Pricing is one of the most important parts—if not the most important part—of your business.
Your prices play a huge role in setting you apart from your competitors. And at the end of the day, it’s really your prices that determine whether or not you will have a successful, profitable business.
But even though pricing is so important to business health, many business owners, unfortunately, fail to understand how to correctly develop and deploy a successful pricing strategy. And while there are many different strategies for pricing products and services, not every pricing strategy will be the right fit for your business.
How can you know which pricing strategy will lead your business to success?
Let’s start by understanding exactly what a pricing strategy is.
What is a pricing strategy?
A pricing strategy is how you figure out the best way to price your products and services. Developing the right pricing strategy is key to your business’s growth because it will ultimately determine your revenue and profit potential. With the right pricing strategy, you can not only boost your profit margin but also improve customer satisfaction, loyalty, and retention.
Why you need to nail down your pricing strategy
Figuring out the best pricing strategy for your business is one of the most important things you can do. It will help you build trust with existing and new customers and put you on the right track to achieving your business goals.
Let’s explore the three main benefits of having a foolproof pricing strategy.
1. Convinces customers to buy
To sell your product, you first have to convince people that it's worth the money.
The best way to do this is by creating a pricing strategy that makes your product look like a better deal than the competition.
It’s important to remember that high prices don’t always convey value—if your price is more than your potential customers are willing to pay, you could end up losing the sale. On the other hand, a low price can make your product look cheap and could cause potential customers to skip over your offering for another product they believe is more valuable.
So what's the ideal price?
One that convinces people to purchase your product instead of other similar offerings from your competitors.
2. Gives customers confidence in their purchase
Buyer’s remorse is a real thing.
It's that guilty feeling you get when you buy something and then later realize it wasn't really what you wanted or need.
You can help your customers avoid buyer’s remorse by learning how to properly price your product. For example, price your products too high, and you risk turning off your customers. Price them too low, and you can still end up turning customers away by making them distrust the quality of the product.
3. Portrays the accurate value of your product
To show what your product is really worth, you need to find the right pricing strategy.
Think about it. If you're selling a product for $5, you can't expect people to believe it's worth $100. But if you're selling a product for $100, people could very well think that it’s actually worth more than that. This is because people usually assume that high price equals high value.
This is why it’s so crucial to set prices carefully. You don't want people to think you’re overcharging them, but you also want it to be clear that your products are truly valuable and are worth the money.
Most common pricing strategies used by industry leaders
There are a lot of different pricing strategies out there, and the best pricing strategy is not necessarily the same for every small business.
Here’s a look at some of the most common pricing strategies:
1. Competition-based pricing
A competition-based pricing strategy uses the prices of your competitors to determine the optimal price for your product.
You can leverage this strategy by creating a list with the price of each of your products. Then, compare that list with the prices of similar products from your competitor.
Once you have all this information in front of you, you can determine the average price for each product. From there, it’s easy to create competitive pricing. Simply adjust your product prices to make them either higher or lower than the average so you can be competitive with other companies' offerings.
2. Value-based pricing
With a value-based pricing strategy, you use the value of your product or service to determine its price. This is especially helpful if you're trying to sell something that adds significant value to the customer's life.
For example, think about solar panels. Solar panels are expensive, but they reduce your carbon footprint and can actually save you money in the long run by reducing your energy costs. So if you're selling solar panels, you might be able to charge a premium price because you're providing your customers with a truly valuable service.
When it comes to value-based pricing, it’s important to remember that it’s not just about what you think is valuable—it’s about what your customers think is valuable.
3. Price skimming
Price skimming is when a company charges the highest possible price for a new product and then lowers that price over time as the product becomes less and less popular.
This strategy has been described as "skimming the cream" because it encourages people to buy a product early at a premium price—and then discourages them from buying it later when the price has gone down.
The price skimming strategy can be used in a variety of situations, but it's most advantageous in two scenarios:
- When there are few competitors in the market
- When there's a clear benefit to being the first one to market.
Being the first one to market allows you to charge higher prices than your competitors because you have a monopoly on the market.
Apple is a great example of this strategy. When they released their first iPhone in 2007, it cost $600—but by 2012, that same phone was available for $400.
4. Cost-plus pricing
Cost-plus pricing is when production costs are added to the final price of the product. The resulting price is then multiplied by some factor (usually 1.2) to determine the profit margin.
