Pricing. Every great digital marketing strategy includes a dedicated section, and for good reason.
Choosing the right pricing strategy for your business needs careful thought, research, calculation, and discernment. Leaving it to guesswork can be detrimental.
I’ve created this guide on all things pricing so that you can make an informed decision on what’s best for your company.
The pivotal role of pricing in business success
Pricing has a straightforward definition – the amount of money a business charges consumers for their products – but pricing strategies are a little more complex.
According to our helpful little glossary, a pricing strategy is a strategy that helps fix the price of a particular product or service by considering various factors like market conditions, customer demand, and supply.
But why does something as simple as pricing require whole strategies?
Well … because pricing isn’t that simple.
The role pricing plays in business success is pivotal. If you set your prices too low, you’ll miss out on valuable revenue. Too high, and you’ll miss out on valuable sales!
Beyond that, prices also communicate much about you to your customers (such as identity, positioning, and value) and affect how much money your business can invest back into itself.
Understanding the importance of choosing the right pricing strategy
Like digital marketing campaigns and marketing strategies, pricing strategies are not one-size-fits-all. Not every pricing strategy will work for you, no matter how well it worked for another company.
The best pricing strategy for your business’ product or service will depend on many factors, such as:
- revenue goals
- variable costs
- production costs
- target audience
- marketing objectives
- overall marketing strategy
- brand positioning
- product attributes
- consumer demand
- competitor pricing
- market and economic trends.
Choosing correctly will help you resonate with your target market, maximize profits, build customer trust, and meet business goals.
In the long term, your business will likely change its pricing strategy. You’re never limited to just one. You can rotate through strategies, blend tactics from different strategies, and even use a different strategy for specific products.
You need the knowledge and a bit of practice to find out what works for you.
With all that in mind, let’s look at some pricing strategy examples.
Cost-Based Pricing Strategies
Cost pricing strategy: Calculating prices based on production costs and desired profit margins
Also known as cost-plus pricing, this pricing strategy relies on the cost of production, manufacturing, and distribution to inform how much your product should be valued.
Essentially, prices are determined by taking a fixed percentage of the costs that go into making and selling the product, adding to the product’s cost, and considering desired profit margins.
Using this strategy, a cost-plus price = (material, labor, running costs) x 1 + the markup amount.
This strategy ignores things like competitor prices and consumer demand. It could be right for you to sell a physical product, but it isn’t the best if you sell software or service because these products usually offer far more value than what it costs to create them.
Competitive pricing: Setting prices in alignment with competitors’ offerings
With competitive pricing, instead of focusing mainly on product costs or consumer demand, you look at what competitors charge and adjust your prices accordingly.
Competitive pricing hinges on your product’s existing market rate (the going rate). Competition-based pricing is a flexible strategy because it responds to competitor and market trends but shouldn’t be confused with dynamic pricing.
Although there is some overlap because dynamic pricing considers competitors’ prices among other factors, competitive pricing’s primary and sometimes sole focus is competitors’ prices.
If your business is competing in a highly saturated space, then competitive pricing could be the pricing method for you because sometimes slightly lower prices are all a customer needs to decide.
A competitive pricing strategy is also great for appealing to price-sensitive customers.
Overhead costs and pricing: Incorporating indirect costs into pricing decisions
If you’re considering cost-based pricing and are deciding between cost-plus pricing and competitive pricing, then your indirect costs will be the deciding factor.
Take a look at factors like your:
- Variable costs
- Material costs
- Labor costs
- Running costs
- Product production cost
- Service Value
These can help you decide what will make the most sense when picking between competitive and cost-plus pricing.
Value-Based Pricing Strategies
Value-Based Pricing: Aligning prices with the perceived value customers place on your product or service
A value-based pricing strategy is when you price your company’s products based on what the customer will pay for them based on customer data and interest.
That means your customers are willing to pay X amount for what you’re selling, and whether you could or want to charge more or less, you set your prices at X.
When used accurately, the value pricing model can be amazing for customer loyalty and sentiment. However, value-based pricing requires much work because you must constantly monitor and check your customer profiles and buyer personas.
The value pricing model works great for businesses that don’t have a lot of customer segments (as what customers are willing to pay for a product can differ vastly across segments) or have very price-sensitive customers, as well as in circumstances where the price the customer is willing to pay is doable for the business.
Psychological Pricing: Leveraging pricing psychology to influence customer perceptions
The psychological pricing strategy uses human psychological principles to boost sales. The best example of this is a very common one – rather than pricing an item at $10; you could price it at $9.99 to view it as a good deal, despite essentially costing $10.
You could also place a costly item next to the one you’re focused on selling which costs less (whether online or in real life) so that it comparatively looks far more affordable.
Then there are deals such as buy 3 for the price of 2, buy one, get one free (or half off), or even doing things such as changing the size, font, and colors on your products and pricing information.
This pricing strategy requires a very intimate understanding of your target audience, so it might not be your strategy if that’s impossible to achieve.
