A good pricing strategy is the foundation of any successful business. Not only can effective pricing build your customer base, but it can also build brand awareness while increasing your revenue. That said, there are lots of different pricing strategies out there, so choosing the right one(s) for your business is critical. Here six you can consider.
Penetration pricing
Penetration pricing is a strategy where a business initially sets low prices for its products in order to draw in customers and increase its market share. This type of pricing is generally good for products and services that are widely used and aren’t too costly to produce, as this method relies on high sales volumes to initially generate revenue.
While this method can be effective at attracting customers looking for a bargain, it’s sadly not the most sustainable pricing method. Eventually, the business will need to raise its prices, ideally at a time when a loyal customer base has been established.
Price skimming
Price skimming is the opposite of penetration pricing. Under this method, a business offers a new product or service at the highest possible price point a customer is willing to pay, gradually reducing the price of the item over time. This is a good way to recoup upfront development costs, while creating a ‘must-have’ appeal for a product or service.
This method is best for businesses that have an established customer following and that offer products or services that are unique or at the forefront of a trend. The technology sector, for example, often employs this strategy. Think of iPhone releases: the latest models always release at the highest price point, when customer interest is highest, only to reduce in price as time passes.
Premium pricing
Premium pricing, sometimes referred to as prestige pricing, is where a business sets a high price for an item, typically for luxury or exclusive products. Unlike price skimming, a business will not aim to reduce the price of the item where it uses premium pricing.
However, to justify this higher price, the product should offer higher-quality features or services that live up to the price tag – high-end fashion labels are a good example of this strategy.
Discounts and bundles
A common pricing strategy is to offer discounts to customers. It’s a simple strategy, but it’s highly effective: discounts can attract both new and existing customers to your business, while also providing an opportunity to sell off excess stock.
Another common tactic is to bundle items together. A bundle of products or services is typically sold at a lower price point than the combined value of each individual item in the bundle, and so acts as an incentive to customers who might want a selection of products at the best price. However, bundling should rarely be a business’s sole pricing strategy – it tends to work best when customers have the option to purchase standalone products as well.
Cost-plus pricing
This is one of the simplest and most widely used strategies: work out the total cost of producing your product or delivering your service, then add a markup to arrive at your selling price. It’s straightforward to calculate, easy to justify, and ensures every sale contributes to your bottom line.
The catch is that it only works if you genuinely know your costs. Many small businesses underprice by overlooking overheads, their own time, or other indirect costs when doing the sums. Even if you ultimately adopt another strategy, understanding your true cost per sale – and therefore your break-even point – should be the foundation of any pricing decision.
Value-based pricing
Rather than starting with your costs, value-based pricing starts with your customer: what is your product or service actually worth to them? A service that saves a customer ten hours a month, for example, can be priced against the value of that time — not simply the hours it takes you to deliver it.
This strategy is particularly powerful for service businesses and for products that solve a specific problem, and it often supports healthier margins than cost-based methods. It does require a solid understanding of your target customer and what they’re willing to pay, so it pairs naturally with the market research covered below. Think of it this way: your costs set the floor for your price, but the value you deliver sets the ceiling.
Research the market
When it comes to deciding which pricing strategy is best for your business, it’s worth doing some research, not only to see what your competitors are doing, but also to understand the level of demand for your products or services, and what price point your target customer is willing to pay. Don’t be afraid to mix and match pricing strategies as well – one product line may benefit from discounts, for example, while another range may sell well with a premium pricing strategy.