9 Proven Pricing Strategies That Can Maximize Growth
Take the guesswork out of pricing your products and services. Get expert insights to help you choose the right pricing strategy for your business.
October 26, 2023
Many of our brand audit clients are business owners and executives. In almost every case, they want to balance value, price, and profit. Before coming to us, most of them used promotions and discount pricing to gain market share.
But, during the audit, we found out they were using the wrong pricing strategy.
Price plays a critical role in the sales process. And your pricing often dictates long-term profitability. That's why choosing the best pricing model for your brand is so important.
Businesses that undercut their competitors may make sales—for a while. But a company won't stay profitable if the pricing strategy and business model don't align.
In this post, I'll cover the most common pricing strategies and how to choose the right one for your business.
Plus, you'll discover:
The Challenges of Pricing Your Product or Service
Competition and the customer's price sensitivity often force brands to overfocus on price. To offset these challenges, many offer discounts or lower selling prices. But these tactics make it harder for companies to remain profitable.
It's difficult to ignore the customer's view of price. But selling at low prices over the long term isn't healthy for businesses. Companies have other considerations, too, such as overhead costs and competitor pricing. It's not always possible to make everyone happy.
All these factors make it challenging to choose a long-term pricing strategy.
So, companies must analyze the market forces that affect pricing. They should also consider customer preferences before deciding which pricing strategy to use.
Let's explore some of the challenges of pricing and how to overcome them.
Align Pricing with the Business Model
Many factors impact a brand's ability to hit revenue goals. But companies must use a pricing strategy that aligns with the way they do business.
For example, assume your company sells a B2B subscription-based product (i.e., SaaS). Let's also say the average monthly subscription for the product is $79.
How should you set sales targets? Should you focus on the number of new monthly subscribers, or would it be best to set a monthly revenue target?
Before you can answer that question, you must consider customer cancellations. Some customers will stop their subscriptions the moment they find a cheaper alternative. Others may quit because they no longer need the product.
You might assess how the product's price impacts turnover to reduce cancellations. If the price is too high, it might force the company to change the pricing model.
The connection between a brand's goals and pricing strategy varies by industry. But the link exists, regardless of the category.
Pricing With Accurate Data
Data is another component companies need to help them choose a pricing strategy.
Many businesses set prices based on a simple market analysis. Others establish pricing based on what they think target customers can stand. Some rely on a business consultant's recommendation. But data removes much of the guesswork.
Businesses can use a few practical methods to gather data to help them set prices.
Here are the primary sources for that data:
Customer Feedback
Customer satisfaction surveys, reviews, and focus groups are valuable pricing data sources. For example, ask your current customer base to rate your prices on a 10-scale. This process is easy and will show how they feel about current pricing or rate increases.
Sales Data
Existing sales data can help a brand figure out if prices are too high, too low, or just right.
Your prices may be too low if:
- You can't find competitors with a lower price.
- You haven't raised prices in a long time (i.e., two or three years).
- There is an imbalance between the value you provide versus the price.
- Your close rate is well over 80 percent.
But your prices could be too high if:
- Sales volume is low, and you're consistently losing customers to competitors.
- Cancellation rates are high.
- Margins are above industry averages, low sales volume, and you're missing sales targets.
Results of Price Testing
Of course, one of the most reliable ways to set prices—and to get accurate pricing data—is by testing. Testing is easier for brands that sell products in large quantities. The larger amount of information gives more detail, so the analysis is more accurate.
The goal is to test price levels with various target audience segments. You may discover optimal prices within a few weeks. It may take longer to find the ideal price point. However, the effort to test prices will have a significant impact on the bottom line.
Price Elasticity
Price elasticity of demand measures the relationship between a product's price and demand. There are several types of price elasticity. Each has its implications for businesses:
Perfectly inelastic: The quantity demanded will remain unchanged no matter the product's price. An example of this would be a life-saving drug or an essential service, such as electricity or water.
Inelastic: Demand will not decrease even if prices increase. An example here could be luxury goods such as cars and high-end jewelry.
Unit elastic: This means that for every one percent increase in price, there will be an equal percentage decrease in demand. This pricing works best when your costs stay relatively consistent, and your customer base is stable.
