Different types of pricing methods and strategies work for different businesses, so you need to be aware of what works for you and your customers. After all, many businesses today don’t focus enough on their pricing strategy and leave money on the table as a result.
The most effective pricing strategies reflect your costs, your customers’ needs, and human behaviour in general, and putting the time in to understand this can support your efforts in a number of ways.
What are pricing strategies?
Pricing strategy refers to the methods you use when you set prices for your goods and services. An effective pricing strategy allows you to repeatedly apply the same method of setting prices no matter what your goods or services are. It also enables customers to know what to expect from you—consistency in your pricing strategy allows them to anticipate how much they’ll spend when they purchase from you.
Types of pricing strategies
Pricing your products or services might be one of the most important decisions you make for the success of your business. It’s tempting to price your items low to attract customers, but doing so might mean you sell a lot without ever making a profit. On the other hand, pricing high might mean your per-sale profits are healthy, but fewer people might potentially buy from you.
Each strategy has its pros and cons, and no strategy is perfect for every company. That’s why it’s important to consider different kinds of pricing and what works for your business and customers. What works well for a restaurant might not work as well for a software-as-a-service (SaaS) company or a bookstore.
Cost-plus pricing
Add a mark-up to the cost of all your goods and services. This is a preferred strategy for business in food-service industries.
Value-based pricing
Establish a price based on the perceived value of your offering. Auto-shops and tech-spaces use this model with incredible efficiencies.
Competitive pricing
Set a price based on the competition’s prices. Retailers and boutiques find ways to stay competitive with each other by competitively pricing similar products.
Penetration pricing
Start with a low price to enter a new market and raise the price later. Think of this strategy as getting to know your customer base and letting them know there’s a new prospect in the market. If you have a plan to build customer loyalty through customer service and exclusive products, the lower prices to start can maintain your customer base as you level your prices down the road.
Price skimming
Start with a high price to enter a new market and then lower the price as the market grows. Showing your competitors that you’re here to make your revenue goals, as well as proving the quality of your product, can be good reasons to use a price skimming strategy.
Freemium pricing
Offer a basic version of your product for free, or very low cost, hoping users will upgrade to a more robust version. Freemium offerings allow your customer base to get a gist of your offering without committing to it financially if they’re unconvinced of your product’s solution in their lives.
The challenge with this model is understanding which product features your customers will love at the free rate, and which features will entice users to buy-in to the higher level of service.
Hourly pricing
Use an hourly rate to charge your clients for professional services. Contractors, consultants, and client-based services rely on this model to know how much business they need to bring in to make their numbers.
Prestige pricing
Charge a premium price to present the image that your product is exclusive, high-value, or luxury. While risky, this markup could bring in the revenues you’ve been waiting for.
Build your pricing strategies to increase sales
Building your pricing strategy involves understanding your needs, understanding your customers’ needs, and knowing your competition.
1. Understand your needs
Calculate the true cost of what you sell, including fixed and variable costs. That information will help you set at least a baseline price. You won’t make a profit if you can’t cover your costs, so you need to price out exactly what your costs will be to operate your business.
2. Understand your customers’ needs
Your pricing isn’t just for you: it’s also to attract customers. Find a pricing strategy that takes into account what your likely customers can and will pay.
If possible, conduct surveys or focus groups to determine what your target market values and what they’d be willing to pay for your goods or services. If you already have a customer base and are considering new goods or services, talk to your existing customers about whether your ideas are feasible.
3. Research competitors’ offerings and pricing
It’s good to know what your competitors offer and how much they charge. Don’t base too much of your pricing strategy on them—you don’t know what their costs or overheads are. That said, how they price their products could give an indication of what the market is willing to pay.
When you examine your competitors, consider any similarities and differences between your offerings. Also, be sure to factor in differences in your business size and target market. Consider whether they are successful by your definition, not theirs.
Evolve your pricing strategy to meet customer needs
Remember that what attracts some customers to you will turn others away. There are people who seek out low prices and those who want to pay more for exclusivity. Understanding your target market, their needs, and their ability to pay determines which strategy works best for them, and in turn, helps you be successful.
Market research is the key to building a pricing strategy that lands and evolves with your customer needs in mind. You can either DIY market research by reaching out to your network or hire a consultant with market experience to conduct a more robust survey of the market.
Create a pricing strategy based on data
Keep in mind what’s important to you and your business, and know your cost of goods sold and profit goals to determine what pricing strategy is best for you.
Be open to changing your prices after you’ve set them based on data you track. If your goods aren’t selling and you’ve charged a high price, consider lowering the price or offering a special rate. Don’t be afraid to make a change if something isn’t working for you. Just make sure any strategy you set is based on data, not just on a hunch, so that you effectively target your intended audience and convert on sales.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.