Types of Pricing Strategies and How to Choose: The Fullest Guide

There’s one common denominator that equally affects all businesses, regardless of industry, size, location, target market, or experience. This is pricing.

Getting your price right will dictate how successful you are in your niche, and luckily, this decision doesn’t have to rely on intuition.

In the following sections, we explore different pricing strategies, uncovering their strengths and weaknesses. By the end of this article, you’ll be able to select the right pricing strategy for your company, guaranteeing long-term financial gains. 

What are pricing strategies?

Pricing strategies are the procedures and tactics companies adopt to establish the right prices for their products or services. 

There are many different pricing strategies that aim to guide business owners in setting a price that will help attract more customers and stay competitive in the market. 

Below, we explore in more depth some of the most common pricing strategies today.

Common Pricing Strategies

In today’s business environment, the most common pricing strategies include:

• Cost-plus pricing
• Value-based pricing
• Competition-based pricing
• Penetration pricing
• Price skimming
• Psychological pricing
• Dynamic pricing
• Bundle pricing
• Economy pricing
• Premium pricing
• Discount pricing
• Manufacturing suggested retail price
• Keystone pricing
• Event pricing

Here’s everything you need to know about each one. 

1. Cost-Plus Pricing

The first pricing strategy that we’ll look into is a cost-based pricing method referred to as cost-plus pricing. Also known as markup pricing, this technique is perhaps one of the simplest ones when it comes to determining the price of a product.

Here, the area of focus is mainly the product production costs (including material costs, labour costs, shipping costs, marketing and overhead costs), also known as COGS (Cost Of Goods Sold).

The selling price is calculated by adding a fixed percentage to the costs of producing your product:

Selling Price = Cost Price + (Cost Price x Markup Percentage)

By implementing this strategy, you’re essentially allocating a price that’s equal to the marginal cost of production plus the profit margin you want to make on each sale. Although it’s extremely easy to work with, this pricing strategy doesn’t factor in market conditions, making it vulnerable on some occasions.

This approach is mostly used by companies that sell physical products. Although it can also be used by service-based businesses, it’s not considered the most effective. 

2. Value-Based Pricing

On the other hand, with a value-based pricing strategy, the pricing reflects the perceived value that users or consumers have of the product or service, ignoring factors like production costs, historical pricing data, and others.

Also referred to as price-to-value, this approach concentrates on setting a price based on how much the shopper is willing to pay. To do so, it acknowledges the target market’s needs and requirements, making it very effective for businesses that offer unique goods or items that are highly valued by consumers.

Naturally, value-based pricing is most popular in niches where the sold products directly influence the consumer’s self-image, like fashion, automobiles, and others. 

The main perk of this strategy is that it enables brands to ask for higher prices and also inspires them to seek innovation. At the same time, it requires extensive market research and is not very effective for those offering commodity items. 

3. Competition-Based Pricing

Another pricing method you can explore as a business is the competitive pricing strategy. 

As the name suggests, this is a pricing strategy based on competitor pricing. It’s most popular for companies that operate in saturated, highly competitive markets or niches, where the only way to attract customers is by offering a lower price than others. 

This is also a recommended pricing technique for businesses that sell similar products to their competitors. 

Using this approach, companies can either price their products or services slightly lower or higher than others in their space. When asking for a price that’s more affordable than most others, you can win over price-sensitive customers and gain market share. 

However, it’s worth noting that selling below the popular prices in a niche can oftentimes mean lower profit margins This especially applies in cases where you haven’t negotiated lower prices with your suppliers and haven’t been able to reduce costs.

Another important point to consider is that competitive-based pricing can easily lead to price wars, potentially affecting whole markets. 

4. Penetration Pricing

Another technique popularly used is the penetration pricing strategy. In this case, businesses initially set a low price with the aim of attracting new customers thanks to a lower price point. 

Gradually, as the product or service begins receiving interest from consumers, the price increases to meet the market price. 

This pricing model is highly effective for new companies that quickly want to gain new clients in an already crowded market. It’s a great way to encourage trial purchases and prove your quality, creating a substantial customer base and potentially triggering loyalty.

At the same time, in the long run, this pricing technique offers limited potential. In most cases, it’s a temporary solution that simply gives quick results. Meanwhile, it may be a challenge to convince your customers to pay more after the penetration phase is over and you’re ready to adjust your prices.  