Highly elastic: Demand will drop significantly if prices increase even slightly. Products such as breakfast cereal and soft drinks fall into this category. These products are commodities because customers have so many options. As a result, people shop around for deals and discounts.
Perfectly elastic: Any increase in price will cause an infinite decrease in demand. An example is airline tickets, which are based on availability and competition from other carriers.
When setting pricing strategies, it's vital to consider elasticity. This helps you increase prices without losing existing customers or alienating new ones. Businesses must also think about how their competitors' prices influence their own. No business wants to become less competitive by raising prices above the expectations of consumers.
The Value of a Product Is Subjective
Some experts believe that the more value a brand offers, the more profit it makes. But we disagree.
Value is subjective. I may find something valuable that you do not, and vice versa. Of course, there are rare exceptions to this rule. For example, if you sell a cure for a deadly disease, most will agree that your product has tremendous value. But if your product or service is like most, you must justify its value.
Yet, each consumer has a unique definition of value. Their view is based on several factors. Past experience, product knowledge, and social or cultural influences are examples.
The subjectivity of value makes it difficult for companies to price a product. So, you must focus on other factors to build more value for your product or service. Then, you can choose a pricing strategy that aligns with your brand's position in the market.
How to Build More Value for Your Product or Service
To create more value, you must show people your product or service is unique. Consumers know unique products cost more because they aren't easy to replace. That's how brand differentiation enhances a product's perceived value.
You need a plan to create differentiation and establish a strong market position. This plan is called a brand strategy.
Effective brand positioning builds higher value in the consumer's mind. A brand with solid positioning doesn't face as much price resistance, so it can charge more.
Companies with weak positioning often experience low marketing conversion rates. So, these brands often reduce prices and increase the marketing budget. Unfortunately, they end up spending more on marketing for less profit. Some even shut down a product line and write it off as a failure without uncovering the actual issue.
Consumers must believe the value of your product or service exceeds its price. When they do, you can charge more for it.
Pricing to the Market
The price of a product is usually seen as the primary factor in the buying decision. This assumption seems logical, given the average customer's sensitivity to price.
But many times, the price of the product isn't the problem. Instead, it's the target audience.
The customers you target impact your ability to make a profit. The more qualified the audience is to buy the product, the easier it will be to choose the right pricing method.
To be successful, a company must align its product or service with its market.
First, the brand must determine the customers who benefit most from its product. Then, they should assess the profitability potential of each customer type. This evaluation is based on the customer's perception of value and their ability to buy.
For example, the demand may be higher for your product among a specific customer segment. But that group isn't qualified if they can't afford to buy it. Selling to price-sensitive customers might force you to use economy or discount pricing.
Brands often sell at a low price point to boost sales. But sales often drop again once the brand tries to revert to the original price level. The gain from discounting often isn't enough to offset lagging sales at normal prices.
Many of our clients discover that the target market and product benefits don't align. As a result, market demand for their product or service is usually low.
In other words, they've been selling to the wrong crowd.
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Competitors and Pricing Strategy
Studies show a direct correlation between a product's perceived quality and cost. The link between price and quality means more when comparisons are hard for the consumer to make.
Here's a viable question: if two products appear to be the same, wouldn't consumers buy the cheapest one?
The answer depends on how a brand has positioned itself against the competition.
Brands with strong product positioning have done a better job of creating differentiation. Thus, they have also created a higher perceived value.
Brands with a higher perceived value can sell what appears to be the same product at a higher price. But it's important to note that even though the products may look similar, they aren't the same in the consumer's eyes.
Companies with strong positioning can use a more profitable pricing strategy. Value-based pricing and premium pricing are examples.
A brand with a weak competitive position may need to use cost-plus or penetration pricing. These strategies involve setting prices low to attract customers and gain market share. But, this approach can erode profit margins and may not be sustainable in the long term.
Brands can also use a skimming strategy. This involves setting high prices at launch when competition is low and gradually lowering them as more competitors enter the market. This strategy is common in the technology and luxury goods sectors.
