The price of your products determines the success of your business. Remember, if your pricing is high, your sales will be low, as customers will go to more affordable options. On the other hand, if your pricing is too low, your profit will also be low. That is why you need to be careful with your pricing, especially because many customers consider this before making a purchase decision.
There’s no denying that product pricing is a major challenge for businesses, especially in highly competitive spaces. Some businesses set up their prices without much thought and may lose customers or count losses depending on whether they're too high or too low. If you’re one of those businesses, there's no need to worry anymore because pricing strategies are here to help.
With the right pricing strategy, you can determine the right price for your business and get the revenue you deserve.
But what product pricing strategies can you rely on for your business to thrive?
What is pricing strategy?
Before we delve deeper into product pricing strategies, it's best to understand what pricing means. Pricing is the amount of money you’re willing to sell your products for. Before settling on your product's price, you must consider your customers, brand, and product.
Since pricing attracts or pushes away customers, you must be careful when calculating it. That's why you need a pricing strategy that helps determine the best price to maximize your profits. Pricing strategy is a method you use to settle on the right product price.
A good pricing strategy considers your revenue goals, target audience, product features, and marketing objectives. All these are driven by other factors like your competitors' prices, economic trends, and consumer demands.
However, most businesses set their pricing in relation to their competitors, making it a bit higher or lower depending on their motives. Though effective, this strategy mostly focuses on customer acquisition instead of maximizing profits. But you need the best pricing strategy that helps boost revenue and grow without requiring lots of effort.
The product pricing strategies for every business venture
You can use different product pricing strategies to make your business succeed. The following are the product pricing strategies you can try out:
Competitive pricing strategy
This is the common product pricing strategy most businesses use. In this strategy, your competitors' prices determine what you charge. It's an ideal strategy for upcoming companies or those in a saturated market trying to attract customers. However, it doesn't consider customers' demands or the product's cost.
Using this strategy, you can set higher, lower, or the same price as your competitor. But you have to ensure the price you choose enables you to be on top of the competition. Additionally, you have to maintain flexible pricing to accommodate the dynamics.
It's best to use this strategy if your business offers better customer care services or has a good return policy. It can also work well if you offer customers exclusive loyalty benefits.
Value-based pricing strategy
In this strategy, your business sets product prices depending on the value of your products. Your pricing will depend on what customers are willing to pay vs. the product's value. Your business should first understand your customer's interests and crucial data.
Value-based pricing can help you maintain your customers' loyalty and positive rating in the market. It's also an ideal strategy when looking for the right customers to give priority to during marketing. Value-based pricing suits products like high-end eCommerce goods or enterprise software.
However, it can be involved as you have to keep researching your customer's personas and profiles. Then use this data to set your pricing. Value-based pricing is the best way to advertise your products and helps increase customer demand. If you settle for this model, ensure your target audience is willing to pay the set price to maximize profits.
Cost-plus pricing strategy
Another product pricing strategy your business can try out is cost-plus pricing. It's a simple model for any business, as you add a percentage to the production cost. For example, if you're dealing in Amazon FBA products, and the production cost is $50, and you want to make 100% profit, your selling price should be $100, excluding fees and breakdowns for FBA.
The cost-plus pricing strategy is common in grocery stores or smaller businesses that can’t afford to do market research. It is an ideal choice when your competitors also use the same pricing model.
But it doesn't attract new customers if your competitors are using it to get customers. Instead, it is a good choice for maximizing your profits. You must do a price analysis to determine your competitors' charges to succeed.
Price skimming
Price skimming is a strategy where your product's price changes depending on the market conditions. Here you can set higher pricing when introducing a new product and gradually reduce the price over time. Price skimming is a good choice when dealing with highly anticipated or innovative products with no competition.
It best suits businesses that want to reach everyone in the market. Gaming or electronics companies can benefit from this model. For example, when the latest PlayStation comes to the market, most customers are willing to buy it at top prices despite knowing prices will drop afterward.
As a business, you must capitalize on the scarcity and popularity of your products to set prices and earn the desired profits. But before settling on this pricing strategy, do research to know if competitors can replicate your products. A good product for price skimming should be unique and challenging to replicate.
So, it maintains a high price after launching and has a reputable brand with loyal customers. However, you must capitalize on marketing such products to avoid reducing the cost of each product you deal with.
Dynamic pricing strategy
Dynamic pricing works best for certain businesses only. Such companies can keep changing their prices without affecting the demand for their products. The product’s pricing changes according to time, place, and the customers your business is selling to. It's a common strategy for hotels and airlines.
