Today, in this competitive era, setting up prices for your products and services can be challenging.
If you set prices too high, and you will miss out on valuable sales. On the other hand, if you set them too low, and you will miss out on valuable revenue.
Thus, today we will be discussing different pricing models and strategies that can assist you in understanding better how to set the prices for your audience and revenue goals.
Let’s dive deeper to know more about it.
A pricing strategy is a way or method that is used to fix the best price for a product or service. It prompts you to choose prices that maximize profits and shareholder value while analyzing consumer and market demand.
Pricing strategies consider many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also controlled by external factors like consumer demand, competitor pricing, and overall market and economic trends.
It’s not unusual for entrepreneurs and business owners to skim overpricing. They usually look at the cost of their products (COGS), analyze their competitor’s rates, and tweak their selling price by a few dollars. While your COGS and competitors are essential, they shouldn’t be at the core of your pricing strategy. The best pricing strategy maximizes your earnings and revenue.
Before we discuss pricing strategies, let’s review a significant pricing concept that will apply regardless of what strategies you employ.
Price elasticity of demand is utilized to discover how a shift in price affects consumer demand.
Consumers still buy a product despite an increase in price (such as cigarettes and fuel), and these products are considered inelastic.
Simultaneously, elastic products suffer from pricing fluctuations (such as cable TV and movie tickets).
You can estimate price elasticity by applying this formula:
% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand
This concept of price elasticity aids you in understanding if your product or service is susceptible to price fluctuations. Ideally, you need your product to be inelastic — so that demand remains stable if prices fluctuate.
Now, let’s learn some common pricing strategies. As we do so, it’s crucial to note that these aren’t necessarily standalone strategies — many can be merged when setting prices for your products and services.
Price analysis is the method of assessing your current pricing strategy against market demand. The purpose of a pricing analysis is to recognize opportunities for pricing changes and developments.
You usually conduct a pricing analysis while considering new product ideas, developing your positioning strategy, or running marketing ideas tests. It’s also wise to do a price analysis once every year or two to estimate your pricing according to your competitors and consumer expectations — doing so preemptively avoids having to wait for poor product performance.
At a high level, carrying a price analysis looks like this:
Analyzing your present pricing model is needed to learn a new (and better!) pricing strategy. It applies whether you’re developing a new product, updating your current one, or simply repositioning your marketing strategy.
It is also known as competitive pricing or competitor-based pricing. This pricing strategy primarily focuses on the current market rate (or going rate) for a company’s product or service; it doesn’t count the cost of their product or consumer demand.
Instead, a competition-based pricing strategy employs the competitors’ prices as a benchmark. Businesses who struggle in a highly saturated space may prefer this strategy since a slight price variation may work as the deciding factor for customers.
With this competition-based pricing model, you can price your products somewhat below your competition, the same as your competition, or somewhat above your competition. Whichever price you prefer, competitive pricing is one approach to be on top of the competition and keep your pricing dynamic.
Dynamic pricing is also considered surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices vary based on market and customer demand.
Hotels, airlines, event venues, and utility companies employ dynamic pricing by using algorithms that analyze competitor pricing, demand, and other factors. These algorithms enable companies to shift prices to meet when and what the customer is ready to pay at the exact moment they’re ready to purchase.
Hotels, airlines, event venues, and utility companies employ dynamic pricing by using algorithms that analyze competitor pricing, demand, and other factors. These algorithms enable companies to shift prices to meet when and what the customer is ready to pay at the exact moment they’re ready to purchase.
A cost-plus pricing strategy concentrates solely on the price of producing your product or service or your COGS. It’s also known as markup pricing since companies who employ this strategy “markup” their products based on how much they’d want to profit.
To use the cost-plus method, add a fixed percentage to your product production cost. For instance, let’s say you sold shoes. The shoes take $25 to make, and you want to make a $25 profit on each sale. You’d set a price of $50, which is a profit of 100%.
Cost-plus pricing is typically employed by retailers who sell physical products. This approach isn’t the best fit for service-based or SaaS companies as their products typically present far greater value than the cost to create them.
A high-low pricing strategy is when a business originally sells a product at a high price but lowers that price when the product falls in novelty or relevance. Discounts, clearance sections, and year-end sales are instances of high-low pricing in action — this the reason why this strategy may also be known as a discount pricing strategy.
High-low pricing is generally used by retail firms who sell seasonal or continually changing items, such as clothing, decor, and furniture. What makes a high/low pricing strategy attractive to sellers? Hence, consumers like anticipating sales and discounts, so Black Friday and other universal discount days are so popular.
