pricing strategy in a business plan example

The pricing strategy guide: Choosing pricing strategies that grow (not sink) your business

Choosing the pricing strategy for your business requires research, calculation, and a good amount of thought. Simply guessing may put you out of business. Here's what you need to know.

Definition of pricing

What are pricing strategies.

• Importance of pricing strategy

Top 7 pricing strategies

• 3 real-world examples
• How to create your strategy
• Determine value metric
• Customer profiles & segments
• User research & experiments
• Bonus: 10 data-driven tips
• Industry differences
• Final takeaway

Pricing strategies FAQs

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Too many businesses set their pricing without putting much thought into it. This is a mistake causing them to leave money on the table from the beginning. The good news is that taking the time to get your product pricing right can act as a powerful growth lever.  If you optimize your pricing strategy so that more people are paying a higher amount, you'll end up with significantly more revenue than a business who treats pricing more passively. This sounds obvious, but it's rare for businesses to put much effort into finding the best pricing strategy.

This guide will cover everything you need to know about setting a pricing strategy that works for your business. 

Check out this introduction video made by the Paddle Studios team.

Price Intelligently is Paddle’s dedicated team of pricing and packaging experts for SaaS and subscription companies. We combine unrivaled expertise and first-party data to solve your unique pricing challenges, break the mold, and catapult your growth.  Learn more

Pricing is defined as the amount of money that you charge for your products, but understanding it requires much more than that simple definition. Baked into your pricing are indicators to your potential customers about how much you value your brand, product, and customers. It's one of the first things that can push a customer towards, or away from, buying your product. As such, it should be calculated with certainty.

Pricing strategies refer to the processes and methodologies businesses use to set prices for their products and services. If pricing is how much you charge for your products, then product pricing strategy is how you determine what that amount should be. There are different pricing strategies to choose from but some of the more common ones include:

• Value-based pricing
• Competitive pricing
• Price skimming
• Cost-plus pricing
• Penetration pricing
• Economy pricing
• Dynamic pricing

Pricing is an underutilized growth lever

Many companies focus on acquisition to grow their business, but studies have shown that small variations in pricing can raise or lower revenue by 20-50%. Despite that, even among Fortune 500 companies, fewer than 5% have functions dedicated to setting the best price possible. There's a missed opportunity in the business world to see immediate growth for relatively little effort. 

Navigating PLG billing and pricing? Read our latest guide on product-led SaaS

Because most businesses spend less than 10 hours per year thinking about pricing, there's a lot of untapped growth potential in optimizing what you charge. In fact, choosing the best pricing method is a more powerful growth lever than customer acquisition. In some cases, it can be up to 7.5 times more powerful than acquisition. 

The importance of nailing your pricing strategy

Having an  effective pricing strategy  helps solidify your position by building trust with your customers, as well as meeting your business goals. Let's compare and contrast the messaging that a strong pricing strategy sends in relation to a weaker one.

A winning pricing strategy:

• Portrays value

The word cheap has two meanings. It can mean a lower price, but it can also mean poorly made. There's a reason people associate cheaply priced products with cheaply made ones. Built into the higher price of a product is the assumption that it's of higher value.

• Convinces customers to buy 

A high price may convey value, but if that price is more than a potential customer is willing to pay, it won't matter. A low price will seem cheap and get your product passed over. The ideal price is one that convinces people to purchase your offering over the similar products that your competitors have to offer.

• Gives your customers confidence in your product 

If higher-priced products portray value and exclusivity, then the opposite follows as well. Prices that are too low will make it seem as though your product isn't well made.

A weak pricing strategy:

• Doesn't accurately portray the value of your product

If you believe you have a winning product, and you should if you are selling it, then you need to convince customers of that. Setting prices too low sends the opposite message.

• Makes customers feel uncertain about buying

Just as the right price is one that customers will pull the trigger on quickly, a price that's too high or too low will cause hesitation.

• Targets the wrong customers

Some customers prefer value, and some prefer luxury. You have to price your product to match the type of customer it is targeted towards.

Let's now take a closer look at the seven most common pricing strategies that were outlined above with more from Paddle Studios .

Click on any of the links below for a more in-depth guide to that particular pricing strategy.

1. Value-based pricing

With value-based pricing, you set your prices according to what consumers think your product is worth. We're big fans of this pricing strategy for SaaS businesses.

2. Competitive pricing

When you use a competitive pricing strategy, you're setting your prices based on what the competition is charging. This can be a good strategy in the right circumstances, such as a  business just starting out , but it doesn't leave a lot of room for growth.

3. Price skimming  

If you set your prices as high as the market will possibly tolerate and then lower them over time, you'll be using the price skimming strategy. The goal is to skim the top off the market and the lower prices to reach everyone else. With the right product it can work, but you should be very cautious using it.

4. Cost-plus pricing 

This is one of the simplest pricing strategies. You just take the product production cost and add a certain percentage to it. While simple, it is less than ideal for anything but physical products.

5. Penetration pricing

In highly competitive markets, it can be hard for new companies to get a foothold. One way some companies attempt to push new products is by offering prices that are much lower than the competition. This is penetration pricing. While it may get you customers and decent sales volume, you'll need a lot of them and you'll need them  to be very loyal  to stick around when the price increases in the future.

6. Economy pricing 

This strategy is popular in the commodity goods sector. The goal is to price a product cheaper than the competition and make the money back with increased volume. While it's a good method to get people to buy your generic soda, it's not a great fit for SaaS and subscription businesses.

7. Dynamic pricing 

In some industries, you can get away with constantly  changing your prices  to match the current demand for the item. This doesn't work well for subscription and SaaS business, because customers expect consistent monthly or yearly expenses.

Three real-world pricing strategy examples

Real-world pricing strategy examples are the best way for a business to better understand the above-listed pricing strategies. Evaluating other businesses' approaches can be a good starting point but keep in mind that the right pricing strategy is based on math, market research, and consumer insights. For now, let’s look at the pricing strategy examples of some of the biggest brands of today: 

1. Streaming services 

Have you noticed that you pay roughly the same amount for Netflix, Amazon Prime Video, Disney+, Hulu, and other streaming services? That's because these companies have adopted competitive pricing , or at least a form of it, called  market-based pricing .

2. Salesforce

When Salesforce first came out, they were the only CRM in the cloud. (It wasn't even called 'the cloud' back then!) Armed with ground-breaking deployment and a target customer of a large enterprise, Salesforce could charge what they wanted. Later, after they'd grown, they were able to lower prices so small businesses could sign up. This is a classic example of  price skimming . 

3. Dollar Shave Club

At one time, you couldn't turn on your TV without an ad for Dollar Shave Club telling you how much cheaper they were than razors at the store. Although an aggressive  marketing strategy  and advertising like that is unusual for the pricing model, they were nevertheless employing economy pricing. It worked out well for them. They were acquired by Unilever in 2016 for a reported $1 billion.

How to create a winning pricing strategy

In the beginning, the actual number you're charging isn't that important.

There are some exceptions, but for the most part, you should first be figuring out the range you're in: a $10 product, $100 product, $1k product, etc. Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you.

Instead, understanding the following is much more important:

• Finding your  value metric
• Setting your ideal  customer profiles and segments
• Completing  user research + experimentation

This video from Paddle Studios goes deep on mastering a winning pricing strategy.

Step 1: Determine your value metric

A “ value metric ” is essentially what you charge for. For example: per seat, per 1,000 visits, per CPA, per GB used, per transaction, etc. 

If you get everything else wrong in pricing, but you get your value metric right, you'll do ok . It's that important. Partly because it bakes lower churn and higher expansion revenue into your monetization.

A pricing strategy based on a value metric (vs. a tiered monthly fee) is important because it allows you to make sure you're not charging a large customer the same as you'd charge a small customer.

If you remember your high school or college economics class, the professor put a point on a demand curve for the perfect price and said “the revenue a firm gets is the area under that point.” The problem here is: what about all that other area under the curve?  You’re missing out on that revenue by charging a flat monthly fee.

“Good, better, best” pricing strategy is a bit more advantageous, because you end up with three points on our trusty demand curve, and thus more revenue potential. You see this problem among many eCommerce businesses and retailers whose products are constrained by being physical goods—the car with the basic package vs. the car with the stereo and sunroof vs. the car with everything. In software, it’s thankfully dying out, but you’ll still see it with mass-market products:  Netflix, Adobe Creative Cloud, etc.

A value metric, however, allows you to have essentially infinite price points—maximizing your revenue potential. In practice, you’ll never show infinite price points on your pricing page , sales deck, or mobile conversion page, but you may have a new customer come in at a certain level and then grow.

Value metrics also bake growth directly into how you charge because as usage or the amount of value received goes up (and those are not the same thing), the customer pays more. If they end up using or consuming less, they pay less (and thus avoid churning). This is why companies using value metrics are typically growing at  double the rate with half the churn and 2x the expansion revenue  when compared to companies that charge a flat fee or where the only difference between their pricing tiers are features.

To determine your value metric, think about the  ideal essence of value  for your product—what value are you directly providing your customer?

In B2B, it's likely going to be money saved, revenue gained, time saved, etc. In  DTC , it may be the joy you bring them, fitness achieved, increased efficiency, etc. Obviously, we can't measure all of these, but if you can,  and  your customer trusts your measurement (meaning you say you saved them $100 and they agree you saved them $100), that’s your value metric.

As an example, the perfect value metric for  Paddle Retain  (our churn recovery product) is how much churn we recover for you. We can measure this, and our customers agree to the measurement, so we can charge on that axis. Other pure value metric products include  MainStreet , which handles government paperwork to automatically get you back tax credits—you pay a percentage of the money saved.

Most of you won't have a pure value metric, so the next step is to find a proxy for that metric. Take for example  HubSpot ’s marketing product. Their pure value metric is the amount of revenue their tool drives for your business. This is hard to measure and hard for the customer to agree to in terms of what percentage of credit HubSpot deserves for revenue from a blog post. Proxies for HubSpot are things like the number of contacts, number of visits, number of users, etc.

To find the right proxy metric, you want to come up with 5-10 proxies and then talk to your customers and prospects. You’ll typically find 1-2 of these pricing metrics will be most preferred amongst your target customers. You then want to make sure those 1-2 also make sense from a growth perspective. Your larger customers should be using/getting more of the metric, whereas your smaller customers should be using/getting less of the metric. You also want to make sure the metric encourages retention.

When we look at HubSpot, if they were to primarily price on “number of seats”, folks could share a login and HubSpot wouldn’t make much more money on large customers vs. small. Ironically they wouldn’t get as many people invested in HubSpot, because there’d be friction to adding additional seats. Instead, if they give unlimited seats and price based on “number of contacts” there’s minimal friction to getting as many people into HubSpot as possible to do activities (e.g., blog posts,  email campaigns , landing pages, etc.) that then produce contacts.

The result: HubSpot’s marketing product’s value metric is “contacts”, which ensures growth is baked directly into how they make money. The usage drives the metric, which therein drives revenue. Most importantly customers small, medium, and large are all paying at the point they see the value and then can grow.

Some other examples:

• Wistia  charges by the number of videos or channels you use/have
• Zapier  invented the concept of zap (connection of software) and charge based on time to connect
• Theater in Barcelona charged based on the number of laughs
• Husqvarna  charges based on time for lawn care products vs. making you buy them
• Rolls Royce  charges per mile for airplane engines. They own the engines on the plane you own and do all the maintenance. Cool model.
• Fresh Patch  charges based on the amount of grass you want per month for your dog—yes they deliver grass to you monthly

As a side note, you should stop pricing based on seats for products where each seat doesn’t provide a unique experience. For instance, imagine you're an AE using a CRM. If you log into the account of the AE sitting next to you, you can’t really do your work because you are only seeing their leads and accounts. Conversely, if you were a marketing exec and were to log in to another marketing manager’s account in HubSpot, you could do all the work you need to. Thus, for the latter, seats are not the right value metric.

Per-seat pricing is a relic of the  perpetual license  era when we couldn’t measure usage or value enough within our products. We’re beyond that point, so use the above as a good litmus test.

Step 2: Determine your customer profiles and segments

The second key component of your pricing strategy is determining your target segment and ideal customer profile. We've all heard about personas, and you may be rolling your eyes at the concept, but most personas are useless because they aren’t quantitative enough. When used properly, quantified personas and segments are beautiful tools. The information needs to go beyond just cute names like “Startup Steve" with a cute avatar, and cute meetings where people tell you they’re targeting "developers."

To get quantified personas, you need to pull out a spreadsheet.  Here’s a template  you can use.

1. Columns: Customer profiles you're targeting

These can take many forms, but the ultimate goal is to be as specific as possible so that you not only know who you’re targeting but how to monetize and retain them. Pragmatically, you typically separate these customer profiles based on size or role (or both). For example, a marketing automation product may target the following profiles:

• Marketing leaders (Director and higher) at companies $1M to $10M
• Marketing leaders (Director and higher) at companies $10.01M to $50M
• Marketing leaders (Director and higher) at companies $50.01M to $100M

The point is you can’t be everything to all people and you need to understand who you’re targeting in order to make better decisions.

2. Rows: Characteristics of each profile to help you differentiate between them

• Most valued features
• Least valued features
• Willingness to pay
• Lifetime value (LTV)
• Customer acquisition costs (CAC)
• ... and any other metric or category you think could be useful

If you're just starting out or you don't have some of this data, it’s fine. Still fill it out though with your hypotheses. You know  something  about your customers.

Next, you then need to validate (or invalidate) the most pressing hypothesis in that spreadsheet based on the decisions you’re going to make. If you're going to validate a new feature for a particular segment, then that's where you should start. Price point the biggest question? Start by researching the price point with each of these roles/segments.

If you don't know who your key roles/segments are, there's no way in hell you’ll set up an efficient growth flywheel, let alone an optimized pricing strategy. Personas act as a constitution within your business to centralize your focus and arguments about direction.

If you don't do segment and persona analysis, you better be able to raise a ton of money. I guarantee you there's some persona or segment on some vision document or in that euphoric part of your entrepreneurial brain that is completely wrong for your business. I see it all the time. Even I—someone who thinks about segments and customer research all the time—fall prey to being an absolute idiot with who we should target.

When we built  ProfitWell Metrics (our free subscription metrics tool) I thought we were geniuses who were going to be billionaires. Turns out analytics products are terrible. Willingness to pay for them is terrible; retention for them is terrible; NPS is terrible. Everything is just terrible, mainly because customers don't appreciate graphs or at least aren't willing to pay much for them. When we did our research this became obvious and put us 18 months ahead of our competitors, pushing us to change up the positioning of the product to freemium, which has fueled our business ever since (oh and our NPS is 70, because we massively over-deliver a free product better than the paid competition).

Never underestimate the power of focusing on the customer through research. You should never, ever just do what they ask, but you need to be an anthropologist who knows them better than anyone else.

Step 3: User research + experimentation

Beyond your value metric and core segments, the monetization game becomes extremely tactical and research-based. Figuring out your price point involves researching those segments and then making decisions in the field. Same with discounting, add-on, and packaging strategies. The point: monetization is never finished because it’s the very essence of translating your value into an optimal framework for your target customer segments.

Practically this is why you should be experimenting with your monetization every quarter. Experimentation can get tricky and have a few quirks, but you’ll find it’s similar to most growth frameworks out there (which are all versions of the scientific method).

Here’s a good prioritization list of what business owners should attack in optimizing their  monetization strategy  once they have the core segments and value metric figured out:

Priority 1: Foundational [see above]

• Core customer segments
• Value metrics

Priority 2: Core

• Order of magnitude price point (are you a $10 product vs. a $500 product)
• Positioning and value props

Priority 3: Optimizations

• Add-on strategy
• Specific price point (are you a $10 product vs. a $11 product)
• Price localization/internationalization
• Discounting strategy
• Contract Term optimization

Priority 4: Growth accelerators

• Market expansion (going up or down market)
• Vertical expansion
• Multi-Product

Your true order of operations with monetization will vary, but for the most part, all companies should work through the foundational and core sections before moving to the optimizations and growth accelerators. If you’re larger or there’s a fire, you may start with an optimization. In fact, this is sometimes a good idea. Something more scoped like “price localization” can help get momentum, be a forcing function to clean up tech and experimentation stacks, and mitigate political conversations. Remember, monetization is something that’s important, uncomfortable, and something you likely don’t know much about, so progress is better than nothing. Start small. You can (and should) always do more.

Bonus: 10 rapid-fire pricing strategy tips rooted in data⚡

In case you're still hungry for more tips on nailing your pricing strategy and achieving maximum profitability, look no further. We've got you covered:

1. You should  localize your pricing  to the currency and willingness to pay of the prospect's region

• Revenue per customer is 30% higher when you just use the proper currency symbol
• Having different price points in different regions increases revenue per customer further, and is justified based on different consumer demands in different regions

2. Freemium is an acquisition model, not a part of pricing

• Think of  freemium  as a premium ebook driving leads, not another pricing tier
• Don't do freemium until you truly understand how to convert leads to customers, because you’ll end up increasing noise or false positives when you’re trying to figure out your segment beachheads. The best folks who deploy free typically don’t implement freemium until two to three years into their business. The exceptions to this notion are if you have a very specific need or network effect (eg., marketplaces, social networks, etc.) or if you have a top 50 growth person on your team.
• To be clear, we're not saying DON’T do freemium. we're saying it's a scalpel, not a sledgehammer that requires thought. A lot of people end up reading our articles on freemium and end up going, “Cool, let’s do freemium and we’ll be a unicorn.” I’m being pragmatic in that you need to realize freemium is fantastic, but doing freemium properly takes a lot of effort and nuance.
• Paid users who convert from free tend to have higher NPS, better retention, and much lower CAC .

3. Value propositions matter oh so much

In B2B value propositions can swing willingness to pay ±20%, in DTC it's ±15%

4. Don't discount over 20%

In some verticals discounting over 20% may be fine, but you're likely not in one of them (although you may think you are), but the size of the discount almost perfectly correlates with higher churn. Large  discounts  get people to convert, but they don't stick around.

5. For upgrades to annual discounts, don't use percentages and try offers

Percentages don't work as well as whole dollar amounts for discounts (ie., "one month" will work better than "X percent off"). Annuals see much lower churn rates.

6. Should you end your price in 9s or 0s? Depends on your price point

Ending your prices in 9s evokes a discount brand, making the customer feel like they're getting something. Ending in 0 evokes luxury or premium, making them feel like they're getting a high-end product. Studies on this for technology products are inconclusive. We have seen it increase conversion in lower-cost products, but retention isn't as good with those customers.

7. You should experiment with your pricing in some manner every quarter

This doesn't mean change you should the price point each quarter, but experiment with variable costs. More changes correlate with increasing revenue per customer. Like all things, focusing on something makes you improve it.

8. Case studies boost willingness to pay quite a bit

Social proof is important.  Case studies  that offer proof of the high quality of your products can boost willingness to pay by 10-15% in both B2B and in DTC.

9. Design helps boost willingness to pay by 20%

This graph didn't look this way 10 years ago when design didn't do much for willingness to pay. Today, affinity for a company's design can boost willingness to pay considerably.

10. Integrations boost retention and willingness to pay

The more integrations a customer is using, typically the higher their willingness to pay and the better their retention. I wouldn't charge for the integrations, but I'd use this as a tool to get people hooked in and paying more or buying different add-ons.

Pricing strategies for different industries

Pricing strategies are not one size fits all. Finding the proper pricing strategy is dependent on your industry, as well as your company's unique objectives. But to give you an idea, we've listed a couple of industries and strategies that are well suited for each other. 

SaaS/Subscriptions

For SaaS and subscription-based businesses, value-based pricing is the winner hands down. As long as your customers are willing to pay, you can charge much more than your competitors.  Because your price is based on how much customers will spend, it isn't artificially lowered like other methods that fail to account for that. 

We also like value-based pricing for B2B companies. Value-based pricing requires you to look outward and understand your customers better. This is good for finding the optimal price, but it's also good for building optimal relationships that will also help grow your company. 

No more price guessing, just pricing that works

Accurately pricing your product for maximum growth requires a lot of market research and even more expertise on how to conduct and analyze that research. Our Price Intelligently  service combines our years of experience in the field with powerful machine learning tools to understand your target customer base and what makes them tick. We know the data to collect, the questions to ask, and the people to ask them of. This is important because businesses in different stages of growth need different strategies for evaluating pricing. Additionally, every business has a unique set of potential selling points and a unique target audience to pitch to.

You need someone in your corner who knows how to evaluate pricing options for your specific businesses. With our help, you can be confident that your pricing strategy and chosen price points will unlock growth levers at your company that have been sitting idle, because they'll be tailored to finding and maximizing the value propositions that are unique to your business. 

Which pricing strategy is best? 

This depends on your business model. For SaaS and subscription companies, as well as many others, we recommend value-based pricing.

How do you determine the selling prices of a product?

First, find a pricing strategy that fits well with your business model and product. As you've seen, pricing strategies differ, but they all give clear instructions for how to use them to set prices.

What is the simplest pricing strategy?

Since you only need to add up the cost to make your product and add a percentage to it, cost-plus pricing is the simplest form of pricing to use.

What is a pricing curve?

A pricing curve is a graph that shows you the number of people who are willing to pay a given price for a product.

What are the 4 major pricing strategies?

Value-based,  competition-based , cost-plus, and  dynamic pricing are all models  that are used frequently, depending on the industry and business model in question.

Related reading

The Ultimate Guide to Pricing Strategies & Models

Discover how to properly price your products, services, or events so you can drive both revenue and profit.

FREE SALES PRICING CALCULATOR

Determine the best pricing strategy for your business with this free calculator and template.

Updated: 08/16/23

Published: 08/16/23

Pricing your products and services can be tough. Set prices too high, and you miss out on valuable sales. Set them too low, and you miss out on valuable revenue.

Thankfully, pricing doesn’t have to be a sacrifice or a shot in the dark. There are dozens of pricing models and strategies that can help you better understand how to set the right prices for your audience and revenue goals.

That’s why we’ve created this guide.

Whether you’re a business beginner or a pricing pro, the tactics and strategies in this guide will get you comfortable with pricing your products. Bookmark this guide for later and use the chapter links to jump around to sections of interest.

Pricing Strategy

Types of pricing strategies, how to create a pricing strategy, pricing models based on industry or business.

Conducting a Pricing Analysis

Pricing Strategy Examples

A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand.

If only pricing was as simple as its definition — there’s a lot that goes into the process.

Pricing strategies account for many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends.

It’s not uncommon for entrepreneurs and business owners to skim over pricing. They often look at the cost of their products (COGS) , consider their competitor’s rates, and tweak their own selling price by a few dollars. While your COGS and competitors are important, they shouldn’t be at the center of your pricing strategy.

The best pricing strategy maximizes your profit and revenue.

Before we talk about pricing strategies, let’s review an important pricing concept that will apply regardless of what strategies you use.

Free Sales Pricing Strategy Calculator

• Cost-Plus Pricing
• Skimming Strategy
• Value-Based Pricing

You're all set!

Click this link to access this resource at any time.

Determine the Best Pricing Strategy For Your Business

Fill out this form to access the free template., price elasticity of demand.

Price elasticity of demand is used to determine how a change in price affects consumer demand.

If consumers still purchase a product despite a price increase (such as cigarettes and fuel) that product is considered inelastic .

On the other hand, elastic products suffer from pricing fluctuations (such as cable TV and movie tickets).

You can calculate price elasticity using the formula:

% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand

The concept of price elasticity helps you understand whether your product or service is sensitive to price fluctuations. Ideally, you want your product to be inelastic — so that demand remains stable if prices do fluctuate.

Cost, Margin, & Markup in Pricing

To choose a pricing strategy, it’s also essential to understand the role of cost, margin, and markup — especially if you’d like your pricing to be cost-based . Let’s dive into the definition for each.

Cost refers to the fees you incur from manufacturing, sourcing, or creating the product you sell. That includes the materials themselves, the cost of labor, the fees paid to suppliers, and even the losses. Cost doesn’t include overhead and operational expenses such as marketing, advertising, maintenance, or bills.

Margin (in this case, gross margin) refers to the amount your business earns after you subtract manufacturing costs.

Markup refers to the additional amount you charge for your product over the production and manufacturing fees.

Now, let’s cover some common pricing strategies. As we do so, it’s important to note that these aren’t necessarily standalone strategies — many can be combined when setting prices for your products and services.

• Competition-Based Pricing
• Dynamic Pricing
• High-Low Pricing
• Penetration Pricing
• Skimming Pricing
• Psychological Pricing
• Geographic Pricing

Now, let's dive into the descriptions of each pricing strategy — many of which are included in the template below — so you can learn about what makes each of them unique.

Discover how much your business can earn using different pricing strategies with HubSpot's free sales pricing calculator so you can choose the best pricing model for your business.

Download Template

1. competition-based pricing strategy.

Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate (or going rate ) for a company’s product or service; it doesn’t take into account the cost of their product or consumer demand.

Instead, a competition-based pricing strategy uses the competitors’ prices as a benchmark. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers.

With competition-based pricing , you can price your products slightly below your competition, the same as your competition, or slightly above your competition. For example, if you sold marketing automation software , and your competitors’ prices ranged from $19.99 per month to $39.99 per month, you’d choose a price between those two numbers.

Whichever price you choose, competitive pricing is one way to stay on top of the competition and keep your pricing dynamic.

Competition-Based Pricing Strategy in Marketing

Consumers are primarily looking for the best value which isn’t always the same as the lowest price. Pricing your products and services competitively in the market can put your brand in a better position to win a customer’s business. Competitive pricing works especially well when your business offers something the competition doesn’t — like exceptional customer service, a generous return policy, or access to exclusive loyalty benefits .

2. Cost-Plus Pricing Strategy

A cost-plus pricing strategy focuses solely on the cost of producing your product or service, or your COGS . It’s also known as markup pricing since businesses who use this strategy “markup” their products based on how much they’d like to profit.

To apply the cost-plus method, add a fixed percentage to your product production cost. For example, let’s say you sold shoes. The shoes cost $25 to make, and you want to make a $25 profit on each sale. You’d set a price of $50, which is a markup of 100%.

Cost-plus pricing is typically used by retailers who sell physical products. This strategy isn’t the best fit for service-based or SaaS companies as their products typically offer far greater value than the cost to create them.

Cost-Plus Pricing Strategy in Marketing

Cost-plus pricing works well when the competition is pricing using the same model. It won’t help you attract new customers if your competition is working to acquire customers rather than growing profits. Before executing this strategy, complete a pricing analysis that includes your closest competitors to make sure this strategy will help you meet your goals.

3. Dynamic Pricing Strategy

Dynamic pricing is also known as surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices fluctuate based on market and customer demand.

Hotels, airlines, event venues, and utility companies use dynamic pricing by applying algorithms that consider competitor pricing, demand, and other factors. These algorithms allow companies to shift prices to match when and what the customer is willing to pay at the exact moment they’re ready to make a purchase.

