Whatever business you are in you can use distinct or combinations of different pricing methods dependent on your business objective(s). A successful pricing strategy can be used to maximise profitability for each unit sold or from the market overall. It can also be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market.
Finding the right pricing method is vital for your business success. Below is an introduction to the various pricing strategies available to you:
A simple method that ensures the price of your product or service covers variable costs, plus a proportionate amount of fixed costs.
This pricing method refers to a strategy under which a business adds up all the costs which have gone into making a product like raw materials and labour and then adds some percentage of profit margin to arrive at a price for a product.
Method of pricing where the seller offers at least three products, and where two of them have a similar or equal price. The two products with the similar prices should be the most expensive ones, and one of the two should be less attractive than the other. This strategy will make people compare the options with similar prices, and as a result sales of the more attractive, higher-priced item will increase.
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 barriers for entry for people to get access to an offering with the aim to get them hooked so that they eventually move towards becoming premium users.
Where goods or services are offered at prices higher than competitors but this pricing strategy focuses on competing through promotions. The promotions are designed to hook in the customer, so that they then also purchase other, higher priced products during a transaction.
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.
This is where analysis and research of the market are already completed, and prices are set dependent on these results. One example would be having a pricing strategy that matches the prices of your competitors.
Pay What You Want!
This is 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 sound like much sense, but studies have shown that in certain sectors this pricing method tends to lead to higher revenues as customers can opt to pay a lot more than the price you might have originally set.
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 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 priced comparison.
This method keeps prices high in order to maintain a perception of quality, desirability, and exclusivity.
A method whereby prices are segmented typically by customer or market of operation.
Price leadership is observed where there is a dominant company in your market sector, and this company (it might be you) has the pricing power to set prices that are usually then followed by smaller competitors.
Prices are set at a level to trigger a psychological, sometimes irrational, decision. For example, the perception that 99p is much cheaper than £1.00.
Here, goods are 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 perhaps due to their need to own the product outweighing the requirement to economise, a greater understanding of the product value - or, just more disposable income.
Target pricing is a process where the price is driven by the return on investment (ROI) required. This method is typically adopted where there has been a large up-front investment such as in public utilities.
Also referred to as surge pricing, demand pricing, or time-based pricing, it's a strategy whereby businesses set flexible prices for products or service based on current market demands.Businesses are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market.
Dynamic pricing is a common practice in several industries such as hospitality, travel, entertainment, retail, electricity, and public transport. Each industry takes a slightly different approach to repricing based on its needs and the demand for the product.
Value-based pricing ignores the actual cost of delivering the product or service, and focuses on the benefit or value the customer will receive from their purchase. As an example, it may cost £100 to attend a one-hour training course, but if the attendee can implement changes/benefits to their business as a result of what they have learned, that brings rewards that far exceed £100. If you are running the course, this may be the time to price based on value rather than cost.
Businesses can use a variety of pricing methods outlined above or stick to one tried and tested strategy. However, in today's competitive markets it is vital to keep abreast of any changes, however slight, in those markets – and to price accordingly. Businesses must be constantly attentive to their opponent's actions in order to have the comparative advantage in the market.
A company's decision on the price of a product and the pricing method implemented impacts on the consumer’s decision on whether or not to purchase the product. Internet usage has increased and developed dramatically therefore price comparisons can be done anytime by potential customers.
Consumers are very selective regarding their purchases and firms must price their products using the most effective pricing strategy at their fingertips – and according to what is most effective in their particular industry.
Nagle, Thomas and Holden, Reed. The Strategy and Tactics of Pricing 2016
Philip Kotler & Gary Armstrong, Principles of Marketing 13E, 2010
Gregson, Andrew. Pricing Strategies for Small Business 2008
Kent B. Monroe, The Pricing Strategy Audit, 2004
Mohammed, Rafi. The Art of Pricing:how to find the hidden profits to grow your business 2005
Kent B. Monroe, The Pricing Strategy Audit, 2003