What is a Pricing Strategy?

Pricing strategy refers to method companies use to price their products or services. Almost all companies, large or small, base the price of their products and services on production, labor and advertising expenses and then add on a certain percentage so they can make a profit.

Businesses can use distinct or combinations of different pricing strategies dependent on their overall business objective. Finding the right pricing strategy is crucial for business success.

Types of Pricing Strategies

Below is an introduction to the various pricing strategies available to you:

ABSORPTION

A method that ensures the price of your product or service covers the variable cost, plus a proportionate amount of fixed costs.

COST-PLUS

A method based on determining the break-even point of your product or service, and adding a mark-up based on the profit you wish to make.

DECOY PRICING

This method is powerful where the seller has at least three products or services, with two of them having a similar or equal price. The two should also be the most expensive, with one of them being less attractive.

Ultimately this method encourages behaviour where the cheapest option is quickly ruled out, and higher sales are witnessed on the more expensive products.

FREEMIUM

Freemium is a business model that offers a basic product or service free of charge. If more advanced features are required (a premium option), the product or service has a charge associated.

Freemium is a good way of lowering the barrier for entry for people to get access to an offering with an aim to get them hooked so that they eventually move towards becoming premium users.

HIGH-LOW PRICING

Where good or services are offered at prices higher than competitors, and then pricing strategy focuses on competing through promotions.

The promotions are designed to hook in the customer, so that they then also purchase higher priced products during the transaction.

LOSS LEADER

A method of selling a product or service at break even point of below cost to stimulate other profitable sales in a similar way to high-low pricing.

MARKET-ORIENTED PRICING

This is where analysis and research of the market is completed, and prices are set dependent on these results. For example having a pricing strategy that matches the prices of your competitors.

PAY WHAT YOU WANT

A pricing method that gives the power to the buyer to pay any desired amount, and sometimes even nothing if there is no minimum price set.

This may not make much sense, but studies have shown in certain sectors that this tends to lead to higher revenues as customers can opt to pay a lot more than a price you would have originally set.

PENETRATION PRICING

Penetration pricing includes setting the price low with the goals of attracting customers and gaining market share. The price will be raised later once this market share is gained.

PREDATORY PRICING

Predatory pricing is a process of intentionally undercutting your competition to drive them out of business or the market. It is illegal in certain countries.

PREMIUM DECOY PRICING

This decoy method adopts a strategy of artificially inflating the price of a product or service in order to increase the sales of a lower prices comparison.

PREMIUM PRICING

This is a practice of keeping prices high in order to maintain a perception of quality, desirability, and exclusivity.

PRICE DISCRIMINATION

A method that prices are segmented typically by customer or market of operation.

PRICE LEADERSHIP

Price leadership is observed where there is a dominant company in a market sector, and therefore have the pricing power to set prices that are usually then followed by smaller competitors.

PSYCHOLOGICAL PRICING

Prices are set at a level to trigger a psychological decision. For example the perception that 99 is much cheaper than 100.

SKIMMING

Goods are typically sold at higher prices so that fewer sales are needed to break even. This method is typically adopted at a product launch where ‘early adopters’ generally have a lower price sensitivity commonly due to their need to own the product outweighing the requirement to economize; a greater understanding of the product value; or more disposable income.

TARGET PRICING BUSINESS

Target pricing is a process where the price is driven by the return on investment required. This is typically adopted where there has been a large up front investment such as in public utilities.

TIME-BASED PRICING

This method utilises the power of technology to dynamically update prices based on a customer’s willingness to pay against market forces such as availability.

VALUE-BASED PRICING

Value-based pricing ignores the cost of delivering the product or service, and focuses on the benefit or value the customer will receive.

For example it may only cost £100 to deliver a one-hour training course, but if the trainee can implement changes to a business as a result of knowledge learned that bring returns that far exceed this, this may be a case to price based on value rather than cost.