The Power of Pricing: How to Create a Pricing Strategy that Drives Profits (+Examples)
Pricing is one of the most important aspects of any business. After all, you won't make a profit if you don't charge enough for your product or service. On the other hand, if you charge too much, you may struggle to find customers. Enter: pricing strategies.
Finding the right pricing strategy is essential for every business. A thoughtful, well-constructed pricing strategy allows you to remain competitive while still being able to cover all of the costs that are involved with running your business.
There are several different pricing strategies--and no one-size-fits-all solution. Your pricing strategy can even become an integral part of your marketing strategy and contribute to bolstering your competitive advantage.
In this guide, we’ll explain 11 different pricing strategies and provide examples of how they work. This way, you’ll have a better understanding of the intricacies involved with pricing—and can determine which strategy makes the most sense for your business.
What is a Pricing Strategy (+ Why is it Important?)
Let's say you're selling a unique product or service that has a high perceived value, like an enterprise software suite, you might be able to charge a premium price. If you're selling a commodity product that is more price-sensitive and can easily be replaced by competitors' offerings, you might need to focus on competitive effective pricing to win market share.
Businesses should continually monitor and adapt their pricing strategy as economic and competitive landscapes evolve. In fact, according to Profitwell, most successful companies review their prices quarterly and make adjustments every six months.
Why does pricing strategy matter? It's not just about profits. (Though that is part of it!) Here's a few other reasons why pricing strategy matters:
- Gain a Competitive Advantage: In a highly competitive market, your pricing strategy can be key to gaining a competitive advantage. Companies can use a strategic pricing strategy to attract a new customer base or retain current customers.
- Attract Your Target Audience: Pricing strategy can impact consumer behavior. For example, a low price might attract price-sensitive customers in SMB, while a higher pricing plan can signal quality and attract enterprise customers.
- Support Brand Image: The right pricing strategy can also bolster your brand image. For example, Rolex’s higher pricing strategy supports its image as a luxury brand.
Whatever pricing strategy you choose, it's important to have a clear plan backed by market research. But be ready to adapt if needed.
11 Types of Pricing Strategies with Real Examples
Now that we've covered the importance of having a pricing strategy in place, let's go over 11 common pricing strategy examples you can use as inspiration for your own pricing strategy.
1. Competitive Pricing Strategy
Many business owners use the competitive pricing strategy to attract customers and increase market share. Essentially, this involves setting prices at or below the level of their competitors’ prices.
This can be a useful strategy if the competitor is a large company with significant overhead and cannot reduce its prices much further. By offering a lower price, small businesses can compete without sacrificing profitability.
However, there are also risks associated with this strategy. If the competitor can lower its prices , the smaller company may be forced to follow suit and risk losing money.
In addition, if customers perceive the quality of a lower-priced offering is also lower, they may be reluctant to purchase it even at a lower price.
Competitive Pricing Strategy Example
Competitive pricing is often be seen in e-commerce. Take, for example, Apple’s AirPods vs a competitor’s “Earbuds”. As you can see below, AirPods cost $329, which Apple can justify thanks to their brand recognition and the quality of their products.
If you go to Amazon and find a similar product from a smaller competitor, you’ll see that these earbuds are just $39.99. They’re similar in style, and they may or may not be similar in quality, but they’re definitely cheaper.
Although nobody knows this brand, they can still compete with big players. This is thanks to the massive discount they’re offering for a product that does more or less the same thing.
Other examples of competitive pricing include bundle pricing, where companies group similar items together and offer a discount.
With competitive pricing, a company may rely more on sales volume than profit margin. With a high enough sales volume, a company can make up for low-profit margins with sheer numbers.
2. Price Skimming
Price skimming is a strategy in which a company charges a high price for a new product or service at first, and then gradually lowers the price over time. The goal of price skimming is to generate the highest possible revenue in the shortest amount of time.
To do this, companies typically target early adopters willing to pay a premium for new products or services. The high price also helps to recoup the costs of developing and marketing the new product or service.
