PRICING STRATEGY
What is a pricing strategy?
It is the method of pricing a business uses to determine how
much to sell their goods or services for.
It's one of the most commonly overlooked and undervalued
revenue levers in business.
A pricing strategy is a model or method used to establish the
best price for a product or service. It helps you choose prices
to maximize profits and shareholder value while considering
consumer and market demand.
3 most common pricing strategies
Value based pricing - Price based on it's perceived worth
Competitor based pricing - Price based on competitors
pricing
Cost plus pricing - Price based on cost of goods or services
plus a markup
5 Easy Steps to Creating the Right
Pricing Strategy
Step 1: Determine your business goals. How you make
money determines everything about your marketing and
sales GTM strategy. ...
Step 2: Conduct a thorough market pricing analysis. ...
Step 3: Analyze your target audience. ...
Step 4: Profile your competitive landscape. ...
Step 5: Create a pricing strategy and execution plan.
Step 1: Determine your business goals
How you make money determines everything about your marketing
and sales GTM strategy. Christof and Wholley outlined the following
business goal considerations for startup founders to use as a
determinant for the basis of pricing:
Increase profitability
Improve cash flow
Market penetration
Larger market share
Increase revenue per customer
Beat the competition
Fill capacity and utilize resources
New product introduction
Reach a new segment
Increase prospect presence
Increase prospect conversion
Step 2: Conduct a thorough market
pricing analysis.
While the first step is grounded in your business goals, this step
ensures that your pricing strategy considers the context of the
market in which your product or service will compete.
If your market and product are broader with many players who
offer similar products or services, chances are you will compete on
price. You will "need to do everything to keep operational costs
down to ensure a maximum profits margin,“
Step 3: Analyze your target audience
This steps enables you to
answer why, what, and how customers will use your product or ser
vice based on their specific and urgent needs
.
"Be guided by the most important question: what perceived and
real value does my product or service bring to the customer. What
is the task they are facing? How does my product or service ease
the pain associated with this task? What does my customer have
to gain by using my product or service?"
Your pricing model and promotional campaigns must align with
why your customer would buy your product.
Step 4: Profile your competitive landscape
Christof suggests the following approach for direct and indirect
competitors:
Identify at least three direct competitors. Study the structure of
their pricing.
Consider the substitutes a customer may use to solve the task or
problem that your product or service addresses. Find out how
much these indirect competitors cost the customer. And
remember, sometimes your indirect competitor is the word "no".
Step 5: Create a pricing strategy and
execution plan
Christof identified 10 pricing strategies to consider
based on your market, customer, and competitive
analysis:
Penetration pricing: Price is artificially low to break into the
market
Economy pricing: Everyday low price with the focus on low
manufacturing/delivery cost
Premium pricing: High price for high value
Price skimming: Go into the market with a high price, but once
your competitors follow, lower your cost and implement other
pricing strategies
Promotional pricing: Discounts over a period of time, one-time
deals
Step 5: Create a pricing strategy and
execution plan
Christof identified 10 pricing strategies to consider
based on your market, customer, and competitive
analysis:
Psychological pricing: Price products or services which triggers
action. For example, charging .99 instead of $1.00
Versioning: Offer different tiers for your services or products:
good, better, best
Sandwich pricing: High, medium and low priced item with the
intent to drive customers to the medium priced item
Competitive pricing: Set the price equal to what your
competitors are charging and win the service game
Value pricing: Understand the value for your customers and their
willingness to pay. Also understand what alternatives do they
have
Types of Pricing Strategies
1. Competition-Based Pricing
is also known as competitive pricing or competitor-based pricing.
This pricing strategy focuses on the existing market rate (or
going rate) for a company’s product or service; it doesn’t take into
account the cost of their product or consumer demand.
Instead, a competition-based pricing strategy uses the competitors’
prices as a benchmark.
With competition-based pricing, you can price your products
slightly below your competition, the same as your competition, or
slightly above your competition.
Types of Pricing Strategies
2. Cost-Plus Pricing Strategy
strategy focuses solely on the
cost of producing your product or service, or your COGS. It’s
also known as markup pricing since businesses who use this
strategy “mark up” their products based on how much they’d
like to profit.
To apply the cost-plus method, add a fixed percentage to
your product production cost. For example, let’s say you sold
shoes. The shoes cost $25 to make, and you want to make a
$25 profit on each sale. You’d set a price of $50, which is a
markup of 100%.
Types of Pricing Strategies
3. Dynamic Pricing Strategy
is also known as surge pricing, demand pricing, or time-based
pricing. It’s a flexible pricing strategy where prices fluctuate
based on market and customer demand.
Hotels, airlines, event venues, and utility companies use
dynamic pricing strategy
4. Freemium Pricing Strategy
A combination of the words “free” and “premium,” freemium
pricing is when companies offer a basic version of their
product hoping that users will eventually pay to upgrade or
access more features.
Types of Pricing Strategies
5. High-Low Pricing Strategy
• A high-low pricing strategy is when a company initially sells a
product at a high price but lowers that price when the
product drops in novelty or relevance. Discounts, clearance
sections, and year-end sales are examples of high-low pricing
in action — hence the reason why this strategy may also be
called a discount pricing strategy.
• It is commonly used by retail firms who sell seasonal or
constantly-changing items, such as clothing, decor, and
furniture.
Types of Pricing Strategies
6. Hourly Pricing Strategy
also known as rate-based pricing, is commonly used by
consultants, freelancers, contractors, and other individuals or
laborers who provide business services. Hourly pricing is
essentially trading time for money.