Uber is one of the businesses that has successfully used this approach. Different customers pay different amounts to use Uber despite covering the same distance. The company relies on time, season, and demand to set prices.
However, this approach can be disadvantageous for small businesses that are yet to become popular. Additionally, a company has to invest a lot of money to adopt this approach. For example, it has to invest in data analysis and AI. Moreover, most customers don't like this pricing approach as they feel the price difference needs to be fairer.
If you opt for this pricing strategy, you must invest in marketing. Plan for promotions and determine the launching price for a promotion at the right time.
Economy pricing strategy
Alternatively, you can use an economy pricing strategy to set the prices for your products. For it to succeed, you have to set lower pricing than your competitors to attract more customers and increase profits. It's ideal for pharmaceutical companies, airlines, or grocery stores.
Such companies ensure their production costs remain low to offer their products at a low price. For example, as a grocery store dealer, you can produce your groceries on a large scale to reduce the cost of production.
If your prices are lower, you get to attract customers on a budget or those conscious of goods pricing to save on costs. This approach can also help your business to get a bigger market share as customers will stop buying from popular brands. It helps grow revenues within a short time, which is every business's dream.
You must work on lowering your production costs and research market demand to be ahead of the competition. However, in a competitive market, your competitors can drop their prices below yours, pulling away most customers.
Penetration pricing strategy
Penetration pricing works best for new businesses trying to enter a competitive market. In most cases, the new companies set lower pricing than that of competitors to enable them to attract customers.
It's a short-term strategy that helps a business get the desired attention and revenue. After the company gets a foothold in the market, the prices gradually increase. It's a good strategy for introducing your brand or product to a certain market.
Most businesses use this approach, hoping the acquired customers will buy high-priced products after changing pricing. It might take time to recover your initial capital and make profits. However, with determination and high-value products, you will succeed and increase prices later.
Freemium pricing strategy
A freemium pricing strategy is common among software companies. It encourages customers to use a product by offering a basic version. Most companies use this strategy, hoping customers will love their products and upgrade to premium versions.
For example, a software company can give its users free trials and a limited membership to allow them to test its features. After the free trial period, they expect customers to subscribe or buy it and be loyal clients. The price can keep increasing according to the product's features and benefits.
The product's value determines its price in this model. Since such products require customers to sign up, you can market various features or products from your company to maintain brand loyalty.
Hourly or metered pricing strategy
If you are a freelancer, contractor, or consultant, this is the best pricing strategy to use. It's also called rate-based pricing, which gives you value for your time. You can rent your car to customers and charge them per hour. A limousine for wedding services is one of the most popular cars charged per hour.
Charging your products per hour is a great choice if the product is in high demand. It's also a good choice if customers get more value for their money with a more cost-effective product than a project-based contract.
Another example of this type of pricing or called metered pricing. Several software companies use this model. A great example of Google or Amazon’s translation services. Where you pay per word translated to say English from Chinese, and overall you are billed on the total number of words translated.
Premium pricing strategy
Premium pricing strategies work best for companies that want to prove to their customers that their products are high-end or luxurious. To use this strategy, you must focus on the product's perceived value instead of its actual value.
It's a good pricing model for established companies with a good customer base. The customers are loyal to the brand as they believe the company gives value through its products. In most cases, these products’ prices are much higher than their competitors, but they still have loyal customers.
Fashion companies or technology industries use this model to determine their product pricing as customers believe in the value of their products. Customers' perception of your product in the market determines the success of this pricing strategy. You can get a positive customer perception by using the right influencers or by using different ways to increase demand.
Geography pricing strategy
A product's price differs from one market to the next depending on how close the market is to the factory. A market next to the factory charges less than one that has to incur transportation costs. Most companies also use this strategy if it's a crowded market and customers can get the same product easily. Your business has to research wages and the economy of different locations to help them determine the price to use this strategy,
It's the same strategy businesses use to determine the price of their products when selling to an international customer. With technological advancements and increased social media marketing, it's easier to use this strategy to determine prices. For example, you can rely on the zip code segment when advertising your product on your social media pages. It makes it easier to select the buyer's location.
High-low pricing strategy
Another product pricing strategy your business can depend on to set prices is the high-low pricing strategy. This strategy allows companies to sell their products at different prices depending on their relevance.
An example of a high-low pricing strategy is during end-of-year sales. Most businesses also offer clearance sales and discounts, which attract more customers and boost sales. It's a common strategy for supermarkets and retailers specializing in seasonal items like clothing or furniture.