Once the early adopters have been captured, the company lowers the price to appeal to a wider range of consumers. This pricing strategy can be very effective in market conditions where there is a lot of consumer demand for new products or services. However, it can also backfire if the company cannot sustain high prices for long enough to make a profit.
Price Skimming Pricing Strategy Example
Gaming consoles are the perfect example of price skimming. Every time a new gaming console hits the market, the price is much higher than what it will be a few years later.
For example, take the Xbox 360. When it was launched in 2005, Microsoft was charging $400 for the console. Now, you can get an Xbox 360 from Walmart for just $183.59.
Due to the novelty of a brand-new product, Microsoft was able to take advantage of the price skimming strategy and maximize its profits in the beginning.
3. Penetration Pricing Strategy
Penetration pricing can be a great way to quickly gain market share. The basic idea is to set the initial price of a product or service low to entice customers. Once customers are hooked, the price increases to a more profitable level.
Of course, this strategy only works if the quality of the product is high enough to justify the higher price. But when done correctly, penetration pricing can be a powerful tool for driving growth.
Penetration Pricing Strategy Example
Jasper.ai is an AI writing software that uses machine learning to produce content. However, now they’re extending their feature set and introducing a new product called Jasper Art.
This tool uses AI and can produce art based on the inputs you give it. It’s a brand-new product, and they’re using penetration pricing to quickly onboard new customers. Here is a screenshot from their product launch post on Facebook.
The post states that their pricing will start at $20/user/month but will likely change (i.e. increase) in the future. A brand new feature combined with an enticing initial price is the perfect combination to get their target audience excited about using their new product, and simultaneously helps them test market demand.
4. Premium Pricing
Premium pricing involves setting a high price for a product or service to convey quality and prestige. This strategy can be particularly effective for luxury goods or products that are higher quality.
There are a few potential drawbacks to premium pricing, however. For one thing, it can alienate potential customers who don't perceive the product as worth the high price tag. In addition, it leaves little room for discounts or promotions, which can be important tools for boosting conversions.
Premium Pricing Example
What better example is there to use for premium pricing than Rolex? Although made with superior craftsmanship, Rolex watches are the epitome of premium pricing. Rolex as a company doesn’t want everyone to own a Rolex. They want to make customers feel like they are purchasing something rare and valuable.
Rolex watches often cost multiple 5-figures and sometimes even 6-figures.
Although the Rolex watches are priced at a premium, it gives their customers a sense of status. This pricing method certainly doesn’t work for everyone (especially new businesses), but it can be a powerful pricing strategy with the right business model, sales strategies, and product offering.
5. Cost-Plus Pricing Strategy
Cost-plus pricing is a popular pricing strategy in which a company sets its prices by adding a fixed markup to the total production costs of its goods or services.
Because cost-plus pricing takes all costs into account, it can help to ensure that a company is making a profit on each sale. However, it can also lead to higher prices for consumers, which can limit demand. In addition, cost-plus pricing can encourage companies to cut corners to provide lower-cost products, which can subsequently lead to lower-quality products.
Cost-Plus Pricing Strategy Example
Cost-Plus pricing is difficult to show as an example as it’s merely a formula:
Cost of goods sold x fixed markup percentage = final price
Cost-Plus pricing is oftentimes used with the sale of alcohol. If a bar is charged on a per liter basis from their supplier, they can then set a markup percentage and pass that fee onto their final customer to make their profit margin.
6. Economy Pricing
Economy pricing is a strategy in which products are priced at a low, competitive rate. The goal of economy pricing is to attract customers looking for a good deal in a competitive market.
This pricing strategy is often used for essential items in high demand, such as food and clothing. Economy pricing can also be used as a loss leader, to attract customers to a store with the hope that they will purchase other, more profitable items as well.
While economy pricing can be an effective way to attract customers, it is important to make sure the low price does not come at the expense of quality. Otherwise, customers may not return in the future.
Economy Pricing Example
For an example of economy pricing, just check your local grocery store’s flyer every week. Grocery stores typically add their best-priced items on the first page to entice people to come shop at their store.