Dynamic Pricing Strategy in Marketing

Dynamic pricing can help keep your marketing plans on track. Your team can plan for promotions in advance and configure the pricing algorithm you use to launch the promotion price at the perfect time. You can even A/B test dynamic pricing in real-time to maximize your profits.

4. High-Low Pricing Strategy

A high-low pricing strategy is when a company initially sells a product at a high price but lowers that price when the product drops in novelty or relevance. Discounts, clearance sections, and year-end sales are examples of high-low pricing in action — hence the reason why this strategy may also be called a discount pricing strategy.

High-low pricing is commonly used by retail firms that sell seasonal items or products that change often, such as clothing, decor, and furniture. What makes a high/low pricing strategy appealing to sellers? Consumers enjoy anticipating sales and discounts, hence why Black Friday and other universal discount days are so popular.

High-Low Pricing Strategy in Marketing

If you want to keep the foot traffic steady in your stores year-round, a high-low pricing strategy can help. By evaluating the popularity of your products during particular periods throughout the year, you can leverage low pricing to increase sales during traditionally slow months.

5. Penetration Pricing Strategy

Contrasted with skimming pricing, a penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing attention (and revenue) away from higher-priced competitors. Penetration pricing isn’t sustainable in the long run, however, and is typically applied for a short time.

This pricing method works best for brand new businesses looking for customers or for businesses that are breaking into an existing, competitive market. The strategy is all about disruption and temporary loss … and hoping that your initial customers stick around as you eventually raise prices.

(Another tangential strategy is loss leader pricing , where retailers attract customers with intentionally low-priced items in hopes that they’ll buy other, higher-priced products, too. This is precisely how stores like Target get you — and me.)

Penetration Pricing Strategy in Marketing

Penetration pricing has similar implications as freemium pricing — the money won’t come in overnight. But with enough value and a great product or service, you could continue to make money and scale your business as you increase prices. One tip for this pricing strategy is to market the value of the products you sell and let price be a secondary point.

6. Skimming Pricing Strategy

A skimming pricing strategy is when companies charge the highest possible price for a new product and then lower the price over time as the product becomes less and less popular. Skimming is different from high-low pricing in that prices are lowered gradually over time.

Technology products, such as DVD players, video game consoles, and smartphones, are typically priced using this strategy as they become less relevant over time. A skimming pricing strategy helps recover sunk costs and sell products well beyond their novelty, but the strategy can also annoy consumers who bought at full price and attract competitors who recognize the “fake” pricing margin as prices are lowered.

Skimming Pricing Strategy in Marketing

Skimming pricing strategy can work well if you sell products that have products with varying life cycle lengths. One product may come in and out of popularity quickly so you have a short time to skim your profits in the beginning stages of the life cycle. On the flip side, a product that has a longer life cycle can stay at a higher price for more time. You’ll be able to maintain your marketing efforts for each product more effectively without constantly adjusting your pricing across every product you sell.

7. Value-Based Pricing Strategy

A value-based pricing strategy is when companies price their products or services based on what the customer is willing to pay. Even if it can charge more for a product, the company decides to set its prices based on customer interest and data.

If used accurately, value-based pricing can boost your customer sentiment and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.

On the flip side, value-based pricing requires you to constantly be in tune with your various customer profiles and buyer personas and possibly vary your prices based on those differences.

Value-Based Pricing Strategy in Marketing

Marketing to your customers should always lead with value, so having a value-based pricing model should help strengthen the demand for your products and services. Just be sure that your audiences are distinct enough in what they’re willing to pay for — you don’t want to run into trouble by charging more or less based on off-limits criteria .

8. Psychological Pricing Strategy

Psychological pricing is what it sounds like — it targets human psychology to boost your sales.

For example, according to the " 9-digit effect ", even though a product that costs $99.99 is essentially $100, customers may see this as a good deal simply because of the "9" in the price.

Another way to use psychological pricing would be to place a more expensive item directly next to (either, in-store or online) the one you're most focused on selling . Or offer a "buy one, get one 50% off (or free)" deal that makes customers feel as though the circumstances are too good to pass up on.

And lastly, changing the font, size, and color of your pricing information on and around your products has also been proven, in various instances, to boost sales.

Psychological Pricing Strategy in Marketing

Psychological pricing strategy requires an intimate understanding of your target market to yield the best results. If your customers are inclined to discounts and coupons, appealing to this desire through your marketing can help this product meet their psychological need to save money. If paying for quality is important to your audience, having the lowest price on the shelf might not help you reach your sales goals. Regardless of the motivations your customers have for paying a certain price for a product, your pricing and marketing should appeal to those motivations.

9. Geographic Pricing Strategy

Geographic pricing is when products or services are priced differently depending on geographical location or market.

This strategy may be used if a customer from another country is making a purchase or if there are disparities in factors like the economy or wages (from the location in which you're selling a good to the location of the person it is being sold to).

Geographic Pricing Strategy in Marketing

Marketing a geographically priced product or service is easy thanks to paid social media advertising. Segmenting by zip code, city, or even region can be accomplished at a low cost with accurate results. Even as specific customers travel or permanently move, your pricing model will remain the same which helps you maintain your marketing costs.

Download our free guide to creating buyer personas to easily organize your audience segments and make your marketing stronger.

Like we said above, these strategies aren’t necessarily meant to stand alone. We encourage you to mix and match these methods as needed.

Below, we cover more specific pricing models for individual products.

Pricing Models

While your pricing strategy may determine how your company sets fees for its offerings overall , the below pricing models can help you set prices for specific product lines. Let's take a look.

1. Freemium

A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product hoping that users will eventually pay to upgrade or access more features.

Unlike cost-plus, freemium is a pricing model commonly used by SaaS and other software companies. They choose this model because free trials and limited memberships offer a peek into a software’s full functionality — and also build trust with a potential customer before purchase.

With freemium, a company’s prices must be a function of the perceived value of their products. For example, companies that offer a free version of their software can’t ask users to pay $100 to transition to the paid version. Prices must present a low barrier to entry and grow incrementally as customers are offered more features and benefits.

Freemium Pricing in Marketing

Freemium pricing may not make your business a lot of money on the initial acquisition of a customer, but it gives you access to the customer which is just as valuable. With access to their email inboxes, phone number, and any other contact information you gather in exchange for the free product, you can nurture the customer into a brand loyal advocate with a worthwhile LTV .

2. Premium Pricing

Also known as prestige pricing and luxury pricing, a premium pricing model is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.

Prestige pricing is a direct function of brand awareness and brand perception. Brands that apply this pricing method are known for providing value and status through their products — which is why they’re priced higher than other competitors. Fashion and technology are often priced using this model because they can be marketed as luxurious, exclusive, and rare.

Premium Pricing in Marketing

Premium pricing is quite dependent upon the perception of your product within the market. There are a few ways to market your product in order to influence a premium perception of it including using influencers, controlling supply, and driving up demand.

3. Hourly Pricing

Hourly pricing, also known as rate-based pricing, is commonly used by consultants, freelancers, contractors, and other individuals or laborers who provide business services. Hourly pricing is essentially trading time for money. Some clients are hesitant to honor this pricing strategy as it can reward labor instead of efficiency.

Hourly Pricing in Marketing

If your business thrives on quick, high-volume projects, hourly pricing can be just the incentive for customers to work with you. By breaking down your prices into hourly chunks, customers can make the decision to work with you based on a low price point rather than finding room in their budget for an expensive project-based commitment.

4. Bundle Pricing

Bundle pricing is when you offer (or "bundle") two or more complementary products or services together and sell them for a single price. You may choose to sell your bundled products or services only as part of a bundle, or sell them as both components of bundles and individual products.

This is a great way to add value through your offerings to customers who are willing to pay extra upfront for more than one product. It can also help you get your customers hooked on more than one of your products faster.

Bundle Pricing in Marketing

Marketing bundle deals can help you sell more products than you would otherwise sell individually. It’s a smart way to upsell and cross-sell your offerings in a way that is beneficial for the customer and your revenue goals.

5. Project-Based Pricing

Project-based pricing is the opposite of hourly pricing — this approach charges a flat fee per project instead of a direct exchange of money for time. It is also used by consultants, freelancers, contractors, and other individuals or laborers who provide business services.

Project-based pricing may be estimated based on the value of the project deliverables. Those who choose this pricing model may also create a flat fee from the estimated time of the project.

Project-Based Pricing in Marketing

Leading with the benefits a customer will derive from working with your business on a project can make project-based pricing more appealing. Although the cost of the project may be steep, the one-time investment can be worth it. Your clients will know that they’ll be able to work with you until the project is completed rather than until their allotted hours are depleted.

6. Subscription Pricing

Subscription pricing is a common pricing model at SaaS companies, online retailers, and even agencies who offer subscription packages for their services.

Whether you offer flat rate subscriptions or tiered subscriptions, the benefits of this model are endless. For one, you have all but guaranteed monthly recurring revenue (MRR) and yearly recurring revenue. That makes it simpler to calculate your profits on a monthly basis. It also often leads to higher customer lifetime values .

The one thing to be wary of when it comes to subscription pricing is the high potential for customer churn . People cancel subscriptions all the time, so it's essential to have a customer retention strategy in place to ensure clients keep their subscriptions active.

Subscription Pricing in Marketing

When marketing your subscription products, it's essential to create buyer personas for each tier. That way, you know which features to include and what will appeal to each buyer. A general subscription that appeals to everyone won't pull in anyone.

Even Amazon, which offers flat-rate pricing for its Prime subscription, includes a membership for students. That allows them to market the original Prime more effectively by creating a sense of differentiation.

Now, let’s discuss how to build a pricing strategy of your own liking.

1. Evaluate pricing potential.

You want to make a strategy that is optimal for your unique business. To begin, you need to evaluate your pricing potential. This is the approximate product or service pricing your business can potentially achieve in regard to cost, demand, and more.

Some factors that can affect your pricing potential include:

• Geographical market specifics
• Operating costs
• Inventories
• Demand fluctuations
• Competitive advantages and concerns
• Demographic data

We’ll dive deeper into demographic data in the next step.

2. Determine your buyer personas.

You have to price your product on the type of buyer persona that’s looking for it. When you look at your ideal customer, you’ll have to look at their:

• Customer Lifetime Value
• Willingness to Pay
• Customer Pain Points

To aid in this process, interview customers and prospects to see what they do and like, and ask for your sales team’s feedback on the best leads and their characteristics.

3. Analyze historical data.

Take a look at your previous pricing strategies. You can calculate the difference in closed deals, churn data , or sold product on different pricing strategies that your business has worked with before and look at which were the most successful.

4. Strike a balance between value and business goals.

When developing your pricing strategy, you want to make sure the price is good to your bottom line and your buyer personas. This compromise will better help your business and customer pool, with the intentions of:

• Increasing profitability
• Improving cash flow
• Market penetration
• Expanding market share

5. Look at competitor pricing.

You can’t make a pricing strategy without conducting research on your competitors’ offerings. You’ll have to decide between two main choices when you see the price difference for your same product or service:

• Beat your competitors’ price - If a competitor is charging more for the same offering as your brand, then make the price more affordable.
• Beat your competitors’ value - Also known as value-based pricing , you can potentially price your offering higher than your competitors if the value provided to the customer is greater.

To see the competition’s full product or service offering, conduct a full competitive analysis so you can see their strengths and weaknesses, and make your pricing strategy accordingly.

So we’ve gone over how to create a pricing strategy, now let’s discuss how to apply these steps to different businesses and industries.

Not every pricing strategy is applicable to every business. Some strategies are better suited for physical products whereas others work best for SaaS companies. Here are examples of some common pricing models based on industry and business.

Product Pricing Model

Unlike digital products or services, physical products incur hard costs (like shipping, production, and storage) that can influence pricing. A product pricing strategy should consider these costs and set a price that maximizes profit, supports research and development, and stands up against competitors.

👉🏼 We recommend these pricing strategies when pricing physical products : cost-plus pricing, competitive pricing, prestige pricing, and value-based pricing.

Digital Product Pricing Model

Digital products, like software, online courses, and digital books, require a different approach to pricing because there’s no tangible offering or unit economics (production cost) involved. Instead, prices should reflect your brand, industry, and overall value of your product.

👉🏼 We recommend using these pricing strategies when pricing digital products: competition-based pricing, freemium pricing, and value-based pricing.

Restaurant Pricing Model

Restaurant pricing is unique in that physical costs, overhead costs, and service costs are all involved. You must also consider your customer base, overall market trends for your location and cuisine, and the cost of food — as all of these can fluctuate.

👉🏼 We recommend using these pricing strategies when pricing at restaurants: cost-plus pricing, premium pricing, and value-based pricing.

Event Pricing Model

Events can’t be accurately measured by production cost (not unlike the digital products we discussed above). Instead, event value is determined by the cost of marketing and organizing the event as well as the speakers, entertainers, networking, and the overall experience — and the ticket prices should reflect these factors.

👉🏼 We recommend using these pricing strategies when pricing live events: competition-based pricing, dynamic pricing, and value-based pricing.

Services Pricing Model

Business services can be hard to price due to their intangibility and lack of direct production cost. Much of the service value comes from the service provider’s ability to deliver and the assumed caliber of their work. Freelancers and contractors , in particular, must adhere to a services pricing strategy.

👉🏼 We recommend using these pricing strategies when pricing services: hourly pricing, project-based pricing, and value-based pricing.

Nonprofit Pricing Model

Nonprofits need pricing strategies, too — a pricing strategy can help nonprofits optimize all processes so they’re successful over an extended period of time.

A nonprofit pricing strategy should consider current spending and expenses, the breakeven number for their operation, ideal profit margin, and how the strategy will be communicated to volunteers, licensees, and anyone else who needs to be informed. A nonprofit pricing strategy is unique because it often calls for a combination of elements that come from a few pricing strategies.

👉🏼 We recommend using these pricing strategies when pricing nonprofits: competitive pricing, cost-plus pricing, demand pricing, and hourly pricing.

Education Pricing Model

Education encompasses a wide range of costs that are important to consider depending on the level of education, private or public education, and education program/ discipline.

Specific costs to consider in an education pricing strategy are tuition, scholarships, additional fees (labs, books, housing, meals, etc.). Other important factors to note are competition among similar schools, demand (number of student applications), number and costs of professors/ teachers, and attendance rates.

👉🏼 We recommend using these pricing strategies when pricing education: competitive pricing, cost-based pricing, and premium pricing.

Real Estate Pricing Model

Real estate encompasses home value estimates, market competition, housing demand, and cost of living. There are other factors that play a role in real estate pricing models including potential bidding wars, housing estimates and benchmarks (which are available through real estate agents but also through free online resources like Zillow ), and seasonal shifts in the real estate market.

👉🏼 We recommend using these pricing strategies when pricing real estate: competitive pricing, dynamic pricing, premium pricing, and value-based pricing.

Agency Pricing Model

Agency pricing models impact your profitability, retention rates, customer happiness, and how you market and sell your agency. When developing and evolving your agency’s pricing model, it’s important to take into consideration different ways to optimize it so you can determine the best way to boost the business's profits.

👉🏼 We recommend using these pricing strategies when pricing agencies: hourly pricing, project-based pricing, and value-based pricing.

Manufacturing Pricing Model

The manufacturing industry is complex — there are a number of moving parts and your manufacturing pricing model is no different. Consider product evolution, demand, production cost, sale price, unit sales volume, and any other costs related to your process and product. Another key part to a manufacturing pricing strategy is understanding the maximum amount the market will pay for your specific product to allow for the greatest profit.

👉🏼 We recommend using these pricing strategies when pricing manufacturing: competitive pricing, cost-plus pricing, and value-based pricing.

Ecommerce Pricing Model

Ecommerce pricing models are how you determine the price at which you’ll sell your online products and what it'll cost you to do so. Meaning, you must think about what your customers are willing to pay for your online products and what those products cost you to purchase and/or create. You might also factor in your online campaigns to promote these products as well as how easy it is for your customers to find similar products to yours on the ecommerce sites of your competitors.

👉🏼 We recommend using these pricing strategies when pricing ecommerce: competitive pricing, cost-based pricing, dynamic pricing, freemium pricing, penetration pricing, and value-based pricing.

Pricing Analysis

Pricing analysis is a process of evaluating your current pricing strategy against market demand. Generally, pricing analysis examines price independently of cost. The goal of a pricing analysis is to identify opportunities for pricing changes and improvements.

You typically conduct a pricing analysis when considering new product ideas, developing your positioning strategy, or running marketing tests. It's also wise to run a price analysis once every year or two to evaluate your pricing against competitors and consumer expectations — doing so preemptively avoids having to wait for poor product performance.

How to Conduct a Pricing Analysis

1. determine the true cost of your product or service..

To calculate the true cost of a product or service that you sell, you’ll want to recognize all of your expenses including both fixed and variable costs. Once you’ve determined these costs, subtract them from the price you’ve already set or plan to set for your product or service.

2. Understand how your target market and customer base respond to the pricing structure.

Surveys, focus groups, or questionnaires can be helpful in determining how the market responds to your pricing model. You’ll get a glimpse into what your target customers value and how much they’re willing to pay for the value your product or service provides.

3. Analyze the prices set by your competitors.

There are two types of competitors to consider when conducting a pricing analysis: direct and indirect.

Direct competitors are those who sell the exact same product that you sell. These types of competitors are likely to compete on price so they should be a priority to review in your pricing analysis.

Indirect competitors are those who sell alternative products that are comparable to what you sell. If a customer is looking for your product, but it’s out of stock or it’s out of their price range, they may go to an indirect competitor to get a similar product.

4. Review any legal or ethical constraints to cost and price.

There’s a fine line between competing on price and falling into legal and ethical trouble. You’ll want to have a firm understanding of price-fixing and predatory pricing while doing your pricing analysis in order to steer clear of these practices.

Analyzing your current pricing model is necessary to determine a new (and better!) pricing strategy. This applies whether you're developing a new product, upgrading your current one, or simply repositioning your marketing strategy.

Next, let’s look at some examples of pricing strategies that you can use for your own business.

Dynamic Pricing Strategy: Chicago Cubs Freemium Pricing Strategy: HubSpot Penetration Pricing Strategy: Netflix Premium Pricing: AWAY Competitive Pricing Strategy: Shopify Project-Based Pricing Strategy: Courtney Samuel Events Value-Based Pricing Strategy: INBOUND Bundle Pricing: State Farm Geographic Pricing: Gasoline

Pricing models can be hard to visualize. Below, we’ve pulled together a list of examples of pricing strategies as they’ve been applied to everyday situations or businesses.

1. Dynamic Pricing Strategy: Chicago Cubs

I live in Chicago five blocks away from Wrigley Field, and my friends and I love going to Cubs games. Finding tickets is always interesting, though, because every time we check prices, they’ve fluctuated a bit from the last time. Purchasing tickets six weeks in advance is always a different process than purchasing them six days prior — and even more sox pricing at the gate.

This is an example of dynamic pricing — pricing that varies based on market and customer demand. Prices for Cubs games are always more expensive on holidays, too, when more people are visiting the city and are likely to go to a game.

(Another prime example of dynamic pricing is INBOUND , for which tickets get more expensive as the event nears.)

2. Freemium Pricing Strategy: HubSpot

HubSpot is an example of freemium pricing at work. There's a free version of the CRM for scaling businesses as well as paid plans for the businesses using the CRM platform that need a wider range of features .

Moreover, within those marketing tools, HubSpot provides limited access to specific features. This type of pricing strategy allows customers to acquaint themselves with HubSpot and for HubSpot to establish trust with customers before asking them to pay for additional access.

3. Penetration Pricing Strategy: Netflix

Netflix is a classic example of penetration pricing : entering the market at a low price (does anyone remember when it was $7.99?) and increasing prices over time. Since I joined a couple of years ago, I’ve seen a few price increase notices come through my own inbox.

Despite their increases, Netflix continues to retain — and gain — customers. Sure, Netflix only increases their subscription fee by $1 or $2 each time, but they do so consistently. Who knows what the fees will be in five or ten years?

4. Premium Pricing: AWAY

There are lots of examples of premium pricing strategies … Rolex, Tesla, Nike — you name it. One that I thought of immediately was AWAY luggage .

Does luggage need to be almost $500? I’d say no, especially since I recently purchased a two-piece Samsonite set for one-third the cost. However, AWAY has still been very successful even though they charge a high price for their luggage. This is because when you purchase AWAY, you’re purchasing an experience. The unique branding and the image AWAY portrays for customers make the value of the luggage match the purchase price.

5. Competitive Pricing Strategy: Shopify

Shopify is an ecommerce platform that helps businesses manage their stores and sell their products online. Shopify — which integrates with HubSpot — has a competitive pricing strategy.

There are a number of ecommerce software options on the market today — Shopify differentiates itself by the features they provide users and the price at which they offer them. They have three thoughtfully-priced versions of their product for customers to choose from with a number of customizable and flexible features.

With these extensive options tailored to any ecommerce business' needs, the cost of Shopify is highly competitive and is often the same as or lower than other ecommerce platforms on the market today.

6. Project-Based Pricing Strategy: Courtney Samuel Events

Anyone who's planned a wedding knows how costly they can be. I'm in the midst of planning my own, and I've found that the bundled, project-based fees are the easiest to manage. For example, my wedding coordinator Courtney charges one flat fee for her services. This pricing approach focuses on the value of the outcome (e.g., an organized and stressless wedding day) instead of the value of the time spent on calls, projects, or meetings.

Because vendors like Courtney typically deliver a variety of services — wedding planning, day-of coordination, physical meetings, etc. — in addition to spending time answering questions and providing thoughtful suggestions, a project-based fee better captures the value of her work. Project-based pricing is also helpful for clients and companies who'd rather pay a flat fee or monthly retainer than deal with tracked hours or weekly invoices.

7. Value-Based Pricing Strategy: INBOUND

While INBOUND doesn't leave the ultimate ticket price up to its attendees, it does provide a range of tickets from which customers can choose. By offering multiple ticket "levels," customers can choose what experience they want to have based on how they value the event.

INBOUND tickets change with time, however, meaning this pricing strategy could also be considered dynamic (like the Cubs example above). As the INBOUND event gets closer, tickets tend to rise in price.

8. Bundle Pricing: State Farm

State Farm is known for its tongue-in-cheek advertisements and its bundle deals for home and auto insurance. You can receive a quote on one or the other, but getting a quote on both can save you money on your premiums.

State Farm benefits from bundle pricing by selling more policies, and consumers benefit by paying less than they normally would if they used two different insurance providers for home and auto coverage.

9. Geographic Pricing: Gasoline

Gasoline is notorious for having a wide range of prices around the world, but even within the United States, prices can vary by several dollars depending on the state you live in. In California for example, gas prices have consistently hovered around $3 in the summer months for the past 10 years. On the other hand, gas prices in Indiana have been in the $2 range during the same time period. Laws, environmental factors, and production cost all influence the price of gasoline in California which causes the geographic disparity in the cost of the fuel.

Get Your Pricing Strategy Right

Thinking about everything that goes into pricing can make your head spin: competitors, production costs, customer demand, industry needs, profit margins … the list is endless. Thankfully, you don’t have to master all of these factors at once.

Simply sit down, calculate some numbers (like your COGS and profit goals), and figure out what’s most important for your business. Start with what you need, and this will help you pinpoint the right kind of pricing strategy to use.

More than anything, though, remember pricing is an iterative process. It’s highly unlikely that you’ll set the right prices right away — it might take a couple of tries (and lots of research), and that’s OK.

Editor's note: This post was originally published in March 2019 and has been updated for comprehensiveness.

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Blogs & articles, how to write a pricing strategy for my business plan.

In this blog you will learn about the importance of choosing the right pricing strategy for a successful business plan.

Why is a pricing strategy important for a business plan?

A business plan is a written document outlining a company’s core business practices – from products and services offered to marketing, financial planning and budget, but also pricing strategy. This business plan can be very lengthy, outlining every aspect of the business in detail. Or it can be very short and lean for start ups that want to be as agile as possible.

This plan can be used for external investors and relations or for internal purposes. A business plan can be useful for internal purposes because it can make sure that all the decision makers are on the same page about the most important aspects of the business.

A 1% price increase can lead to an 8% increase in profit margin.

A business plan could be very lengthy and detailed or short and lean, but in all instances, it should have a clear vision for how pricing is tackled. A pricing strategy ultimately greatly determines the profit margin of your product or service and how much revenue the company will make. Thorough research of consultancy agencies also show that pricing is very important. McKinsey even argues that a 1% prices increase can lead up to an 8% increase in profits. That is a real example of how small adjustments can have a huge impact!

It is clear that each business plan should have a section about pricing strategies. How detailed and complicated this pricing strategy should be depends for each individual business and challenges in the business environment. However, businesses should at least take some factors into account when thinking about their pricing strategy.

What factors to take into account?

The pricing strategy can best be explained in the marketing section of your business plan. In this section you should describe what price you will charge for your product or service to customers and your argumentation for why you ask this. However, businesses always balance the challenging scale of charging too much or too little. Ideally you want to find the middle, the optimal price point.

The following questions need to be answered for writing a well-structured pricing strategy in your business plan:

What is the cost of your product or service?

Most companies need to be profitable. They need to pay their expenses, their employees and return a reasonable profit. Unless you are a well-funded-winner-takes-all-growth-company such as Uber or Gorillas, you will need to earn more than you spend on your products. In order to be profitable you need to know how much your expenses are, to remain profitable overall.

How does your price compare to other alternatives in the market?

Most companies have competitors for their products or services, only few companies can act as a monopoly. Therefore, you need to know how your price compares to the other prices in the market. Are you one of the cheapest, the most expensive or somewhere in the middle?

Why is your price competitive?

When you know the prices of your competitors, you need to be able to explain why your price is better or different than that of your competitions. Do you offer more value for the same price? Do you offer less, but are you the cheapest? Or does your company offer something so unique that a premium pricing strategy sounds fair to your customer? You need to be able to stand out from the competition and price is an efficient differentiator.

What is the expected ROI (Return On Investment)?

When you set your price, you need to be able to explain how much you are expeciting to make. Will the price you offer attract enough customers to make your business operate profitable? Let’s say your expenses are 10.000 euros per month, what return will your price get you for your expected amount of sales?

Top pricing strategies for a business plan

Now you know why pricing is important for your business plan, “but what strategies are best for me?” you may ask. Well, let’s talk pricing strategies. There are plenty of pricing strategies and which ones are best for which business depends on various factors and the industry. However, here is a list of 9 pricing strategies that you can use for your business plan.

• Cost-plus pricing
• Competitive pricing
• Key-Value item pricing
• Dynamic pricing
• Premium pricing
• Hourly based pricing
• Customer-value based pricing
• Psychological pricing
• Geographical pricing

Most of the time, businesses do not use a single pricing strategy in their business but rather a combination of pricing strategies. Cost-plus pricing or competitor based pricing can be good starting points for pricing, but if you make these dynamic or take geographical regions into account, then your pricing becomes even more advanced!

Pricing strategies should not be left out of your business plan. Having a clear vision on how you are going to price your product(s) and service(s) helps you to achieve the best possible profit margins and revenue. If you are able to answer thoughtfully on the questions asked in this blog then you know that you have a rather clear vision on your pricing strategy.