It’s also worth noting that while this is a powerful strategy for software and apps, the impact of psychological pricing works best on physical products.
Dynamic Pricing: Adjusting prices in real-time based on demand and market conditions
Dynamic pricing is also known as surge, time-based, or demand pricing. It’s a flexible pricing strategy that varies depending on customer and market demand.
Businesses that employ dynamic pricing use algorithms considering factors like competitor pricing, demand, and world and local events. This allows them to shift prices to match customers’ willingness to pay at a certain time.
Dynamic pricing is an excellent choice for businesses where customers pay anyway, even when they offer different price points. Examples include hotels, airlines, event venues, and even utility companies.
Services like Uber also employ a kind of dynamic pricing called surge pricing, where prices increase temporarily when there’s high demand and a limited supply.
However, this isn’t the pricing strategy for companies that sell physical goods, subscriptions, or SaaS because customers expect consistency.
Premium pricing: Communicating luxury
The premium pricing strategy (prestige or luxury pricing) sees companies putting a premium price on their products to present a high-value, premium, or luxury image.
The product pricing here is similar to value pricing because it’s based on perceived value rather than actual value or production cost, but it is different because the customers that premium pricing works on almost want to pay higher prices. The expensive nature of the product is a plus.
It’s an effective pricing strategy for brand awareness and perception, as brands that apply this method are known for giving their customers status and value by purchasing these products.
This is one of the most common pricing strategies for fashion and technology, as they can be marketed as exclusive, luxurious, and rare.
Premium pricing depends on product perception to influence pricing. You can affect how your product is perceived with influencer marketing, controlling supply, and driving up demand, but it takes a lot of effort and won’t work for all products.
Stay away from this if your customers are looking for low prices, your selling point is economy pricing, you mass-market, you’ve got a lot of competition, or if you’re not marketing based on prestige and luxury.
Penetration Pricing and Price Skimming
Penetration Pricing Strategy: Entering the market with lower prices to gain market share
Penetration pricing is a pricing method that involves introducing a product into the market at a low price, possibly lower than the optimal price.
The penetration pricing model’s goal is market penetration. You draw your competitors’ attention and revenue to yourself by offering a low initial price. As a result, it can be seen as a kind of competition-based pricing strategy.
It can help you get a foothold in the market, achieve a decent sales volume, and get customers’ notice, but you’ll need to work hard on customer loyalty.
This is because when prices increase, a lot of customers who are early adopters tend to fall off, and you will need to increase prices. Low prices aren’t sustainable, and you need to be profitable.
The penetration pricing strategy s about disruption and withstanding a temporary loss, so it doesn’t work in the long run. It can work well for a little while, especially for new businesses looking for customers or businesses looking to debut in an extremely crowded market.
Don’t use penetration pricing if you’re not able to wait for the money to roll in if you’re marketing a premium product; economy pricing is your selling point, or if you’re not confident you can build up enough customer loyalty for when you raise prices.
Price Skimming Strategy: Launching at higher prices and gradually reducing to attract different customer segments
Conversely, the price skimming strategy is when companies charge a higher price (the highest possible price) when introducing their product and then lower prices over time as its popularity decreases.
This higher price can help recover sunk costs and allow companies to sell products well past their novelty. However, price skimming can also annoy customers who pay that higher price, thereby giving competitors an unwanted edge.
This pricing model is standard for technology products; DVD players, smartphones, video game consoles, etc. It can work well if you sell products with varying life cycles, and you can maintain your marketing for those products without constantly adjusting pricing.
However, do note that price skimming may not work for you if your target market is made up of customers who are unwilling or unable to afford that higher price point, your perceived value doesn’t match the price you’ve set, or if your products have shorter life cycles.
Bundle Pricing and Promotional Pricing
Bundle Pricing: Offering product bundles to provide greater value and increase sales
The bundle pricing strategy is when companies give their customers two or more of the same or complementary products for a single or discounted price.
Sometimes the products in the bundle are only available, but not always.
It’s a great way to give your customers more value, especially those who pay more upfront and get multiple products. It also gets customers interested and using multiple products.
Bundle pricing upsells and cross-sells but is beneficial to the customer, so it’s a strong pricing strategy for customer loyalty and revenue at the same time.
Promotional Pricing: Using limited-time discounts and offers to stimulate demand
There’s nothing like a bit of gentle pressure to make a sale. The promotional pricing strategy temporarily reduces the prices of products to drive sales up quickly.
Dedicated promotional and marketing campaigns often support it.
Promotional pricing stands the test of time because people love offers. The trick with this pricing strategy is to determine the promotion’s specifics.
What should it be? How often should you do them? When should you do them?
And the answers all depend on your customer base. Doing it too much and too often can cause your customers to undervalue your products and expect lower prices consistently, meaning that you can tend toward cutting into your profit margins!
As always, getting promotional pricing right needs careful research. When done well, it’s applicable for most products and services, but use it minimally or even not at all if you’re selling luxury/prestige goods.
