How to Choose a Pricing Strategy: 11 Pricing Strategy Models

A pricing strategy is a model for determining the right price for a product or service. Entrepreneurs, small businesses, and enterprise companies all benefit from developing a pricing strategy. A pricing strategy can help you maximize profit margins and increase market share while taking consumer and market demand into consideration. The best pricing strategies are aligned with a business's marketing strategy in order to reach the target audience and increase sales volume.

When it comes to determining the price of a product or service, the key is to strike a balance that will generate revenue without deterring potential customers. Setting prices too high can make a product prohibitively expensive for your target audience while setting prices too low can threaten your bottom line. Fortunately, there are a number of different pricing strategies that can help you determine the right price for your products. Having a robust pricing strategy gives you a competitive advantage by allowing you to meet consumer demand in a competitive market.

Here are eleven common pricing strategies.

1. 1. Competitive pricing: Also known as competitor pricing, a competitive pricing strategy relies on the current market rate for a product to determine price. Instead of basing prices on production cost or consumer demand, the competitive pricing method is based on the prices other companies charge for a similar product or service. Businesses who rely on this method typically operate in a highly competitive market where even the slightest price difference can make or break a sale.
2. 2. Cost-plus pricing: Also known as markup pricing, a cost-plus pricing strategy relies solely on production costs to determine the price of products. This is typically accomplished by adding a fixed percentage to production costs. This strategy allows you to keep up with market conditions by charging a higher price based on fluctuating production costs.
3. 3. Skimming strategy: Price skimming is when a company sets a high price for a new product and then incrementally lowers it as it becomes less desirable or other competitors enter the market. This is common among technology and appliance companies whose products have a short life cycle. A price skimming strategy can be effective, but it also risks upsetting early adopters who paid full price.
4. 4. Penetration pricing: The opposite of a skimming strategy, users of the penetration pricing strategy enter the market offering a lower price than their competitors and then raise it after a short time. Initially offering a low price is an effective market penetration strategy for getting new customers, but unless you have a significant pool of capital to draw from, it may not be feasible in the long term.
5. 5. Loss leader pricing: Loss leader pricing is similar to penetration pricing. It involves offering some products or services at a loss in the hope of recouping revenue through the sale of complementary higher-priced items. This strategy is often seen as predatory and may be legally sanctioned.
6. 6. Premium pricing: Premium pricing is a high-end pricing strategy used to present an image of prestige or luxury. It is based on the perceived value of a product rather than its actual value or production cost.
7. 7. Economy pricing: Economy pricing is the opposite of premium pricing, but follows much of the same principles. Businesses using this pricing strategy target consumers looking for the lowest price available. It can be an effective strategy for moving a high volume of goods, but may have the effect of decreasing the perceived value of your product.
8. 8. Bundle pricing: Bundle pricing involves offering two or more products at a lower cost when the products are purchased together. This can be an effective way to upsell products or services.
9. 9. Dynamic pricing: Also known as demand or surge-based pricing, the dynamic pricing model relies on consumer demand to set prices. This is a standard business model in industries such as air travel, events, hotels, and utilities.
10. 10. Psychological pricing: Psychological pricing takes advantage of human psychology and market research to determine price points. For example, a business could position two similar products of varying prices (one high, one low) directly next to one another in the hope of selling more of the less expensive product—consumers are likely to think they’re getting a deal relative to the more expensive product. Another common psychological pricing practice is known as the “nine-digit effect.” Research shows that consumers are more likely to purchase a product if they see a 9 in the price—such as $9.99 compared to $10.00.
11. 11. Promotional pricing: Also known as freemium—a portmanteau of the words “free” and “premium”—this strategy works by offering consumers a free version of your product in the hope that they’ll eventually pay to get full access. This is a common strategy used by e-commerce and SaaS companies that offer free trials or ad-based subscription levels. It’s an effective model for establishing a customer base, but is dependent on the perceived value of the company's products.

To know which pricing strategy is best for your business, you must first have an in-depth knowledge of your product and the market. Here are some tips to help you choose the right pricing strategy.

• Know the true value of your product. To determine the true value of your product, consider the fixed and variable costs, the time it takes to make your product, and how much consumer demand there is for your product.
• Identify your target market. Creating buyer personas can help ensure you’re reaching your target customers. Personas are groupings of demographics that describe the type of person who could become a potential customer. Conduct thorough market research, such as polls and interviews, to learn more about your target customer and their willingness to pay different prices for your product.
• Evaluate your competitors’ pricing. In order to properly set your own prices, you’ll need to know what your competitors are charging. This will help you determine the best option for how to compete—will you compete on price, or will you compete on value? If your competitor is charging a higher price for a similar product, you may choose to offer a lower price. If they’re setting a lower price for an inferior product, you may decide on a higher price to indicate the superior quality of yours.

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