’t long-term sustainable and is usually only used for a limited period.
This price technique is appropriate for firms who are just starting out and seeking for clients, or businesses that are breaking into a crowded industry. Disruption and temporary loss are fundamental to the plan… and hoping that your first consumers would remain around when your rates rise.
9. Premium Pricing Strategy
When companies want to give the perception that their products are of high-value and the impression that they are luxury or premium, they go for the Premium Pricing strategy for their products. This is also known as Prestige Pricing or Luxury Pricing. The perceived worth of a product, rather than its real value or manufacturing cost, is the subject of prestige pricing.
Prestige pricing directly depends on brand awareness and impression. This pricing approach is used by brands that are recognized for giving value and status through their products, which is why they are more expensive than their competitors. This method is frequently used to price fashion and technology since they may be portrayed as luxury, special, and unusual.
10. Pricing Strategy Based on Projects
A project-based pricing strategy is the polar opposite of hourly pricing: instead of a direct exchange of money for work, this method charges a fixed price per project. Consultants, freelancers, contractors, and other persons or employees providing business services utilize it as well.
Project-based price estimates can be made using the value of the project deliverables. Those who select this pricing model can also generate a flat price based on the project’s projected time.
11. Value-Based Pricing Strategy
When organizations price their products or services based on what the client is prepared to pay, they are using a value-based pricing approach. The corporation decides to set its rates based on client interest and data, even if it has the ability to charge more for a product.
Value-based pricing, when utilized correctly, may improve consumer sentiment and loyalty. It might help you prioritize your customers in other departments of your business, including marketing and customer service.
Value-based pricing, on the other hand, necessitates ongoing awareness of your varied consumer profiles and buyer personas, as well as the possibility of varying your rates depending on those variations.
12. Pricing Strategy for Bundles
Using a bundle pricing technique means offering (or “bundling”) two or more related products or services for a combined single cost. You can choose to offer your combined goods or services only as a bundle, or as both independent products and bundle components.
This is a great way to provide customers who are willing to spend more upfront for multiple things, that add value. It may also assist you in getting your consumers addicted to more than one of your items more quickly.
13. Psychological Pricing Strategy
Psychological pricing does exactly what it says on the tin: it uses human psychology to increase sales.
Customers may see a product that costs $99.99 as a good deal solely because of the “9” in the price, even though it is effectively $100, according to the “9-digit effect.”
Another technique to employ psychological pricing is to position a more costly item right next to the one you’re trying to sell (either in-store or online). Alternatively, provide a “buy one, get one 50% off (or free)” bargain that makes clients feel as though the situation is too good to pass up.
Last but not least, altering the font, size, and color of your price information on and around your items has shown to be effective in boosting sales.
14. Pricing Strategy by Region
Pricing strategy by region, also known as geographic pricing, is used when items or services are priced based on the geographical market location.
This method may be employed if a consumer from another nation makes a purchase or if there are differences in aspects such as the economy or salaries.
How to Develop a Pricing Plan
1. Determine the possibility of pricing
Create a strategy that is customized for your unique business. The first step is to determine your pricing potential, which is an estimate of the product or service pricing based on the cost, demand, and other factors of your company.
The following are some of the aspects that might influence your pricing potential:
- Specifics of the geographical market
- Costs of operation
- Variations in demand
- Advantages and concerns in the marketplace
- Information about the population
2. Make a list of your buyer personas
Your goods and services must be priced based on your target customer persona. When you consider your ideal consumer, you must consider the following factors:
- Customer Value Over Time
- Paying Willingness
- Customer Complaints
Interview customers and prospects to learn more about what they like and dislike, and get feedback from your sales staff on the best leads and their attributes.
3. Examine data from the past
Examine your prior pricing approaches. You may compare the number of closed sales, churn statistics, and sold goods for various pricing strategies that your company has used in the past and see which ones were the most effective.
4. Strike a balance between the importance of the product and the company’s objectives
You want to make sure the price is beneficial for both your bottom line and your customer personas when designing your pricing strategy. This compromise will benefit your business and consumer base more, keeping the following goals in mind:
- Profitability improvement
- Boosting cash flow
- permeation of the market
- Increasing market share
5. Check out the price of your competitors
You can’t come up with a price plan without first researching what your rivals have to offer. There are two things you may do if you see different prices for the same items or services
Beat the pricing of your competition – If a competitor is charging more for the same service as your brand, lower the price.
Beat your rivals’ value – Also known as value-based pricing, you might potentially charge a higher price for your offering if the value delivered to the consumer is higher.
Conduct a complete competitive study to examine the competition’s entire product or service offering, as well as their strengths and shortcomings, and adjust your pricing approach appropriately.
It’s easy to become lost in the details of pricing: competition, production expenses, client demand, industry demands, profit margins… the list goes on and on. Fortunately, you don’t have to get good at everything at once.
Simply sit down, crunch some data (such as COGS and profit targets), and determine what’s most essential to your company. Start with what you require, and this will assist you in determining the best price plan to employ.