It's important to note that a brand's competitive position isn't static. It can change because of market trends, technological advancements, and competitor actions. So, brands must continue to manage their pricing strategies as the market changes.
How to Build More Value for Your Product or Service
To create more value, you must show people your product or service is unique. Consumers know unique products cost more because they aren’t easy to replace. That’s how brand differentiation enhances a product’s perceived value.
You need a plan to create differentiation and establish a strong market position. This plan is called a brand strategy.
Effective brand positioning builds higher value in the consumer’s mind. A brand with solid positioning doesn’t face as much price resistance, so they can charge more.
Companies with weak positioning often experience low marketing conversion rates. So, these brands often reduce prices and increase the marketing budget. Unfortunately, they end up spending more on marketing for less profit. Some even shut down a product line and write it off as a failure without uncovering the actual issue.
Consumers must believe the value of your product or service exceeds its price. When they do, you can charge more for it.
9 Common Pricing Strategies
There are different pricing strategies you can use to boost profit margins. In this section, I have elected to cover the most popular ones:
- Competitive pricing
- Dynamic pricing
- Cost-plus pricing
- Economy pricing
- Penetration pricing
- Price skimming strategy
- Bundle pricing
- Value-based pricing
- Premium pricing
Competitive Pricing
Businesses that use a competitive pricing strategy use competitors' prices as a baseline. Other pricing factors, such as demand and brand value, are secondary considerations.
Businesses have access to a wealth of analytics and other digital data. This enables them to watch competitors' pricing strategies. So, a company can set prices in real time, which helps it remain competitive.
Competitive pricing makes it easy for a business to establish acceptable price levels. But this approach comes with some disadvantages. First, they're allowing competitors to control price floors and ceilings. This can limit profitability.
A brand also risks letting competitors hold them hostage. This could force them to sell at a discount without considering other factors like production costs.
Dynamic Pricing
Dynamic pricing is a strategy that adjusts the price of a product or service based on demand and supply. The goal is to increase profit by charging more when demand is high and less when it's low. We often use this pricing strategy in transportation, hospitality, and entertainment.
As an example of dynamic pricing, a business might optimize revenue by charging the highest price during peak periods.
There are various ways to use dynamic pricing. This includes surge pricing, time-based pricing, and personalized pricing. Surge pricing involves charging higher prices during peak periods. Rush hour or holidays are prime examples. Time-based pricing involves charging different prices based on the time of day or week. Personalized pricing involves setting prices based on customer behavior, preferences, and history.
Cost-Plus Pricing
The cost-plus pricing strategy is one of the most common pricing strategies. The process involves adding a fixed percentage of production costs or overhead. This is a simple pricing strategy popular among retailers and manufacturing companies.
For example, a brand might establish its price by adding a percentage to its cost of goods and services. So, if a product costs $50 to produce, and the revenue goal is a 20 percent profit margin, then the product's price would be $60.
This price strategy works best for businesses that sell low-cost goods and services.
Economy Pricing
Economy pricing involves setting low prices for products with minimal production costs. The goal is to attract price-sensitive users who respond to special offers and promotions. This pricing strategy is often associated with generic products that are easily replaceable.
This price strategy saves money by using cheaper materials and a simpler production process. However, the downside is that low prices can indicate inferior quality. This could have a negative impact on profit. Customer loyalty also tends to be lower because they don't stand to lose much by switching to a cheaper competitor.
Penetration Pricing
The penetration pricing strategy is effective for new businesses. The goal of this price strategy is to charge below-market prices at launch to get customers. Then, the company can raise prices as the business grows.
This pricing strategy comes with a significant challenge. It may be difficult for the company to raise prices later. People may resist price changes when you position your business as a low-cost brand.
Some companies choose not to increase prices for existing customers. Instead, they elect to raise them for new customers only. But this can cause a problem if new customers find out what's going on.
The penetration pricing strategy also puts the brand at risk. Customers may leave for a cheaper competitor after a price increase.
Price Skimming
Using a price skimming strategy, businesses set high prices for new products. Then, they gradually lower them as competitors enter the market. This strategy is the opposite of penetration pricing. Penetration pricing starts with low prices to build a large customer base at the outset.