A popular high-low pricing strategy that most customers anticipate is the Black Friday offers. It's the best strategy for businesses that want to maintain steady foot traffic throughout the year. But researching when your products are popular and the slow season is much more beneficial.
Psychological pricing strategy
A business can also use customers' psychology to set prices and boost revenue. The common psychological pricing strategy is the “9-digit effect”. For example, instead of setting a product's price at $100, you can make it $99.99. Customers may see this as a discount and buy the product.
Some retailers also use customers' psychology to convince them to buy by placing an expensive product next to a cheaper one. Additionally, the “buy one, get one” offer can persuade customers to purchase goods without a second thought.
But you must understand your target audience for this strategy to yield results. If your customers like discounts, that's what you should focus on to make them buy. However, if they value quality, give them value for their money.
Bundle pricing strategy
If you sell two or more complementary products at the price of a single product, then that's a bundle pricing strategy. It's a simple way of enticing customers to try your other products while convincing them to buy. But you have to set a price that doesn't affect your profits or production costs.
Bundling sales boosts sales and enables you to sell more products simultaneously. It's a win-win situation for both buyers and sellers, as both parties benefit.
How to develop the best pricing strategy
Before using any product pricing strategy, you must understand how to create it. You can develop the right pricing strategy by researching the following:
Pricing potential
First, you need to evaluate your products' potential prices. This should be in relation to the value metric of the product. For example, you can charge per transaction or seat. Use the demand for the product to help you determine this. But also the geographical market features, demographic data, operating costs, and competitive advantages determine the price range.
You can categorize the pricing potentials as “good, best, better” to help settle for a price depending on demand. With it, your business considers all customers and emphasizes maximizing profits.
A good price potential should provide room for growth, as the more customers use a product, the more they realize its value. So they end up paying more for such a product. It should also consider the chances of making losses since customers can end up not using the products, resulting in fewer purchases or forcing price reductions.
Buyers persona
Another important component of your pricing strategy is the buyer's persona. To achieve this, research the targeted customers' profiles to know how to maintain and benefit from them. Narrow down each profile’s characteristics to easily differentiate them.
Check the customer's lifetime values, willingness to pay, and pain points. Doing this will help you develop an optimized pricing strategy. You can also interview the targeted customers to know what they like and do.
Historical data
Then research and analyze the historical pricing data. Analyze the user research data to know the price range most customers are willing to spend. If your business has existed for a long time, go through the pricing strategies you used before and settle for the best.
Create a balance between your product's value and business goals
After going through customers' profiles and historical data, look at how to balance them to decide on the right pricing strategy. Use your product’s value and business goals to determine this. Your profits will increase if you balance your business goals and product value well.
Additionally, it will be easier to penetrate and increase market share. Customers may also increase as they get valued products.
Compare your competitor's prices
Remember to research the amount your competitors are charging for the same product. After knowing what your competitors charge, you can decide to:
● Lowering prices-this is if the competitors are charging more for the same product you deal in.
● Charge more-you can outsmart your competitors by charging more for your products. If you opt for this approach, you must ensure you give customers the desired product value. If possible, exceed customers' expected value to win their loyalty.
Importance of choosing the right product pricing strategy
Having the right pricing strategy is important as it determines the success of a business. That is why you need to be careful before settling on your product's pricing strategy, as it helps in:
Convincing customers to buy
A good product pricing strategy helps customers make a purchase as your pricing convinces them to take action. Customers can buy your products despite charging more than competitors after using the right approach. Even so, customers may fail to buy your products even if you set a lower price than competitors because of using the wrong product pricing strategy.
So, you must choose the right product pricing strategy to market well.
Determining the value of the product
Additionally, the pricing of your products can help you define their perceived value to potential customers. Remember, customers perceive a cheap product as having either low value or a low price. Most customers perceive affordable products as having low quality or value. But the high-priced products are assumed to be of higher value and attract more sales.
Results in brand loyalty
If customers trust your brand after believing your products offer value, usefulness, or popularity, they become loyal. Loyal customers are good for a brand as they help it grow by referring other customers. Loyal customers also stick with a business regardless of the circumstances.
Boosts sales
If customers believe in your brand because the products are valuable, be ready to see an increase in sales. Additionally, if your product pricing strategy convinces customers to buy, you will make more profit than competitors who help you grow.
Bottom line
If you want your business to grow and attract the right customers, choose the right product pricing strategy. You can use penetration, freemium, economy, or dynamic pricing strategies.
Dynamic pricing, price skimming, cost-plus pricing, or a competitive pricing strategy can set you apart from the competition. However, the kind of product you're selling, the market location, and the customers largely determine your product pricing strategy.