If there are still some things unclear or vague, then it would be adviceable to learn more about all the possible pricing strategies . You can always look for inspiration to our business cases. Do you want to know more about pricing or about SYMSON? Do not hesitate to contact us!

Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!

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Frequently asked questions, related blogs.

Leverage Ethical Pricing and Discount Strategies with SYMSON's AI-Powered Solutions

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Pricing Strategies: Pricing Strategies for Launching New Products

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12 real-world pricing strategy examples.

Pricing your products and services is one of the most daunting yet most crucial parts of doing business. The goal of strategic pricing is to maximize your profit. It’s a lot more complicated than raising your prices or increasing your profit margins.

Every business is different. They have different products, different customers and different market share. It makes sense that there isn’t a one-size-fits-all pricing strategy. So how do you make the most out of your sales without alienating a potential customer? And how does your pricing align with the brand identity you want to convey?

Read on for our full guide on how to price your product or service. This includes 12 common pricing strategies and real-life examples you can learn from

In this article, we’ll cover:

What Is a Pricing Strategy/Pricing Model?

The four cs of pricing your product, the four main pricing strategies you should know, other kinds of pricing strategy, pricing strategy benefits, key takeaways.

Most marketing guides use pricing strategy and pricing model interchangeably. There are some key differences that you should keep in mind.

A pricing strategy is how the seller uses pricing to achieve a certain business objective. It deals with the psychological reaction that a consumer has towards certain kinds of prices.

A pricing model, on the other hand, is how the seller goes about implementing the pricing strategy. Pricing models are usually specific and quantitative in nature. Here are some of the most common pricing models:

• Hourly: You charge an hourly rate (e.g., $40/hour) and then bill the client for the total number of hours worked.
• Project-based: You charge a flat rate for the entirety of the project (e.g., $5,000 for a website).
• Retainer: You charge a monthly fee for on-going deliverables (e.g., $300/month for search engine optimization).
• Performance-based: You charge a rate based on the results you produce (e.g., $100 per key performance indicator reached).
• Cost-plus pricing: You charge for the production costs (e.g., $10 to make a shirt) plus a profit markup (e.g., 100%, or total $20).

Pricing strategies work best when they take into consideration the four major pillars of pricing. These are customers, current positioning, competitors and costs. Keep the four Cs in mind when choosing the best pricing approach for your business.

Who is your target market ? What is your ideal customer’s disposable income range? How much would that customer be willing to pay for your products and service? Will pricing your products/services impact your customers’ purchasing behavior or attitude towards your brand? What kind of pricing strategy speaks to your target customer the best? How does it align with your brand image and what type of value does it communicate?

Current Positioning

What is your brand identity? Which parts of the market are you catering to with your marketing efforts? Are you known as a budget or low-cost alternative, or are you a luxury business with elite clients? Are you a relatively unknown startup, or does your company already have a hold on the market? Your products and services need to be priced accordingly. The more luxury your offerings (or the more established you are as a company), the more you can demand from your customers. This is not to say you should necessarily “price high.” Your product and pricing need to work together in order to create the image that you want.

Competitors

How much are your competitors charging? If your competitors raise or lower their prices, how would that affect your sales? Are your products/services comparable, or do you offer something special for the same cost? You can use your competitors’ prices as a benchmark. Always take note of any major differences that allow you to be more flexible on your price.

It’s simple math—you can’t profit if you’re spending more than you bring in. Always take into consideration production costs (how much it costs to produce a product or service) and fixed costs. (What you have to pay regardless of how many units you sell—e.g., marketing, rent, staffing, other operating expenses , etc.). A common method for this using cost plus pricing. Determine your costs, then determine how much additional you want to charge on top of that.

There are dozens of strategies in existence. There are four basic strategies that provide the foundations for more complex pricing. These are: economy pricing, penetration pricing, price skimming and premium pricing.

Pricing Strategy Examples: #1 Economy Pricing

Under the economy pricing strategy, your company charges as little as possible to entice the largest number of potential customers. This works by lowering operating and production costs as much as you can. Because your profit margins are usually lower, you also have to focus on volume.

This pricing approach is most commonly seen at dollar stores. It’s also common at chain supermarkets like Target or Walmart. However, if you’re a small business, this tactic is a bit tricky. You may not have the volume, market share, or brand awareness to set your products and services at the lowest possible price to reach that target customer.

Pricing Strategy Examples: #2 Penetration Pricing

If you’re a relatively new business, you may want to consider pricing for optimum market penetration. This means that you initially sell your product or service at a low introductory price. This will attract new customers. Then raise prices one you’ve secured your share in the market.

You can see this pricing strategy at work with telecommunications or cable companies. They’ll initially charge a lower-than-market rate for the first month or so. This will entice customers to sign up for their services. There are two potential downsides to this strategy. First, your profits will take a hit. Second, some customers may not buy into the higher price.

Pricing Strategy Examples: #3 Price Skimming

Think of price skimming as the opposite of penetration pricing strategy. You start with a higher initial cost, and then lower the price over time. This occurs as consumer demand falls and newer goods take over the market. This is a great way to cover production and marketing costs early. It also reinforces the idea that your brand is one of quality and luxury.

Price skimming is very common in the tech/electronics industry. Whenever a new flagship phone from Apple or Samsung comes out, prices are high. However, if a customer buys the same phone a year or even just a few months later, they could get it at a much lower price.

Pricing Strategy Examples: #4 Premium Pricing

It may seem counterintuitive to price your product at a premium price point. Customers can actually respond positively to higher prices. Because only a few people can afford them, expensive products create the illusion of exclusivity, status and quality.

You can opt for a premium price if your product or brand has a competitive advantage. The trade-off is that though your business will likely sell fewer units. The high profit margin should be able to make up for loss of volume. Premium pricing can be found in most industries. This includes restaurant and hospitality to automotive to fashion.

While economy, penetration, skimming and premium pricing are the most common pricing strategies, they’re not the only ones you can use. Below are eight more approaches that could benefit your business.

Psychological Pricing

Also known as charm pricing, psychological pricing takes advantage of the fact that humans are emotional by nature. We respond to things emotionally and impulsively rather than logically.

The biggest example of this is when sellers mark their prices as $0.99 or $0.75. This is rather than rounding up to the nearest whole number—like when an item costs $99.99 instead of $100. This is because we see and react to the first set of numbers. We immediately think it is cheaper, even though there’s a negligible difference in cost.

Bundle/Product Line Pricing

If you have a range of products or services that complement each other, you can bundle together products.  This may allow you to charge a lower price than if customers bought them individually. This is called bundle pricing. This is a great way to get rid of stock, move products and encourage more spending.

Retail brands will bundle together related items. Service providers have package deals if you get multiple services at one time. The tricky part of product line pricing is that you have to make sure that your profit loss doesn’t outweigh how much you earn by pushing multiple products at the same time.

Promotional Pricing

Promotional pricing is also known as discount pricing. You sell your products or services at a discounted rate for a short period of time. This could involve slashing off a percentage of the price. This provides vouchers or coupons, launching two-for-one deals or giving away free items with every purchase.

Promo pricing follows the idea that some profit is better than no profit. We recommend using this strategy on high-volume periods (e.g., the holidays). It also works at the end of the season when moving products out of inventory is a higher priority than pure profit.

Geographical Pricing

If you are a local business, then geographical pricing isn’t for you. But if you’re an international company that sells all over the world, then this pricing approach is very relevant.

With geographical pricing, you price your goods and services according to geographical factors such as cost of living, average income, legislation, taxes, and of course, supply and demand. For example, gas stations in a busy urban area are likely to have different prices than similar stations in a rural town.

Captive Product Pricing

This pricing strategy works best if customers have to keep buying from you to continue using your products. Examples of this are shaving products and subscription services like the Dollar Shave Club. Once you buy a razor from a particular brand, the customer will have to keep buying blades and other accessories from you since other brands won’t be compatible.

You can charge a low price for the initial buy-in (e.g., razor handles, printers), and then make up for any profit loss through the renewables (e.g., blades, printer ink).

Optional Product Pricing

You might be familiar with optional product pricing through another term: upselling. With upselling, you can tack on extra services or products for a slightly higher cost. You see airlines using this strategy all of the time, with extra charges for optional services such as baggage, priority check-in, in-flight meals and exit row seats. The idea behind this is that it’s easier and more profitable to convince a current customer to spend more than it is to try and attract a new customer.

Value Pricing

Value-based pricing means basing your prices off how much value your customers feel they are getting when they buy your product or service, instead of deciding prices based on how much a product or service costs to make. The idea behind this is that customers are willing to spend more money on something that they feel is worth it and provides them with value.

For example, a T-shirt may cost just $5 or $10 to produce. But because there’s some value attached to the style and brand, some companies may charge as much as hundreds or even thousands of dollars for it.

Dynamic Pricing

Dynamic pricing is a pricing strategy that’s variable instead of fixed. This means that, depending on the time or other external factors, prices can and will fluctuate. You see this often in the tourism industry—hotels and airlines usually charge higher rates during peak season and will lower their rates when there is less consumer demand.

Flexible pricing systems often use technology to generate the best rates depending on market factors. While this makes it easier to maximize profits, gathering the data necessary to implement dynamic pricing may be too time-consuming or expensive for small businesses.

There are several benefits to using pricing strategies like the ones above. Some of these benefits include:

• Allowing for increased margins on higher priced items. In the case where your margins are based on the initial sale only, using a pricing strategy that encourages recurring purchases will yield higher profits.
• Increasing competitiveness. When everyone else in your industry is jacking up prices and cutting discounts to maximize short-term profits, it might be time to rethink your approach. Using a pricing strategy that entices customers to keep buying from you will make your business more competitive and increase customer loyalty.
• Price flexibility. By using geographical pricing, captive product pricing and dynamic/flexible pricing, you can charge customers different prices based on certain criteria.
• Simplifying your marketing messaging. If your marketing message focuses on value and benefits rather than price, you can make it easier for customers to understand and trust your brand.
• Reducing customer price resistance. When your customers feel that they’re getting a good deal, they’ll be more likely to trust and buy from you.

There are many benefits to having a good pricing strategy. By using one or more of the pricing strategies discussed above, you can increase your profits and grow your business.

The right pricing strategy will help you get more customers and increase your profits. But what works for one company may not necessarily work for you—even if they’re in the same industry. It’s important to take a look at your specific marketing strategy and circumstances before choosing the most effective price strategy. Check out our resource hub for more information!

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Business tips

15 pricing strategies and how to set yours

Hopefully, you enjoy what you do, and that's why you do it. But unfortunately, business isn't just about doing what you love—it's also about making money. And of course, making money means pricing your products or services correctly.

For your business to be sustainable, you'll need a pricing strategy that generates adequate income while also being attractive to customers.

Here's a guide to creating a pricing strategy that will keep your profits moving up and to the right.

What is a pricing strategy?

A pricing strategy is a plan for setting the best price for your products or services. The goal is to set a price that will entice customers to buy, but that isn't so low that you're not making a profit. 

Sure, you could just trial-and-error a bunch of prices until you find the price that maximizes profit without deterring potential customers—and there will probably still be some of that even after you choose a pricing strategy for your business. But you'll spend a lot less time and money starting with a pricing analysis than you will taking a complete shot in the dark.

15 common pricing methods and examples

Your core pricing strategy has to do with what you're selling: a luxury, a bargain, or just a good product for a good price. Once you have that figured out, you'll move on to choosing a pricing method, which is the how of your pricing strategy.

Pricing methods are sort of like plays in a playbook. Your product probably isn't going to switch from being a luxury to a bargain and back again, but you can (and, in some cases, should) switch up the pricing method you're using to better meet your market demands.

Here, we'll look at 15 of the most common pricing methods, plus how and when to use them.

1. Value-based pricing

The first pricing method is probably the one you're most familiar with: value-based pricing. You might think of it as the "default" pricing method since it consists of finding what the customer is willing to pay (the WTP price), making sure it's higher than the cost of production, and setting your price somewhere in between.

If you need to make a price adjustment, you can do so as long as the new price falls within the WTP range. If the new price surpasses this range, you'll need to explore avenues to expand the WTP range. You can do this by incorporating additional value into your product or service to increase the customer's willingness to pay the new price.

Takeaway: Charge what you can without turning off the customer to your product. 

2. Cost-plus pricing

A very similar method to value-based pricing is cost-plus pricing. Instead of basing prices on what the customer is willing to pay, businesses set prices by determining the cost of production and their ideal profit margin. For example, if a product costs $100 to make and a company's target margin is 15%, then the product will sell for $115. 

Cost-plus prices still need to fall within the WTP range, but they're not chosen based specifically on what the customer is willing to pay. If the cost-plus price falls outside the WTP range, the company either needs to adjust its target margin or find a way to lower production costs.

Takeaway: Ensure all costs are covered and don't keep you from reaching your desired profit margin.

3. Competitive pricing

When Norm McLaughlin formulated the pricing model for his business, Norm's Computer Services , he decided that he wanted to be considered competitive but not cheap. That meant his pricing was on par with his peers, but he avoided the use of any terminology like "budget," "cheap," or "cheapest" in his small business's marketing .

One of the things he tried early on was offering the first 15 minutes of work free of charge—if he solved the issue within that first quarter of an hour, the job would be completely free. It worked. Clients told him they wanted to pay even if he solved the issue in under 15 minutes because they didn't feel good about paying nothing for a service that involved someone coming to their home. It was an attractive offer that increased his competitive edge without negatively impacting his bottom line.

Takeaway: Maintain or gain market share from your competitors.  

4. Economy pricing

Similar to competitive pricing, economy pricing involves setting the lowest prices among your competitors to attract bargain buyers. But unlike competitive pricing, economy pricing specifically targets people who will consciously sacrifice quality in exchange for a cheaper price. Knowing this, you can source cheaper supplies, eliminate extra features, and make other changes to lower your production costs so that you can offer extremely low prices while continuing to make a profit. 

The fast fashion industry is infamous for its reliance on economy pricing. Clothes are created quickly using cheap (and often ethically questionable) labor, and they wear out quickly. This allows stores to sell highly trend-conscious clothing, since customers need to replace their clothes more frequently. Unfortunately, it also causes major environmental damage —and usually doesn't even save customers money compared to buying more expensive but longer-lasting clothing.

Takeaway: Attract price-sensitive customers while achieving high sales volume and cost efficiencies.

5. Penetration pricing

As a new business , you may find that you need to set your prices toward the lower end of the spectrum. Penetration pricing is when a business sets the price of a product or service low at the beginning, then raises the price once the company is more established.

Businesses that provide a service can draw customers in with low pricing, then win their loyalty with great service. Introductory offers can be a great way to entice new clients or customers. For example, you could offer a fixed price or percentage off the first job, or a portion of free labor. At least one of Norm's competitors offered a 10% reduction on labor for returning customers. In Norm's view, a better approach to customer retention was to offer them that 10% off the first job—and then do such good work that they wouldn't mind paying the full price for subsequent jobs.

Takeaway: Gain market share and attract customers quickly with low initial prices, then raise prices once you've established a strong customer base. 

6. Dynamic pricing

Have you ever pulled out your phone intending to grab a rideshare on a busy weekend night or (I wince just thinking about it) a holiday? Those jaw-dropping price surges are the result of what's called dynamic pricing, or pricing that changes fluidly according to availability and demand.

Truly dynamic pricing requires an algorithm that can automatically adjust prices according to purchasing activity. Uber's CEO isn't sitting behind a Wizard of Oz curtain declaring price surges; the app automatically increases prices when demand is higher than the number of drivers on the road. A less immediate version of dynamic pricing can be seen at the gas pump, where prices change frequently in response to demand but aren't automatic (in some states, like New Jersey, they can't change more than once per day). 

For small businesses, dynamic pricing works best with services or custom products that require a price quote, since customers expect prices to be different depending on the project and circumstances. If your prices are listed on your site and you change them constantly, you'll drive away potential customers who perceive you as unpredictable or unreliable.

Takeaway: Maximize revenue while adjusting for real-time factors like demand, competition, and market conditions. 

7. Price skimming

Price skimming is the opposite of penetration pricing, where you start by setting the maximum price and gradually lower it over time. This strategy works best with products that have major releases, like laptops or cars. By price skimming, you'll be able to capture early buyers willing to pay top dollar for the latest and greatest; then, as you gradually lower the price, you'll be able to sell the maximum number of products at each price before dropping it again. 

One of the most well-known price skimmers is Apple, which has made its product launches into full events with tickets and fans to build as much hype as humanly possible. Mega-fans buy the newly unveiled products the moment they're available, even waiting in lines overnight outside Apple Stores to do so. As each new product is released, the older models get shunted down the pricing ladder to capture buyers with lower WTP points. 

Takeaway: Capture early adopters and maximize revenue with high initial prices before gradually reducing prices to attract more price-sensitive customers.

8. Hourly pricing

Often used in service-based industries, hourly pricing establishes prices based on the time spent on a particular task or service. This aligns the price directly with the effort or resources dedicated to the project. It's a straightforward method for you and the client to understand and agree upon the service's value.

Having said that, if your projects' complexity or required resources vary quite a bit, a flat hourly rate may not be best for your business.

Takeaway:   Ensure customers are billed fairly based on the actual hours worked.

9. Project-based pricing

Project-based pricing is also common in service-based industries. This method determines prices based on the scope, complexity, and resources required for each project. Rather than charging a fixed or hourly rate, companies assess the unique needs of each project and provide a tailored quote. That way, businesses are accounting for factors like resources, expertise, and time commitment required to complete the project successfully.

This pricing model is common for architects. When a client approaches an architecture firm with a request to design and construct a building, the firm will assess the project's scale, complexity, materials, and other specific requirements to provide a project-based quote. Obviously, the process and requirements for designing a public bathroom vs. a skyscraper will be very different, beyond just time discrepancies. 

Takeaway: Make sure profitability and effort are accounted for in your pricing structure.  

10. High-low pricing

I've taught all my loved ones that we don't walk into Michael's without a coupon or buy anything at JOANN that hasn't been marked down to at least 40% off.

These stores use high-low pricing, where they offer products or services at a higher price initially and periodically discount them. This approach attracts price-sensitive customers who are motivated by discounts (me) while also maximizing revenue from customers willing to pay higher prices to get their hands on the product before it starts flying off the shelves once it's been discounted.

Companies can maintain a balance between profitability and reaching a larger range of customers by driving traffic to their stores or websites during promotional periods.

Takeaway: Create a perception of value to encourage customer purchases. 

11. Bundle pricing

You've probably seen the Progressive commercials practically begging you to bundle your car and home insurance for a better deal. Or maybe you bundled your cable and phone services back in the day. 

Bundle pricing is when a company combines multiple products or services and offers them at a lower overall price than what each item would individually cost. This creates a perception of added value, convenience, and savings for customers. If you sell a lot of small items or are trying to spread the love to an overlooked service, this pricing strategy may help you increase your sales.

Takeaway: Sell items together in a package deal that's slightly cheaper than if you were to sell the items individually to increase sales and customer satisfaction.

12. Geographic pricing

I follow a candy shop on TikTok with the most delicious-looking candy I've ever seen. They're located in the U.K. and I'm in the U.S., which means I'd have to pay outrageous prices to account for the shipping costs.

Geographic pricing involves setting prices based on different geographic regions or markets, considering factors like local market conditions, competitive landscape, and transportation costs like shipping. While this strategy makes it harder for a candy lover like me to get their hands on some delectable sweets, if you want to expand outside of your own geographic region, this strategy may be inevitable to keep your profits stable.

Takeaway: Maintain profitability across all your geographic markets by adjusting for variable factors.

13. Psychological pricing

A book priced at $20? I'll pass. A book for $19.99? I'll take 10. This common phenomenon that we all fall for time and time again is called psychological pricing. Also known as charm pricing, this strategy leverages consumers' perceptions and emotions to make them think they're getting a better deal than they actually are. 

Making the price seem more appealing or affordable to customers effectively influences customer behavior and increases sales, even if the price difference is negligible (and even if the customer knows in their heart of hearts that it's negligible). You can combine this strategy with another method since it's a common standard in many industries.

Takeaway: Create the illusion of a lower price so customers perceive your price as fairer.  

14. Freemium pricing

If you're like me, you started out with the free version of Spotify until the ads were so grating on your soul that you gave in and shelled out the cash for the paid ad-free version. This method of offering a basic version of a product or service for free and charging for additional premium features or advanced functionality is called freemium pricing. 

By offering a free version, companies can give customers a taste of the value their product or service offers, build brand awareness, and create a larger user base. They then monetize their user base with an enhanced experience for a subscription fee or one-time purchase. If you're new to the market, this is a great way to get buy-in from people who would otherwise be unwilling to convert.

Takeaway: Attract a large user base and convert some into paying customers. 

15. Premium pricing

Some people enjoy the prestigious vibe and social appearance of luxury brands. For example, luxury car companies, like BMW or Mercedes-Benz, position their vehicles as high-end, offering advanced technology, luxurious interiors, and superior performance. (Although I'd love to see what they have that my Honda CR-V doesn't.) 

With those high-end features comes a high-end price tag, otherwise known as premium pricing. This strategy positions the company as exclusive and superior in value in comparison to lower-priced competitors. It appeals to a target market willing to pay a premium for the perceived benefits. If that's your target market, then this is your ticket.

Takeaway: Target affluent customers and generate higher profit margins. 

Factors to consider when pricing a product

You likely know off the bat that you'll need to consider your own business costs and competitor prices so that you can find a price that earns a profit but isn't so high that it drives potential customers to other businesses with better deals. But unfortunately, it's not that simple: there are a lot of factors you'll need to consider in order to determine the best pricing strategy for you.

I know I just said cost wasn't the only factor to consider, but it is the most important one to start with. If your prices aren't higher than your costs, you'll be out of business before you even get your company off the ground.

When calculating costs, make sure you include:

Product materials

Employee wages (that includes what you pay yourself!)

Overhead costs (rent, insurance, utilities, taxes, etc.)

Software and services for things like accounting, marketing, and legal

Shipping and transportation

Economic factors

When costs change, your prices will have to change in order to stay competitive and keep making a profit. Businesses that rely directly on commodities as supplies—so things like lumber, oil, and metals—will be most vulnerable to economic fluctuations , but all industries are affected in some way or another by global, political, and social changes. 

Conduct thorough research to identify what economic conditions your business thrives in, and recession-proof your business . Be proactive about anticipating events that could affect your supply and demand . You especially need to incorporate a safety net into your profit margins to ensure you have enough funds to stay in business during slow periods if you're in a more temperamental industry.

Competitor pricing

Your prices don't always need to be lower than your competitors', but if they're higher, you need to be able to justify it with added quality. Your products don't always need to be quality, but if they're low-quality, you'll need to be able to justify it with lower prices. Where you fall on either side of this trade-off determines your value position , which we'll discuss in a bit. But no matter how you decide to position your product, you'll need to stay up-to-date on what your competitors charge, pricing trends in your industry, and what pricing models work best for your market.

It's usually not difficult to find out what your competitors charge—either by visiting their websites or by calling them to ask. As you gather information for your competitor analysis , keep a spreadsheet where you can record prices and note things like introductory offers, loyalty programs, and discounts.

Positioning

It's a common misconception that businesses have to sell good-quality products to be successful. There are buyers at every price and quality level; what matters is how your product quality and price are positioned with respect to each other.

One of the easiest industries for demonstrating this concept is the airline industry, because there's no way to mistake the difference between a high- and low-quality purchase when there's a literal curtain dividing them. Normally, price and quality will align with one another. First-class tickets offer high quality at a high price, economy tickets offer low quality at a low price, and everyone else gets piled into coach. 

Value prices occur when quality is higher than price—when you fly during off-peak times or get upgraded to first class for free. When demand is high and seats are limited, the airlines can afford to charge higher prices for lower-quality seats, counting on the fact that you'll pay full price for a terrible seat if it's your only option.

When you apply this to your own pricing, ask yourself what kind of value your product or service offers. Are you solving an urgent problem , or is your product more for comfort and enjoyment? If you sell a first-class product, you'll lose money by selling it at economy prices. If you sell an economy product, you'll need to sell it for a bargain price.

As you start off in business, it's important to remember that you can change your pricing strategy as you go along. This is a marathon, not a sprint, so it's more about building a client base of satisfied customers who will come back to you again and again than it is to make as much money as possible as quickly as possible. 

And the good news is that you don't have to get everything right from the very beginning. You can try different approaches and make adjustments as you go until you're achieving the outcomes you want. To continue optimizing for success, learn how you can automate your small business .

Related reading:

The best eCommerce website building platforms for online stores

Optimizing your small business product mix

The best CRMs for small businesses

The best project management software for small businesses

This article was originally published in December 2020 by Norm Mclaughlin. It was most recently updated in July 2023.

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Cecilia is a content marketer with a degree in Media and Journalism from the University of South Dakota. After graduating, Cecilia moved to Omaha, Nebraska where she enjoys reading (almost as much as book buying), decor hunting at garage sales, and spending time with her two cats.

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Retail | Listicle

19 Pricing Strategies (+ Pricing Strategy Examples)

Published June 15, 2023

Published Jun 15, 2023

REVIEWED BY: Meaghan Brophy

WRITTEN BY: Katie-Jay Simmons

Your Privacy is important to us.

This article is part of a larger series on Retail Management .

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• 1 Keystone Pricing
• 2 Cost-plus Pricing
• 3 Manufacturer’s Suggested Retail Price (MSRP)
• 4 Psychological Pricing
• 5 Value-based Pricing
• 6 Discount Pricing
• 7 Loss-leader Pricing
• 8 Price Anchoring
• 9 Competitive Pricing
• 10 Penetration Pricing
• 11 Bundle Pricing
• 12 Project-based Pricing
• 13 Hourly Pricing
• 14 Premium Pricing
• 15 Price Skimming
• 16 Freemium Pricing
• 17 High-low Pricing
• 18 Dynamic Pricing
• 19 Geographical Pricing
• 20 Pricing Strategies Frequently Asked Questions (FAQ)
• 21 Bottom Line

Pricing strategies are the methods and formulas that businesses use to determine the cost of their products. A good pricing strategy finds the sweet spot between what customers are happy to pay and what makes your business money. It should also adapt to changes in the market or economy.

Here’s a list of 19 effective pricing strategies—from using the manufacturer’s suggested price to aligning with your competitors’ pricing to changing pricing in real time based on events—with examples of how to use them.

1. Keystone Pricing

What Is It: Doubling the product cost to get the selling price Commonly Used By: Retailers and ecommerce sellers

Keystone pricing is a strategy in which the asking price is double the product’s wholesale cost, or close to a 50% profit margin. It’s the default pricing strategy across both retail and ecommerce due to its simple application and ability to yield profits.

Occasionally businesses will use keystone pricing as a base markup on most goods, then apply higher markups or discounted pricing to certain items based on demand, volume, and competition. It’s a particularly common strategy in fashion, consumer goods, and grocery sectors.