Take, for example, the Big Y flyer below. The weekly sales items are prominently featured, using larger images and attractive pricing.
Grocery stores aren’t worried about making a small margin on their sale items because they know, more often than not, you’ll pick up additional (larger margin) items while you're shopping.
7. Discovery Call Pricing
Discovery call pricing is used by businesses to provide potential customers with an estimate for services. Under this pricing model, customers are required to book a consultation with the business to discuss their needs.
Based on the information gathered during the consultation, the business will provide the customer with a price for their services.
While discovery call pricing can be beneficial for businesses, it is important to note that it can also be frustrating for customers who are not given a clear price upfront.
Discovery Call Pricing Example
Parakeeto for example, a company that helps agencies become more profitable, requires that you fill out an application form and jumping on a call before pricing is disclosed.
This type of strategy can work well for businesses that offer more custom services because it allows you to better understand the customer’s needs before putting together a proposal.
8. Value-Based Pricing Strategies
Value-based pricing is an ideal pricing strategy for SaaS companies that takes into account the perceived value of your offering. This can be based on factors like brand recognition, quality, or even customer service.
When setting prices using this method, businesses typically start with their costs and then add a markup that reflects the perceived value of their product or service. While this approach can help you to attract customers who are willing to pay more for a high-quality product, it's important to remember that perception is often subjective.
Value-based pricing is not an exact science, and there is always some risk involved. Nevertheless, when done correctly, value-based pricing can be an effective way to boost your profits.
Value-Based Pricing Strategy Example
Starbucks is a great example of value-based pricing. They can charge a large markup mainly due to the perceived value of their brand. Even more shocking is that lower-priced competitors, like Dunkin’ Donuts, scored higher in a blind taste test.
A small Dunkin’ Donuts coffee (10 oz) is priced at $1.69. Compare that to a Short Starbucks coffee (8 oz), and you’re paying $2.55, that’s a whopping 41 percent price increase (for less coffee.)
Are you curious about value-based selling and how it can improve your sales performance? Check out this article to discover the benefits and best practices.
9. Dynamic Pricing Strategies
The basic idea of dynamic pricing is to charge customers different prices based on factors, such as time of day, demand, and even the weather.
For example, a business might charge higher prices during peak times, or when demand is high, and lower prices when demand is low. Dynamic pricing can be a very effective way to increase revenue, but it can also be controversial. Some customers feel like they are being charged more than others, based on factors that they cannot control.
As a result, businesses need to be careful when implementing dynamic pricing strategies. But when done correctly, dynamic pricing can be a very effective tool for increasing profits.
Dynamic Pricing Example
Ride-sharing companies like Uber and Lyft take advantage of dynamic pricing. This allows their prices to fluctuate based on the current demand.
Try to find an Uber after a stadium concert, while it’s raining. You’ll pay a lot more for that ride than you would on a sunny Sunday morning when half of local businesses are closed.
10. Psychological Pricing Strategies
Have you ever noticed that some prices end in .99? That’s because businesses are using a pricing strategy called psychological pricing.
Studies show consumers perceive prices ending in .99 as being significantly lower than prices that round up to the next dollar. Businesses can increase their profits by using this seemingly small change in pricing. In addition to prices ending in .99, businesses also use a variety of other pricing strategies to manipulate consumer behavior.
For example, SaaS companies may use anchoring to make a high-priced package seem more reasonable by offering a premium package that costs even more. Or they may use loss aversion to encourage people to buy now by stressing the potential loss of a sale price.
Whether we realize it or not, businesses constantly use pricing strategies to influence our behavior.
Psychological Pricing Strategy Example
You’re likely very aware of what psychological pricing looks like. We see it daily, both online and in physical stores. Just do a quick search on Amazon for any product, and you’ll probably see some form of psychological pricing at play.
Take the example above. Whether products are priced at .99 or .95, they’re all using psychology to trick our brains into thinking prices are lower than they are.
