Pricing Strategy

Prices are one of the most powerful elements of any business. They evoke strong emotions and are the most consolidated representation of value. Pricing strategy can make or break a brand.

When a business first approaches pricing, they may look at its costs or competition to see what a competitor’s prices are set at. Sadly, these two options are setting up the business for failure.

The best way to approach pricing is from a strategic perspective so you can be deliberate in your pricing. When you do this, your business is able to experience better market positioning as well as increased profits. Not being focused on profit only works if you’re a non-profit or plan to be a giant behemoth like Amazon or Alibaba. If that’s not in the cards, then profitably must be a central concern for your business. Profit isn’t evil, it’s the lifeblood that justifies the value your business delivers as well as empowers it to better serve your audience (and stay in business).

The pricing strategy you choose can have a significant impact on the success of your business. Here are some key principles to keep in mind:

• There are many ways to price and tactics to help make sales, however it’s important to keep in mind what best suites your business and brand. If you’re a premium brand and wish to be perceived that way, then your pricing is a reflection of that.
• The value must be there to back up the position in brand and price. There’s an expectation with a brand and price point like that to follow through with the value which will increase their willingness to pay the price. Even if you are a low-cost provider, you must bring the value of time or convenience with the sale.
• Profitability is obtained through volume, cost reduction, or price. Pricing is your best way to increase profits because it is immediate and is low-cost to improve. Volume is playing a much larger game(like Amazon) and costs can only be reduced so far. Typically costs need volume to help get them lower and increase your margin.

Let’s take a look at some of the different pricing strategies you can implement in your business:

1. Cost-plus pricing: This strategy involves adding a markup to your costs in order to determine your selling price. For example, if your costs are $10 and you want to make a 20% profit, you would charge $12. I don’t particularly like this strategy as costs can fluctuate and you’re forever basing your price on the cost of your product or service and not the value you deliver.
2. Value-based pricing: With this strategy, you set your prices based on the perceived value of your product or service to your customers. For example, if you offer a premium product that provides significant value to customers, you might charge a higher price. This strategy can make more sense for specific needs or expertise as they sell solutions that create results.
3. Penetration pricing: This involves setting a low price initially in order to gain market share and attract customers. Once you have established a customer base, you can gradually increase your prices. We’ve seen this in many markets, it’s not my favorite but it gets the job done.
4. Skimming pricing: This strategy involves setting a high price initially and gradually lowering it over time. This can be effective for products or services that are in high demand and have a limited market. Apple did this with their iPhone and TVs have done this, however since the price is such a huge indicator of value, there is definitely a limit on this. Like TVs it can easily slip into commodity market which leads to businesses losing money or barely in profit on each sale. Yikes.
5. Bundle pricing: This involves offering multiple products or services together at a discounted price. This can be a good way to increase sales and encourage customers to purchase more from you.
6. Dynamic pricing: This strategy involves setting prices that change in real-time based on various factors such as demand, time of day, or season. For example, airlines and hotels often use dynamic pricing to adjust their prices based on demand and availability.
7. Psychological pricing: This strategy involves using pricing tactics to influence customers’ perception of the value of a product or service. Examples include pricing a product at $9.99 instead of $10.00, or using odd or unique pricing like $4.97 instead of $5.00.
8. Freemium pricing: This involves offering a basic version of your product or service for free, and then charging for premium features or upgrades. This can be a good way to attract customers and build a user base, while still generating revenue from those who are willing to pay for premium features.
9. Premium pricing: This strategy involves setting a high price for your product or service in order to create a perception of exclusivity and quality. This can be effective for luxury or high-end products that are associated with status or prestige.
10. Price discrimination: This strategy involves charging different prices to different customer segments based on their willingness to pay. This can be effective for businesses that sell products or services with varying levels of value to different customer groups.

The key is to choose a strategy that aligns with your goals and the needs of your customers. Regularly monitoring and adjusting your pricing strategy can help you stay competitive and maximize profits.

One study suggests that pricing has two to four times the potential to influence profitability relative to other business levers. Companies that actively pursue pricing as an important part of their strategy typically outperform industry peers on several financial metrics.

Although there are many advantages to a proper pricing strategy, one must be careful and ethical when it comes to the power of price. Your pricing strategy can make or break your brand and your business depends on it.