A cost-plus pricing strategy is typically used by retailers who sell physical products.
For example, imagine you’re a clothing retailer. If you buy a shirt for $10 and then sell it for $20, you have a 100% markup. Similarly, if you buy that same shirt for $10 but then sell it for $30, you have a 300% markup.
5. Penetration pricing
Penetration pricing is a business strategy that’s used to entice customers by offering them the lowest price.
For example, when Amazon first launched its e-book service, it offered books at prices below what other publishers were charging. This enabled them to quickly grow their customer base, gain customer loyalty, and, ultimately, become known as the go-to place for affordable e-books.
Of course, after penetrating the market with the lowest price, you can then increase the prices of your products over time.
6. Economy pricing
Like penetration pricing, an economy pricing strategy focuses on selling products at lower prices—but it’s not just for businesses that are new to the market.
Instead, economy pricing is a marketing strategy that aims to maximize the sales of a product by reducing its price. The idea behind this strategy is that consumers will be more likely to buy a product if it's cheaper than similar products on the market.
Discounts are a popular example of economy pricing. When companies offer things like special promotions or unique discounts to customers who buy in bulk, they’re enacting an economy pricing strategy.
Amazon is, again, a great example. When you sign up for Amazon Prime, you get free two-day shipping along with a host of other perks like free music streaming and early access to special deals—a major way to hook and retain customers.
7. Dynamic pricing
Dynamic pricing is a strategy that involves changing the cost of a product or service based on a variety of factors, such as time, location, and even the customer’s past purchasing behavior.
With this kind of price elasticity, you can adjust the price of your products in line with supply and demand.
For example, let’s say you want to book a flight this weekend from New York to Los Angeles, but there are only a few seats left on the flight. With limited supply and increased demand, the airline can respond to market changes by increasing the price of the remaining tickets to maximize profit.
How to create the right pricing strategy for your business
It’s clear that finding the right pricing strategy is the foundation for generating solid revenue and driving your business’s growth. But with many different pricing strategies, it’s not always clear which is the best approach for your specific business and industry.
Here’s how to create the best pricing strategy to help you meet your objectives:
1. Determine your business goals
It might seem counterintuitive, but when you're developing your pricing strategy, you need to start with the end in mind.
- What do I want to accomplish with my pricing?
- Am I trying to increase profitability? Improve cash flow? Increase revenue per customer?
- What are my overarching business goals?
- How can I meet those goals with my pricing structure?
Once you've figured out what your goals are, you can focus on what you can do to make those goals achievable.
For example, suppose one of your key goals is to increase profitability. If you have a product that has been selling poorly but that you know is high quality and unique, you could adjust your pricing strategy to lower the price so you can attract different potential customers who are more likely to follow through with the sale. This would improve your cash flow by both increasing sales volume and maintaining profitability.
2. Analyze the market and your competitors
After understanding your own business goals, you should next turn your attention to your competitors so you can better understand the market as a whole and your market share.
Get started by conducting a thorough market pricing analysis. This means looking at how your competitors are pricing their products—and then understanding how they’re doing it.
The goal of this analysis is twofold: to find out how much money your competitors are making from their products and how big their profit margins are. You can begin this analysis by looking at the numbers on competitor websites and comparing prices between different websites that sell similar products.
3. Understand your target audience
One of the most important questions you can ask yourself is why your customers will use your product or service.
This helps you understand what they really want out of your product or service—and how much of their time and money they’re willing to spend on it to fulfill their needs.
As you analyze your target audience, ask yourself:
- Who are they?
- What do they need?
- What about my product or service interests them?
- How will they use my product or service?
4. Select a pricing strategy and start executing
After getting clear on your business goals, analyzing the market and your competitors, and understanding your target audience, you’ll be equipped with all the right information to pick the best pricing strategy for your business.
To recap, that could be:
- Competition-based pricing
- Value-based pricing
- Price skimming
- Cost-plus pricing
- Penetration pricing
- Economy pricing
- Dynamic pricing
The next step is to start taking action by deploying your new strategy.
Set up your dynamic pricing strategy with Profasee
There are a lot of variables that go into developing a dynamic pricing strategy.
Whether your company is new to dynamic pricing or you’re ready to expand on your existing dynamic pricing solution, we can help take your business to the next level.