You’re doomed if you don’t have a price strategy. Why? Because your main competitors are almost certainly using fantastic pricing strategies.
Here’s the thing: if you overprice your offers, you’ll end up with less sales. And if you underprice things, you’ll make less money than you otherwise could. To succeed, you must first identify the sweet spot, which begins with choosing the appropriate pricing plan.
But, exactly, what are pricing strategies and how do they work? There are a plethora of pricing structures to select from as well – which one is right for your company?
This guide will show you how to implement the most common pricing systems.
Let’s get started.
Cost-Plus Pricing Strategy
One of the most easy ways to price your offers is to use a cost-plus pricing strategy. The following is how it works: You’d start by calculating the total cost of manufacturing and selling your product or service, often known as the cost of goods sold (COGS). Product sourcing, packaging, shipping, storage, marketing, overheads, and any other costs associated with producing and selling the product or service are included.
To generate a profit, you would apply a fixed percentage once you’ve computed the COGS. The cost-plus pricing model is commonly referred to as “markup pricing” because of this.
The cost-plus pricing strategy is mostly used by retailers selling many physical products. It usually doesn’t work very well for more complex products or services, such as software or consulting services.
Price skimming is a pricing strategy in which businesses initially set high rates for their product or service.
This price strategy was created to assist businesses in capitalising on sales of new products and services. It helps firms to maximise earnings from early adopters. As new competitors enter the market, the company will gradually lower the price to attract more price-conscious customers.
A way to make early profits, price skimming is also an effective tool to make your product or service appear more exclusive or unique when it is first introduced as it creates an aura of prestige around your product.
Psychological Pricing Strategy
If you’ve ever walked into a discount store, you’ve experienced psychological pricing firsthand. This pricing strategy is all about using human psychology principles to increase sales. A common tactic is ‘charm pricing’ — when a price ends in 9, 99, or 95 to make it feel cheaper than it is. This works because when people read from left to right, the number appears smaller.
Another psychological pricing tactic is called price anchoring. It works by anchoring the price high and then offering a lower price to make the price seem like a good deal. For example, “$100 NOW $75.”
Premium Pricing Strategy
The term “premium pricing approach” means precisely what it says. The goal is to improve the perceived value of a product or service by charging a premium price. It’s also known as luxury or prestige pricing.
Premium pricing is most commonly used by luxury firms in the fashion and hospitality industries, which is unsurprising. Rolex, for example, has a premium price strategy.
Freemium Pricing Strategy
Freemium pricing is when businesses provide a basic version of their core offering for free to encourage people to use the product or service. The company will then work to upsell users to a paid premium version of the product or service that provides more value.
This pricing strategy is mostly used by software-as-a-service (SaaS) businesses that offer free plans with limited features, allowing users to experience the software before committing.
Project-Based Pricing Strategy
Project-based pricing is another strategy most often used by service-based businesses. Instead of charging for the hours worked, the business will set a flat fee for the project upfront. This allows clients to know the total cost of the project before work begins — and consequently, feel comfortable in the knowledge that the job will be completed within their budget.
You may want to combine this pricing strategy with another. For example, you could combine project-based pricing with cost-plus pricing. In this instance, you would work out your COGS, add a markup, and charge per project.
Bundle pricing, otherwise known as product bundling, is when a business sells multiple products for a lower rate than customers would face if they purchased each item individually.
It is a great strategy for businesses that are able to offer courtesy products. For instance, if you run a cosmetics brand you could maximise on bundle pricing by offering a free eye liner with every mascara purchased. Or, if you run a café you could offer a free muffin with every coffee on a certain day of the week.
However, businesses using this strategy do need to ensure that they can afford to make up for the losses on the lower-value product and must be able to generate a good profit on the high-value product.
Penetration Pricing Strategy
Penetration pricing is most often used by large companies that have the resources to break even or even lose money for a period. Consequently, they can offer very low prices to attract customers — and poach customers from competitors.
Over time — once the company is established in the market — the company will gradually raise the price to make a healthy profit.
Netflix used this new product pricing strategy when it entered the market at just $7.99. The company now offers three plans that cost $9, $14, and $18.
High-Low Pricing Strategy
A high-low pricing strategy is the opposite of a penetration strategy. Instead of starting with a low price and increasing it over time, businesses sell products for a high price initially and then lower the price as the product loses market demand, relevance, or novelty.
Whenever you see a store with a large discount section, you’re witnessing the high-low pricing strategy in action.
Pricing strategies are used to determine the optimal price for a product or service to increase sales and profit.
Selecting a pricing strategy can feel overwhelming at first. So, start by calculating your COGS. Then, if you’re struggling to decide which pricing model to go with, consider using whichever pricing strategy is most popular for your type of product, service, or industry.