When starting a business, there is an extensive list of elements and to-do’s one has to consider. A crucial element you must determine is the pricing strategy that will be implemented. Said strategy has the potential to attract or deter clients and should be carefully considered.
In order to best go about this, businesses may take into account current market conditions, competition, production and distribution costs and the consumer’s desire or ability to pay.
An appropriate pricing strategy can help maximize profits, differentiate your business from competitors and develop customer loyalty. Consider financial reports and take into account the 12 different pricing strategies that you could potentially use.
1. Competition-Based Pricing
Businesses that implement competition-based pricing analyzes the pricing strategy used by competitors and set a similar price. This strategy is usually implemented by businesses that operate in highly competitive markets (think of Pepsi vs Coca-Cola). This strategy is not always ideal as it doesn’t consider the cost of product of the demand of consumers.
2. Cost-Plus Pricing
The Cost-Plus Pricing strategy only considers the cost of the product and adding a certain percentage or mark-up. In order to implement this pricing strategy, add a certain percentage to your product. This strategy is normally utilized by retailers (clothing, food, etc.). This is done in supermarkets.
3. Dynamic Pricing
Dynamic Pricing, also known as Surge pricing, is a strategy in which prices fluctuate based on demand. You may have experienced surge pricing with Uber the last time you tried to get somewhere in rush hour. Companies usually rely on algorithms to help determine the price based on what the competition is doing, current customer demand and other factors.
4. Freemium Pricing
No, not premium pricing. It’s premium pricing! This strategy is implemented when companies offer a basic version of their product or service for free for a certain period of time in hopes that the customer will purchase the service or product at the end of the trial. This is normally used by SaaS and software companies (think of applications like Calm).
This may be a strategy for you is you think you can hook your client during the free trial. It is all about the perceived value of the product and whether or not this can be transmitted to your potential consumer in a short period of time.
5. High-Low Pricing
High-Low Pricing is basically a fancy name for discounts and sales. Initially, your business may offer your product at an elevated price and lower the price after a certain time (seasonal change, not as relevant, expiration date soon).
6. Skimming Pricing
Skimming pricing also involves releasing the product at an elevated price and then gradually decreasing the price over time. Although it sounds similar to High-Low Pricing, the price is not lowered in sales or special discounts. Instead, pricing diminishes as the product loses popularity.
This pricing strategy is commonly used by technology companies. Think of how the price of iPhone slowly decreases after its launch date.
7. Hourly Pricing
Hourly pricing is normally used by consultants, freelancers or other individuals who work independently and provide their services. This may not be appropriate for your business if you are selling a product.
8. Project Based Pricing
Again, this pricing strategy is employed by freelancers, contractors or other individuals who are hired to perform specific jobs. In this case, they may set a price for the entirety of the project or job completed. Think of it as the opposite of hourly pricing.
9. Premium Pricing
This strategy is usually implemented by luxury brands as their price is a way of signaling their high value and the premium that comes with the brand. Think of Gucci, Chanel or Prada. The price may not necessarily represent the cost of the item but instead it is tied to the perceived value of the good.
10. Bundle Pricing
Bundle Pricing is when businesses offer additional products connected to the initial item and provide a special price for purchasing them together. You may choose to create different types of bundles or sell components separately.
Businesses use this strategy to add value to customers who are willing to pay a little extra for an enhanced experience or product. You have probably experienced Bundle Pricing in fast food restaurants where they offer set prices for special meal deals (entrée, drink, side for a special price).
11. Psychological Pricing
Lastly, psychological pricing uses consumer psychology to make price seem more appealing. You have seen this multiple times with objects priced ending in .99. According to the “9-digit effect” theory, consumers think that these products are a great deal solely because they do not get to the whole number ($99.99 is much better than $100!).
Other similar strategies include placing expensive offers next to the product you are interested in selling, 2X1 offers or even changing the typography of pricing information.
All pricing strategies have their pros and cons but there is something out there for you. What pricing strategy do you think works best for your business?