7. Skimming Pricing Strategy
is when companies charge the highest possible price for a
new product and then lower the price over time as the
product becomes less and less popular. Skimming is different
than high-low pricing in that prices are lowered gradually over
time.
Technology products, such as DVD players, video game
consoles, and smartphones, are typically priced using this
strategy as they become less relevant over time.
Types of Pricing Strategies
8. Penetration Pricing Strategy
Contrasted with skimming pricing, a
penetration pricing strategy is when companies enter the
market with an extremely low price, effectively drawing
attention (and revenue) away from higher-priced competitors.
Penetration pricing isn’t sustainable in the long run, however,
and is typically applied for a short time.
9. Premium Pricing Strategy
Also known as premium pricing and luxury pricing, a prestige
pricing strategy is when companies price their products high
to present the image that their products are high-value,
luxury, or premium.
Types of Pricing Strategies
10. Project-Based Pricing Strategy
is the opposite of hourly pricing — this approach charges a
flat fee per project instead of a direct exchange of money for
time. It is also used by consultants, freelancers, contractors,
and other individuals or laborers who provide business
services.
11. Value-Based Pricing Strategy
is when companies price their products or services based on
what the customer is willing to pay.
Types of Pricing Strategies
12. Bundle Pricing Strategy
is when you offer (or "bundle") two or more complementary
products or services together and sell them for a single price
13. Geographic Pricing Strategy
It is when products or services are priced differently
depending on geographical location or market.
This strategy may be used if a customer from another country
is making a purchase or if there are disparities in factors like
the economy or wages (from the location in which you're
selling a good to the location of the person it is being sold
to).
Types of Pricing Strategies
14. Psychological Pricing Strategy
it targets human psychology to boost your sales.
For example, according to the "9-digit effect", even though a
product that costs Php 99.99 is essentially Php 100, customers
may see this as a good deal simply because of the "9" in the
price.
Another way to use psychological pricing would be to place a
more expensive item directly next to the one you're most
focused on selling. Or offer a "buy one, get one 50% off (or
free)" deal that makes customers feel as though the
circumstances are too good to pass up on.
And lastly, changing the font, size, and color of your pricing
information on and around your products has also been
proven, in various instances, to boost sales.
Pricing Models Based on Industry or
Business
1. Product Pricing Model
Unlike digital products or services, physical products incur hard
costs (like shipping, production, and storage) that can influence
pricing. A product pricing strategy should consider these costs
and set a price that maximizes profit, supports research and
development, and stands up against competitors.
Pricing Models Based on Industry or
Business
2. Digital Product Pricing Model
Digital products, like software, online courses, and digital books,
require a different approach to pricing because there’s no
tangible offering or unit economics (production cost) involved.
Instead, prices should reflect your brand, industry, and overall
value of your product.
Pricing Models Based on Industry or
Business
3. Restaurant Pricing Model
Restaurant pricing is unique in that physical costs, overhead costs,
and service costs are all involved. You must also consider your
customer base, overall market trends for your location and
cuisine, and the cost of food — as all of these can fluctuate.
Pricing Models Based on Industry or
Business
4. Event Pricing Model
Events can’t be accurately measured by production cost (not
unlike the digital products we discussed above). Instead, event
value is determined by the cost of marketing and organizing the
event as well as the speakers, entertainers networking, and overall
experience — and the ticket prices should reflect these factors.
Pricing Models Based on Industry or
Business
5. Services Pricing Model
Business services can be hard to price due to their intangibility
and lack of direct production cost. Much of the service value
comes from the service provider’s ability to deliver and the
assumed caliber of their work. Freelancers and contractors, in
particular, must adhere to a services pricing strategy.
Nine laws of price sensitivity and
consumer psychology
The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden
outline nine "laws" or factors that influence how a consumer perceives
a given price and how price-sensitive they are:
Reference Price Effect – buyer's price sensitivity for a given product
increases the higher the product's price relative to perceived
alternatives. Perceived alternatives can vary by buyer segment, by
occasion, and other factors.
Difficult Comparison Effect – buyers are less sensitive to the price of
a known or more reputable product when they have difficulty
comparing it to potential alternatives.
Nine laws of price sensitivity and
consumer psychology
Expenditure Effect – buyers are more price-sensitive when the
expense accounts for a large percentage of buyers' available
income or budget.
Shared-cost Effect – the smaller the portion of the purchase price
buyers must pay for themselves, the less price sensitive they will
be.
Fairness Effect – buyers are more sensitive to the price of a
product when the price is outside the range they perceive as "fair"
or "reasonable" given the purchase context.
Nine laws of price sensitivity and
consumer psychology
End-Benefit Effect – the effect refers to the relationship a given
purchase has to a larger overall benefit, and is divided into two
parts:
Derived demand: The more sensitive buyers are to the price of the end
benefit, the more sensitive they will be to the prices of those products
that contribute to that benefit.
Price proportion cost: The price proportion cost refers to the percent of
the total cost of the end benefit accounted for by a given component
that helps to produce the end benefit (e.g., think CPU and PCs). The
smaller the given components share of the total cost of the end
benefit, the less sensitive buyers will be to the components' price.
Nine laws of price sensitivity and
consumer psychology
The Framing Effect – buyers are more price sensitive when they
perceive the price as a loss rather than a forgone gain, and they
have greater price sensitivity when the price is paid separately
rather than as part of a bundle.