For example , say you run a jewelry store. You purchase a birthstone ring from a wholesaler for $90. To maintain a keystone pricing strategy, you set the retail price for the ring at $180, ensuring a consistent 100% markup. This approach allows you to cover your costs, account for operating expenses, and generate a reasonable profit while offering the product to customers at a perceived fair market value.

Keystone pricing may not be the best strategy for every type of product. If your goods have low turnover rates, involve high shipping and handling costs, or are unique or rare, you may be undervaluing them by using keystone pricing. However, if your products are widely available and easily replaceable, keystone pricing may put them at too high of a price to generate sales.

Check out our guide on how to price your products for step-by-step instructions.

2. Cost-plus Pricing

What Is It: Applying a standard markup percentage on top of your cost of goods sold (COGS) Commonly Used By: Wholesalers, manufacturers, artisans, and private label sellers

Cost-plus pricing (also known as markup pricing ) involves calculating the total fixed and variable costs associated with your product (labor, marketing, shipping, etc.), and then adding a markup to achieve your desired profit margin. Most retail brands aim for a 30%–50% margin, which means roughly a 40%–100% markup.

Cost-plus pricing works well for companies that sell labor-intensive products or large amounts of similar products. Here are some examples of how wholesalers, manufacturers, artisans, and craftsmen typically use cost-plus pricing:

• Wholesalers: Wholesalers usually add a flat percentage markup to all goods that pass through their hands. A common wholesale or middleman markup on most consumer goods is 20%, but that can vary depending on your industry.
• Manufacturers: Manufacturers use different cost-plus prices depending on the buyer. A manufacturer might sell bulk goods to wholesalers at a cost-plus of 100%, just like a keystone markup—but then also sell single units directly to consumers on its website at a 200% markup (generating a 67% margin). This way, it makes more money per unit on smaller sales.
• Artisans and Craftsmen: Labor is the cornerstone of artisanal and craft works, so the cost-plus price represents the value of the labor and the product. For example, if you have a wooden chest built by an artisan, the cost-plus markup might be 70%. The base price represents materials and hours, and the 70% markup represents the value of the labor and finished product.

Use this formula to calculate cost-plus pricing based on the markup you want:

Item Cost x (1 + [Markup/100]) = Selling Price

So, if you are a craftsman who spent $150 making that wooden chest we mentioned above and wants to sell it at a 70% markup, your calculation would be:

150 x (1 + [70/100] 150 x (1 + 0.70] 150 x 1.70 Selling price = $255

3. Manufacturer’s Suggested Retail Price (MSRP)

What Is It: Using the price that product manufacturers recommend for their goods Commonly Used By: Retailers and ecommerce sellers

The MSRP pricing strategy is popular among retailers that purchase goods rather than making the products themselves. The MSRP often matches the Keystone price, but there can be exceptions.

Some retailers may have the flexibility to adjust the MSRP, but certain manufacturers or brands strictly prohibit alterations to their suggested prices. This is called MAP or Minimum Advertised Pricing , and it’s commonly used by brands like Apple to maintain their products’ value. Because of this, it’s crucial to know the pricing terms before you start working with a manufacturer to avoid legal trouble.

The downside of using MSRP as your pricing strategy is that you’ll have the same prices as your competitors. So, you’ll have to differentiate your store in other ways—for example, offering free shipping for ecommerce sellers and exceptional in-store promotions for retailers.

Some brands print the MSRP on their product packaging to ensure retailer compliance. If you choose to use a different pricing strategy in these cases, you’re likely to upset your customers as well as the manufacturer. (Source: Reddit)

4. Psychological Pricing

What Is It: Using prices that end in an odd number (typically 9, 5, or 7) to give the impression of a lower price and a good deal Commonly Used By: Retailers, ecommerce sellers, big box stores, and discount chains

Have you ever walked into a store or viewed an infomercial and noticed that all of the prices end in 99 cents? That’s psychological pricing at work.

A store may price a product at $199 instead of $200 or $4.95 instead of $5. With psychological pricing, the theory is that customers put a greater emphasis on the first digit of a product price, so $199 seems like a much better value than $200, even though the actual price difference is minimal.

By providing customers with the sense that they’re getting a bargain or paying less, psychological pricing reduces the psychological pain of loss that customers experience when parting with their money. This incentivizes shoppers to buy, especially in impulsive scenarios. It also gives them the sense that they’re walking away with a good deal.

An ad from Food Lion shows all the deals that it is currently offering and gives us a great example of a retailer creating the illusion of a deal with psychological pricing. (Source: Pinterest)

Psychological pricing is also a great “bang for your buck” pricing strategy, where only a few cents can inspire customers to make much larger purchases. For example, at my boutique, we decided to re-price our jeans from $70 to $69.99. Immediately, we saw a massive uptick in denim purchases, simply due to the 1-cent price change.

Many retailers choose to mark all their goods with 99-cent endings. Some, however, will reserve the power of psychological pricing exclusively for their sale pieces to incentivize faster turnover of old merchandise. Other common prices that retailers use to make a more appealing sticker price are 95 cents, 89 cents, and 69 cents.

Steer clear of psychological pricing techniques if you sell high-value items, as it may decrease the perceived worth.

5. Value-based Pricing

What Is It: A strategy in which pricing is based on perceived value or how much the customer believes the product is worth Commonly Used By: Specialty stores, luxury stores, sellers of rare and unique goods

The value-based pricing strategy works best for merchandise with high brand recognition, luxury goods, and unique products that have exclusive features that set them above the competition. It does not work well for businesses that sell commoditized goods or products that lack exclusive features (such as grocery or convenience retailers).

As a value-based pricing strategy example, say you own a shop that sells vintage luxury handbags. The value of your products is not represented by doubling the production cost price or by any MSRP. In this case, you would use a value-based pricing system that accounts for the exclusivity of designer labels and the rarity of the bags to reflect perceived value.

To implement a value-based pricing strategy, you have to analyze three things:

• Your Customers: Conduct surveys, research locally, and understand your target market so that you can learn their value system (and set prices accordingly).
• Your Market: Research industry trends and national consumer patterns to understand the value-based price that the greater population is willing to pay for your products.
• Your Competitors: Look to competing sellers to see how they are pricing their products. Successful businesses in your industry can help you understand the pricing that is helping them prosper, as well as what prices will allow you to compete.

6. Discount Pricing

What Is It: A strategy of regularly selling goods at prices under competitors’ Keystone or MSRP prices Commonly Used By: Retailers, ecommerce seller, big box stores, and discount chains

Discount pricing drives entire business models—think Dollar Store, Big Lots, and Home Goods. It’s best for volume-driven businesses that can get lower prices from suppliers by purchasing large quantities.

Be sure customers know they’re getting a deal by clearly displaying your discount or even including the undiscounted MSPR/Keystone price on the tag. This shows customers exactly how much they are saving.

Mark your racks and tags with the discount you are offering so customers know just how much they are saving. (Source: Crazy Coupon Lady)

For the small retailer, an overall discount pricing strategy can leave you with razor-thin profits that easily dip into losses. But running occasional sales, markdowns, seasonal specials, and coupons is an excellent way for small businesses to move through old products and attract new shoppers.

Plus, small businesses can use discount pricing strategies to kick-start drooping sales, unload stale stock, and take advantage of seasonal shopping trends.

To ensure that you don’t sacrifice your bottom line, run your numbers and determine whether a discount will leave you with healthy margins before applying this strategy.

7. Loss-leader Pricing

What Is It: A strategy that sets prices below production costs to attract new customers or increase sales Commonly Used By: Retail, ecommerce sellers, convenience stores, big box stores, and discount chains

Loss-leader pricing is when you sell select products at extremely low prices to draw customers in and then get them shopping for more profitable goods as well.

A good loss-leader pricing strategy example is Costco, a popular wholesale grocery membership club that sells rotisserie chickens for $4.99 each. Costco states that it actually loses money on each chicken sold, but they function as a loss leader that inspires people to sign up for memberships and shop the rest of their store.

Take a note out of Costco’s book and place your loss leaders in the back of your store . This will force shoppers to go through your entire space and be exposed to lots of other products before they reach the deal.

Loss-leader pricing is a great strategy for grocers and other stores where people make multi-item purchases, but it can be a risky pricing strategy for small businesses. The strategy relies on the fact that the profits you lose from your loss leader will be made up by profits of other items. This is difficult to ensure if you don’t sell many items per ticket or if your margins on other goods are small. Be sure that you run the numbers and know your typical units per ticker (UPT) before introducing a loss leader to your pricing strategies.

Units per ticket (UPT): A popular retail metric that tells you the average number of items in each transaction over a certain period of time. Also called IPC or Items Per Customer.

UPT formula:

UPT = total units sold / total number of transactions

8. Price Anchoring

What Is It: A strategy that involves displaying a higher anchor price alongside your product price to make it look like a better deal to customers Commonly Used By: Retail stores, ecommerce stores, discount chains, secondhand stores

There are two primary ways that you can implement an anchor pricing strategy. This first is when you display a regular or MSRP price and your lower price on the same tag. Stores like Marshalls, TJ Maxx, and other discount, consignment, and antique stores use this pricing strategy storewide.

TJ Maxx, a popular discount store, shows the “compare at” price on all their tickets so shoppers know just how much they are saving. (Source: Consumer Products Safety Commission)

Another anchoring strategy that you can use is to display multiple models of the same product together so that the cheaper model seems like a good deal. For example, if you have ever had to choose a new phone or computer, you’ve seen that the cheaper models are typically displayed together with the most expensive model acting as the anchor price. In effect, when a customer chooses one of the less expensive models they feel as though they are getting a good deal compared to the anchor price.

Anchor pricing can work well for small sellers. It’s especially useful if you sell in a niche that has a lot of competition, but not so much that you have to substantially lower your price to compete. Often, a standard storewide 5% to 10% anchor pricing discount is enough to create a memorable sense of value that brings shoppers back for more.

9. Competitive Pricing

What Is It: A pricing strategy in which you use competitors’ prices to set the price of your same or similar products Commonly Used By: Convenience stores, big box chain stores, discount stores, gas stations, retail stores

Competitive pricing ensures that your goods are priced low enough to compete with other sellers. It’s a smart option for products that are common and easily attainable elsewhere. It’s also a useful strategy to use when testing new products that are similar to competitor’s.

Alternatively, you can use this strategy to set yourself a step ahead by making your prices lower than the competition.

In the age of Amazon and other large-scale retailers, competitive pricing is particularly important. If a shopper could just as easily buy your product on Amazon, it’s crucial to have a better price. If that’s not attainable, consider creating value in other ways—like offering free shipping or a free gift with purchase.

10. Penetration Pricing

What Is It: A pricing and marketing strategy that involves temporarily selling at a lower price to attract customers and increase brand recognition Commonly Used By: Retailers with membership options, discount stores, and big box retailers

Penetration pricing is a smart way to introduce a product to new customers, build brand recognition, and foster customer loyalty .

It works particularly well for promoting new products or things that you have to buy on a subscription or membership basis. The idea is that the low price will penetrate the market and get customers to make an initial purchase. Then, once hooked, they will continue purchasing the item as its price increases (or buying for other products from your store).

Penetration pricing strategy examples include:

• Offering a free month of membership upon sign-up
• Selling a new product at a steep price to drum up hype
• Offering a limited-time deal

For example, Fabletics, a fitness clothing membership retailer, offers new customers two bottoms for $24 and 70% off everything when they sign up. This is a deal that really gets people excited and willing to sign up for the $50 monthly subscription. The catch? The deals that reeled you in are only available for your first purchase, and after that, prices are back to their normal rates.

Fabletics has mastered the art of penetration pricing with its enticing sign-up offers. (Source: Fabletics)

11. Bundle Pricing

What Is It: A pricing strategy that offers a discount when two or more products are purchased together, rather than buying them separately Commonly Used By: Discount retailers, beauty supply, office supply, and grocers

Bundle pricing is a pricing strategy in which retailers sell multiple items together at a lower price than if purchased individually. This type of pricing typically has two objectives: giving customers a sense that they are getting a bargain and selling more products.

The benefit behind bundle pricing is that retailers are able to sell more items and increase their transaction sizes while customers walk away feeling like they got a deal.

Fast food restaurants famously take advantage of bundle pricing by offering discounted combo meals. (Source: Burger King)

In retail, bundle pricing is primarily used by discount stores or businesses that sell a lot of complementary products, like beauty or craft stores. It is also sometimes used around the holidays to promote gift baskets.

12. Project-based Pricing

What Is It: When you charge a flat fee for a specific service Commonly Used By: Service providers, freelancers

Project-based pricing is a service pricing strategy in which you set your pricing based on the service/project provided, not based on an hourly rate. This is a great way for service-based businesses to create security in the minds of their customers because it allows them to know the price upfront.

Some businesses will set a time limit on the project-based price and then upcharge or set an hourly rate for the additional time the project requires.

This strategy works best for businesses that provide services with set parameters and few potential variables, and should not be used for more creative projects. For example, nail salons charge a set price for manicures and pedicures or a tire shop offers the same price for wheel removal. Home improvement projects, on the other hand, have more variability, so hourly pricing may be better suited here.

13. Hourly Pricing

What Is It: When your price is based on an hourly rate that correlates to the length of a project Commonly Used By: Service industries that offer creative or highly variable services

This pricing strategy is the flip side of project-based pricing. It’s typically used for projects with more creative elements or less controllable or consistent parameters. This strategy is usually less favorable than project-based pricing in the eyes of the customers, but it’s more practical for most service-based industries.

For example, consider if a company charged a flat “landscaping” fee for their landscaping projects. This pricing structure would not make sense, as there are countless types of landscaping services and as well as sizes of yards and gardens. In this case, the company would have been better off using an hourly pricing strategy, so it could charge accordingly for the variability of the work and make a fair profit based on labor, resources, and time.

14. Premium Pricing

What Is It: The practice of setting a high price to give the impression that a product is superior or high quality Commonly Used By: Luxury retailers, specialty shops, antique goods, and tourist shops

Premium pricing is when retailers artificially inflate prices to create a sense of value among customers. This is a practice commonly used by luxury retailers and specialty stores to help them demonstrate the value of their goods. In other words, the price of the good creates its perceived value, which increases its demand, and, in turn, justifies its price.

Retailers that sell established brands (or are established brands themselves) can use premium pricing on all their products. However, it is also a popular strategy to select only one or a few goods to set at a premium. The products with premium pricing will raise your entire brand’s perceived value and make customers willing to pay more all-around.

For example, say that you own a specialty pool store, and Walmart sells the same pool floaties that you carry. Rather than pricing your floaties equal to or lower than Walmart’s, you can price them slightly higher to reflect your expertise, personalized service, and unique value proposition.

15. Price Skimming

What Is It: Selling a product with a higher-than-usual markup and then lowering the price over time Commonly Used By: New product launches, subscription-based businesses, retailers with membership options

Price skimming (also known as skim pricing) is a strategy that involves charging the highest initial price that customers will pay for your product then lowering it over time. The main goal is to generate the highest possible revenue by targeting customers who are willing to pay premium prices. Then, as consumer demand fades and new competitors enter the market, you reduce the price and attract more cost-conscious customers.

This strategy doesn’t work in every scenario. Price skimming is usually used when:

• There is enough demand from prospective customers who are willing to pay a high price
• There is no direct competition that would deter buyers
• A high price can effectively contribute to the item’s perceived value
• You need to recoup development and/or production costs

A classic price skimming example is the iPhone. When Apple launches a new model, they sell it at a high price to plenty of loyal, price-insensitive customers who value having the latest technology. Then, as new versions and competing devices are introduced, the company drops the price to capture more sales.

Price skimming can also be used by businesses that require recurring payments (like subscriptions and memberships). It helps foster loyalty by rewarding long-term customers with better prices. The strategy can even help with the initial signup by creating an incentive to “earn” the better rate.

16. Freemium Pricing

What Is It: A model that provides a free basic service with the option to upgrade to a paid premium version for additional features Commonly Used By: Subscription-based businesses, retailers with membership options, service providers, software-as-a-service companies

Freemium pricing is when a business will offer a base-level service, plan, or membership tier for free, as well as the option to upgrade to a premium or paid version with enhanced features, advanced functionality, or additional benefits.

By offering a free option at the forefront, the freemium pricing structure helps businesses reel in customers and get them interested in their products or services. You may be familiar with this pricing model from streaming services like YouTube or Spotify.

In both of these companies’ freemium pricing structures, there is a free service where you can play music or videos without charge. But, to listen to the entertainment without advertisements or breaks, you have to join their monthly subscription.

Another form of freemium pricing is offering a free trial . The free initial product also serves to get customers interested in your business and makes them more likely to sign up for your paid service.

Generally, you use freemium pricing on services and products that are low-cost and need to be sold in high volumes. A popularly cited stat says that there is between a 1% and 10% conversion rate from free trials to paid services through freemium pricing. If you’re thinking about using this pricing structure, be sure that your product’s overhead and marketing costs are low so you don’t end up digging yourself into an unprofitable situation.

Shipping software companies (like ShippingEasy, pictured here) use a freemium pricing model to offer a low-volume base plan. When the customer’s business grows and sales increase, they must upgrade to a paid plan to meet their order volume.

17. High-low Pricing

What Is It: When a company alternates between offering high prices and promotional discounts to attract customers Commonly Used By: Discount stores, electronics stores, clothing brands, supermarkets

High-low pricing is a strategy in which retailers alternate between discounted promotional prices and prices that are or above the product’s MSPR. This is accomplished by having frequent sales during which prices are lowered for a short time.

This strategy establishes the value of a product then uses limited-time promotions to deliver a bargain— which drives bursts of high-volume sales. Similar to loss-leader pricing, the high-low strategy works to drive store traffic and encourage customers to buy additional items once they’re in store. It also uses the same structure as price skimming to capture sales from multiple target markets by using different price points.

But, unlike price skimming, hi-low pricing can retain the product’s perceived value after the promotion as long as you’re careful. Too many sales and discounts will result in shoppers perceiving your sale prices as the actual value, which dilutes your brand.

One example of high-low pricing is the fashion retailer Zara, which frequently introduces new collections at regular prices and then offers promotional discounts during seasonal sales. This strategy helps Zara attract customers with the initial higher-priced items and later bring in price-conscious shoppers with discounted prices. It also creates a sense of urgency and drives sales.

18. Dynamic Pricing

What Is It: A strategy where prices are adjusted in real time based on factors such as demand, supply, competitor pricing, and market conditions Commonly Used By: Hospitality, tourism, transportation, entertainment, and utilities

Dynamic pricing is when a business changes its pricing based on the seasons or other demand-shift indicators (weather, day of the week, political climate, etc.). It takes into account things like competitor pricing, supply and demand, and other external market factors in setting its prices. This pricing strategy works best for services in the hospitality and transportation industry and essential goods like gas and electricity.

This strategy can help companies maximize their profits in industries with a lot of volatility in terms of traffic and demand. For example, a resort might charge $300 for a room during the peak season and $220 for the same room during the offseason. This type of pricing helps the business owners capitalize on busy times when demand is high, and use lower prices to incentivize offseason purchases.

To use dynamic pricing, be sure to understand your industry and its peaks and valleys in demand. Then assign higher prices during peaks and lower pricing during valleys. It’s important that your dropped prices can still generate enough revenue to cover your costs, or, alternatively, profits acquired during peak prices can cover profits lost from low prices.

19. Geographical Pricing

What Is It: The practice of adjusting an item’s price based on the location of the buyer Commonly Used By: Multilocation retail stores, franchise businesses, ecommerce sellers, luxury brands

Geographical pricing is a strategy that adjusts the price of a product based on the buyer’s location. This pricing strategy takes into account several factors— including shipping costs, local market conditions, economic status, and buying habits of different geographical areas. Sometimes, it also considers the cost of living and the average income of people in a specific region.

For example, a multilocation clothing store might charge different prices for the same item in New York City versus a rural town in Kansas. In the city, the price could be higher due to increased demand, higher average income, and a higher cost of living. This higher price also helps to offset the inflated cost of the retailer’s rent and other utilities. On the other hand, in a rural town where income levels and cost of living are lower, the seller may opt for a lower price to match the local market’s purchasing power.

Pricing Strategies Frequently Asked Questions (FAQ)

What is the most used pricing strategy.

The most popular and common pricing strategies are:

• Cost-plus pricing: calculating your costs and adding a markup
• Keystone pricing: doubling the wholesale price
• Competitive pricing: setting your price based on what competitors charge
• Value-based pricing: pricing your goods based on what the customer thinks they’re worth

These pricing strategies are used by businesses throughout a number of industries, from small companies and startups to enterprise-level companies. They’re popular because they’re simple to use across large inventories and generate profit while attracting customers.

Can You Combine Pricing Strategies?

You can combine multiple pricing strategies to find the best (and most profitable) ways to price and market your products.

For example, a handcrafted furniture business might use cost-plus pricing for a table that costs $200 to make. They add a 50% profit margin and sell it for $300. That business can then combine bundle pricing by offering a living room set that features the table along with a bookshelf and a chair. Bought separately, these items would cost $950, but as a bundle they sell for $850.

Another example of combined pricing strategies could be a retailer using high-low pricing to attract customers with promotional deals, while also implementing geographical pricing to adjust prices based on the location of their stores. This allows them to attract a wide range of customers while accounting for local market conditions and cost variations.

How Do You Determine the Selling Price of a Product?

Setting the perfect price for your products means you need to understand your costs, know how much your customers are willing to pay, and keep an eye on your competitors. With this information, you can choose from a variety of pricing strategies to set a price that will be attractive to customers and still make you a profit.

It may take some experimentation to find the best prices for your goods. Even once pricing is dialed in, most businesses continuously test and adjust their pricing strategies based on market conditions and customer feedback.

Bottom Line

With nearly 20 pricing strategies to choose from, there are a lot of options when it comes to pricing your products. The best thing you can do to sell through your products and maximize your profits is to use a mix of pricing strategies based on what works for each individual item you sell. Whatever you choose, be sure to continuously monitor their success and ability to generate sales and profits, so you can make adjustments and continue to maximize your retail business.

About the Author

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Katie-Jay Simmons

Katie-Jay Simmons aims to put answers in the hands of small business owners by leveraging more than 10 years of retail and hospitality experience. Informed by a background in jewelry and gemology, she specializes in ecommerce with a focus on fulfillment and global sourcing. Her scope of expertise ranges from traditional brick-and-mortar businesses to innovative, high-volume ecommerce operations.

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9 Popular Pricing Strategies to Maximize Revenue Growth

• Table of contents

Pricing is one of the most crucial and influential levers in driving revenue for your company. Unfortunately, many organizations take a “set and forget” approach to pricing and fail to develop a comprehensive, research-backed strategy to determine appropriate price points.

This mistake leaves a significant revenue opportunity on the table and is responsible for as much as 18% of startup failures .

It seems obvious, optimize your pricing strategy to maximize revenue from each customer. This leads to improved growth and higher profit.

However, many SaaS revenue leaders fail to put this simple idea into effective practice.

This guide will dive deep into 9 of the most powerful pricing strategies and outline how to choose the optimal approach based on the type of company you operate.

What Is Pricing, and Why Is It Important to Get Your Pricing Right?

Simply put, pricing is the process of determining what you’re going to charge for your company’s products or services.

The operative term in this definition is “process.” Setting your price must not be an arbitrary decision based loosely on market norms and competitor price points (though these factors should be taken into account).

That “process” (which we’ll discuss in more detail in subsequent sections) is informed by your pricing strategy — the theory and principles behind your product pricing.

So, why is it so crucial to get pricing correct?

The main reason is that pricing optimization leads to increased profits. Studies show that a pricing increase of just 1% can induce profit growth of more than 11%.

Of course, by setting prices too high, you’ll alienate certain market segments and risk pricing yourself out of the market. You need to find the right price, or prices, to maximize market penetration.

More than that, a company’s pricing contains inherent indicators of value and how customers should perceive that product. 

At a basic level, higher-priced items are perceived as being of higher quality (a psychological phenomenon known as premium or prestige pricing ) and vice versa. 

How, then, do you determine the optimal price point for your product or service? First, you need to determine the pricing strategy that best fits your revenue and organizational goals.

What Are Pricing Strategies? 

Your pricing strategy is your methodology, concept, or theory behind your product pricing. 

Pricing strategies allow you to make informed decisions on pricing changes and to understand how those changes will be impactful and appeal to your target audience.

Let’s take two common pricing strategies to illustrate: price skimming and cost-plus pricing (both of which we’ll discuss in more detail shortly).

Price skimming is a strategy where you start by setting high prices — as high as the market can tolerate (capturing maximum revenue per unit early on) — and then gradually lower prices to reach a wider audience as demand reduces.

Cost-plus pricing is a strategy that takes your total production cost and adds a margin on top of it (typically a percentage).

A startup entering the CRM market, for example, might perform research and determine that the maximum they can charge for their product right now is $80 per user (using the price skimming strategy). They’ll capture some high-value clients upfront and then slowly reduce their price over time to widen the pool of potential customers.

If they choose to use a cost-plus pricing strategy, however, with a margin of 50%, they may calculate the total cost of production to $30 per user and so decide to set their price at $45 per user.

Why Are Pricing Strategies Important? 

Without an effective pricing strategy, you’re essentially throwing darts in the dark — there’s a chance you’ll hit the bullseye, but you’re more likely to miss the board altogether.

Several things go wrong when the price of a product is not informed by a sound strategy:

You fail to meet market expectations

You fail to capture as much revenue as you could

You risk losing business to competitors whose pricing more accurately reflects market sentiment

You fail to communicate the real value of your product

Your marketing strategy misses the mark

To illustrate, let’s examine the opposite scenario. 

You’re releasing a new product, and it’s time to nail down pricing and get it to market. Because you aren’t using a specific pricing strategy, you’re just going to make your best guess at what the price should be and see how things pan out.

One of two things will happen:

1. Your price is too high. Most of the market isn’t going to buy from you. If you’re really good at selling value, you might capture a few upmarket buyers, though they’ll likely churn once they realize the value you sold isn’t reflective of the actual product, and they’ll move to a competitor that offers the same value for a lower price.

2. Your price is too low. The majority of the market sees your product as cheap, inferior, and altogether not worth purchasing, as the price point you’ve selected doesn’t indicate the product’s true value. You’ll close a few frugal customers, but you won’t generate much revenue from them. If you’re not careful, you may even fail to set the price high enough to cover your production costs. Then, when you realize you’ve gone too low, you’ll increase your pricing and lose the majority of those buyers who only purchased your product — because the price was the most important factor to them. 

The latter is more likely, statistically speaking, as the majority of startups underprice their products and gradually increase total deal size as they grow.

But it’s not as simple as continuing to bump up your product’s price point. Inevitably you’ll reach a glass ceiling, and you’ll experience diminishing returns. Once you exceed a certain pricing threshold, you’ll narrow your addressable market, close fewer deals, and risk actually reducing total revenue.

So, neither of the above scenarios is ideal, but the problem runs deeper.

