Determining the right price for your products and services can be challenging – set your prices too high and you can risk losing customers to competitors but set them too low and you may not be able to cover your costs or make a profit.
This is where pricing strategies come in. A pricing strategy is a plan or approach used to determine the best price to ensure that your prices are competitive, your profits are maximized, and your customers are satisfied.
However, different strategies suit different situations, and it can be tricky to decide which will work best for you. The most widely-used pricing strategies are:
- Competitive Pricing
- Cost-plus Pricing
- Promotional Pricing
- Value-based Pricing
Each of these can be used as a stand-alone pricing strategy or can be integrated with one or several others.
First, why are pricing strategies so important?
Pricing strategies are important for any business, big or small, as the price of a product or service is often the first thing that customers consider when making a purchase. By taking the time to develop a pricing strategy, you can ensure that your prices are competitive, your profits are maximized, and your customers are happy!
Pricing your products too high or too low can lead to lost sales or reduced profitability, however setting your prices based on customer needs and expectations can:
- Convince your customer to purchase
- Portray the value of your product or service
- Give customers confidence in your brand, and,
- Increase customer satisfaction and long-term loyalty.
A carefully planned pricing strategy considers several factors, including production costs, competition, and consumer demand to determine the best price for your product or service.
Pricing Strategies
According to our research, four of the most beneficial pricing strategies include:
Competitive Pricing:
Competitive pricing is defined as “when your prices either match or beat those of similar products that are sold by competitors”.
This pricing strategy is simple to implement and is recommended for new businesses as they work to build their customer base. With competitive pricing you can choose how you want your brand to be perceived in comparison with your competition.
However, although choosing to enter the market with a price below competitors can attract more customers, your products could be branded as ‘cheap’ and low value.
Simply matching competitor prices shows customers you are offering a fair and competitive price for your product, building trust and encouraging repeat sales. When using this strategy, it is recommended to establish a point of difference to set yourself apart from competitors and drive sales.
If you choose to price your products or services higher than the usual market price you should ensure you are conveying with customers the reason, whether it be higher quality, additional features or improved customer service.
Cost-plus Pricing:
Cost-plus pricing is a pricing strategy that determines the price of a product or service by adding a markup percentage to the cost of the product. The cost of product includes both variable – which are directly related to the numbers of products made or purchased – and fixed costs – the overhead expenses that don’t change with the sales volume. The markup percentage is a fixed percentage which is added on top of the total cost to allow for a predictable profit.
This strategy has advantages which include simplicity, cost recovery, consistency, risk management, and pricing transparency. It’s a straightforward pricing strategy that can help businesses recover their costs and ensure profitability.
However, it doesn’t consider market demand, which could lead to prices that are higher or lower than what customers are willing to pay, decreasing sales or cutting into your profits.
Promotional Pricing:
Promotional Pricing is “a pricing method where a company temporarily reduces the price of a product or service in the interest of quickly driving sales” (HubSpot). Within promotional pricing, there are several different approaches you can use including: Flash Sales, Buy One Get One Free (BOGOF), Loyalty Programs, and Seasonal Sales.
Flash sales and seasonal sales are ideal for increasing your short-term sales and generating quick profits. However, it’s recommended to limit the use of these sales, as constant lower prices can hurt your brand image and label them as ‘cheap’ products.
A loyalty program offers deals or discounts to dedicated customers as a reward for their loyalty with repeated purchases. This longer-term promotional pricing strategy is beneficial for building relationships with your customers and growing customer retention.
Value-based Pricing:
Value-based pricing sets the price of a product or service based on its perceived value to the customer. This approach considers the benefits that the customer gets from the product or service and the price that they would be willing to pay.
In a value-based pricing strategy, businesses focus on understanding their customers’ needs and preferences, and how they perceive the value of the product or service. The price is then set based on the value, rather than on production costs or the prices of competitors.
This pricing strategy has several benefits, including showing the full value of a product or service, aligning pricing with customer preferences, and improving customer satisfaction. By pricing based on the perceived value of a product or service, businesses can often set higher prices and increase their profitability.
However, it can be difficult to monetize the value of products and services, which could lead to overpricing or under-pricing.
Choosing your pricing strategy
When choosing your pricing strategy, it’s important to consider:
- Your target audience: Knowing who you are aiming to sell your products and services to is one of the first things you should consider when determining pricing. Through research you should determine your target market and their willingness to pay for the product or service you provide.
- The product or service you are offering: Consider the value of the product or service and the costs associated with producing it. An important factor to remember is whether the product or service is unique or similar to that of competitors and what pricing strategies they might use.
- Your businesses financial goals: Determine the goals and objectives of your business, such as maximising profitability, gaining market share, or maintaining a consistent pricing strategy. Consider each of the pricing options above to work out which help you to reach your financial goals.
Considering these options can help you find which pricing strategy will align your prices with your goals and customers preferences. However, don’t limit yourself to one strategy – It’s recommended to use a combination of strategies across your product range for them to have the best impact on your business.
For example, if you are wanting to use a cost-plus pricing method, the value of the product and competitors prices can be used to determine the markup percentage you use. Promotional pricing is also best used alongside other strategies to attract customers with a sale, only to keep them coming back for the value your product gave them. Loyalty programs are also recommended to drive repeat customers and reward their continued support.
The value your customer gets from your product or service should always be taken into account to ensure you are not overpricing or underselling.
Summary
Setting prices can make or break your business’s profits. That’s why the best pricing tip for a business is to research which pricing strategies will help them achieve business goals and keep customers satisfied. Competitive, cost-plus, promotional, and value-based pricing are all proven and easy-to-implement pricing strategies, but it may also be worth continuing research to find what is best suited for your business.
Don’t set and ignore your prices! Ensure you are consistently researching and staying on top of the pricing trends in your market to maintain ideal pricing.
References
- Pricing strategy guide: How to choose one for your business | Quickbooks
- 7 Pricing Strategies for Small Businesses | Storiusmag
- Pricing Strategy Guide: Unlock Growth with These 3 Strategies | Price Intelligently
- Your best pricing strategy: 7 examples to maximize your profits | Podium
- Develop a pricing strategy | Business.gov
- The Ultimate Guide to Pricing Strategies | HubSpot
