What Is a Pricing Strategy? + How To Choose One for Your Business
Explore different pricing strategies, what they offer buyers and sellers, and the steps to making the best pricing decision for your business, products, and brand.
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What is a pricing strategy?
Price is one of the 4Ps of marketing. It refers to how much a product or service costs. A pricing strategy is a process and methodology for determining product and service prices.
As we’ll explore in this article, different pricing strategies work for different products and business models. The right pricing strategy can enable several things for a business:
Convey value to customers
Attract customers
Inspire customer trust and confidence
Boost sales
Increase revenue
Improve profit margins
Types of pricing strategies
Several common pricing strategies exist to price products and services, from value-based pricing to price skimming. The first step in choosing a pricing strategy is to examine the different types, review pricing strategy examples, and understand how they differ.
| Pricing strategy | Pricing strategy definition | Pricing strategy example |
|---|---|---|
| Skimming pricing strategy (also called pricing skimming or skim pricing) | Setting new product prices high and subsequently lowering the price as competitors enter the market | Innovative electronics that are sold initially at high prices to attract early adopters and later sold at lower prices |
| Competitive pricing strategy | Pricing products based on the price of competitive products rather than cost or target profit; usually cheaper than competitors | Rental properties that lower the rental price to match or beat a competitor’s price and gain market share |
| Dynamic pricing strategy | Pricing varies based on marketing and customer demand | Rideshare services with price surges during periods of peak usage |
| Value-based pricing strategy | Pricing a product based on how much the customer believes it’s worth | A coffee company with strong brand loyalty amongst its customer base pricing coffee higher than competitors |
| Penetration pricing strategy | Entering a market at a low price and increasing prices over time | A media streaming service that offers a low starting subscription price |
| Economy pricing strategy | Pricing a product low because of low costs of production, marketing, and advertising, and relying on high sales volume to generate profit | Airlines that offer economy seating at the lowest price tier |
| Premium pricing strategy | Pricing a product deliberately high to encourage favourable perceptions of the brand based on the price | Designer eyewear that is sold at a premium price that's much higher than competitors |
| Cost plus pricing strategy | Adding a fixed percentage on top of the cost of producing a product, regardless of consumer demand or competitors’ pricing | Clothing brands that sell garments for 50 percent more than what it costs to manufacture them |
| Freemium pricing strategy | Offering a product for free alongside paid versions with more features | Software as a service (SaaS) and file hosting apps that offer free (basic) and paid (premium) versions |
| Project-based pricing strategy | Pricing each finite service or project on a case-by-case basis according to the value of the outcome instead of on the time spent to complete it | Wedding and party planners who quote prices based on the details of individual events |
How to choose your pricing strategy
Now that you know the different pricing strategies, your next step is choosing one for your business. Streamline your process and make an empowered decision with our pricing strategy guide.
1. Determine your value metric.
A value metric refers to how a company determines the value of one product unit for sale. For example, if you sell footwear, you would determine the value of one pair of shoes. If you sell a monthly service subscription, you would determine the value of the services and features a customer can access during one month.
To establish your value metric, identify the basic unit of your product or service. What would this be if you were to sell just one unit to one customer?
2. Evaluate pricing potential.
Pricing potential refers to the approximate price you can charge for your product or service. Consider operating costs, consumer demand, and competitive products to evaluate your product or service's pricing potential.
3. Review your customer base.
Another important consideration regarding 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 price changes discouraged or boosted sales?
You can use these insights to refine your buyer personas.
4. Determine a price range.
Price range refers to a product or service that fits what customers and sellers find appropriate. To determine the price range, ask yourself these questions:
What is the minimum price you can charge for a product or service while making a profit based on the cost of production, marketing, and advertising?
What is the maximum price you can charge for a product or service without alienating your target customers?
5. Review competitors’ pricing.
Another factor in pricing your offerings effectively is competitors’ pricing. Make a list of competitive products and how they are priced. Then, decide whether 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 ones used in your industry. For example:
In the SaaS industry, freemium pricing with different price tiers for purchasing more features is a common strategy for offering customers a path to upgrade as their software needs increase.
In the restaurant industry, luxury brands use premium pricing to create an image of higher quality.
In the service provider industry, designers, consultants, and other providers might use project-based pricing to customise 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 the quality of the offerings, so make sure your pricing strategy corresponds to the brand.
For example, a brand that focuses on affordability could choose 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.
Customer feedback can be invaluable when considering pricing an existing or new product. Survey current and potential customers with questions such as:
What 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?
At what point would you think the price is so low you’d question its value?
At what point would you consider the price too expensive?
9. Experiment with pricing.
Conduct a few live experiments to gather data on your products' performance at different prices. For example, you could use an A/B test to introduce a product at two different prices to separate audiences and determine which is favoured. You could also position your products next to competitive products in your marketing messaging to determine how consumers respond.
Live experiment results and customer feedback can give you insights for successful product launches. You can reduce the trial and error that often comes with introducing offers to the marketplace.
10. Consider the pros and cons of different pricing strategies.
As you approach selecting a pricing strategy, reviewing its possible pros and cons is a good idea. For example, cost-plus pricing can offer simplicity by marking up a price after factoring in the cost of production. Still, it can mean ignoring how customers respond to the price.
Combining pricing strategies brings you closer to one that works for your business.
Improve your pricing strategy with Coursera
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