5. Price Skimming

On the other hand, the price-skimming strategy can be described as the exact opposite of the penetration method.

This approach includes initially setting prices that are higher than others in the market in order to acquire as much revenue as possible from early adopters. Naturally, this makes the most sense for companies that innovate and offer something unique, like technology. 

As the product matures, prices drop gradually with the aim of winning more price-sensitive customers. The price decrease, in most cases, is visible once the competition and the market saturation increase. 

Just like with the penetration pricing strategy, there are significant short-term gains here. This is mostly a result of earning more from the high demand and the low competition, or thanks to product scarcity. 

However, in a crowded market, this technique is likely to fail. There could be exceptions if you offer a product or service with unique features that are hard to imitate. In addition, it could create a negative brand image if you don’t plan your price drops adequately. 

6. Psychological Pricing

Psychological pricing, as the name gives away, is a pricing approach that centres around human psychology.

It relies on specific pricing techniques to influence spending behaviour and decision-making. For example, this could include setting a price that’s just below round numbers (like £9.99 instead of £10). By doing this, companies create a false assumption that the product is much cheaper. 

Another example is positioning an expensive product next to the product you actually want to sell, making it appear more affordable.

This strategy is incredibly powerful for stimulating impulse purchases as it builds a perception that the shopper is getting a better deal. However, it also means that it’ll be harder to increase prices in the future or work with whole numbers, potentially disturbing sales results.

7. Dynamic Pricing

Unlike other pricing strategies that rely on rather constant factors, dynamic pricing monitors factors like consumer demand, supply, and competition at specific points in time to adjust prices in real-time.

Companies that use this pricing technique ultimately aim to achieve higher profit margins by asking for the optimal price, both for the business and the consumer.  

Some examples of industries where dynamic pricing is popular include hotels, airlines, event venues, and utility companies. To use this approach, it’s essential to work with advanced algorithms, which will help you calculate the best rates. 

Unfortunately, there is no single formula. 

However, the fundamental version can be visualised as:

Selling Price = Base Price + (Customer Demand x Competitor Price)

Although this strategy helps boost revenue by adapting to market conditions, it’s also incredibly difficult to manage. In addition, businesses relying on this pricing mechanism risk alienating customers if prices fluctuate excessively. 

8. Bundle Pricing

Another frequently used pricing strategy is bundle pricing or multiple pricing. In this case, companies offer packages (two or more complimentary products or services) that shoppers can purchase for a single price, usually discounted. 

Retailers leverage this approach to enhance the perceived value of their products while keeping costs appealing, ultimately encouraging larger volume purchases. Another advantage is the ability to sell items individually at a higher margin.

For example, if you sell a T-shirt and jeans as a package for £50, you can sell them separately for £35 each, bringing in more profits. Meanwhile, this strategy can eat away at your profit margins if discounts aren’t calculated properly. 

9. Economy Pricing

Another pricing strategy worth becoming familiar with is economy pricing – an approach where you ask for lower prices and rely on a high sales volume for revenue.

This pricing method is usually preferred by companies that offer commodity goods that are associated with lower costs or production (like drugs or groceries). Under this business model, the main aim of the company is to sell high quantities of an item on a regular basis.

When working with the economy pricing strategy, it’s important to be aware of the basic formula for price calculations:

Selling Price = Production Costs + Profit Margin 

Using this technique, you can attract a large customer base and achieve high sales volumes. However, your profit margins are likely to be thin, not to mention that cost efficiency is key for this strategy to be effective. 

10. Premium Pricing

Premium pricing, also known as prestige pricing or luxury pricing, represents an approach where companies ask for a high price for products just to create an association with exceptional quality and exclusivity. 

A great example of premium pricing is Starbucks, where the purchase price for a coffee is much higher than that of an ordinary coffee shop. The purpose behind the high price is mainly the branding and the created perception among target customers. 

In order to use premium pricing, you must be aware of your unique selling points and all that separates you from your competitors in terms of the quality you offer. Note that this method can be more difficult to implement than others. It all depends on your target audience and how much they’re willing to spend on products or services in your niche.

11. Discount Pricing 

Without a doubt, consumers love to feel like they’re getting a great deal when shopping, no matter the type of product or service.

The discount or promotional pricing strategy leverages this desire and is a top preferred approach in retail. 

