9 Proven Pricing Strategies Businesses Can Use to Boost Profit
Take the guesswork out of pricing your products and services. Get expert insights to help you choose the right pricing strategy for your business.
May 16, 2023
Introduction
Many of our brand audit clients are business owners and executives who are looking to strike a balance between price and profit. Before coming to us, most of them were using promotions and discount pricing campaigns to gain market share.
But, once they completed a brand audit, they often discovered they had been using the wrong pricing strategy.
While price plays a critical role in the sales process, your pricing strategy often dictates long-term profitability. That’s why it’s so important to choose the best pricing model for your brand’s growth objectives.
Businesses that try to undercut their competitors may make sales—for a while. But if the price strategy doesn’t align with the brand’s business model, it can be more difficult for the company to remain profitable.
We believe companies should plan pricing decisions carefully. In this post, you’ll learn more about pricing strategies and how to choose the right one for your business.
Plus, you’ll discover:
How to Choose the Best Pricing Strategy for Your Business
The competitive market and customer’s price sensitivity can cause companies to become too focused on price. As a result, many of them offer discounts or establish a selling price that is too low, making it harder for them to remain profitable.
But it’s impossible to ignore the customer’s perspective, even if their preferences work against the brand’s mission to make money. For example, discounts are popular among consumers, but aren’t always beneficial for the business’s long-term health. Companies have other considerations, such as overhead costs and competitor pricing.
All these factors make it tougher to choose a long-term pricing strategy.
That’s why companies must analyze market forces and customer preferences before deciding which pricing strategy works best for them.
Let’s look at some keys to identifying the best pricing strategy for your business.
Align the Pricing Model with the Business Model
Many factors impact a brand’s ability to hit its revenue targets. The marketing strategy and sales cycle are examples.
For example, let’s assume your company sells a B2B subscription-based product (i.e., software as a service) and that the average market price for this product is $79 per month.
How should you set sales targets? Should you focus on the number of new subscriptions each month, or would it be best to set a monthly revenue target?
Before you can answer that question, you must also consider customer cancellations. Some customers will cancel their subscription if they find a cheaper alternative to your product. Others may end their subscription because they no longer need it.
To reduce cancellations, the brand might consider how the product’s price impacts turnover. If the price is too high, it might force the company to change the pricing model completely.
The effect of a brand’s goals on its pricing strategy will vary from one industry to another. But the link exists, regardless of the category.
Use Accurate Pricing Data
Data is another component that companies need to determine which pricing strategy they should use.
Many businesses set prices based on a simple market analysis. Others establish price points based on what they think target customers can stand. Some rely on a business consultant’s recommendation. But data removes much of the guesswork associated with pricing.
Businesses can use a few practical methods to gather data that will help them set prices.
Here are the primary sources for that data:
1. Customer Feedback
Customer satisfaction surveys, reviews, and focus groups are valuable sources of pricing data. For example, ask your current customer base to rate your prices on a 10-scale. This simple process will reveal how they feel about current pricing tiers or potential rate increases.
2. 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%.
However, your prices could be too high if:
- Sales volume is low and you’re consistently losing customers to competitors.
- Cancellation rates are high.
- Profit margins are above industry averages, sales volume is low, and you’re missing sales targets.
3. 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 higher sales volume provides more information on a granular level, which makes for more accurate analysis.
Testing is especially helpful for brands that use premium pricing or service providers.
The goal is to test price levels with various target audience segments. You may discover optimal prices within in a few weeks. It may take longer to find the ideal price point. But the effort to test prices will have a significant impact on the bottom line.
Consider That a Product’s Value Is Subjective
Every business should offer value to the target market through its product or service.
Some experts believe that the more value a brand offers, the more profit it makes. But this isn’t true.
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 have to justify its value.
Yet each consumer has a unique definition of value. Their perspectives are based on several factors, such as past experience, product knowledge, and social or cultural influences.
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 marketplace.
The Foundation of an Effective Pricing Strategy
Many believe the price of a product is the primary factor in the consumer’s 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 customer you target directly impacts 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 model.
To be successful, a company must align its product or service with consumer demand.
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 consumer demand and the customer’s ability to purchase.
For example, there may be a higher demand for your product from a specific customer segment. But that group isn’t qualified if they can’t afford to buy it. Likewise, if you target price-sensitive customers, economy pricing or the discount pricing strategy may be your only options.
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 brand audit clients discover they haven’t aligned their target market with the right product benefits. As a result, market demand for their product or service is usually low.
In other words, they’ve been selling to the wrong crowd.
What Is a Premium Brand?
A combination of high quality and exceptional value puts elite brands in a category of their own.