A mixture of the words “free” and “premium,” freemium pricing is when businesses give a basic version of their product, assuming that users will eventually pay to upgrade or access more features. Unlike cost-plus, freemium is a pricing strategy usually used by SaaS and other software companies. They prefer this strategy because free trials and limited memberships allow a “peek” into a software’s full functionality and establish faith with a potential customer before buying.
With freemium, a company’s prices must be a function of the noted value of their products. For instance, companies that allow a free version of their software can’t ask users to pay $100 to transition to the paid version. Prices must give a low barrier to entry and grow incrementally as customers are granted more features and benefits.
Hourly pricing, also considered rate-based pricing, is usually applied by consultants, freelancers, contractors, and other individuals or laborers who provide business services. Hourly pricing is essentially trading time for money. Some clients are reluctant to accept this pricing strategy as it can reward labor instead of efficiency.
Distinguished with skimming pricing, a penetration pricing strategy is when companies join the market with a meager price, effectively enticing attention (and revenue) away from higher-priced competitors. However, penetration pricing isn’t sustainable in the long run and is typically applied for a short time.
This pricing approach works best for brand new businesses looking for customers or businesses breaking into a current, competitive market. The strategy is all about disruption and temporary loss and assuming that your initial customers stick around as you eventually raise prices.
(Another divergent strategy is loss-leader pricing, where retailers entice customers with intentionally low-priced items in beliefs that they’ll buy other, higher-priced products, too. It is precisely how stores like Target get you — and me.)
A skimming pricing strategy is when companies impose the highest possible price for a new product and lower the price over time as the product becomes less and less popular. Skimming is distinct from high-low pricing in that prices are reduced gradually over time.
Technology products, such as DVD players, video game consoles, and smartphones, are typically priced using this strategy as they become less important over time. A skimming pricing strategy benefits in recovering sunk costs and selling products well beyond their novelty. Still, the strategy can also irritate consumers who bought at full price and attract competitors who recognize the “fake” pricing margin as prices are lowered.
A project-based pricing strategy is the reverse of hourly pricing — this plan charges a flat fee per project rather than a direct exchange of money. It is also employed by consultants, freelancers, contractors, and other individuals or laborers who present business services.
Project-based pricing may be evaluated based on the value of the project deliverables. Those who prefer this pricing strategy may also produce a flat fee from the estimated time of the project.
Also known as premium pricing and luxury pricing, a prestige pricing strategy is when businesses price their products high to show that their products are high-value, luxury, or premium. Prestige pricing concentrates on the recognized value of a product rather than the actual value or production cost.
Prestige pricing is a primary function of brand awareness and brand perception. Brands who implement this pricing method are known for providing value and status through their products — which is why they’re priced costlier than other competitors. Fashion and technology are often rated using this strategy because they can be marketed as luxurious, exclusive, and rare.
A value-based pricing strategy is when businesses price their products or services based on what the customer is ready to pay. Even if they can charge more for a product, they choose to set their prices based on customer interest and data.
If applied accurately, value-based pricing can encourage customer sentiment and loyalty. It can also support you to prioritize your customers in other aspects of your business, like marketing and service.
On the flip side, value-based pricing expects you to constantly be in tune with different customer profiles and buyer personas and probably vary your prices where your customers vary.
Psychological pricing is what it seems like — it targets human psychology to increase sales. For instance, according to the “9-digit effect”, even though a product that costs $99.99 is actually $100, customers may view this as a good deal just because of the “9” in the price.
Another way to utilize psychological pricing would be to place a more costly item directly next to (either in-store or online) the one you’re most focused on selling. Or give a “buy one, get one 50% off (or free)” deal that makes customers think that the circumstances are too good to pass up on. And finally, changing the font, size, and color of your pricing information on and around your products has also been demonstrated, in various instances, to increase sales.
A bundle pricing strategy is when you give (or “bundle”) two or more complementary products or services together and trade them for a single price. You may want to sell your bundled products or services only as a bundle component or sell them as both components of bundles and individual products.
This is an excellent way to attach value through your offerings to customers willing to pay extra upfront for more than one product. It can also benefit you to get your customers hooked on more than one of your products faster.
Geographic pricing comes when products or services are priced individually depending on geographical location or market.
This strategy may be applied if a customer from another country purchases or has disparities in factors like the economy or wages (from the location in which you’re trading a good to the person’s location it is being sold to).
Like we have mentioned above, these strategies aren’t necessarily intended to stand alone. We urge you to mix and match these techniques as and when needed.
Now, it’s time to know how to apply these strategies to different businesses and industries.
Not all pricing strategies suit every business. Some strategies are more suited for physical products, whereas others work great for SaaS companies. Here are examples of some standard pricing models based on industry and business.