Because you don’t have a well-developed pricing strategy in place, pricing across your product range is likely to be disconnected, particularly when you have different leaders in charge of each.

And, as you continue to adjust to the market and learn more about how your pricing fits (and the fact that you got it wrong to begin with), you’re going to keep changing it, which is a sure way to confuse and alienate your existing customer base.

Pricing strategies are crucial because they help you to:

Communicate the value of your product and create expectations you can actually make

Target the right customers to increase average deal size and minimize churn

Differentiate your offering from competitors — a good pricing strategy can be a competitive advantage

Types of Pricing Strategies

There are a number of pricing strategies that SaaS companies adopt to communicate value to their target audience and drive revenue.

Before settling on a singular strategy for your own company, take time to consider these nine approaches and how they might impact your own profitability. 

1. Value-Based Pricing

Value-based pricing is the most common approach for SaaS and subscription businesses . With the value-based pricing strategy, you’re setting pricing based on what your customers believe the value of your product to be.

That is, you charge as much as your customers are willing to pay.

It doesn’t take into account cost factors, as the assumption is that if the cost of producing that product exceeds what customers would be willing to pay, then the business model isn’t viable and not worth venturing into.

Many B2B SaaS organizations use this strategy. Take Asana, for example.

Asana uses a freemium model (more on that later), with two paid pricing tiers: Premium and Business.

Note that the Business plan costs twice as much as the Premium plan. That’s because, with the features included in this plan, Asana can demonstrate how they’ll create significant value for their Business customers, and so they’ve priced this plan based on that value.

Value-based pricing is the most suitable strategy for the majority of subscription businesses for a few reasons.

First of all, determining the cost of production (in order to use a strategy like cost-plus pricing) is more well-suited to physical goods than virtual goods like software platforms. With software, once a product is built, it’s built, and so the cost is less relevant to pricing than it would be for, say, a smartphone.

Secondly, it’s the best way to maximize your revenue. Charging based on value allows you to find the optimal balance between revenue per user and the number of users in total.

Thirdly, it puts the customer at the center of your pricing decisions. 

This ensures an alignment between the product and its pricing (as both are designed around the end-user) and puts upward pressure on your company to provide more value. If you can deliver more value than your competitors, you can justify charging a higher price and prevent engaging in a race to the bottom (a competitive situation that occurs when companies compete solely on price).

However, there is one drawback of using the value-based pricing strategy: it’s a reasonably time-consuming process.

Where strategies like competitive pricing are easy to implement (you monitor what your competitors are charging and adjust when they do), value-based pricing requires a deep understanding of your target audience, their needs, and the benefits your product provides. 

It can also be hard to satisfy different segments, like price-sensitive small businesses and big-budget enterprises, with the same offering.

That said, you should get to know your target market and different segments in-depth anyway if you want to effectively market your product, so it’s not the most concerning drawback.

Value-based pricing is a fairly dynamic approach. It involves testing different pricing points (whether actively in the market or by conducting surveys) as well as performing customer research and interviews.

And, of course, each time you release a new update or feature, your value changes, so you’ll need to reassess how that impacts your pricing.

While the value-based pricing strategy is best implemented through a combination of testing and research, a simple formula called the 10x rule can be used to get you into the ballpark:

Value-based price = Value you provide to client (monetarily) / 10

That is, the value you provide in monetary terms — either the additional revenue you help to create for a customer or the amount of money your product saves them — should be 10x your price.

If your product costs $499 per month, for instance, then you should be saving or creating $4999 of value per month for the customer — a premium price needs to line up with your product’s perceived value in your customer’s mind.

2. Competitive Pricing

Competitive pricing is a fairly straightforward strategy. You’re simply setting your prices in accordance with what your competitors are charging.

It’s not a particularly sophisticated strategy, but it’s an easy one and one that can help you find a decent pricing range fairly quickly, assuming your product or service is very similar to the companies you’re competing with.

A company using the competitive pricing strategy would assess the competitive landscape and the various pricing models used and then determine whether they want to sit slightly above, slightly below, or on par with the market.  

If you’re new to a market that has a few established businesses, then competition-based pricing can be a reasonable approach (though it should really only be used as a starting point).

Let’s say you’ve developed a new CRM for sales reps. You’re entering a pretty well-established (and fairly saturated) market, so there’s plenty of competition to base your pricing on.

First, you check out Pipedrive.

Then, Copper.

And a third for good measure: Zoho CRM.

Now we’ve got some good ballpark figures to work from. If you’re planning on offering three different plans, you should start your pricing in these ranges:

Tier 1 - $15-20 

Tier 2 - $40-50

Tier 3 - $60-90

Remember: use these figures as a starting point only. You should test and optimize from there, and ideally move toward a value-based pricing strategy once you’re able to establish and demonstrate the value your product delivers

If your product or service differs significantly from what your competitors offer, then competitive pricing might not be a suitable strategy, as you’re not comparing apples with apples, despite competing in the same market segment.

The other downside of the competition-based pricing model is that you’re relying on someone else’s research, and as we know, that research isn’t always applicable to your business. 

In some instances, it might even be non-existent, and so you’re setting your prices based on a competitor with a price point that isn’t backed by data.

All things considered, paying attention to your competition is still an important aspect of pricing, regardless of your chosen strategy.

Charge much more than your competitors (without being able to communicate additional value), and you’ll likely alienate a large segment of the market. Charge much less, and customers are likely to make the assumption that your product is somehow inferior.

3. Price Skimming

The price skimming strategy is all about squeezing as much revenue out of each customer as possible, focusing initially on those who are willing to pay the most.

With the price skimming strategy (also known as the high-low pricing strategy), you start by setting your price as high as the market will tolerate. You’ll capture revenue from buyers who have the most need and demand for your product or service, but be priced out of the market for the majority.

As time progresses, you’ll gradually lower your price to capture more of the market.

This is a pretty common approach in the electronic goods market, with console producers like Sony and Microsoft using the price skimming strategy for their PlayStation and Xbox product lines.

This pricing strategy works best for products that are able to be positioned as premium (iPhones, for example) and for one-off purchase items such as electronic goods (the intersection of these two product types is ideal).

It’s not so well-suited to subscription products or services because your intention with this style of business is to grow revenue over time. But if you continue to lower your prices, you’ll reduce your revenue from each existing customer and ruin your Customer Lifetime Value (LTV) .

But many of today’s consumers are aware of this pricing strategy, and they understand that prices for certain goods are likely to come down with time. Many will even wait for price reductions before purchasing. So inevitably, you won’t capture the full market demand in the short term, slowing down your cash flow.

4. Cost-Plus Pricing

Cost-plus pricing is an incredibly simple pricing strategy — it’s your costs plus your markup.

To set prices for a new product, you take the total cost of producing it, then add a percentage on top to determine your price.

It’s easy to calculate but not really suitable for anything other than physical products, where your production costs align reasonably closely with an increase in the number of units produced.

With software products, however, the majority of the production costs happen up front. The cost to develop the product is the cost to develop the product; that doesn’t change each time you land a new customer.

As such, cost-plus pricing is generally unsuitable for subscription-based businesses.

On the other hand, the major benefit of using this pricing strategy is that it guarantees your profit margin and provides some security as far as profitability is concerned. If you build a 50% margin into your pricing, then you’ll always maintain a healthy profit margin.

5. Penetration Pricing

Penetration pricing is a strategy commonly used by new companies looking to break into an existing market and generate a solid customer base that they can then leverage to create social proof and move upmarket.

With the penetration pricing strategy, you set your prices far below what your competitors are charging but provide the same (or similar) value.

The idea here is that customers will switch over to your company from a competitor, and you’ll be able to gain a foothold, despite making less revenue and profit per customer than you could if you charged more. In some cases, companies using penetration pricing actually make a loss but offset this against future gains.

There are, of course, a few drawbacks to this strategy:

You’ll need to close a lot more customers to make decent revenue

There’s a significant risk that as you increase pricing, you’ll lose existing customers

You risk setting a low pricing expectation in the market, which could prevent you from lifting prices later on

There’s always a risk that you’ll be unable to survive the phase of unprofitability while prices are set so low

New Relic, an observability platform for developers, is a great example of a company using penetration pricing to gain some ground in the market.

Competing with existing industry standards like Datadog and Dynatrace, New Relic offers a similar feature set but charges significantly less than its competitors.

It’s worth bearing in mind that some customers may be wary of newcomers who are charging significantly less. Pricing has a major psychological impact on how customers perceive your value, so penetration pricing does put you at risk of customers thinking your product is inferior.

New Relic does a fantastic job of overcoming this objection by providing a breakdown of the features they offer (and how they charge for them) in comparison to competitors, demonstrating that they can offer the same value at a fraction of the price.

The penetration pricing strategy is best utilized by companies in markets where consumer demand is reasonably elastic (demand is significantly influenced by price).

6. Economy Pricing

Economy pricing is all about sales volume.

With the economy pricing strategy, you aim to produce a product with lower production costs than your competitors (which often means you create an inferior product) and sell it at a lower price. The idea is to sell the product at a higher volume and thereby generate the same profit as you would if you sold a lower volume at a greater price.

This is the pricing strategy that generic soda brands use to compete with established and recognizable brand names like Coca-Cola and Pepsi.

However, it’s not a great fit for subscription and SaaS businesses, as it limits your revenue potential and generates downward pressure on market pricing.

Plus, it incentivizes producing an inferior product, which is not a strategy that’s suitable for delivering long-term growth in SaaS, where customer relationships are everything.

7. Dynamic Pricing

Dynamic pricing is a pricing strategy that involves rapid changes to your pricing in response to either market demand or costs of production.

Depending on the approach you take, you set your initial price (based on current conditions) and then continue to alter it upward or downward based on cost or demand.

As you can imagine, this isn’t a very suitable pricing strategy for subscription businesses, but it does have a place in certain markets and is more common than you might expect.

Entities like Shell and Mobil, for example, use a dynamic pricing strategy to set pricing for their fuel. In this case, their dynamic pricing is informed by the cost of crude oil.

On the demand side, we can look to Uber for an example of the dynamic pricing model in action.

When immediate demand for Uber’s service is high, the company imposes “Surge Pricing,” an inflated pricing differential designed to capitalize on the fact that a high number of users in the area are seeking to access Uber’s driver network.

8. Geographic Pricing

The geographic pricing strategy involves setting different prices based on your customers’ geographic location.

Market demand differs from country to country, which has a major impact on local pricing expectations. As such, it may be appropriate to use different pricing structures in different markets.

This approach ensures you’re capturing maximum revenue in markets where demand and price expectations are high and meeting the largest market possible in markets where the opposite is true.

Most global enterprises follow this strategy. Consider Netflix’s pricing in different regions.

In India, the cost of a Netflix subscription starts as low as ₹149 ($1.95).

In Denmark, customers are paying 10x that price, with a Netflix subscription topping $12 a month.

Of course, the geographic pricing strategy can be combined with any of the other strategies we’ve covered here. For example, you could use an economy pricing strategy as your general approach but then use market insights to determine what pricing level is appropriate in each country.

9. Bundle Pricing

Bundle pricing is a strategy employed to create the appearance of greater value while simultaneously maximizing the throughput of product lines that might otherwise be purchased less frequently.

With bundle pricing, you sell multiple similar products as a package (i.e., a bundle) rather than separately.

The bundle pricing strategy is prevalent in the fast-food industry, with companies such as McDonald’s regularly promoting products together.

There are three factors that make this such an effective pricing model for a company like McDonald’s. 

Firstly, meal deal combos include a main, a side, and a drink; a fairly standard combination, meaning they’re appealing to existing demand.

Secondly, the difference in the cost of the bundle and the price of the items individually is significant (it’s much cheaper), so it creates the illusion of greater value. We say illusion because, in reality, very few people purchase the items individually.

Thirdly, the addition of extra items like fries and, in particular, a drink comes at a minimal cost increase to McDonald’s, especially compared to the price increase. The difference in price between the burger on its own and the bundle might be a couple of dollars, but the cost increase to McDonald’s is mere cents.

This pricing strategy has an application in the SaaS and subscription industries as well.

Mailchimp, for example, offers blocks of email credits for purchase individually.

Alternatively, customers can sign up for a bundle plan which includes a designated number of email sends (based on the size of your contact base), as well as access to their other tools such as landing page builders, automation, and A/B testing.

Pipedrive , for example, offers “add-ons” for customers subscribing to their CRM who need additional capability.

A pricing manager at Pipedrive could experiment with bundle pricing by creating a package that includes the standard CRM as well as all four available add-ons.

How to Choose the Right Pricing Strategy for Your Business?

Having a knowledge of the different pricing strategies available to you is important, but knowing how to apply that knowledge and choose the ideal strategy for your business is even more crucial.

We’re going to look here at six key steps to take in choosing the ideal strategy. When following these steps, bear in mind that the initial idea is to determine the broad range your product fits into. Is it a $10 product? A $50 product? A $500 product?

We don’t want to waste time here arguing over the difference between $45 and $49. We’ll optimize for that down the line. The important component here is understanding the broad category you’ll fit into.

1. Conduct Target Market Research

We know that a thorough understanding of our customers’ challenges, goals, and demographics is important for marketing a product, but we need some technical details in order to land on an appropriate pricing strategy.

This template , for example, demonstrates how granular you need to get to understand a customer profile in relation to pricing strategies.

In particular, the data that will guide pricing strategy choice includes:

Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), and Average Revenue per User (ARPU) by customer profile/market segment

Acceptable pricing range and “indifference” price point

Compelling value props

Feature preferences 

2. Assess Your Competitors’ Pricing

While you don’t want to base your product pricing entirely on competitors (unless you’re using a competition-based strategy), this information is still necessary for certain strategies.

Consider Pipedrive’s pricing tiers:

And then look at those of Copper, a close competitor to Pipedrive.

These two products are fairly similar as far as pricing goes. Imagine, then, that you’re in charge of pricing at ActiveCampaign, and you want to use a penetration pricing model to break into the CRM market.

You’d need to know what these two competitors are charging, so you can position your most basic product package at a much lower price point.

3. Consider Your Revenue Model

Your revenue model has a significant impact on the appropriateness of different pricing strategies.

If you’re primarily generating recurring revenue, for example, then the price skimming strategy might not be the most appropriate approach. However, it might be a suitable method for those selling high-value goods such as electronics and vehicles.

Similarly, economy pricing often isn’t the best strategy for SaaS and subscription businesses, though it’s great for many FMCG (fast-moving consumer goods) companies. 

Perhaps, though, your revenue model is a partial subscription model , with the remainder of your revenue made up of services. 

Bench, for example, uses this model.

They have a proprietary software platform and offer services over and above this.

In this instance, it may be suitable to use an economy pricing model for the platform itself (acting as a sort of loss leader to attract new clients) and generate the majority of its revenue using a value-based pricing strategy for service.

4. Get Absolute Clarity on Your Costs

Even if you aren’t going to use a cost-based strategy (such as cost-plus pricing), it’s imperative that you understand the total expense of production.

This will help you to ensure your pricing more than covers that cost and will be crucial in conducting analyses such as calculating your breakeven point .

5. Evaluate Your Company’s Strengths and Weaknesses

What is your company great at, and in what areas are you not so strong?

If, for example, you have a great marketing team with strong storytelling skills, you know you’ll be able to get more leverage out of a value-based pricing strategy.

If, on the other hand, you’re really good at cost reduction and maximizing production, an economy pricing strategy might prove appropriate. 

6. Ensure Your Pricing Strategy Aligns with Your USP

What is your company’s unique selling point? Is it convenience? Financial savings? Customer revenue growth?

Your USP needs to align with the strategy you choose to determine pricing.

For example, if your value props demonstrate your ability to generate the customer thousands of dollars in new revenue, a penetration pricing model where you charge relatively little for your product probably doesn’t align.

Pricing Strategy for Different Industries 

In general, the most appropriate pricing strategy for SaaS and subscription businesses is the value-based pricing strategy.

This pricing strategy:

Maximizes your revenue per user

Allows you to increase pricing as the value your product offers improves

Mitigates the effect of competition that uses penetration or economy pricing models 

2. Ecommerce

For ecommerce companies, the ideal pricing strategy to use depends quite heavily on the industry you’re in, the stage your company is at, and the kinds of products you’re selling.

Value-based pricing is always a good move, and competitive pricing can be a good place to start if you’re unsure about what customers are willing to pay. Both can also be valuable strategies for ecommerce companies moving over to a subscription model.

If you’re selling discount goods at volume, economy pricing can be a viable solution.

3. E-learning

E-learning companies can follow similar advice to SaaS companies (value-based being the ideal strategy), assuming they’re operating on a subscription model.

For e-learning businesses selling using a perpetual license model, penetration pricing can be a viable alternative for market newcomers looking to gain market share, though value-based will win out in the long term.

4. Publishing

Value-based and competitive pricing strategies will be best for subscription-based publishing companies , though price skimming may be suitable if you’re able to position yourself as a premium product.

5. OTT and Video

OTT and video businesses should follow suit with SaaS companies and adopt a value-based approach. 

Competition should be analyzed, but given content varies significantly from platform to platform, a strictly competition-based approach shouldn’t be followed.

Difference Between Pricing Strategy and Pricing Model 

Many revenue leaders confuse pricing strategies and pricing modes, and they’re often used as synonyms, despite this being incorrect.

Your pricing strategy is the theory behind your product pricing. It tells you how you set your price and what data you need to pay attention to when calculating that figure.

Your pricing model, on the other hand, is the way you display, package, and communicate your product pricing to your customer.

Examples of pricing models include seat-based or user-based pricing (common in SaaS, for example, $49 per month, per user), perpetual license (a one-off purchase), and usage-based (such as your monthly utility bills).

When determining product pricing, you’ll need to decide on both. You’ll use a pricing strategy to determine how you’ll set the price, then decide on a pricing method to determine how you’ll communicate and invoice that price.

Types of Pricing Models 

So far, we’ve laid out the most common pricing strategies and discussed what distinguishes these strategies from pricing models.

Here, we’ll examine eight common pricing models, which you can combine with the overall strategy you’ve chosen for your company. 

1. Freemium

Freemium is an extremely common approach to pricing and involves offering a free version of your product with the goal of converting users to a paid plan at a later point.

monday.com, for example, makes use of the freemium pricing model .

With freemium, the idea is to design a stripped-back version of your product, so you retain some leverage to bring users up to a paid plan.

It’s important, however, that you still provide enough value in the free version to make it worthwhile to the user. 

In monday.com’s case, the free plan allows for unlimited boards and access to over 200 templates to get started immediately. 

However, users on the free plan are limited to just two team members, meaning monday.com has built growth right into its pricing (if the free user gets significant value out of monday.com, their team will grow beyond two members, and they’ll need to upgrade to a paid plan).

2. Per Seat

With the per-seat pricing model (also known as the per-user model), your customers pay based on the number of employees that are using the product.

GitHub, for example, uses the per-seat pricing model:

Note, like with both GitHub and monday.com, the per-seat model can be combined with the freemium model.

The per-user model has a few important advantages:

Revenue growth is built-in — as the customer’s company grows in size, they’ll add more users (depending on the need your product serves)

Pricing is easy to digest, and customers can budget accordingly

Customers have immediate access to all features (that are included in their plans)

However, it has some drawbacks as well:

Users can often share passwords to avoid paying for extra seats

Total costs can get expensive for customers when they expand, so they can be reluctant to upgrade

Getting customers from one user to many users can be a challenge

High-usage customers can be a drain on your resources relative to the revenue you’re receiving from them

Low-usage customers may feel they aren’t getting a lot of value out of your product

Most subscription businesses use the tiered approach. With a tiered pricing model , you’ll create different ‘plans’ (generally between three and five) at different pricing points.

ActiveCampaign, for example, uses the tiered model:

With tiered pricing, each subsequent plan gives users access to more features or higher usage volumes.

This is a powerful method for attracting revenue growth from SME customers. When new customers in this segment sign up, they’re more likely to opt for a more affordable plan.

As the company grows, you’ll continue to demonstrate value through the results your product generates, as well as any marketing and sales activities you engage in to increase your annual contract value.

It can also be an effective way to take advantage of price anchoring, a technique where the lowest and/or highest pricing tiers help to establish the middle tier as better value. 

GitHub’s pricing model demonstrates price anchoring in action, where their “Team” plan appears as higher in value when compared with the much higher cost of the “Enterprise” option. 

4. Flat-rate

Flat-rate pricing takes the opposite approach to the tiered pricing model.

With a flat-rate pricing model, you charge one price for access to all of your product features. Basecamp, for example, uses the flat-rate pricing model, which is unusual in SaaS.

Flat-rate pricing models can be considered a form of penetration pricing, where companies compete with industry leaders who charge on a per-user model.

Consider, for example, a company with 30 users comparing Basecamp’s pricing with monday.com’s pricing.

Even at monday.com’s lowest pricing tier ( $8 per month ), that’s a cost of $240 per month vs. $99 at Basecamp.

The primary benefit of running a flat-rate pricing model is this competition. Plus, it makes your pricing much more digestible, as potential customers don’t need to waste time figuring out the differences between your various plans.

It does come with a major drawback though: the inability to grow revenue from existing accounts. 

When you use a tiered pricing model, you’ve got revenue growth built in, as you always have the ability to upsell lower-tier accounts. And if you’re charging per user, you’ll continue adding revenue as your customers scale.

There is a workaround for this problem. Note that Basecamp’s flat-rate pricing model includes unlimited users. It’s also possible to combine the flat-rate model with a per-user pricing model, where you offer only one plan at a flat rate but charge extra per additional seat.

5. Usage-Based

Usage-based pricing is a pricing model where customers pay based on what they use in a given month.

You’ll find this model used across the majority of utility companies.

In the B2B world, usage-based pricing is often used for cloud computing and web infrastructure services. Entrepreneurs and business owners often prefer this model because of the transparency — you pay for what you get.

Amazon Web Services (AWS), for example, uses this pricing model.

Some companies use a hybrid model, where usage-based and per-seat pricing models are combined to provide a set monthly rate with usage ceilings.

Auth0, for instance, takes this approach.

It makes the most sense for high-volume plans — sending an extra invoice for each new user is not feasible.

6. Pay as You Go

The pay-as-you-go pricing model is a variation of the usage-based model in that customers pay only for what they use.

The difference, however, is that they pay in each instance they use the product rather than receiving an invoice at the beginning of the month for the last period’s total usage.

Ride-sharing apps like Uber and Lyft are good examples of the pay-as-you-go model. Customers pay based on usage (longer distances cost more) and are changed at the point of use.

Twilio is an example of a B2B SaaS company who charges using the pay-as-you-go model for certain features.

7. À La Carte

The a la carte pricing model allows customers to pick and choose features or modules, essentially building their own customized solution.

This is beneficial when you offer a large range of features and want to ensure customers are getting maximum value for their dollar. Rather than having to upgrade to a more comprehensive plan to access a single feature, they can simply add it on.

This does, however, have implications for revenue. 

With a tiered approach, customers who need a more advanced feature must upgrade to a more expensive plan. With a la carte pricing, they can simply add on the new feature they need, which typically costs less than the difference between tiered plans, meaning your ability to grow revenue from upsells is limited.

Because of this risk, a la carte is less common as a SaaS pricing model, though some companies, such as Pipedrive, incorporate a la carte into their tiered approach.

8. Perpetual License

The perpetual license is, for lack of a better term, the “old” software model.

Before SaaS was the most common approach, customers would need to purchase the software outright (now known as a perpetual license).

With the perpetual license pricing model, customers pay a one-off fee and have access to the product in perpetuity. Depending on your structure, that might include all future updates, or they may need to pay a crossgrade/upgrade fee in the future.

Microsoft, for example, still sells Word on a perpetual license (though you’ll see that they’re trying to push customers toward a subscription model).

Making the Most of Pricing: Tips and Best Practices

Not sure how to start optimizing your prices? Here are a few tips and best practices.

1. Adopt a Localized Pricing Model

While the USD may be a pseudo-universal currency, failing to display localized pricing inevitably creates friction in the buying process.

Buyers in regions that also use the term “dollar” (Australia, New Zealand, and Singapore), for example, may misinterpret how you’re displaying prices, resulting in an unwelcome surprise when it comes time to enter their credit details (often resulting in cart abandonment).

Moreover, charging exclusively in one currency means customers incur foreign currency fees, and due to fluctuations in exchange rates, your consistent monthly cost is no longer all that consistent.

A simple way to get around this is to install a plugin on your site that detects the visitors’ region and calculates local pricing automatically. There are two drawbacks here, however:

The nature of exchange rates means that prices are displayed differently each time the customer visits. So unappealing price points ($43.67, say) limit your ability to take advantage of psychological pricing.

You’re not truly localizing pricing.

Localized pricing must reflect the demands and expectations of the geography you’re selling into, and this is not always the same as a simple exchange rate calculation.

Zoho, for example, makes it clear to Australian visitors that they’re charging in AUD, and uses localized pricing to set digestible, round numbers for each of their pricing tiers. You also need to consider the buying power of your target market in each country.

2. Messaging Matters

Though the price points you choose do influence how customers perceive the value your product offers, they’re far from the only lever you can pull.

The messaging around your pricing, and the value propositions you use to communicate the benefits your customers can expect to receive, can influence buyers’ willingness to pay by as much as 20% .

Testing is the best (and really only) way to nail your messaging with 100% confidence. The problem is, testing messaging on a live audience can be time consuming, and presents a risk to revenue growth, because testing ineffective messaging on real customers means you’ll convert less than you could.

To maximize impact (and minimize time spent in A/B testing in a real-life scenario where revenue is on the line), use a message testing service like Wynter to gather in-depth feedback from relevant B2B audiences.

Start by testing internally before investing in professional message testing. Perform Voice of Customer research by interviewing your current buyers and questions about the challenges they faced previously and how your product impacts their lives today.

Pull important quotes and insights from these interviews to use as fuel for your product messaging. Develop several messaging options, and ask for feedback from internal stakeholders (marketing, sales, and customer service).

Use this feedback to refine your message and draft the final landing page copy, then submit it for testing, and use the feedback from that professional process to polish, finalize, and publish.

3. Test Psychological Pricing

Psychological pricing is somewhat of a misnomer — all pricing is psychological.

The term itself, however, refers to the concept of manipulating price points at the micro level to influence buyers’ perceptions of value.

The classic example, and one which you see nearly everywhere, is ending price points with a 9 (such as $19 instead of $20, or even better, $19,99).

Ending your pricing in 9s isn’t the only method, however. While this strategy does work for lower-value products (think FMCGs like those pictured above), it tends to be coupled psychologically with discount brands.

Pricing that ends in a 0, on the other hand, can establish the opposite; an appearance of luxury or premium quality.

The most important factor here is what works for your audience. Set up multivariate testing to establish whether 9, 0, or 5 (or any other number, for that matter) appeals most to your target customer.

4. Keep Pricing Packages Simple

Many studies support the notion that offering too many choices results in something known as “ analysis paralysis .” Buyers are too overwhelmed with the number of options they have and are less likely to make a decision than those given fewer options.