Choosing and creating the best pricing strategy for your business
You’re probably feeling a little overwhelmed at this point. Maybe you’re asking questions like, is a competition-based or premium pricing strategy right for my business? Should I focus more on my business’ market share or market penetration for now?
It’s okay! Now that I’ve explained some pricing strategy examples, we can move on to considering the different factors that go into choosing the right strategy (or strategies) for you.
Market analysis: Assessing the competitive landscape to determine optimal pricing
A great place to start is the market. Perform a competitive market analysis: what are your competitors selling? What strategies are they using? Are they succeeding?
Next, you can look at buyer behaviors in response to your competition and their strategies. What seems to be working to attract and retain customers? Why?
Take stock of what’s working, what isn’t, and how you can do it better.
Identifying pricing gaps and opportunities in the market
Every market is unique—geographical market specificities, buyer and seller trends, production cost variances, etc.
In your research, look for gaps and opportunities in the market that you can fill. Even in markets you think are saturated, there’s a way to be different if only you can dream it and make it real.
Innovation is a superpower.
Pricing about market demand and response to market fluctuations
Market demand is as changing as the tides. It’s a great idea to do whatever you can to predict it and make plans for likely outcomes, but an even better idea is to have an agile business.
Your company needs a pricing strategy to respond to market demand fluctuations fast enough to stave off shutting down.
Choose a pricing strategy that suits your market’s behavior, and analyze historical data to create backup plans to help you respond to extreme events.
Aligning pricing strategy with overall marketing and business goals
One of the best questions to ask when deciding on a pricing strategy is: which of these options aligns with my overall marketing and business goals?
You’ll likely have specifics on how much you want to:
penetrate the market
expand market share
expand customer base
increase lead conversion, and more.
Your business’ short, medium, and long-term goals must inform your strategies.
What is your business’ identity? What are your business’s values, culture, branding, and positioning?
In short, who is your brand? Your pricing strategy must reflect and echo this. It’s yet another way that you will convey who you are to your customers.
Target Customer and Market Segmentation
You need a deep understanding of who your customers are. They don’t exist as a monolith, so it’s a good idea to use segmentation, targeting, and positioning marketing practices to break them into groups called segments.
These segments are created based on their common characteristics: age, cultural background, gender, political beliefs, etc.
By understanding your segments, you can understand their unique pain points, motivations, behaviors, and desires, allowing you to use the pricing strategy to target them best.
Understanding your target customers’ price sensitivity
Each of your segments will have a different price sensitivity. Some segments will notice the smallest price change, meaning that if one of your selling points is low, they may not like pricing strategies like surge and premium pricing.
Conversely, if luxury and prestige are your selling points, then your customers may be sensitive to you dropping prices.
Knowing who your customers are and what they want to achieve by purchasing from you can help you avoid such situations.
Tailoring pricing strategies for different market segments
As I said, you don’t have to pick and settle with one pricing strategy forever. Choosing multiple pricing strategies to cater to your different market segments is a widespread and advisable practice.
You can also consider using various pricing strategies if you have multiple products with unique value propositions. And that brings us to …
Considering the unique attributes of your product or service
What is your product’s unique value proposition? What sets it apart? What is its selling point?
When discussing each pricing strategy, I gave examples of situations and products that would and wouldn’t work.
You can try and apply each of these strategies to your product. Would they work, and why or why not?
Adapting Pricing Strategies to the Product Life Cycle
Products have price elasticity.
Adjusting pricing as the product moves through different life cycle stages is another secret for success. For example, when a product launches, you can consider strategies like price skimming or penetration pricing, but remember that they don’t work for all customers, markets, or products.
Consider your products’ life cycles carefully when you’re using pricing strategies. Don’t be afraid to change your strategies at different stages of these cycles, especially when pricing for new product launches and early adopters.
And finally, always think about and prepare for external factors such as economic conditions and industry trends.
Recessions and pandemics, minimalism and maximalism, external factors can be as unpredictable as the weather. However, you can still do your part to prepare for certain outcomes by researching how businesses survived through them historically.
Take what resonates with your products, customer base, business identity, and goals, and then use this knowledge to respond agilely whenever the world throws you a curveball.
The Art and Science of Pricing for business success
Now that you have all the keys to unraveling the mystery of the right strategy, you’re more than capable of understanding the science of pricing.
However, it’s also an art that must be practiced before it’s good.
Excellent pricing strategies will bring your business success, but remember that it will take a lot of time and effort to get it right. Don’t let this discourage you; any mistakes you make will only show you the right way forward.
Optimize pricing strategies for long-term growth and profitability
Perfecting your pricing strategies is a surefire way to long-term growth and profitability.
There’s so much that goes into getting it right – customer demand, profit margins, competitors … but don’t worry, you don’t have to master everything all at once.
A few tries, and a lot of research is normal! Start small and then work your way up from there. Determine what’s most important for your business, and remember it’s a process.