Unlike digital products or services, physical products acquire hard costs (like shipping, production, and storage) that can impact pricing. A product pricing strategy should recognize these costs, set a price that maximizes profit, fosters research and development, and stands up against competitors.
We recommend these pricing strategies while pricing physical products: cost-plus pricing, competitive pricing, prestige pricing, and value-based pricing.
Restaurant pricing is unique in that physical costs, overhead costs, and service costs are all included. You must also analyze your customer base, overall market trends for your location and cuisine, and the cost of food — as all of these can fluctuate.
We recommend utilizing these menu pricing strategies when pricing at restaurants: cost-plus pricing, premium pricing, and value-based pricing.
Digital products, like software, online courses, and digital books, need a different approach to pricing because there’s no tangible offering or unit economics (production cost) included. Instead, prices should exhibit your brand, industry, and overall value of your product.
We recommend applying these pricing strategies when digital pricing products: competition-based pricing, freemium pricing, and value-based pricing.
Business services can be challenging to price due to their intangibility and lack of direct production cost. Much of the service charge comes from the service provider’s ability to deliver and the given caliber of their work. Freelancers and contractors, in particular, must adhere to a services pricing strategy.
We recommend practicing these pricing strategies when pricing services: hourly pricing, project-based pricing, and value-based pricing.
Events can’t be precisely measured by production cost. Instead, event value is defined by the cost of marketing and organizing the event, and the speakers, entertainers’ networking, and overall experience — and the ticket prices should indicate these factors.
We recommend applying these pricing strategies when pricing live events: competition-based pricing, dynamic pricing, and value-based pricing.
Nonprofits require pricing strategies, too — a pricing strategy can support nonprofits to optimize all processes so they’re successful over an extensive period.
A nonprofit pricing strategy should reflect current spending and expenses, the breakeven number for their operation, ideal profit margin, and how the strategy will be delivered to volunteers, licensees, and anyone else who needs to be notified. A nonprofit pricing strategy is unique because it usually calls for a combination of elements from a few pricing strategies.
We recommend applying these pricing strategies when pricing nonprofits: competitive pricing, cost-plus pricing, demand pricing, and hourly pricing.
Real estate comprises home value estimates, market competition, housing demand, and cost of living. Other factors play a role in real estate pricing models, including potential bidding wars, housing estimates and benchmarks (which are available through real estate agents but also free online resources like Zillow), and seasonal shifts in the real estate market. The involvement of first-time home buyers can impact market dynamics and influence pricing trends in certain areas.
We recommend applying these pricing strategies when pricing real estate: competitive pricing, dynamic pricing, premium pricing, and value-based pricing.
Education includes a wide range of essential costs depending on education, private or public education, and education program/ discipline.
Particular costs to analyze in an education pricing strategy are tuition, scholarships additional fees (labs, books, housing, meals, etc.). Other essential factors to note are competition among similar schools, demand (number of student applications), number and costs of professors/ teachers, and attendance rates.
We recommend applying these pricing strategies when pricing education: competitive pricing, cost-based pricing, and premium pricing.
Agency pricing models affect your profitability, retention rates, customer happiness, and how you market and sell your agency. When expanding and evolving your agency’s pricing model, it’s essential to consider diverse ways to optimize it so you can determine the best way to boost the business’s profits.
We recommend practicing these pricing strategies when pricing agencies: hourly pricing, project-based pricing, and value-based pricing.
Ecommerce pricing models are how you decide the price at which you’ll sell your online products and what it’ll cost you to do so. Meaning, you need to think about your customers’ willingness to pay for your online products and what those products cost you to buy and/or create. You might also factor in your online campaigns to promote these products and how simple it is for your customers to get similar products to yours on the eCommerce sites of your competitors.
We recommend applying these pricing strategies when pricing eCommerce: competitive pricing, cost-based pricing, dynamic pricing, freemium pricing, penetration pricing, and value-based pricing.
The manufacturing industry is complicated — there are numerous moving parts, and your manufacturing pricing model is no distinct. View product evolution, demand, production cost, sale price, unit sales volume, and other costs related to your process and product. Another crucial part of a manufacturing pricing strategy is knowing the maximum amount the market will pay for your particular product to allow for the most significant profit.
We recommend utilizing these pricing strategies when pricing manufacturing: competitive pricing, cost-plus pricing, and value-based pricing.
Studying about everything that goes into pricing can make your head spin: competitors, production costs, customer demand, industry needs, profit margins … the list is infinite. Thankfully, you don’t need to understand all of these factors at once.
Start with what you require, which will help you pinpoint the right kind of pricing strategy to apply.
More than anything, though, learn pricing is an iterative process. It’s improbable that you’ll set the correct prices right away — it might demand a couple of tries (and lots of research), and that’s fine.
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