Limiting your selection to three to five packages tends to be the most effective approach. It is also enough space to incorporate a free plan and a custom enterprise plan on either side of the scale, like monday.com does.

Pricing presented like this is extremely easy to digest, because most customers will fall into one of three categories:

Customers who are just getting started who know they want a free platform

Customers at the enterprise level who will gravitate automatically to the Enterprise plan

Customers that are anywhere in between, who’ll then only have three options to choose from

Plus, presenting three options makes it easy to take advantage of the center stage effect , the tendency for consumers to choose the middle option when presented with a row of pricing packages.

Note also how monday.com uses a subtle design cue (the “Most Popular” icon) to further influence this decision pathway with a bit of social proof.

5. Use Design to Impact Purchase Decisions

The design of your pricing page (in conjunction with the price points you set and the messaging you use to sell your value props) can have a significant impact on pricing decisions.

It’s fairly well-established that buyers more readily choose the middle option when presented with a selection of products or packages.

But, if, like many SaaS brands, you want to influence customers to choose a more extensive package with a higher price point, you can use subtle design cues to make one package stand out.

ActiveCampaign, for example, uses a couple of simple yet effective design tricks to make their Professional plan stand out, as well as a subtle “Most Popular” banner to influence choice based on social proof.

Conclusion 

Your pricing strategy is one of the most crucial growth levers you have.

It helps you establish a price point that serves market expectations, and if you choose the appropriate strategy for your industry and company type, can build revenue growth right into your price tags.

Of course, determining pricing is just one small step on a very large journey towards revenue optimization. On the other side of that journey is a need to manage, influence, and grow subscription revenue , which is where a platform like Chargebee comes in.

Chargebee is a dedicated revenue management and subscription billing platform designed to help you streamline revenue operations and consistently improve profitability.

The Power of Pricing: How to Create a Pricing Strategy that Drives Profits (+Examples)

Pricing is one of the most important aspects of any business. After all, you won't make a profit if you don't charge enough for your product or service. On the other hand, if you charge too much, you may struggle to find customers. Enter: pricing strategies .

Finding the right pricing strategy is essential for every business. A thoughtful, well-constructed pricing strategy allows you to remain competitive while still being able to cover all of the costs that are involved with running your business.

There are several different pricing strategies--and no one-size-fits-all solution. Your pricing strategy can even become an integral part of your marketing strategy and contribute to bolstering your competitive advantage.

In this guide, we’ll explain 11 different pricing strategies and provide examples of how they work. This way, you’ll have a better understanding of the intricacies involved with pricing—and can determine which strategy makes the most sense for your business.

What is a Pricing Strategy (+ Why is it Important?)

Let's say you're selling a unique product or service that has a high perceived value, like an enterprise software suite, you might be able to charge a premium price. If you're selling a commodity product that is more price-sensitive and can easily be replaced by competitors' offerings, you might need to focus on competitive effective pricing to win market share.

Businesses should continually monitor and adapt their pricing strategy as economic and competitive landscapes evolve. In fact, according to Profitwell , most successful companies review their prices quarterly and make adjustments every six months .

Why does pricing strategy matter? It's not just about profits. (Though that is part of it!) Here's a few other reasons why pricing strategy matters:

• Gain a Competitive Advantage : In a highly competitive market, your pricing strategy can be key to gaining a competitive advantage. Companies can use a strategic pricing strategy to attract a new customer base or retain current customers.
• Attract Your Target Audience : Pricing strategy can impact consumer behavior. For example, a low price might attract price-sensitive customers in SMB, while a higher pricing plan can signal quality and attract enterprise customers .
• Support Brand Image : The right pricing strategy can also bolster your brand image. For example, Rolex’s higher pricing strategy supports its image as a luxury brand.

Whatever pricing strategy you choose, it's important to have a clear plan backed by market research. But be ready to adapt if needed.

11 Types of Pricing Strategies with Real Examples

Now that we've covered the importance of having a pricing strategy in place, let's go over 11 common pricing strategy examples you can use as inspiration for your own pricing strategy.

1. Competitive Pricing Strategy

Many business owners use the competitive pricing strategy to attract customers and increase market share. Essentially, this involves doing a comprehensive competitive landscape analysis and setting prices at or below the level of their competitors’ prices.

This can be a useful strategy if the competitor is a large company with significant overhead and cannot reduce its prices much further. By offering a lower price, small businesses can compete without sacrificing profitability.

However, there are also risks associated with this strategy. If the competitor can lower its prices , the smaller company may be forced to follow suit and risk losing money.

In addition, if customers perceive the quality of a lower-priced offering is also lower, they may be reluctant to purchase it even at a lower price.

Competitive Pricing Strategy Example

Competitive pricing is often be seen in e-commerce. Take, for example, Apple’s AirPods vs a competitor’s “Earbuds”. As you can see below, AirPods cost $329, which Apple can justify thanks to their brand recognition and the quality of their products.

If you go to Amazon and find a similar product from a smaller competitor, you’ll see that these earbuds are just $39.99. They’re similar in style, and they may or may not be similar in quality, but they’re definitely cheaper.

Although nobody knows this brand, they can still compete with big players. This is thanks to the massive discount they’re offering for a product that does more or less the same thing.

Other examples of competitive pricing include bundle pricing, where companies group similar items together and offer a discount.

With competitive pricing, a company may rely more on sales volume than profit margin. With a high enough sales volume, a company can make up for low-profit margins with sheer numbers.

2. Price Skimming

Price skimming is a strategy in which a company charges a high price for a new product or service at first, and then gradually lowers the price over time. The goal of price skimming is to generate the highest possible revenue in the shortest amount of time.

To do this, companies typically target early adopters willing to pay a premium for new products or services. The high price also helps to recoup the costs of developing and marketing the new product or service.

Once the early adopters have been captured, the company lowers the price to appeal to a wider range of consumers. This pricing strategy can be very effective in market conditions where there is a lot of consumer demand for new products or services. However, it can also backfire if the company cannot sustain high prices for long enough to make a profit.

Price Skimming Pricing Strategy Example

Gaming consoles are the perfect example of price skimming. Every time a new gaming console hits the market, the price is much higher than what it will be a few years later.

For example, take the Xbox 360. When it was launched in 2005, Microsoft was charging $400 for the console . Now, you can get an Xbox 360 from Walmart for just $183.59.

Due to the novelty of a brand-new product, Microsoft was able to take advantage of the price skimming strategy and maximize its profits in the beginning.

3. Penetration Pricing Strategy

Penetration pricing can be a great way to quickly gain market share. The basic idea is to set the initial price of a product or service low to entice customers. Once customers are hooked, the price increases to a more profitable level.

Of course, this strategy only works if the quality of the product is high enough to justify the higher price. But when done correctly, penetration pricing can be a powerful tool for driving growth.

Penetration Pricing Strategy Example

Jasper.ai is an AI writing software that uses machine learning to produce content. However, now they’re extending their feature set and introducing a new product called Jasper Art.

This tool uses AI and can produce art based on the inputs you give it. It’s a brand-new product, and they’re using penetration pricing to quickly onboard new customers. Here is a screenshot from their product launch post on Facebook.

The post states that their pricing will start at $20/user/month but will likely change (i.e. increase) in the future. A brand new feature combined with an enticing initial price is the perfect combination to get their target audience excited about using their new product, and simultaneously helps them test market demand.

4. Premium Pricing

Premium pricing involves setting a high price for a product or service to convey quality and prestige. This strategy can be particularly effective for luxury goods or products that are higher quality.

There are a few potential drawbacks to premium pricing, however. For one thing, it can alienate potential customers who don't perceive the product as worth the high price tag. In addition, it leaves little room for discounts or promotions, which can be important tools for boosting conversions.

Premium Pricing Example

What better example is there to use for premium pricing than Rolex? Although made with superior craftsmanship, Rolex watches are the epitome of premium pricing. Rolex as a company doesn’t want everyone to own a Rolex. They want to make customers feel like they are purchasing something rare and valuable.

Rolex watches often cost multiple 5-figures and sometimes even 6-figures.

Although the Rolex watches are priced at a premium, it gives their customers a sense of status. This pricing method certainly doesn’t work for everyone (especially new businesses), but it can be a powerful pricing strategy with the right business model, sales strategies , and product offering.

5. Cost-Plus Pricing Strategy

Cost-plus pricing is a popular pricing strategy in which a company sets its prices by adding a fixed markup to the total production costs of its goods or services.

Because cost-plus pricing takes all costs into account, it can help to ensure that a company is making a profit on each sale. However, it can also lead to higher prices for consumers, which can limit demand. In addition, cost-plus pricing can encourage companies to cut corners to provide lower-cost products, which can subsequently lead to lower-quality products.

Cost-Plus Pricing Strategy Example

Cost-Plus pricing is difficult to show as an example as it’s merely a formula:

Cost of goods sold x fixed markup percentage = final price

Cost-Plus pricing is oftentimes used with the sale of alcohol . If a bar is charged on a per liter basis from their supplier, they can then set a markup percentage and pass that fee onto their final customer to make their profit margin.

6. Economy Pricing

Economy pricing is a strategy in which products are priced at a low, competitive rate. The goal of economy pricing is to attract customers looking for a good deal in a competitive market .

This pricing strategy is often used for essential items in high demand, such as food and clothing. Economy pricing can also be used as a loss leader, to attract customers to a store with the hope that they will purchase other, more profitable items as well.

While economy pricing can be an effective way to attract customers, it is important to make sure the low price does not come at the expense of quality. Otherwise, customers may not return in the future.

Economy Pricing Example

For an example of economy pricing, just check your local grocery store’s flyer every week. Grocery stores typically add their best-priced items on the first page to entice people to come shop at their store.

Take, for example, the Big Y flyer below. The weekly sales items are prominently featured, using larger images and attractive pricing.

Grocery stores aren’t worried about making a small margin on their sale items because they know, more often than not, you’ll pick up additional (larger margin) items while you're shopping.

7. Discovery Call Pricing

Discovery call pricing is used by businesses to provide potential customers with an estimate for services. Under this pricing model, customers are required to book a consultation with the business to discuss their needs.

Based on the information gathered during the consultation, the business will provide the customer with a price for their services.

While discovery call pricing can be beneficial for businesses, it is important to note that it can also be frustrating for customers who are not given a clear price upfront.

Discovery Call Pricing Example

Parakeeto for example, a company that helps agencies become more profitable, requires that you fill out an application form and jumping on a call before pricing is disclosed.

This type of strategy can work well for businesses that offer more custom services because it allows you to better understand the customer’s needs before putting together a proposal.

8. Value-Based Pricing Strategies

Value-based pricing is an ideal pricing strategy for SaaS companies that takes into account the perceived value of your offering. This can be based on factors like brand recognition, quality, or even customer service .

When setting prices using this method, businesses typically start with their costs and then add a markup that reflects the perceived value of their product or service. While this approach can help you to attract customers who are willing to pay more for a high-quality product, it's important to remember that perception is often subjective.

Value-based pricing is not an exact science, and there is always some risk involved. Nevertheless, when done correctly, value-based pricing can be an effective way to boost your profits.

Value-Based Pricing Strategy Example

Starbucks is a great example of value-based pricing. They can charge a large markup mainly due to the perceived value of their brand. Even more shocking is that lower-priced competitors, like Dunkin’ Donuts, scored higher in a blind taste test .

A small Dunkin’ Donuts coffee (10 oz) is priced at $1.69. Compare that to a Short Starbucks coffee (8 oz), and you’re paying $2.55, that’s a whopping 41 percent price increase (for less coffee.)

Are you curious about value-based selling and how it can improve your sales performance? Check out this article to discover the benefits and best practices.

9. Dynamic Pricing Strategies

The basic idea of dynamic pricing is to charge customers different prices based on factors, such as time of day, demand, and even the weather.

For example, a business might charge higher prices during peak times, or when demand is high, and lower prices when demand is low. Dynamic pricing can be a very effective way to increase revenue, but it can also be controversial. Some customers feel like they are being charged more than others, based on factors that they cannot control.

As a result, businesses need to be careful when implementing dynamic pricing strategies. But when done correctly, dynamic pricing can be a very effective tool for increasing profits.

Dynamic Pricing Example

Ride-sharing companies like Uber and Lyft take advantage of dynamic pricing. This allows their prices to fluctuate based on the current demand.

Try to find an Uber after a stadium concert, while it’s raining. You’ll pay a lot more for that ride than you would on a sunny Sunday morning when half of local businesses are closed.

10. Psychological Pricing Strategies

Have you ever noticed that some prices end in .99? That’s because businesses are using a pricing strategy called psychological pricing.

Studies show consumers perceive prices ending in .99 as being significantly lower than prices that round up to the next dollar. Businesses can increase their profits by using this seemingly small change in pricing. In addition to prices ending in .99, businesses also use a variety of other pricing strategies to manipulate consumer behavior.

For example, SaaS companies may use anchoring to make a high-priced package seem more reasonable by offering a premium package that costs even more. Or they may use loss aversion to encourage people to buy now by stressing the potential loss of a sale price.

Whether we realize it or not, businesses constantly use pricing strategies to influence our behavior.

Psychological Pricing Strategy Example

You’re likely very aware of what psychological pricing looks like. We see it daily, both online and in physical stores. Just do a quick search on Amazon for any product, and you’ll probably see some form of psychological pricing at play.

Take the example above. Whether products are priced at .99 or .95, they’re all using psychology to trick our brains into thinking prices are lower than they are.

11. Freemium Pricing Strategy

With freemium pricing, businesses offer a basic version of their product for free, with the option to upgrade to a premium version for a fee. This can be an appealing option for customers who are undecided about whether they want to commit to a paid subscription. And it can be a great way for businesses to generate interest in their products.

If you're considering using freemium pricing for your business, you should keep a few things in mind. First, make sure the free version of your product is still useful and enjoyable to use. Otherwise, customers will have no incentive to upgrade to the paid version.

Second, consider what features you will include in the premium version. You want to strike a balance between offering enough value to justify the price tag, but not so much that there are no compelling reasons for customers to continue using the free version.

Finally, be prepared for an influx of users when you launch your freemium pricing strategy. If your dedicated servers can't handle the increased demand, customers will be turned off and may never come back. If you can manage the pitfalls successfully, freemium pricing can be a great way to grow your business.

Freemium Pricing Strategy Example

Dropbox and Google Drive are great examples of the freemium model at work.

Dropbox, for example, offers a free basic account with 2GB of storage. If you need more storage, you can upgrade to a paid plan.

This provides new users with the ability to try out a service, and as they find more value in it, they can upgrade to a paid account. Freemium pricing is typically found in software service-based businesses due to the low marginal costs of providing additional service to customers.

How to Create a Pricing Strategy for Your Business in 5 Steps

Every business needs to have a pricing strategy to remain competitive and profitable. But how do you create a pricing strategy? It's not as difficult as it might seem. Here are five steps to follow.

1. Determine Your Pricing Objectives

The first step is to determine your pricing objectives. What are you trying to achieve with your pricing? Do you want to maximize profits? Or are you more focused on getting market share? Once you know your objectives , you can start to develop a pricing strategy that will help you achieve them.

2. Understand Your Customers

The second step is to understand your customers. Who are they and what are they willing to pay for your product or service? If you don't understand your customers, it will be very difficult to price your products correctly. Take the time to create your ideal customer profile and get to know what they want.

3. Research Your Competition

Third, research your competition. How are they pricing their products or services? What strategies are they using? You need to be aware of what other businesses in your industry are doing so that you can stay competitive.

4. Find Your Value Proposition

The fourth step is finding your value proposition . What makes your product or service better than the competition? Why should someone pay more for what you're offering? What’s the customer value? If you can't answer these questions, then it's going to be difficult to justify a higher price point. An effective pricing strategy starts with knowing the real value of your product.

5. Collect Data and Modify If Necessary

The fifth and final step is collecting data and modifying it if necessary. Once you've launched your pricing strategy, it's important to monitor how it's working and make changes if necessary. Don't be afraid to experiment a bit and see what works best for your business.

Pricing Strategy FAQs (Frequently Asked Questions)

What are the best pricing strategies for a new product.

When it comes to pricing a new product, there are several different strategies that businesses can use. However, two strategies that work well for new products are price skimming and penetration pricing .

With price skimming, businesses charge a high price for the initial release of the product to capitalize on early adopters who are willing to pay a premium. This strategy is typically used for products with no close substitutes.

Penetration pricing, on the other hand, involves setting a low introductory price to attract customers and gain market share. This strategy is often used for products that face intense competition.

What is the best pricing strategy for SaaS companies?

While many factors can impact the right pricing strategy for a company, most SaaS companies use either freemium pricing or psychological pricing strategies to drive user adoption and target customers in their ideal customer market.

How can pricing strategies be improved?

There are a few general tips that can help to improve your pricing strategy. First, make sure that your selling prices are in line with the competition. If you are too high, you will lose customers; if you are too low, you will struggle to make a profit. Second, don't be afraid to experiment. Try different price points and see how your customers respond. Finally, keep an eye on your bottom line. At the end of the day, your goal should be to maximize profits, not just sales. These are simple ways to find the right price for your product without decreasing the customer life cycle.

Final Thoughts on Developing Pricing Strategies

Pricing is a critical part of your business and, if done correctly, can be the deciding factor between you and your competition.

By understanding the different pricing strategies and how to create your own strategy amongst the sea of advice floating around, you'll be able to put yourself in a much better position to increase profits, grow your business, and keep your customers happy.

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Essential guide to pricing strategy: how to, types and examples

Mar 17th, 2022

What is a pricing strategy?

Types of pricing strategies, how to create a pricing strategy .

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Pricing is one of the paramount challenges faced by companies. Prices should not only correspond to the existing market conditions but also cover the company’s expenses, take into account the competitors’ pricing and allow the organization to make a profit. A pricing strategy should also maintain balance while addressing customers’ needs and generating revenue. 

Moreover, when it comes to pricing, there is no one-size-fits-all solution. Instead, you need to continuously review the pricing strategy and adapt it to changing market conditions and competitive environment. Thankfully, a variety of pricing models and approaches will help you identify the best pricing that will help you find the sweet spot between your clients’ ability to pay and your financial goals. This article will describe the most common pricing strategies and provide examples of their successful implementation.

Pricing strategy is a method of determining the most appropriate price for a product or service. This process takes into consideration market and consumer demand and focuses on maximizing profits and shareholder value. When developing a pricing strategy, businesses consider various factors, such as marketing goals, financial objectives, target customers, brand positioning , input costs, trade margins, and product characteristics. The external factors that affect pricing strategy include competitor pricing, economic and market trends.

When selling a product or service, a company may employ a range of pricing strategies. Before deciding on the most suitable pricing strategy, senior executives need to analyze the brand positioning with respect to its competitors and to the customers’ perspective, price segmentation or establishing different prices for the same products or services and competitive pricing response strategy or the way to respond to competitor price changes. It should also be noted that pricing strategy greatly depends on economic, cultural, and industrial conditions and varies from one organization to another.

Many articles on pricing use the terms pricing strategy and pricing model interchangeably. However, there are some notable differences. A pricing model deals with the implementation of a pricing strategy. Pricing models rely on quantitative data. Some of the most popular pricing models include hourly, project-based, retainer, and performance-based approaches. The retainer model, for example, is when a business owner charges a monthly fee for a specific amount of time spent on the task or deliverables. 

Pricing strategy, in contrast, is how the seller utilizes pricing to accomplish defined business goals. The term refers to a consumer’s reaction to particular prices. In this guide, we will review pricing strategies and the steps needed to create one. 

An effective pricing strategy allows you to strengthen your position in the market by gaining consumers’ trust and meeting your business objectives. The listed approaches will be based on various characteristics, such as product value, expenses you need to cover, the purchasing power of your target market, and competitors’ pricing. Let us compare different types of pricing strategies, their advantages and disadvantages. 

Penetration pricing strategy

The main idea of the penetration pricing strategy is to encourage potential buyers to purchase the product by offering a lower price during the initial release. This pricing strategy helps new businesses enter the market and attract customers. Penetration pricing utilizes low prices to raise awareness about a new product among a large number of clients. After some time, the company raises prices to maximize profits and demonstrate the increasing value of the product.

According to penetration strategy, a brand initially lowers prices to gain market share and build a customer base with the goal of keeping new clients once the prices go back to normal. Due to this reason, penetration pricing is usually applied for a limited time, and it is not suitable as a long-term strategy. Moreover, there is a considerable risk that the buyers may prefer the brand at first but then choose the competitor as prices rise. 

Landlocked Airlines employed a penetration pricing strategy to encourage customers to use its services during certain seasons. This approach proved to be effective for a small airline company. Landlocked Airlines promoted its services during the winter holidays. The company reduced prices for inter-state trips, which helped it earn a good reputation and attract many new customers who would book more expensive tickets in the future.

Competitive pricing strategy

A competitive pricing strategy is based on using competitors’ prices as a reference point to set your product prices. This strategy does not take into account consumer demand or product cost. The approach is suitable for an over-saturated market as slightly different prices can play a critical role for the customers while the characteristics of the products remain the same. 

There are three options for businesses that follow a competitive pricing strategy. The companies may set prices below the competition, at the competitors' level, or above the competition.

If the company sets higher prices for the products than its competitors, it should justify the pricing by providing additional features or special payment terms. When the company is going to charge a price below the market, there is a chance of potential losses. The profits from the additional products can compensate for the expenses on the product priced below the market. If a business sets the same prices as its competitors for similar products, it may distinguish itself through outstanding product marketing .

Pepsi and Coca-Cola are perfect examples of competitive pricing strategy. This is because the brands are very similar in terms of the quality and characteristics of the products. However, Pepsi is usually slightly more expensive than Coca-Cola. So will typically have smaller total sales volumes with better profit margins, while Coke will usually achieve necessary overall profits through larger sales volumes.

Skimming (or high-low) pricing strategy

Skimming strategy is when a business sets the highest initial price for a new product and then cuts it once there is lower demand. The skimming pricing strategy is widely used in technology markets where companies aim to reimburse R&D costs. The tech companies producing devices like smartphones and video game consoles usually price their products according to this strategy as gadgets tend to lose relevance over time.

This approach targets early adopters or customers who have lower price sensitivity. It happens for several reasons: these people’s need for the product outweighs their desire to save money, they usually have higher income or better knowledge of the product’s value. Companies apply a skimming strategy for a limited period to recover their investments in product development. To obtain greater market share, businesses should use other approaches like penetration pricing strategy after some time. However, the skimming method may irritate consumers who purchased the product initially and attract competitors who notice the sudden decrease in prices.

Apple uses a skimming pricing strategy to gain the highest profit in a short time instead of getting the maximum sales. The company also applies this strategy to differentiate itself from the competitors in the market. Furthermore, Apple made minor adjustments in the skimming pricing strategy. The company charges high prices for the new products and then justifies them by increasing the value of the products in future versions. 

Premium (or prestige) pricing strategy

Premium pricing strategy is also known as prestige pricing or luxury pricing. According to this strategy, companies artificially increase prices to create the perception that the products are exclusive, high-end, or luxurious. The strategy is based on consumers’ belief that expensive products have a solid reputation, are more trustworthy or attractive, and symbolize excellent quality and distinction. Premium pricing focuses more on the product’s perceived value than its actual value.

Customers of the brands sticking to the premium pricing strategy are typically not price-sensitive, so they are ready to pay more for the latest trends. Technology and fashion brands use this approach as they aim to provide value and status through their products. The drawback of the strategy is the difficulty of implementation. The success depends on the physical locations of the stores and target customers.

Starbucks is an example of a premium pricing strategy. The coffee company’s customers choose its lattes and signature coffee products over lower-priced competitors, such as Dunkin’ Donuts and smaller or local coffee chains.

Value-based pricing strategy

This strategy relies on determining the price of the product according to its value for the customer. A value-based pricing strategy is often used when the value of the product to the customer exceeds the cost of production. The businesses that use this strategy always target one specific customer segment or a single customer if it is a B2B company . The value-based approach is not applicable in the case of multiple segments as it would be difficult for marketers to determine the appropriate price for each one.

The strategy will not work well for the “blue ocean” products as this pricing method works if the product has a competitor’s alternative offer. First, the marketers have to use the competitor’s product as the criterion for establishing a value-based price. Then it is essential to determine the product’s unique features that distinguish it from the competing option. Finally, the marketers need to calculate the value of the differentiated features. 

Supreme , an American streetwear brand, differentiates itself from competitors by emphasizing the exclusivity of clothing while maintaining prices relatively cheap and affordable. The brand always keeps a minimal inventory and never produces a large number of items. You cannot buy Supreme clothing in large retail stores, their supply is restricted. Owning limited items sold by Supreme makes its owner a much more fashion-conscious person. This strategy creates a sense of originality of the products while increasing their desirability. As a result, the brand has a unique value that you cannot get from owning any other piece.

Dynamic pricing strategy

Dynamic pricing strategy, sometimes also known as time-based pricing, surge pricing, and demand pricing, establishes prices based on various factors, such as competitor pricing, customer demand, market, and supply. When implementing a dynamic pricing strategy, the companies use data collected from customers or react to changing market conditions. Then businesses adjust the prices for comparable goods to correspond to consumers’ capacity to pay. 

The companies that typically use dynamic pricing strategy are hotels, airline companies, and entertainment facilities. These organizations apply specific machine learning algorithms that analyze demand, competitor prices, and other factors to customize prices to current market conditions or customers’ willingness to pay. The dynamic method is also suitable for large businesses like eCommerce platforms and retail stores as implementing the strategy can be quite expensive.

Uber charges a price for a ride depending on the route, traffic, and rider-to-driver demand at the moment. The algorithm or service rules consider these factors when determining the prices. 

Cost-plus (or economy) pricing strategy

A cost-plus strategy is one of the easiest methods to set up the price for the product. The strategy takes into account only the cost of producing the product. Then you need to add the set markup percentage to the costs and sell the product for the total. Thus, to derive the price of the product, you need to add material costs, labor costs, shipping costs, marketing, and overhead costs to a markup percentage. 

Retailers who sell physical goods often use this method. The advantage of the cost-plus strategy is that it is easy to calculate. If all your production and labor costs are fixed, this pricing strategy can generate consistent profits. However, the method does not consider market factors, such as customer perceived value or competitors’ prices.

Let us imagine the company that produces jellies and jams. The production cost of a jar of wild blueberry jelly is $1.50 per 250 ml. The company is going to add a markup of 40%. Thus, the price of the jelly in the shop will be $2.10.

Target pricing strategy

Target pricing strategy is a method used by companies to establish the product price on the basis of market prices. A target price is an expected price the potential buyers are willing to pay for a product. To set the price for the product, the company conducts market research and analyzes the prices for similar offers. Then the company determines the profit margin or the amount of profit it aims to gain from a product or service. After setting the profit margin, the business evaluates whether the cost of manufacturing the product is within the budget. 

This strategy can guarantee that the company gets reasonable profit as the business sells the product at a price that corresponds to market demand. Large companies like automobile manufacturers choose target pricing strategy as it is not related to product demand as they sell the complete stock volume. Furthermore, target pricing increases the profitability of the companies by lowering the cost of manufacturing the product while the selling price is fixed and determined beforehand. 