Brand Positioning and Pricing Strategy
Did you know low prices reduce the value of a product or service in the customer’s mind?
Think about it. When we buy a cheap product, a voice in our head tells us we should probably lower our expectations of it. So, are we surprised when the thing quits working, the terms change, or the company we bought it from won’t call us back?
Price is an indicator of quality. Studies show the direct correlation between the perceived quality of a product and its cost. The link between price and quality matters more when brand comparisons are hard for the consumer to make.
Here’s a viable question: if two products appear to be the same, wouldn’t the consumer buy the cheapest one?
The answer depends on how a brand has positioned itself.
Brands with strong product positioning have done a better job 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 pricing strategy that allows for more profit. Value-based pricing and premium pricing are examples.
How to Build More Value for Your Product or Service
To create more value, you must show people that your product or service is unique. Consumers understand that unique products and services 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. To solve the problem, 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.
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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 Strategy
A competitive pricing strategy requires that businesses use their competitors’ prices as a baseline. Other factors, such as demand and brand value, are secondary considerations.
Businesses now have access to a wealth of analytics and other digital data that enables them to monitor competitors’ pricing strategies. This allows a company to set prices in real time, which helps them remain competitive.
Competitive pricing makes it easy for a business to establish acceptable price levels. However, this approach comes with some disadvantages. First and foremost, you’re allowing competitors to control price floors and ceilings, which can limit your profitability.
A brand also risks being held hostage by competitors’ prices, which may mean selling at below-market rates indefinitely without considering other factors, such as product production cost.
Dynamic Pricing Strategy
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. This pricing strategy is commonly used in industries such as transportation, hospitality, and entertainment.
As an example, a business might optimize revenue by charging the highest possible price during peak periods.
Dynamic pricing can be implemented in various ways, including surge pricing, time-based pricing, and personalized pricing. Surge pricing involves charging higher prices during peak periods, such as rush hour or holidays. 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 Strategy
The cost-plus pricing strategy is one of the most common pricing strategies. The process involves adding a fixed percentage to production costs or overhead. This is a simple pricing strategy popular among retailers and manufacturing companies.
As an 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 Strategy
Economy pricing involves setting low prices for products with minimal production costs. The intention is to attract the interest of the most price-sensitive users who respond to special offers and promotions. This pricing strategy is typically associated with generic products or basic services that are easily replaceable.
An economy pricing strategy leverages the lower production costs that result from using cheaper materials and a simpler production process. But the downside to this approach is that low prices can indicate low quality, which could actually decrease profit. Customers loyalty also tends to be lower because they stand little to lose by switching to a cheaper competitor.
Penetration Pricing Strategy
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. However, this can cause a problem if new customers find out what’s going on.
The penetration pricing strategy also puts the brand at risk because customers may leave for a cheaper competitor after a price increase.
Price Skimming Strategy
Using a price skimming strategy, businesses set high prices for new products and gradually lower them as competitors enter the market. This strategy is the opposite of penetration pricing, which starts with low prices to build a large customer base at the outset.
Price skimming is often 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, which tends to attract customers who will pay a premium for the latest and greatest products.
As competitors enter the market and prices drop, businesses can segment customers based on their willingness to pay, allowing them to maintain profitability.
Bundle Pricing Strategy
Bundling is a pricing strategy that combines two or more products and offers them at a discounted price. This pricing method is prevalent in retail and e-commerce because it gives customers more value for their money.
To create effective product bundles, businesses need to consider several factors, including customer preferences and product compatibility. It’s best to bundle complementary products that customers are likely to buy together, or products with different price points that give people more options and flexibility.
Value-Based Pricing Strategy
The value-based pricing strategy focuses on the perceived value of a product or service to the customer. This strategy is customer-centric, meaning that brands base their prices on how much the customer believes a product is worth.
This strategy is effective for brands that offer unique or highly valuable features or services because they’re better positioned than companies that sell commoditized items. Companies that use this pricing method are also more likely to build customer loyalty because they aren’t easy to replace.
Premium Pricing Strategy
A premium pricing strategy is like value-based pricing, but with a significant difference. There is a psychological pricing strategy component that requires the brand to leverage its brand identity and positioning to set prices that are above market averages.
This strategy is based on the premise that price is an indicator of quality. In this sense, price becomes a product differentiator.
How a Brand Audit Can Help Your Business Identify 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 price points that are likely to be most effective and profitable for your product or service.
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.
Are you ready to find out how a brand audit can transform your business?
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.
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Latest Insights
What Is a Premium Brand?
A combination of high quality and exceptional value puts elite brands in a category of their own.