By implementing discount pricing, retailers can enjoy increased foot traffic in physical locations, quick offloading of inventory, and a lot of new customers. However, if overused, this method can create a negative brand reputation associated with lower quality. This may create difficulties if the company decides to increase prices after some time.

12. Manufacturing Suggested Retail Price 

The manufacturing suggested retail price or MSRP is a price recommended by a manufacturer to a retailer at the time of selling the product. 

By suggesting a retail price, the manufacturer aims to create a standardised rate for the same goods across areas and retailers. 

This tactic is most common in high-ticket industries, like electronics and appliances. 

Despite the standardisation, this strategy achieves, competing with this type of pricing approach is impossible. 

13. Keystone Pricing

On the other hand, when using keynote pricing, businesses increase the retail price by doubling the wholesale price that they’ve paid for the item. 

In simple, calculating your price using this product pricing strategy includes using the following formula:

Retail Price = Wholesale Price x 2

This is yet another simple way of calculating your price and ensuring that you achieve a satisfactory profit margin. However, doubling your markup can also create risks, especially if there’s a low demand for the product or its availability is inconsistent.

14. Event pricing 

If your business is in the events niche, calculating your prices based on production costs or other similar factors won’t be possible. 

This is where the event pricing strategy comes in. Here, ticket prices and other event prices are calculated based on the expenses associated with marketing and organising. These could include speaker costs, entertainer fees, networking expenses, and others.

Choosing the Right Pricing Strategy

So far, we’ve seen that not every pricing strategy will be appropriate for every business. But how can you identify the most effective pricing strategy for you?

Ultimately, the best pricing strategy will depend on a range of factors. 

Here are some of the most important ones to consider.

Understand Your Costs

Before you select a pricing method for your products or services, make sure you’re fully aware of your fixed costs and variable costs. This will help you determine a pricing floor.

Ideally, your main objective is to make sure that the pricing strategy you’ve selected covers the expenses for product production while generating profit at the same time. 

Assess Market Conditions

Finding the right price is also about understanding the competitive landscape. 

Analyse your competitors (both those offering the same product and those offering similar products or services in your niche). Where possible, identify opportunities for price adjustments and assess in detail the spending power of your target audience.

By having enough information about the customer demand in your space, you’ll be able to understand how price-sensitive consumers are. Then, you can set prices that will be both attractive and rewarding for you as a business.

Define Your Business Goals

A lot of companies underestimate the importance of setting and defining goals when thinking about pricing strategies.

What do your priorities look like – are you focused on growing your revenue, gaining more market share, or increasing your profit margins?

Answering these questions will help you choose a pricing approach that will allow you to meet your long-term objectives. 

Common Pricing Strategy Mistakes to Avoid

When choosing and implementing your pricing strategy, there are a few common obstacles that may come your way. 

Some of the most popular pricing strategy mistakes to avoid include:

• Ignoring market dynamics – don’t forget that it’s vital to acknowledge the pricing of your competitors and the customer demand in your niche. Failing to do so can influence your results and potentially lead to missed opportunities.
• Overlooking costs – regardless of which pricing strategy you choose, it’s vital to make sure that your prices at least cover your costs. Companies that miss this can suffer from dramatic long-term losses.
• Choosing a one-size-fits-all approach – as noted above, not every strategy will fit your business. Most importantly, a single strategy won’t always be enough, even for one business. You can use a combination of pricing strategies, depending on how diverse your product or service catalogue is. 

Being aware of these challenges and exploring every avenue to avoid them will help you step foot on the road to profitability.

Conclusion

No matter how large or small your business is, setting the right price will shape your profitability now and in the future.

Understanding the different types of pricing strategies and acknowledging their advantages and drawbacks will help you make the right decisions. With a strategic price, you can grow, attract new customers, and position your business competitively on the market.

Don’t forget to ensure you offer a diverse range of payment methods to conveniently and safely process transactions from your customers. 

Last but not least – regularly evaluate and adapt pricing strategies to ensure continued profitability and market relevance.

Frequently Asked Questions

Why are pricing strategies important for businesses?

Pricing strategies help businesses maximise profits, stay competitive, attract customers, and position their brand effectively in the market.

When do you need a pricing strategy?

You need a pricing strategy when launching a product, entering a new market, adjusting for competition, optimising profit margins, or responding to economic changes.

What are some of the most popular factors that influence pricing strategies?

Key factors include economic trends, market demand, profit goals, competition, consumer perception, government regulations, and overall business strategy.