Toyota uses target pricing to save costs at the development stage and increases the quality of the products at the same time. The goal of the company is manufacturing costs reduction, so Toyota strives to meet the goal through design adjustments of the vehicles.

Discount (or low-cost) pricing strategy 

Discount pricing strategy is a method of reducing the prices for original products or services to increase traffic, move inventory and generate additional sales. Discount pricing creates a sense of urgency and a feeling that a customer is making a good deal, so this approach attracts many potential buyers. However, a discount pricing strategy is used very often by various brands and may create a reputation that your company is a bargain retailer. In addition, it may lead to a negative perception of your products’ quality. Discount pricing strategy, which is based on cost advantage can also be used as a barrier to entry for new businesses, coming to the market.

There are three common types of discount pricing: seasonal, clearance, and volume discounts. During the seasonal discounts, companies usually provide special discounts on seasonal products. Sometimes businesses apply seasonal discounts to out-of-season products to sell old inventory. Companies use the term “clearance” to denote that the products are available at exceptionally low prices and only for a limited time, like “buy two items and get one for free”. A volume discount is also known as bundling or selling goods in bulk.

Beardbrand , a company that produces brand care products, promotes discounted bundles of its goods. The bundles are different kinds of one product. They are less expensive if purchased as a set than purchased separately. Customers can test different product variations to choose the most favorite one.

Seasonal pricing strategy

The seasonal pricing strategy sets the prices for the products depending on the demand during the high season or low season. The goal is to balance the demand by attracting customers with low prices during less busy times and increasing income in peak periods by charging higher prices. The peak seasons typically include annual holiday periods like New Year and Christmas, public holidays, school holidays, and local events like festivals and concerts.

To implement the strategy, you need to adapt to fluctuations in customer demand by breaking the year into low, mid, and peak periods. Then, determine the minimum and maximum prices you are going to charge. Try different prices to ensure that seasonal discounts do not motivate people to wait until the end of the peak period. Thus, the extra fees would not drive away customers seeking greater value.

Hotels, online travel agencies, and booking systems like Airbnb and Booking.com adjust their pricing to meet consumer demands. In addition, some services utilize artificial intelligence and machine learning to determine seasonal prices with the help of the algorithm.

Psychological pricing strategy

Psychological pricing aims to create a positive psychological impact to increase sales. According to psychological studies , when customers make purchases, they experience pain or loss. Therefore, the sellers can reduce this effect, improving the chances that the customers will buy the product.

The companies employ psychological pricing strategy by setting prices ending in 9, such as $8.99 instead of $9. It looks like the seller reduced the price as much as possible, taking into account every cent. As a result, the customer perceives the price as if purchasing the product for $8 instead of $9. 

Another way to use this strategy is to put more expensive items right next to the ones you are trying to sell in a physical shop or online. For example, suppose you use it in combination with discount pricing and offer a 50% discount when buying two products. In that case, customers will consider this a favorable situation to buy a product. 

McDonald's uses psychological pricing by selling combination meals that seem like a good deal compared to purchasing a single product. The brand encourages people to spend money on additional products they might not otherwise buy. 

Geographic pricing strategy

Geographic pricing is when a company sets different prices on its products or services depending on the market or geographical location. This strategy is suitable for multinational companies. The price for the product may be based on customers’ disposable income or the economic conditions of a particular country. 

Paid social media advertising makes it simple to market a product or service using a geographic pricing strategy. You can create your pricing model focusing on the city, region, or zip code of your target customers. If some clients travel and relocate permanently, it will not influence your overall strategy to a large extent.

In 2019 Apple stores in China were selling the latest iPhones at discounts. Apple faces many challenges in the Chinese market as there are low-cost phone manufacturers like Huawei . Due to these obstacles, geographical pricing strategy allows the brand to compete effectively.

Map pricing strategy

Although MAP pricing might seem like a variation of the geographic pricing strategy, it is, in fact, something completely different. MAP is an acronym for Minimum Advertised Price. Some countries, for example, the United States, allow brands or manufacturers to establish MAP policies to define the lowest prices at which the retailers can promote their products. A MAP policy is a document that prevents price erosion which typically leads to lower seller margins and reduced value of the goods. In addition, MAP policy allows for identifying fraud and protects customers from purchasing fake goods. The minimum advertised price policy also specifies the consequences for companies that violate the established rules as well as the procedure for enforcing the policy.

There are MAP regulations for almost every product in the world. The policy is helpful for both manufacturers and retailers as it allows standardizing the prices and differentiating the product from the competition by focusing on its unique features like service and customer support. In addition, it helps small and mid-sized retailers compete against larger companies.

If a backpack manufacturer establishes a minimum advertised price of $50 for the best-selling item, all product resellers should advertise this product at $50 or more. However, if a reseller decides to promote the item at a $35 price, this will violate MAP regulations.

It might be challenging to develop a successful pricing strategy as it requires considering various characteristics of your business. True, creating a pricing strategy is a complicated task, so we broke the process into five steps.

1. Determine your business objectives. Your goals might include increasing profitability, introducing a new product, gaining more significant market share, or reaching a new market segment . Consider what you want your company to contribute to the economy and the world.

2. Perform a comprehensive market pricing analysis. Analyze the market in which your product or service is going to compete. If the market is over-saturated and you have many competitors offering similar products or services, the price will be your key to success. Try to reduce operational costs to maximize profit margins. If you produce a highly differentiated product, you can use premium pricing and focus on better customer service.

3. Make a list of your competitors. Competitors’ pricing strategies have a notable impact on yours. So, you need to identify several direct competitors and analyze their pricing. Then consider the alternatives that consumers may use to solve the problem instead of your product or service. Next, study the pricing of these substitute products. Finally, develop your pricing strategy based on all of the above.

4. Understand your target customers. At this stage, you need to determine why and how your target audience will use your product or service. The most important issue is the perceived value of the product. You need to understand the task your product or service solves for the customer, how it alleviates the pains related to this task, and what benefits the customer will get by using the product.

5. Set your prices and review them regularly. Finally, set the prices for your product or products based on your goals and the data you have collected. Set lower prices if you believe in market potential and want to quickly grab a larger share of it. Or set higher prices if the product you offer is superior to the competition. And make sure to review your results and update the prices if there is an opportunity to improve your results.

Now you have a better grasp of the most common pricing strategies. You can choose the most effective one for your business from the above-listed methods and then make adjustments to create more personalized experiences for your audience. It is time to offer the customers the best price for value!

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Pricing Strategies and Models Explained

4 min. read

Updated January 18, 2024

What’s the right price for your product or service?

What price will make you profitable and attract customers?

Not sure? Keep reading to learn the basics of pricing strategy and setting the right price.

• What is a pricing strategy?

A pricing strategy is the overarching approach or plan a business uses to determine the price of its products or services. 

It considers various factors such as market conditions, competition, production costs, and the perceived value to the customer. The ultimate goal of a pricing strategy is to maximize profitability, maintain or grow market share, and ensure long-term sustainability while meeting the company’s other objectives.

• What is a pricing model?

A pricing model is the specific method used to set the price of a product or service. It provides a structure to implement your chosen pricing strategy.

What’s the difference?

The distinction between a pricing strategy and a pricing model lies in their scope, purpose, and application.

The pricing strategy aligns prices with business objectives, market conditions, and customer perceptions. A pricing strategy considers market entry tactics, customer psychology, brand positioning, and long-term market objectives. 

The pricing model is the mathematical method you use to create a specific price. It usually involves manufacturing costs, customer demand, and competitor pricing. 

Think of the strategy as the roadmap guiding where a company wants to go with its pricing and the model as the vehicle it uses to get there.

• Types of pricing strategies

1. Penetration pricing

Setting an initial low price to quickly attract customers and establish a market presence. Ideal for new entrants wanting rapid market share. 

Example: Streaming services offering discounted rates for the first three months.

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2. Price skimming

Starting with a high price and then reducing it over time. Suitable for innovative products. 

Example: New tech gadgets like smartphones often use this strategy.

3. Value-based pricing

Pricing based on the perceived value to the customer rather than production costs. Works best for unique products or services. 

Example: Luxury brands like Rolex or Louis Vuitton.

4. Competitive pricing

Setting prices based on competitor rates. Ideal for industries with many competitors offering similar products. 

Example: Supermarkets pricing staple goods.

5. Premium pricing

Charging a higher price to reflect a product’s premium status and quality. 

Example: Brands like Apple or Tesla.

6. Economy pricing

Offering no-frills products at a low price. Common in mass markets. 

Example: Budget airlines like Ryanair.

7. Bundle pricing

Grouping multiple products together at a discounted rate. Useful for increasing sales volume. 

Example: Cable TV packages.

8. Price leadership

Price leadership occurs when one dominant company, usually the largest or most influential in an industry, sets the price of a product or service, and other competitors in the market follow suit.

Example:  

OPEC often influences global oil prices by adjusting its production levels. 

9. Preemptive pricing

Intended to drive away competition or deter others from entering the marketplace by deliberately selling at below market prices (temporarily, of course).

Amazon launching the Kindle with e-books priced below typical hardcover prices. 

• Types of pricing models

1. Cost-plus pricing

Calculating the cost of production and adding a fixed gross margin. Common in retail. 

Example: A shirt that costs $20 to make might be sold for $40.

2. Geographic pricing

Adjusting prices based on location or region. 

Example: A software product priced differently for the U.S. versus India.

3. Dynamic pricing model

Prices change based on real-time factors. 

Example: Uber’s surge pricing during high demand.

4. Tiered pricing model

Different prices for varying levels of product features. See an example of how tiers and introductory pricing can be used to introduce and grow your business.

Example: Software packages with Basic, Pro, and Premium tiers.

5. Freemium model

Basic services are free, with charges for advanced features. 

Example: Spotify offers free music streaming but charges for an ad-free experience.

6. Subscription model

Recurring fee for product or service access. 

Example: Monthly Netflix subscriptions.

7. Pay-what-you-want model

Customers choose their price. Often seen in indie industries. 

Example: Some indie video games or music albums.

8. Volume-based pricing

Decreased price per unit with increased quantity. 

Example: Wholesale retailers like Costco.

9. License pricing model

One-time fee for product usage over a period. 

Example: Microsoft Office’s one-time purchase option.

10. High-low pricing model 

Products have a higher standard price but are frequently discounted. 

Example: Department stores having frequent sales.

• How to choose your pricing strategy

Selecting a pricing strategy comes down to cost, goals, and customer perception. Here’s how:

1. Set business objectives

Define clear goals, such as maximizing profit, penetrating the market, establishing a premium brand image, or achieving specific revenue targets. Your pricing should align with these objectives.

2. Understand your costs

Consider both direct costs (like raw materials and labor) and expenses (such as rent and marketing). Factor in variable costs that change with production volume and expenses that remain constant. Determine the break-even point to identify the minimum price needed to cover all expenses.

3. Analyze the competition

Research competitor prices and understand their value propositions. Identify their market positioning, whether premium or budget and observe any historical pricing trends or changes to gauge market reactions.

4. Know your audience

Understand your target audience’s demographics and what they value in a product. Gauge their price sensitivity and gather feedback on pricing preferences to ensure your price resonates with them.

5. Test and adjust

Before a broad rollout, test the new pricing on a segment of your audience. Refine your pricing based on customer input.

• More on pricing products and services

Check out our other startup pricing resources to turn your pricing strategy into profitable steps for your business.

• How to price your products
• How to price your services
• Mistakes to avoid when setting prices

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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Pricing Strategy 101: Types, Examples, and Best Practices

Pricing strategy is an important aspect of any business as it can highly impacts a product or services sales performance.

When launching a new product or attempting to boost revenue for an existing one, selecting the appropriate pricing method is crucial.

With numerous pricing approaches to choose from, it may be challenging to determine where to start.

This blog post provides a comprehensive guide to pricing strategy, including types, examples, and best practices, to identifying the most suitable approach businesses takes to achieve their objectives and meeting customer requirements.

Let’s delve in and explore!

Introduction: What is Pricing Strategy?

Cost-plus pricing, competitive pricing, value-based pricing, dynamic pricing, skimming pricing, penetration pricing, advantages of pricing strategy, apple: premium pricing, walmart: everyday low prices, starbucks: value-based pricing, coca-cola: penetration pricing, how to create a pricing strategy: 6 steps to success, faq’s.

Pricing strategy is a business plan for pricing a product or service. It is crucial to comprehend pricing strategy as it serves as one of the key components of any business model.

Businesses can maximize profits and ensure long-term sustainability by establishing the right pricing strategy.

Over time, pricing strategies have evolved, becoming more sophisticated with a variety of approaches being employed.

These strategies consider the product, price elasticity, competition, target market, cost of production, and other factors.

Companies must also consider external factors such as the current economic climate and consumer sentiment when creating their pricing strategy.

7 Most Common Types of Pricing Strategies

The significance of pricing strategy cannot be overstated in any business as it can determine the success or failure of the venture.

There are seven common types of pricing strategies:

Cost-plus pricing refers to setting prices based on the cost of goods or services plus an additional markup.

A markup is typically a percentage or a fixed dollar amount added to the cost.

This type of pricing is often used by businesses that have high fixed costs or where there is little competition.

Competitive pricing is when businesses sets its product or services price based on what their competitor in the same industry is charging. This approach can be highly effective in industries with intense competition and price-sensitive customers.

When a business sets its prices based on the perceived value of the goods or services they are providing to the customer is known as Value-based pricing.

This type of pricing takes into account things like customer needs and wants, product features, and brand reputation.

Value-based pricing is very effective for the businesses that offer high-quality products or services which are not easily replicated by competitors.

Dynamic pricing is when a business sets its prices based on real-time market conditions.

This type of pricing is becoming increasingly popular as businesses become more data-driven and technology-enabled.

Dynamic pricing allows businesses to quickly adjust their prices in response to changes in demand, supply, and competition.

Skimming pricing is when a business sets its prices higher than the competition in order to maximize profits.

This type of pricing can be effective for businesses that know there will be high demand for their product or service and are willing to sacrifice some sales in the short term in order to maximize profits over the long term.

Penetration pricing is when a business sets its prices lower than the competition in order to gain market share.

This type of pricing can be effective for businesses that are entering markets with established competitors and need to quickly attract customers.

Premium Pricing

Premium pricing is when a business sets its prices higher than the competition in order to create the perception of higher quality or value.

This type of pricing can be effective for businesses that have high-quality products or services and are willing to charge a premium price for them.

There are many different pricing strategies that businesses can use, and the best pricing strategy for a business will depend on the products or services they offer, their target market, and their overall business goals.

There are several advantages to having a pricing strategy.

• It optimizes profits by ensuring that the right price is charged for the product or service.
• It manages costs by analyzing competitors’ prices to avoid overspending on production costs.
• It maintains competitiveness in the market by understanding and adjusting prices based on competitors’ pricing strategies.
• It builds customer loyalty by providing discounts or incentives to regular customers.
• It optimizes marketing strategy by identifying the most effective promotions or discounts to attract customers.

Overall, a pricing strategy is an essential element of running a successful business as it helps maximize profits, maintain competitiveness, and build customer loyalty.

Disadvantages of Pricing Strategy

Pricing strategy can be a great tool for businesses, but there are also some disadvantages that should be considered.

• Pricing strategy can lead to decreased demand for a product or service . This happens when customers believe that the price is too high and they are not willing to pay it. This can lead to lost sales and revenue.
• Pricing strategy can result in lower profits. This happens when businesses set their prices too low and they are not able to make a profit on each sale.
• Pricing strategy can also lead to increased competition. This happens when businesses set their prices too low and others enter the market to compete for sales.
• Finally, pricing strategy can also lead to customer dissatisfaction. This happens when customers believe that the price is too high and they are not getting good value for their money.

Overall, pricing strategy can be a great tool for businesses if used correctly. However, it is important to keep in mind the disadvantages that can come with it.

Examples of pricing strategy: Apple, Walmart, Starbucks, and Coca-Cola

Here are some examples of pricing strategies used by Apple, Walmart, Starbucks, and Coca-Cola:

Apple has always been a company that charges more for its products than its competitors. It’s able to do this because it has built a reputation for quality and innovation.

By charging premium prices, Apple is able to maintain high profit margins, which it then reinvests into research and development to create even better products .

Walmart is the world’s largest retailer and is known for its “everyday low prices” strategy.

This pricing strategy is based on the idea of offering customers low prices on a consistent basis, rather than running sales or discounts.

By doing this, Walmart is able to keep costs low and attract a large volume of customers.

Starbucks is one of the most successful coffee chains in the world and uses a value-based pricing strategy.

This means that it charges slightly higher prices than its competitors, but offers customers perceived value in return.

For example, Starbucks offers free WiFi in all of its stores and has a comfortable and inviting atmosphere.

Customers are willing to pay slightly more for their coffee knowing that they’ll get these added benefits.

Coca-Cola is one of the most popular soft drinks in the world and uses a penetration pricing strategy to gain market share.

This involves setting low initial prices in order to attract customers and build market share quickly.

Once Coca- Cola has gained a foothold in the market, it can then increase prices and maximize its profits.

Overall, there are many different pricing strategies that businesses can use depending on their goals and market conditions.

Creating a pricing strategy involves several steps:

Understand your costs

Determine the costs associated with producing and delivering your product or service , including material costs, labor costs, and overhead costs.

Research your competitors

Conduct market research to understand what your competitors are charging for similar products or services .

Determine your value proposition

Identify the unique value your product or service provides to customers and use this to determine your pricing strategy.

Choose a pricing model

Choose a pricing model that aligns with your value proposition and business goals. Some common pricing models include cost-plus pricing, value-based pricing, and penetration pricing.

Set your prices

Set your prices based on your costs, your value proposition, and your chosen pricing model. Offering discounts or promotions also helps to attract customers.

Monitor and adjust

Continuously monitor your pricing strategy and adjust as needed based on changes in market conditions, customer demand, and competition.

Overall, creating a pricing strategy requires careful analysis and consideration of various factors. By taking the time to develop a well-thought-out pricing strategy, businesses can optimize their profits while staying competitive in their market.

What is a pricing strategy?

A pricing strategy is a plan for setting prices and maximizing profits. It takes into account factors such as costs, competitor prices, market demand, and perceived value.

When can companies adopt a market penetration pricing strategy?

Companies can adopt a market penetration pricing strategy when they are introducing a new product or service to the market and want to quickly gain market share.

Why is pricing strategy important?

Pricing strategy is important because it directly impacts a company’s profitability and competitiveness. By setting the right prices, companies can attract customers, maximize profits, and gain a competitive advantage in their market.

What are the 7 pricing factors?

The 7 pricing factors are: Cost, Competition, Customer demand, Brand image, Distribution channels, Government regulations and Economic conditions

What are the 4 components of pricing?

The 4 components of pricing are: 1. Cost of production 2. Desired profit margin 3. Competition 4. Customer demand

What are the 3 major pricing methods?

The 3 major pricing methods are: 1. Cost-based pricing 2. Value-based pricing 3. Competition-based pricing

Misconceptions of penetration pricing

There are several misconceptions about penetration pricing, including:

1. It is only suitable for new products or services 2. It is a long-term pricing strategy 3. It always leads to low profit margins 4. It is only effective in price-sensitive markets 5. It is unethical or anti-competitive

However, these misconceptions are not necessarily true.

Penetration pricing can be effective in a variety of situations and can help companies gain a foothold in their market while still maintaining profitability over time.

Pricing products or services correctly is critical for the success of any business. A solid pricing strategy helps maximize profits and gain a competitive edge.

This article aims to provide an understanding of different pricing strategies, examples, and best practices for successful implementation.

With the right approach, businesses can ensure attractive prices while maintaining profitability.

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Pricing Strategy in a Business Plan: Deep Dive

• March 21, 2024
• Business Plan , How to Write

In this blog post, we’re diving into how to choose and explain your pricing strategy in your business plan. We’ll cover different pricing models like penetration, premium, and value-based. We’ll also dive into how to present your pricing strategy in your business plan.

Whether you’re starting a new business or preparing a business plan for an existing company, getting your pricing right is key to attracting customers and making a profit. Let’s break down how to make your pricing strategy clear and effective. Let’s dive in!

What are the different pricing strategies?

Different pricing strategies can significantly influence demand, profitability, and market positioning for businesses. Here’s an overview of some common pricing strategies:

• Cost-Plus Pricing: Adds a markup percentage to the cost of producing a product or delivering a service. It’s simple to calculate and ensures a profit margin.
• Value-Based Pricing: Sets prices based on the perceived value to the customer rather than the cost of production. This strategy focuses on the benefits and value the product or service brings to the customer.
• Competitive Pricing: Prices are set based on competitors’ pricing structures. Businesses might price their products slightly lower than competitors to gain market share or at a similar level to match the market rate.
• Penetration Pricing: Involves setting lower prices to enter a competitive market and attract customers quickly. The goal is to gain market share and then gradually increase prices.
• Premium Pricing: Setting the price of a product or service higher than the competitors. This strategy is used to signal superior quality or exclusivity to justify the higher cost.
• Dynamic Pricing: Adjusting prices in real-time based on market demand, competition, and other factors. Common in industries like hospitality and airlines.
• Freemium Pricing: Offering a basic product or service for free while charging for premium features. This strategy is often used by software and service companies to attract users.
• Bundle Pricing: Combining several products or services and selling them at a single price, often lower than the total cost of buying each item separately. This can increase the perceived value and encourage sales.

How to choose a pricing strategy

Here’s how to come up with an efficient pricing strategy:

Align Pricing with Market Strategy

Begin by articulating how your pricing strategy complements your overall market strategy. If you’re aiming for market penetration, explain how your pricing is designed to attract a large volume of customers by being more affordable than competitors.

For a premium pricing strategy, discuss the exceptional quality, exclusivity, or unique value your offerings bring, justifying higher price points.

If you’re adopting a value-based pricing model instead, illustrate how your pricing directly correlates with the perceived value to the customer, possibly through superior benefits or cost savings they provide.

Relate Pricing to the Target Market

Your pricing strategy should be closely tied to your understanding of your target market .

For instance, if your target market highly values sustainability and is willing to pay more for eco-friendly products, your pricing should reflect this. Similarly, if you’re targeting a price-sensitive segment, explain how your pricing strategy enables you to offer competitive value while maintaining profitability.

Consider the Competitive Landscape

A comprehensive pricing strategy also considers the competitive landscape . Analyze your competitors’ pricing and how your strategy positions you within this context.

Are you offering a more affordable alternative to premium products, or are you introducing a higher-quality option in a market segment dominated by low-cost competitors?

Discuss how your pricing strategy gives you a competitive edge, whether it’s by filling a gap in the market, offering better value, or challenging the status quo with innovative pricing models.

Where to include your prices in your business plan?

In your business plan, prices should be detailed under “Products or Services” within the Business Overview section of your business.

This part of the plan not only describes what you are offering but also provides an ideal opportunity to outline your pricing strategy and the specific prices or price ranges of your products or services.

Here, you can explain how your pricing fits into the market and aligns with your overall business strategy, giving potential investors or lenders a clear understanding of your approach to generating revenue.

Remember your pricing strategy should align with your financial projections (projected income statement, cash flow statement, and balance sheet). Indeed, you will need to give some high-level explanation of how you came up with these financial projections, based on your pricing strategy too.

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How to Choose the Right Pricing Strategy for Your Business

Pricing a product or service is a delicate art, there are many options to choose and the optimal one is never set in stone. In this tutorial, we run down some of the popular methods and how you can select the most appropriate strategy for your business.

By Toptal Research

A correct pricing strategy is key for a company. Setting your pricing strategy and price levels appropriately can make the difference between profitability, breaking even, or failing. There are many examples of companies that were able to find sustainable business models thanks to specialized pricing strategies, such as eBay’s promoted posts or LinkedIn’s premium package .

Before we define the different pricing strategies that are available, it is first very important for the founder to understand what market they are actually entering and what their clients are demanding. Furthermore, a founder needs to be aware of how their business model could support different pricing levels. There are many ways to reach $100 million dollars in revenue , but keep in mind that the pricing strategy you choose will greatly affect how your business will be run.

In this post, we will outline the main pricing strategies, walk through a process that you can follow to reach your appropriate pricing option, and detail the main pitfalls. To fully understand the pros and cons of each of these variables, you should also tap your network for entrepreneurs with experience in pricing strategy or get help from professional experts such as the pricing finance experts at Toptal .

Define Your Type of Business

Before choosing the pricing strategy, your first must define what type of business you’re pricing for. It is very different to sell to businesses (business to business, or B2B) than it is to sell to final consumers (business to consumer, or B2C). Depending on which type of client a company has, there are different implications that have to be thought out before choosing the pricing strategy.

Although for many readers the difference between both types of companies is clear, it is worth defining them:

B2B: A company with a business-to-business model is a company that sells to other businesses. The ticket size per transaction is usually large, but the sales cycle is also usually longer than selling directly to consumers, depending on the size of the companies involved. Furthermore, a sales process within the B2B sector can usually involve several bidders that compete with each other (request for proposal). Finally, a B2B transaction tends to have recurrent customers that buy frequently from the seller, which helps with cash flow. Some could argue that B2B is a more quantifiable business model to price towards, as business owners largely are drawn to products that either help them sell more and/or spend less.

B2C: A company with a business-to-consumer model is a company that sells directly to the individual consumer. The ticket size per transaction is usually smaller than B2B sales, but the purchaser usually decides to make the transaction immediately. The stickiness of a B2C customer is frequently lower than a B2B client.

Recently, there have been a few additions to this simple classification, such as business to business to consumer ( B2B2C ) or direct to consumer ( D2C ). For the purposes of pricing implications, most of these additions can be grouped into B2B or B2C.

Types of Pricing Strategies

Once you have defined what type of clients your business caters toward, you can review the different pricing options available and the implications that they might have on your growth. It is important to note that this is just an overview of each pricing strategy, and the application of different pricing strategies will have different effects depending on the business.

SaaS Pricing: SaaS means software as a service, which is a software distribution model in which another company hosts an application or product for the customer and that the customer can access it through an internet connection. SaaS pricing is usually periodical, where the customer pays for the right to use the software for a specific time period. Unlike traditional software models, where a lump license is bought outright for one version of a product, SaaS business models charge customers into perpetuity for new iterations of the service.

Freemium Pricing: Freemium pricing means offering your customers some product features for free, with the expectation that they get hooked on the service and eventually demand more features that will be charged. Spotify is a great example of freemium pricing: At first, you sign up for free streaming, accepting ads every once in a while. After a few months of this, you get tired of hearing the same ad again and again and you finally pay up the monthly fee. Dropbox is another notorious example: You use the limited free space for your family photos, but once you reach the limit, you are hooked and decide to pay for the premium version.

Tiered or Goldilocks Pricing: Tiered or goldilocks pricing offers several pricing options to the customer, usually going from basic all the way to enterprise. Businesses structure them in ways such that a customer eventually increases their knowledge and use of the service, hits a roadblock in their current service plan, and then upgrades. By way of example, once again look at Dropbox , which as you can see offers three different business plans for customers depending on customer needs.