11. Freemium Pricing Strategy
With freemium pricing, businesses offer a basic version of their product for free, with the option to upgrade to a premium version for a fee. This can be an appealing option for customers who are undecided about whether they want to commit to a paid subscription. And it can be a great way for businesses to generate interest in their products.
If you're considering using freemium pricing for your business, you should keep a few things in mind. First, make sure the free version of your product is still useful and enjoyable to use. Otherwise, customers will have no incentive to upgrade to the paid version.
Second, consider what features you will include in the premium version. You want to strike a balance between offering enough value to justify the price tag, but not so much that there are no compelling reasons for customers to continue using the free version.
Finally, be prepared for an influx of users when you launch your freemium pricing strategy. If your servers can't handle the increased demand, customers will be turned off and may never come back. If you can manage the pitfalls successfully, freemium pricing can be a great way to grow your business.
Freemium Pricing Strategy Example
Dropbox and Google Drive are great examples of the freemium model at work.
Dropbox, for example, offers a free basic account with 2GB of storage. If you need more storage, you can upgrade to a paid plan.
This provides new users with the ability to try out a service, and as they find more value in it, they can upgrade to a paid account. Freemium pricing is typically found in software service-based businesses due to the low marginal costs of providing additional service to customers.
How to Create a Pricing Strategy for Your Business in 5 Steps
Every business needs to have a pricing strategy to remain competitive and profitable. But how do you create a pricing strategy? It's not as difficult as it might seem. Here are five steps to follow.
1. Determine Your Pricing Objectives
The first step is to determine your pricing objectives. What are you trying to achieve with your pricing? Do you want to maximize profits? Or are you more focused on getting market share? Once you know your objectives, you can start to develop a pricing strategy that will help you achieve them.
2. Understand Your Customers
The second step is to understand your customers. Who are they and what are they willing to pay for your product or service? If you don't understand your customers, it will be very difficult to price your products correctly. Take the time to create your ideal customer profile and get to know what they want.
3. Research Your Competition
Third, research your competition. How are they pricing their products or services? What strategies are they using? You need to be aware of what other businesses in your industry are doing so that you can stay competitive.
4. Find Your Value Proposition
The fourth step is finding your value proposition. What makes your product or service better than the competition? Why should someone pay more for what you're offering? What’s the customer value? If you can't answer these questions, then it's going to be difficult to justify a higher price point. An effective pricing strategy starts with knowing the real value of your product.
5. Collect Data and Modify If Necessary
The fifth and final step is collecting data and modifying it if necessary. Once you've launched your pricing strategy, it's important to monitor how it's working and make changes if necessary. Don't be afraid to experiment a bit and see what works best for your business.
Pricing Strategy FAQs (Frequently Asked Questions)
What are the best pricing strategies for a new product?
When it comes to pricing a new product, there are several different strategies that businesses can use. However, two strategies that work well for new products are price skimming and penetration pricing.
With price skimming, businesses charge a high price for the initial release of the product to capitalize on early adopters who are willing to pay a premium. This strategy is typically used for products with no close substitutes.
Penetration pricing, on the other hand, involves setting a low introductory price to attract customers and gain market share. This strategy is often used for products that face intense competition.
What is the best pricing strategy for SaaS companies?
While many factors can impact the right pricing strategy for a company, most SaaS companies use either freemium pricing or psychological pricing strategies to drive user adoption and target customers in their ideal customer market.
How can pricing strategies be improved?
There are a few general tips that can help to improve your pricing strategy. First, make sure that your selling prices are in line with the competition. If you are too high, you will lose customers; if you are too low, you will struggle to make a profit. Second, don't be afraid to experiment. Try different price points and see how your customers respond. Finally, keep an eye on your bottom line. At the end of the day, your goal should be to maximize profits, not just sales. These are simple ways to find the right price for your product without decreasing the customer life cycle.
Final Thoughts on Developing Pricing Strategies
Pricing is a critical part of your business and, if done correctly, can be the deciding factor between you and your competition.
By understanding the different pricing strategies and how to create your own strategy amongst the sea of advice floating around, you'll be able to put yourself in a much better position to increase profits, grow your business, and keep your customers happy.
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