Price skimming is used to generate higher short-term profits and attract early adopters. New products with high prices can also create a perception of exclusivity and luxury. This strategy attracts customers who will pay a premium for new, innovative products.
As competitors enter the market and prices drop, businesses can segment customers based on their willingness to pay. This allows them to maintain profitability.
Bundle Pricing
Bundle pricing combines two or more products and offers them at a discounted price. This pricing method is prevalent in retail and e-commerce. It's based on the idea that the brand gives customers more value for their money.
To create effective product bundles, businesses need to consider several factors. Customer preferences and product compatibility are examples. It's best to bundle complementary products that customers are likely to buy together. You can also bundle products with different price points that give people more options.
Value-Based Pricing
The value-based pricing strategy focuses on the perceived value of a product or service. This strategy is customer-centric, meaning brands base their prices on how much the customer believes a product is worth. To use value pricing, businesses must carefully observe how customers buy and what they prefer.
When businesses use this strategy, they should also think about other factors that affect their pricing. Production costs are one example. This includes costs associated with delivery (i.e., marketing and distribution expenses).
Value-based pricing can help businesses differentiate and focus on specific market segmentation. For example, a company can set higher prices for customers who focus on quality over price. By doing so, brands can attract customers who will pay more for better features and services. The key is to identify each segment's needs and design specific offers at an appropriate price point.
Value-based pricing has a powerful psychological effect. It gives customers an option to choose from various levels of quality without sacrificing too much for a lower cost.
Premium Pricing
The premium pricing strategy helps businesses position themselves in the market as a provider of higher quality. Companies must use their brand identity to justify charging a high price. By doing so, brands can attract customers who will pay more for a superior product or experience.
This pricing strategy is based on the perception that price is an indicator of quality. To make sure this perception rings true, the quality of an offering must justify the higher price tag. The brand may need to invest in better materials. They might also improve the customer experience and offer unique features or services.
Premium pricing also has the benefit of creating an exclusive atmosphere. Customers feel like they're getting something special when their product comes with a higher tag. This can be useful for high-end luxury brands.
Charging higher prices can help businesses stand out and earn more money for what they offer. But it's important to remember that this strategy only works if the value offered justifies its cost. Otherwise, customers may buy cheaper options instead.
What Is a Premium Brand?
A combination of high quality and exceptional value puts elite brands in a category of their own.
Managing Your Pricing Strategy: The Market, Consumers, and the Competition
The key to overcoming the challenges of pricing lies in having a strategy. This involves conducting market research, testing prices, getting customer feedback, and adjusting prices.
Conduct Market Research
Understanding your market is the first step towards setting an effective price. Look at your competitors' prices. Understand your customers' willingness to pay, and watch market trends. Tools like Google Trends and Nielsen can provide valuable insights.
Test Different Pricing Models
Once you've gathered your data, experiment with different pricing models. Cost-based pricing, value-based pricing, and competitive pricing are just a few options. The goal is to find a model that maximizes profits while maintaining a strong value proposition.
Assess Customer Feedback
Listen to your customers. Are they happy with your prices? Do they see value in what you're offering? Use surveys and social media insights to gauge customer sentiment and adjust your prices if needed.
Adjust Prices Based on Market Conditions
Finally, remember that pricing is not a set-and-forget task. Review and adjust your prices based on market conditions, customer feedback, and your business goals.
Do You Need Help Choosing the Right Pricing Strategy?
A brand audit is a powerful tool that can help you identify the right pricing strategy for your business. The process includes an analysis of the market, customer preferences, and competitors. The results can help you determine the most effective and profitable price points.
An audit can also help you:
- Target the right customers who appreciate the value of your product or service.
- Build brand positioning that creates more value.
- Determine which pricing strategy is best for your business goals and target market.
To learn more, get in touch with us to schedule a free consultation.
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Our brand audit process is a comprehensive analysis designed to help companies increase ROI and reduce marketing expenses.
- Increase ROI on lead generation and sales conversions.
- Reduce marketing expenses.
- Strengthen brand positioning to become more competitive.
We guarantee satisfaction or get your money back! Schedule a discovery call with a brand auditor to find out more.
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