When considering the goldilocks pricing option, it is important to know what objectives you have for your company. There are two different goals that can be pursued:

Being able to offer different options to different clients (customer segmentation)

Nudging the customer to choose a specific option, which is usually the middle price between the extremes. This strategy is also called the anchoring effect. In the Dropbox example, it seems the company is pushing customers to buy the Advanced model, with unlimited space versus “only” 2TB.

This Ted Talk from MIT professor Dan Ariely provides one of the best examples available (starting at 12:25), where he speaks about a specific case. In this real-life example, The Economist provided its readers with three subscription options: online subscription for $59, print-only subscription for $125 and finally a third option of print plus online, also for $125.

Ariely showed his MIT students all three options to see what options they would choose, and the results can be seen in the following table:

As the table shows, 84% of students chose the print and online option. After this first survey, Ariely removed the “print only” option and gave a separate group of MIT students the same survey with the two remaining options. These were the results:

The difference in results is clear: Only 32% of students chose the print and online option. If these were real results for The Economist, offering all three options with the “print only” anchor would have increased revenue by 42.8%. Clearly, anchoring through Goldilocks pricing can be a highly effective strategy for getting the maximum value from your products and services.

One-time Licensing Fee: In a one-time licensing fee, the customer buys the software or product one time and it is owned by the customer without any more payments. One clear disadvantage is that this pricing strategy does not make the customer sticky, as the transaction is made only once. Another disadvantage is that there are no immediate incentives for software updates and maintenance. From a cash flow perspective, this pricing model also results in irregular periods of high cash inflow, around times such as a new release, new budget years, or even Christmas.

This option was popular before the rise of the internet (remember buying Microsoft Encarta every year?) and the resulting ability to upgrade and maintain software online.

Per User/Seat Pricing: Per user/seat pricing means pricing in conjunction with how many users per customer will use the product. This option is also called per license pricing.

Enterprise Pricing: Enterprise pricing is an ad-hoc pricing that a company prepares for a large client that cannot fit into a standard option plan. Usually enterprise contracts are closed for at least a year, as the amount of development and setup work is significant for both parties.

Cost-based Pricing: Cost-based pricing first analyzes what the actual product costs are, and then based on that cost level the business increases the pricing a certain percentage. For example, a physical store retailer can decide that it will sell all items at a 100% markup: Therefore, if it buys a product wholesale for $10, it will sell the product at $20. This option is very common among retail companies.

Value-based Pricing: Value based pricing first looks at what value a specific product provides to the customer and then calculates the pricing as a function of that value. A generally accepted rule of thumb for setting the final price is to set it at 10 times less than the value provided to the customer. For example, if for the customer, the perceived value is $1,000, the retailers would sell it for $100. This pricing strategy can only be sustained if the product sold is unique, without many competitors undercutting the price.

Competitive Positioning: With a strategy that pursues competitive positioning, the company analyzes how it wants to be perceived vis-a-vis other competitors. The company could try to slightly undercut its competitors, with the risk that the competitors would match this pricing and start a downward pricing spiral. Alternatively, the company could try a more premium approach and set its price above competitors.

Razor Blade Model: A razor blade model consists of providing an initial product that hooks the customer and then later selling them a second product that is essential to the use of the first product. There are two clear examples of this strategy: first, the actual razor blade company Gillette, which sells its razor handles relatively cheap and then sells the actual razor blades at a premium. Secondly, printers. While actual printers sell at a low price, continuous purchasing of ink toners will eventually by far exceed the initial hardware cost. You can see further examples of this pricing within the industries of video game consoles and pod-based coffee machines.

Free Products (Revenue Is Earned from Critical Mass and Ads): This pricing is currently very popular with the success of companies such as Facebook and Google—They do not charge their customers for the use of their products, making customers’ data the actual product to sell to third-party businesses. There are clearly some very successful examples of this strategy. However, a founder must be aware that success with this strategy is very difficult to achieve, as the company needs to become very large and reach critical mass while being unable to obtain significant income during the ramp-up phase.

How to Set Up Your Pricing Strategy

After having gone through all of the different options and creating a shortlist of feasible routes for your company, you must do the hard work of executing and setting the final pricing strategy.

The first thing you should know is that whatever pricing strategy you choose, this option will define the business entirely, from how revenue will grow to how the actual business and team will be built. It is very different to set up a company that sells through a SaaS model compared to one that sells through a one-time purchase strategy.

The second thing to keep in mind is that the choice of a pricing strategy and pricing level is actually a process, and this process must be repeated periodically during the lifetime of the business, as we will see in the last section of this article.

During the process of selecting a strategy, you must first conduct deep customer research. However, be very careful when gathering feedback from non-paying customers. The only feedback that is worthwhile comes from customers that have actually bought your product. Anyone else will probably not have thought through the problem as much as a real customer that has a real need and has paid money for the service.

To obtain these first customers in this beta phase, try to tell a story through your pricing. For example, if you go with the option of value-based pricing, make it clear how valuable your product is and why your initial pricing really makes buying your product worth it. To increase the chances of obtaining these first customers, the founder should hit the road and help to tell the story.

Also, keep it very simple for these first customers. Do not overcomplicate the options. If you want to test different price points, you should create different subsets of clients that will each see a different price point. You can then test the rate of adoption at each price point. For example, it might not be a good idea at this stage to try goldilocks pricing, or at least to show it to the customers.

In addition to all of the above, make sure to research your main competitors, both direct and indirect, and understand why they chose their price levels and strategies. Use this information as another reference point for your decision making process while keeping in mind that your competitors could actually be wrong with the pricing that they chose. Always test out pricing for yourself.

After the initial pricing is set, the iteration process starts. Increase the price slightly and see where the limit is, depending on the level of pushback the customers start to give. Do this with different pricing levels with different customers, and you will have great insight into different customer segments.

Common Pitfalls in Pricing Strategies

There are a few common pitfalls that entrepreneurs make regarding their pricing strategy:

Not Changing Your Price: Even after full launch, a company should periodically review its pricing. At least once a year is good practice. This exercise will allow you not only to stay abreast of what your customers demand, but also what the competition is doing, and be able to adjust accordingly.

Underselling Your Company: Some entrepreneurs, when facing initial resistance from potential customers, tend to reduce their pricing to close sales. This can lead to a situation where they are selling themselves and their product short. Also, thinking that this client resistance is only due to high pricing can be a distraction from other key problems that are the real reason, such as a flawed product-market fit.

Thinking That Non-paying Customers Have Value: As said in the previous section, a founder should be wary of incorporating feedback from non-paying customers. This applies for both initial pricing testing and ongoing sales to a customer, where sometimes a client demands specific changes to your product before buying it.

Providing Too Much Choice: When customers have to choose between too many options, it makes the decision harder for them . Psychologist Barry Schwartz proved in his book the Paradox of Choice that customers can defer decisions for a long time or never actually make the decision. A company should avoid putting their potential clients in a similar situation.

Making Negative Connotations: When selling a product or service, an entrepreneur should avoid using arguments that are negative. For example, it is preferable to not mention that your product will reduce the number of employees your customer needs. It is better to be positive—say, for instance, that your employees will be significantly more productive.

Not Giving Special Treatment to Loyal Customers: For subscription-based businesses, you can push customers toward annual or quarterly payments instead of monthly payments by offering a better price if you pay annually or quarterly. This will will help you with cash flow and the customer will perceive a direct benefit thanks to his loyalty to your product.

Conclusions

Clearly a significant amount of analysis, customer research, and iterative testing is required for proper pricing strategy. There is no one-size-fits-all approach: Each company within each market is different. The key is to fine-tune your pricing until you reach the sweet spot that you are looking for, testing different strategies and price points until you find the perfect combination for your product or service

Start testing!

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Pricing Strategy: 10 Strategies & Examples to Maximize Profits

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Everything You Need to Know About Pricing Strategy

Free Product and Service Description Worksheet

Aayushi Mistry

• February 26, 2024

13 Min Read

Your pricing should not be too high. But at the same time, it should not be too low for you to bear losses or have no profit at all. Your pricing strategy should bring balance to your books as well as to your customers.

In either case, here’s what will happen:

If your price is too high, you will miss out on valuable sales. Whereas if your price is too low, you may have adequate sales but may have to miss out on revenue.

Hence, to find the right pricing for your product or service, you need to have the right pricing strategy. And in this blog post, we are talking about a few pricing strategies that you can implement for your product and service. Along with that, we have also put together a short and actionable guide for you.

What Is a Pricing Strategy?

A pricing strategy is a model you use to determine the best price for your product/service. The ideal pricing strategy allows you proper profit margins, goes along with the industry standards and fits in your audiences’ budget.

However, it is not as easy as it sounds and the process is rather long and sometimes perplexing.

While deciding your pricing, you need to account for many different factors like revenue goals, marketing adjectives, target audience, brand positioning, and product attributes. Other than that, some other external factors like consumer demand, competitor pricing as well as market and economic trends.

But that’s not it. Entrepreneurs like you have to compare your pricing with your cost price as well as competitors’ price. However, while deciding on the most profitable pricing model, your focus should be on offering value and increasing your revenue.

Price Elasticity of Demand

With time, you may have to change your pricing. The change in price largely affects your target audience. This and in turn affects your profit margins and revenue . To determine such a change you use a factor called the price elasticity of demand.

If your audience still buys your product or enrolls in your services despite the increase in price, then your product is called inelastic. On the other hand, if you see a change in the buying pattern of your consumer after increasing or decreasing the price, then your product is called elastic.

Now, this is all about theory. But do you know that there is also a formula to calculate your elasticity?

It goes something like this-

Price elasticity helps you to understand if your product or service is sensitive to price fluctuations.

Ideally, companies want their products/ services to be inelastic. So even when the price fluctuates, the demand remains stable.

Now let us discuss different pricing strategies:

1. Competition-Based Pricing

Here, your pricing is solely dependent on your competitors and industry trends.

This pricing strategy focuses on existing pricing trends in the industry. In this model, you may or may not consider the production or processing price. At the same time, you don’t have to look at the demand-supply chart.

Benefits: You stay in line with your competition and industry standard. Hence, your product appears to be more relevant to your target audience. And this relevancy can help you add to your sales and revenue. The process could be slow but sustainable.

When to use it? When you are working in a highly saturated industry.

How to apply this strategy? See, you can bring your pricing slightly lower than your competition. This can help you lure more customers/clients. And then, with time, you can bring your pricing to par with your competitors. Along with that, you can even implement a launching scheme that not only brings you enough attention. But adequate profits.

2. Cost-Plus Pricing

This pricing model is solely based on the production cost of your product/service or your all-inclusive cost price. A lot of times, it is also called mark-up pricing.

In this pricing model, it does not matter what your industry trends are or what your competitors’ price is like. You simply decide your profit margins and put up your pricing.

Implementing this pricing model is quite easy. Decide on the profit margin you want to make, and calculate it with your cost price or all-inclusive cost price. The resultant amount is your market selling price.

Benefits: You get to maintain your individuality. Besides, as you get to decide on your profit margins, you can claim all the profit for yourself.

When to use it? Cost-price pricing is best for you if you are a retailer. It gets even better if you are selling physical products When you can bring down your production, sales, and transportation price.

3. Dynamic Pricing

In this pricing model, you keep changing the price with respect to demand.

You keep the pricing low as long as the demand is low. But just when the demand starts to hike, you increase the pricing.

Benefits You make the most of the peak points. Sometimes, you make enough profits to survive even while the demand is low.

When to use it? You can use this pricing model if you are into the tourism, airlines, hospitality, and FnB industry. Along with that, you can use this model even if your business falls into the utility and event-based industry.

How to apply this strategy? You can reap the most benefits of this pricing model if you implement automatic algorithms. These algorithms help you shift your pricing intuitively whenever the graph of demand changes.

4. Freemium Pricing

Basically, freemium is the mixture of two words: Free + Premium. Hence, the explanation lies in the word itself. With this pricing model, you offer your premium services for free for a certain period of time.

There are two ways of implementing this pricing model:

• You offer your premium services for free for a certain time (let’s say, three days, a week, a month, three months or so on) And then, after that period, if your user like your offers, they can pay and enjoy it again.
• Another way of implementing freemium is to offer certain basic services for free forever. And if your user base wants to use your premium services, they will have to pay and upgrade their plans.

Benefits: It helps you to boost your user base. Other than that, you get a chance to build a relationship with your audience before offering to make a sale.

On the other hand, even your customer gets a hang of your product. Hence usually, companies who offer this pricing model have awesome conversions if their product is found valuable.

When to use it? It is the best pricing model if you have a SAAS product and OTT platforms . A lot of times, even telecom service providers use this pricing model to gather the user base.

How to apply this strategy? In the beginning, you should offer your services at a lower price or for free. And gradually with increasing users, you should increase the price with respect to the features they use. Other than that, you can even offer multiple packages.

5. Skimming Pricing

With this pricing model, you sell your product/service at a high rate and then bring it down with time when the hype goes down.

You hype up your product/service before the launch. With the rising hype, the demand naturally goes up. And to take the advantage of the high demand, you put up your highest possible price for that product/ service.

And gradually, with the hype going down and decreasing demand, you bring down the price.

Here, the pricing may not fluctuate. It straight away falls from high to low. Or, a lot of times, some companies would even have a mid-range price before it falls down to the low. But, the direction of the pricing graph is all the same, without fluctuations.

Discounts, clearance sections, and year-end sales are a few examples of the same.

Benefits: With this pricing model, you keep a grip on your audience’s attention toward your company. Hence, they always keep a tab on your offers and are more likely to buy from you.

When to use it? Tech, auto-mobile, clothing, decor, furniture, beauty, and other retail industries take a lot of benefits from such pricing models. Such a pricing model works best for you when your company is already an established brand.

6. Penetration Pricing

Penetration pricing is the opposite of skimming pricing. With this pricing model, you keep the pricing low in the beginning. And with the rising popularity, you increase the price.

You introduce your product with a launching price. Or sometimes, you don’t label it anything. You simply put out the product/service at a low price in order to grab attention. And just when you have enough sales and revenue with respect to your graph and goals, you increase the price.

A lot of time, there is no certain pattern when it comes to the increasing price. Some companies would increase the price gradually whereas, some might prefer to increase the price tag number all at once.

Benefits: You give your product and your company enough time to get accustomed to the market. A lot of people believe that this pricing model is not sustainable in the long run. However, the notion is quite debatable as many others believe that this model is decent enough if you run it strategically.

When to use it? You can use this model if your industry is highly saturated and your audience has a low attention span.

How to apply this strategy? Firstly, by giving the best possible value. Secondly, by announcing that a certain low price is your launch price. And that, you will eventually increase the pricing. Other than that, you can apply this model if you have high-end as well as low-end products for your audience. Where, you will lure your audience with the low-end product and eventually, release the high-end products.

7. Value-Based Pricing

This pricing model is customer-centric. Wherein your customers will pay purely based on the value they receive.

Companies study their buyer persona , apply the algorithm, and do complete industry research before setting a price. Just to make sure that the customer is satisfied with the value and price and product.

Benefits: If used accurately, value-based pricing can boost your customer sentiment and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.

When to use it? You can use it if your product is service-based. Or, you can apply the same model in the education and coaching industry. Only apply this pricing model if you are confident in your product and customer research . This pricing model is mostly seen in small to medium businesses.

8. Bundle Pricing

A bundle is when you offer two or three products/services together and decide on single pricing.

In this model, you also offer single products as well as a bundle. You become intuitive about your audience’s needs. And accordingly, you put all the related services/products in one bundle. And to make it easier for them as well as for you, you price on the bundle.

Benefits: This is a great way to add value through your offerings to customers who are willing to pay extra upfront for more than one product. It can also help you get your customers hooked on more than one of your products faster.

When to use it? You can use this pricing model if you are in the service industry, clothing, furniture, and so on.

9. Psychological Pricing

You simply take the help of psychology to boost your sales. However, it is not as much as exclusive as it sounds. Because, in every pricing model, you consider your buyer persona’s psyche.

In this pricing model, you simply play the game of numbers. Like, putting $99 instead of $100.

Other than that, you can also put a more expensive product right next to not-so-expensive products. This will help you drive the sales of a product that is not so expensive.

Another way of using this pricing model is to lure your customer with discounts and deals.

Benefits: You grab your audience’s attention and drive them to make a sale for you.

When to use it? Depending on the industry and target market , every company can use such psychological hacks to boost its sales.

How to apply this strategy? Let research and implementation be your strong point. With every implementation, analyze. Be open to ideas, you only get better with time.

Pricing Analysis

Pricing analysis is when you evaluate your current pricing strategy against market demand. You perform a pricing analysis to identify your opportunities and threats with respect to changes in the pricing model.

When to conduct pricing analysis?

• When you are considering new product ideas
• When you are developing new positioning strategies
• When running marketing tests
• When you are analyzing your pricing against your competitors.
• When you are trying to determine and meet your consumer price expectations.

By running the price analysis regularly you-

• Actually know the exact price of your product/service
• Understand how your target market responds to your pricing model
• Analyze your price with respect to your competitors

How to decide on the right pricing strategy for your business?

Price is what you pay for the value you receive. So, whatever price you decide on your product should justify your offer. That’s the customer-centric approach. But at the same time, your pricing should suffice your production and processing costs and bring you profit.

Other than that do detailed research with respect to the target market and the industry your product is based. Allow yourself to think out of the box so that your pricing can be your competitive advantage .

For which, you can research the following aspects that affect your pricing and profits:

• The production/processing of your product/service
• The complete cost of your product/service:
• The marketing and branding cost:
• The industry standards

So Which One Is the Best Pricing Strategy?

We can not pinpoint one pricing strategy and call it the best for you. You have to try it and analyze it. Research well on your product, and target market and develop a strategy that regulates your sales and revenue goals. After implementing the strategies, analyze. See whatever suits you and your customer base and go ahead with it.

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Five good pricing strategy examples and how to benefit from them

• Jonas Timonen
• April 19, 2021

Pricing strategies are the main profit drivers in eCommerce.  As price is the key detail consumers compare in eCommerce, pricing strategies should be your number one focus area. Building winning pricing strategies is easy: find out how your customer value is delivered and ensure your pricing is part of it.  In this article we introduce five best  pricing strategy examples  that are simple to follow and implement.

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Ecommerce Pricing Strategy Checklist

Does your pricing strategy deliver customer value?

Are your customers in search of low prices or a premium service and experience?  Customer value is the core of your pricing and you should integrate your  pricing strategy  into your marketing strategy. 

Let us assume you are an eCommerce company. You have decided your position in the market, you are clear on  customer value  and how your pricing delivers it. Now you must consider some tactics to make your prices and strategy work. You can consider aspects like competitor actions, market conditions, consumer trends, and other variables, including product costs, to account for the pricing model of your goods. It is vital and something we have seen multiple times: sticking to a simple pricing strategy works best if it delivers the value the customer wants. You can easily win your competitors over by creating a simple, understandable pricing plan that includes customer value at the core. 

As a retailer or an e-commerce player, you must decide right pricing strategies before advertising products to customers. In the list below, we will review five most common pricing approaches. You need to determine the best pricing strategy for your business.

Need Expert Guidance on Your Pricing Strategy?

Explore our pricing solutions to enhance your ecommerce strategy., 1. competition-based pricing strategy.

Competition-based pricing utilizes pricing data of competitors for similar products to set a base price for their products. Rather than focusing on production costs or the item’s value for the customer, this pricing method relies heavily on market data.

Think of it in this way. You have five competitors who sell the same product as you, and you categorize the products from the most high-end brand to the affordable brands. Then, you decide where you fit in.

What is the ideal situation for using competition-based pricing?

The reason companies rely on competition-based pricing or market pricing is simple. Market-based pricing strategy is an easy strategy, and you have complete control over your market position. In addition, market information gathered on competitors can give more insights than just pricing, which you can implement in your brand to replicate similar results.

The disadvantages are that it is hard for companies to sustain only competitive pricing if they are not actively adding value to customer experience and are lacking quality products. Also, one of the major pitfalls is that selling based on a competitor’s pricing can undermine your product and cost you revenue.

Analyse competitor pricing strategies

Insert information about your competitors to get clear dashboards and a comprehensive analysis of your competitors.

2. Cost-plus pricing strategy

Cost-plus pricing strategy or cost-based pricing strategy is an essential strategy that takes into account the total cost of making a product and adds a markup to that to determine the real price of a product. Although it is a good and straightforward strategy, as a business owner, you must understand the costs involved in production : material, labor, warehousing, machinery, utilities and such.  The markup price added to the top of production cost is what the company makes in profit.

Here’s how cost-plus pricing works:

• Step 1 : calculate the entire production cost for x units of a product.
• Step 2 : divide the cost by x units to get the unit cost.
• Step 3 : multiply unit cost by markup percentage. If unit cost is $10 and markup percentage is 20, then the profit margin is $10 X 20/100 = $2. The price of the product is $12.

Based on the products that are offered, they can charge different markups. However, this is not ideal for example software service companies and music producers as the product price is significantly higher than the product cost.

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3. Dynamic pricing strategy

The simplest way to describe  dynamic pricing is that your prices are not static but they change based on other factors. These factors can be, for example, segments, time, market changes or competitor prices. In eCommerce, the use of dynamic pricing in  market-based pricing strategies  is very common.

Dynamic pricing in different segments

Companies use algorithms and Dynamic Pricing Software to derive their prices for different groups based on statistics. Let’s look at an example. Y ou own a car rental company and use AI-algorithms for pricing. You designed those to raise prices at locations with many pubs and bars. If this sounds highly illegal and impractical, we can assure you it is not. We are just describing Uber. Dynamic pricing, also known as adaptive pricing, is standard practice to raise profitability.

Dynamic pricing by time

Sales-based companies, like a car or insurance dealerships, are in a rush to close deals at the end of the month. As a result, dealers offer lower prices on products to match the sales quota compared to the start of the month. In today’s world, we see this happen all the time. For example, Amazon, Uber, and aviation companies use dynamic marketing based on supply and demand.

Read our latest post on dynamic pricing

Read  “How to use competitor pricing to improve your profitability” and use our 15-step guide to get started and better understand your competition. 

4. Penetration price strategy

Penetration pricing is used to  capture market share by setting product prices at a below-market level to gain customers. Once you get a sizeable market share, you readjust your pricing accordingly.

Here’s how penetration pricing works

Let’s look at an example of penetration pricing. Consider company X, a small to a medium-sized soap maker, that sells lavender soap bars at $10. An international company Y, with a higher production capacity, enters the market and begins to sell a similar lavender soap bar at  $5. 

The goal of Y is to run the small-sized competitor X out of business even if at $5 company Y makes a low minimal profit. Still company Y is confident that company X cannot match their prices . As customers begin to buy from Y, X will eventually run out of business. This extreme form of penetrative pricing is also often called predatory pricing.  World-renowned Walmart is known for relying on this practice  and has been the bane of smaller local businesses due to their unmatchable price. 

Learn how to build pricing strategies

With the help of our article on an introduction to pricing strategies, easily fine-tune or build your pricing strategy from scratch.

5. Price skimming strategy

The practice of charging a higher price point for a product when launching it is known as price skimming.  Instead of this, you can leverage market demand and then lower or readjust the price based on price elasticity later.

We see this often at the launch of celebrity product lines or new product launches from a reputed brand. In these cases, customers are willing to pay considerably higher prices. Whether the price reflects the actual value of the product is not essential. Customers want the anticipated product, w hether it is Rihanna’s Fenty Beauty or the newest Playstation, when the demand is high.

Lowering the price of products attracts price-sensitive customers . Therefore, you can charge the maximum amount for each customer segment by skimming off the top of these customer segments and  get higher profits as a business owner. Monitor if you need to lower the price in a few months.

Most frequent questions and answers​

Businesses can effectively combine multiple pricing strategies by carefully analyzing their target market, competition, and product offerings. For example, they may use cost-plus pricing to ensure profitability while incorporating dynamic pricing to adjust prices based on market conditions and customer demand. By understanding customer value and market dynamics, companies can tailor their pricing strategies to maximize profits while remaining competitive.

Ethical considerations and potential drawbacks associated with certain pricing strategies should indeed be carefully evaluated by businesses. While penetration pricing can help capture market share, predatory pricing practices can harm competition and lead to antitrust issues. You should ensure that your pricing strategies comply with legal regulations to avoid negative consequences and maintain trust with customers and stakeholders.

One tip we have is you should make sure your master data is formalized and as well completed as possible. Additionally, with software you can conduct thorough testing and analysis to optimize pricing strategies and ensure accurate and efficient price adjustments that align with your business objectives and customer expectations.

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Pricing Strategy Plan Template

What is a Pricing Strategy Plan?

A pricing strategy plan outlines the steps required to set and execute pricing strategies in order to achieve business goals. It is a comprehensive plan that covers the entire process of setting, monitoring, and adjusting pricing strategies in order to optimize revenue, profitability, and customer retention. The plan should include a clear outline of the focus areas, objectives, measurable targets (KPIs), related projects, and implementation timelines.

What's included in this Pricing Strategy Plan template?

• 3 focus areas
• 6 objectives

Each focus area has its own objectives, projects, and KPIs to ensure that the strategy is comprehensive and effective.

Who is the Pricing Strategy Plan template for?

This pricing strategy plan template is for marketing and sales leaders, managers, and teams of all sizes and industries. The template provides a comprehensive framework to create a plan to set pricing strategies that are tailored to their unique business goals and objectives. With this plan, teams can build and improve pricing strategies that maximize revenue, profitability, and customer retention.

1. Define clear examples of your focus areas

Focus areas are the broader topics that the pricing strategy plan will address. These areas should be specific enough to provide direction to the team, while being broad enough to accommodate an array of objectives. Examples of focus areas could include Establish Pricing Strategies, Monitor Pricing Performance, and Evaluate Pricing Strategies.

2. Think about the objectives that could fall under that focus area

Objectives are the goals that the team is aiming to achieve. Objectives should be measurable and achievable, and should be closely related to the focus area. Examples of objectives could include Maximize Revenue, Increase Profitability, and Track Pricing Performance.

3. Set measurable targets (KPIs) to tackle the objective

KPIs (Key Performance Indicators) are the measurable targets that teams can use to track the progress of their pricing strategy. Examples of KPIs could include Increase Average Revenue per unit, Increase Profit Margin, and Increase Average Sales.

4. Implement related projects to achieve the KPIs

Projects (or Actions) are the individual activities that the team will carry out in order to achieve the KPIs. Examples of projects could include Develop pricing strategies, Adjust pricing strategies, Monitor pricing adjustments, and Analyze pricing performance.

5. Utilize Cascade Strategy Execution Platform to see faster results from your strategy

Cascade Strategy Execution Platform helps teams create and execute pricing strategies faster than ever with its easy-to-use interface and powerful analytics capabilities. With Cascade, teams can quickly identify areas of opportunity, develop pricing strategies, monitor performance, and analyze the results to maximize revenue and profitability.