What Is a Pricing Strategy? Common Types + How To Choose One
What is a pricing strategy?
Price is one of the 4 Ps of marketing and is an important factor in marketing and selling goods successfully. A pricing strategy is the process and methodology used to determine prices for products and services.
Different pricing strategies work for different products and business models. With an appropriate pricing strategy, you can target the right customers, build trust in your product, and accurately portray the value of your product. Review several ways to determine your pricing strategy to inspire your approach.
A good pricing strategy can enable several things for a business:
Types of pricing strategies
There are different types of pricing strategies to consider based on your product, goals, and customer needs. Let's review each one. .
1. Value pricing
A value pricing strategy means pricing your goods according to customer-perceived value. This method requires a trusted brand name or scarcity already present to be effective. For example, luxury brands like Gucci or Dior will be higher priced because customers deem them more valuable than more common or less expensive brands.
Consider purchasing a beverage or hot dog at a sports event to understand how scarcity and value pricing go together. If event-goers are thirsty or hungry, they have little choice but to spend the money at the concession stand to buy food or drink. The value goes up because other options aren’t available in the area.
2. Skim pricing
Skim pricing is a strategy where you introduce a product at a higher price and gradually reduce it over time. It will be particularly effective if you’re entering a market without many competitors and your product is in high demand. Without competition, you can ask for a higher price. As competition begins to enter the market, you can lower your prices slowly and position yourself as a more affordable option to others.
An example of when price skimming works best might be a new, cutting-edge piece of technology. Until other companies begin to manufacture similar products, you can ask for a premium price. But once other options become available, you can lower your asking price.
3. Penetration pricing
A penetration pricing strategy is the opposite of a price skimming strategy, where you introduce a product at a lower price and gradually raise it over time. This strategy has the most significant effect when you want to enter a market with a lot of established competition. A low price encourages customers to try your product, causing you to gain market share. Once you’ve earned some consumer awareness—and, hopefully, customer loyalty—you can raise the price.
For a specific example of penetration pricing, consider Gillette razors. Through promotions or giveaways, Gillette makes it inexpensive for customers to get their first razor. To keep using the razor, customers need to purchase replacement blades. They may also want accessories or other attachments, which Gillette prices at a premium. Selling the first razor at a discount builds the base of users who will then purchase more expensive items.
4. Premium pricing
A premium pricing strategy means recognizing that your product has a unique characteristic that differentiates it from what your competition is doing, setting the price higher accordingly. If your product offers something customers can’t get elsewhere, you may uncover a market share of individuals willing to pay a higher price for a superior product. This strategy works best when you have no direct competition.
Luxury fashion brands could be an example of a premium pricing strategy. Whether the garments include higher-quality materials and craftsmanship or simply carry the luxury brand label, manufacturers can set their prices higher as a result.
5. Competitive pricing
A competitive pricing strategy in marketing is when you survey your competitors, record their average prices, and then price yourself depending on how you differ from them. For example, you could price slightly higher if you have a product with more features than your competitors.
Competitive pricing works best in markets that benefit from stable prices. If one manufacturer cuts its prices, the entire market would shift to remain competitive. The manufacturer would lose any advantage from cutting its prices, and everyone would make less profit. Therefore, manufacturers have an incentive to keep prices stable.
Consider toilet paper, for example. Toilet paper manufacturers attempt to differentiate themselves based on the qualities of their product—three- or four-ply, more significant roles, a softer texture—but comparable products use similar pricing strategies.
6. Economy pricing
The economy pricing strategy is a plan to be the leading affordable brand on the market. Generic and store-brand goods are examples of implementing economy pricing. This strategy works best for brands that don’t spend much on production and aim to get their product to as many people as possible for lower prices.
Another example of economy pricing at work is generic drugs and medications, which sell similar products as brand medications at discount costs to reach a wider audience.
7. Dynamic pricing
Dynamic pricing strategies will require updating prices automatically based on demand and availability. For example, a vacation destination may offer rooms for a lower rate in the off-season when fewer travelers visit and a much higher rate in the busy season when the demand allows for it. Other examples of dynamic pricing include airplane tickets and e-commerce marketplaces like Amazon.
8. Cost-plus pricing
A cost-plus pricing strategy describes a simple method of calculating price, where you add a predetermined profit margin to the cost to produce the product. For example, say it costs $5 to create your product. You decide that a 30 percent profit margin is a good fit for your industry and competition. You would then price your item, which took $5 to create, at $6.50. This strategy works best for companies who want a straightforward pricing strategy that doesn’t require a lot of additional research.
9. Bundle pricing
Bundle pricing is a strategy that puts multiple items into one purchase, usually for a discount unavailable when buying each item individually. Sometimes, companies implement bundle pricing for a paired set, such as shampoo or conditioner. If you want to purchase one, you’ll have to buy both.
An example of bundle pricing could be a value meal at a restaurant. If you wanted to buy a burger and a drink at a fast food restaurant, you might discover that purchasing a bundled meal with french fries costs only a few cents more. That feels like a good deal to the consumer, but at the end of the day, it’s a higher price point.
10. Psychological pricing
Psychological pricing strategies involve pricing items so customers spend more money than initially planned. A classic example is the .99 cents strategy, also known as charm pricing. Instead of pricing your item at $20, a charm price would be $19.99.
A co-study between the University of Chicago and MIT indicated that items priced ending in a nine have a higher demand than similar items that do not end in a nine [2]. One proposed explanation is that customers perceive $19.99 to be closer to $19 than $20 because they first look at the left digit.
How to best price products and services
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?
Use these insights to refine your buyer personas. Creating fictional versions of your ideal customer segments can help you determine pricing.
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:
5. Check out your competitors’ market pricing.
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 strategies used in your industry. For example:
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 benefit from 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?
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 customer feedback 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.
