how to make pricing strategy in business plan

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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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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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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.

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

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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.

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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

Image Source

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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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.

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How to Write Pricing Strategy for Your Business Plan

Product and Service Description Workbook

• May 16, 2024

15 Min Read

You have finally created that awesome product. It’s now time to sell.

At what cost?

This is the question that troubles most businesses.

Price your products too high and you see low sales. Price it too low and you struggle to make profits.

What’s the sweet spot to finding a balance between profitability and business sustenance?

The answer is a smart pricing strategy in your business plan . But how to decide on a pricing strategy for your products?

This article is your answer.

In this guide to creating the right pricing strategy, we cover everything you need to know about a pricing strategy from A to Z.

Let’s decode the recipe to a pricing strategy that brings in both: great profit margins and happy customers.

What is a pricing strategy?

A pricing strategy is a model you use to decide the price of your products or services.

It is a critical component of your business plan, as it decides on how you:

• Make profits
• Compete against competitors
• Optimize conversion and lead generation

Creating the right pricing strategy means taking into account various factors such as market conditions, competition, production costs, perceived value to the customer, and so much more.

We agree it’s the hard part.

The main objective: Establish a price point that’s good enough to attract customers while also maintaining profitability for effective financial planning.

Why is pricing strategy critical to a business plan

A recent survey by Bain and Company found that roughly 85% of businesses are seeking an improvement in their pricing decision-making process. On the other hand, McKinsey contends that even a mere 1% increase in prices can result in an impressive 8% boost in profits.

Your business plan is a document that contains the goals of your company and how you plan to achieve them. A pricing strategy highlights how you will be making actual profits from your product offerings to achieve those goals.

The price you set reflects not only the value you assign to your brand’s products and customers but also serves as a pivotal factor that can either attract or deter potential buyers.

Let’s delve deeper into the benefits of the right pricing strategy in a business plan:

Establishes the road to profitability: Your pricing strategy determines your profit margins. By understanding your costs and competitors’ pricing, you can set a price that ensures profitability and sustainability for your business.

Enables better market positioning: An optimized pricing strategy helps you put your products and services in the correct price bracket. It guides your business and helps you decide which market position to occupy for the best chances of success.

Helps project demand: With a good pricing strategy, you can project and satisfy the demand for your product or service. Choosing the optimal pricing strategy (such as skimming, penetration, or value-based pricing) will help you manage demand fluctuations and optimize sales volume. This makes your business plan stronger.

Helps project ROI: You also get a rough idea regarding your sales goals with a strong pricing strategy based on competitor and marketing analysis.

Enhances chances for funding: If you’re a startup seeking funding, a strong and thoroughly analyzed pricing can highly strengthen to secure funding.

With an understanding of the criticality behind integrating a pricing strategy into your business plan, it’s now time to explore some real-world pricing strategies before you come to designing your own.

Choosing the best pricing strategy for your business

“You know you’re priced right when your customers complain—but buy anyway.” — John Harrison

You know what it is, and you know why you need it. But which strategy should you implement? What’s the best one for you?

Let’s get you out of all these conundrums with our comprehensive list of best pricing plan strategy examples.

Competitive pricing

The competitive pricing strategy involves setting your prices based on what your competitors are charging for similar products and services.

As such, it’s ideal for businesses venturing into markets that sell similar products such as groceries or retail stores.

Think of how airline prices for a particular destination all rise up together during holidays.

A competitive pricing strategy is used both in B2B and B2C sectors like communication services, retail stores, grocery, telecom market, and more.

Essentially, you can implement this strategy by:

• Setting your prices below competitors’
• Setting your prices similar to your competitors’
• Setting your prices a little above your competitors

What approach you choose depends on how well you know your market or customer. For instance, if you price your goods a bit lower, you may attract more customers. However, you must make sure not to attract big losses.

If you decide to set your product prices higher than your competitors, you’ll want to draw on some ideas from value-based pricing strategies that help clarify why you are charging more for your products. Are you offering better quality? Are you treating customers better?

Marketing efforts like a refund scheme, better customer experience, and more will play a crucial role in justifying the higher cost to customers.

Best for: Both B2B and B2C sectors like communication services, retail stores, grocery, telecom market, and others with stiff competition . Works best if your product offers more value than the competition.

Value-based pricing

The value-based pricing method works based on what your customers think the value of your product should be.

Thus, the price is dependent on what the customer is willing to pay (WTP price) for your product.

Depending on the value that you bring to your customers’ business or life, you get a chance to price your products much higher than the actual production cost.

Think of how a fine-dining restaurant sets its price. While it may seem exorbitant to some, patrons willing to throw in that amount happily visit such a place.

This technique is well used by B2C or B2B service providers, freelancers, and experts who teach a specific skill.

Best for: This technique is well used by B2C or B2B service providers, freelancers, and experts who teach a specific skill.

Apple, in particular, is notorious for using this strategy to demand excessive prices for products that are either only slightly better or equivalent to their counterparts.

Cost-plus pricing

The cost-plus pricing strategy pulls us away from a “willing to pay” towards a more business-centric approach. This strategy, aptly named markup pricing, involves taking into account the production cost and simply adding an extra dollar value to it.

Cost-plus pricing, in a nutshell:

My production costs + Markup price = My selling price.

If you plan to sell a product that costs you $100 to produce. Simply speaking, you now need to sell the product at a higher price to earn a profit.

If you want a 20% profit margin, you have to sell at $120. If you want a 15% profit margin, you sell at $115. Pretty easy, right?

With the cost-plus strategy, it becomes easy for you to get a rough draft regarding the profits you can generate depending on the volume of your sales.

So, let’s say you have a profit goal of $10000 and a profit margin of 20% with each product costing $100 to make.

Thus, your sales goal should be

$10000/$20 = 500

You need to sell 500 units to reach that goal.

Best for: Cost-plus pricing strategies are commonly employed in B2C retail settings such as grocery stores, big-box stores, and convenience stores.

Economy pricing

In the economy pricing strategy, you sell products at a bargain price, i.e. at the lowest price to get your potential customers to start buying your products.

While this method might seem quite similar to competitive pricing, there is a hidden catch.

Unlike competitive pricing, economy pricing targets those customers who may be okay with a slightly lower product quality or those who don’t care about brand image.

By sourcing cheaper supplies and streamlining features, you can offer extremely low prices for your goods while remaining profitable.

Best for: This strategy is usually employed in the B2C industry. For instance, large retail stores and food delivery services often use this method.

You might have noticed a retail chain’s cheaper alternative sugar packet stocked right beside the branded ones. Another great example includes generic drugs—they are priced lower because they come with lower production costs.

Premium pricing

The premium strategy is exactly the opposite of the economy pricing strategy. Instead of selling products at their cheapest, you hike up the price to give customers the essence of a luxury product.

Of course, companies do add some additional value to their products but the bulk of the pricing comes from the perception of the product as high-end by the customer.

Best for: This pricing approach is generally employed by companies that manufacture upscale B2C goods, such as luxury cars, cosmetics, and devices. B2B companies also use it.

Psychological pricing

The psychological pricing strategy plays with the psyche of your customers to make them want to buy your stuff.

For instance, one of the most popular and widely used techniques in this strategy is the 9-digit effect. It suggests that even though a product priced at $9.99 is essentially $10, customers perceive it as a better deal due to the presence of the “9” in the price.

Placing the target product next to an expensive alternative, giving good deals, tweaking your typography, and inducing FOMO (fear of missing out) are some other basic ways to subtly manipulate buyer psychology.

Best for: This strategy is suitable both for B2B and B2C products. You must understand your customers.

Dynamic pricing

Dynamic pricing goes by many names—surge pricing, demand pricing, or time-based pricing. And as the names suggest, it is a pricing strategy that is flexible in nature and is catered to adjust to the fluctuating market and customer demands.

Dynamic pricing lives and dies with your monitoring and analysis capabilities. You need to stay on top of various metrics like supply and demand, spatio-temporality, customer preferences, and more.

Best for: This strategy suits both B2B and B2C customers. Travel prices are one of the most dynamically priced as you might have noticed airlines or cab services changing their prices depending on your time, location, and demand.

Penetration pricing

In this strategy, you enter the market with a low baseline price for your products. That attracts customers and you set up your market presence. This helps you pull customers away from competitors who demand higher prices for similar products. That’s what the penetration strategy is all about.

Do note that this strategy may not be always sustainable in the long run. This requires you to have a suitable plan in place once you establish a suitable foothold in the market.

Best for: Both B2B and B2C companies can make ample use of this service. We see it in use in telecom services, bulk retailers, and mostly by other market newbies who are trying to establish a presence.

Uber made great use of this strategy. They started with a customer-centric strategy where rides were cheaper than the competing taxi service.

Price skimming strategy

As a complete opposite to the penetration strategy, we have price skimming, where you start off with a high price and slowly bring it down.

Price skimming works best when you are stepping into a market where there’s not a lot of competition, focusing on a specific bunch of customers, and really highlighting the value of your product or service.

Of course, this comes with a hefty upfront investment in marketing and promotional campaigns.

Once more players start popping up in your market, you’ve got a chance to drop your prices a bit and snag a larger slice of the customer pie.

Best for: This strategy should be reserved for innovative products and sectors, both B2B and B2C.

Take the Apple iPhone, for instance. They frequently employ a price-skimming strategy when they first release a new model. But once competitors like the Samsung Galaxy hit the market or they release newer models, Apple adjusts the price downward to maintain a competitive edge

Steps to design an ideal business pricing strategy

We covered a whole lot of potential pricing strategies that can make way into your business plan. However, you still need to decide which one is the most suitable for your business and how you can implement it. Let’s help you with that with some easy-to-follow steps:

Step 1: Secure your business goals

The first and most important step is to understand what your business needs. You need to discern what your pricing should depend on.

Is it increasing profitability, improving cash flow, extending your market share, beating a competitor, reaching out to a new audience, or introducing a new product?

Your entire pricing strategy will depend on these factors. Choose wisely.

Step 2: Undertake a thorough analysis of the market pricing

Ensure that your pricing strategy is suitable for both internal affairs and market conditions.

For instance, if the market you choose is saturated, you must gear up for competition and go for something on the lines of a competitive pricing approach. On the flip side, if it’s a new market, you can go for a value-based pricing approach.

Step 3: Understand your target audience

Why should your customers purchase your products? What will they buy and how should you provide it to them? Is it a premium customer base? Or are you targeting price-sensitive customers?

These are essential questions you need to find the answer to. It is only by knowing your target audience and your Ideal Customer persona that you can initiate and maintain your sales.

Opening a fine-dine restaurant in a Tier-2 city? Value-based or premium pricing can work. Opening another cafe in a metro city? You’re in for competitive or economy pricing.

Step 4: Analyze your competitors

Identify at least three direct competitors and analyze how they structure their pricing. Take a look at whether they break down their pricing into components and offer significant discounts. This gives you a solid idea of how to price your own products.

Check if they bundle products or solutions with others. Look into value-based pricing, where clients pay a percentage of the perceived return on investment. When considering substitutes, think about what options customers might use and their costs.

Remember, sometimes the best solution is the decision to do nothing. Consider self-solutions or choosing not to address the issue, along with alternatives from indirect vendors.

Step 5: Draft a pricing strategy and a plan to implement it

Now that you have gathered enough info to design and draft your pricing strategy, this is the stage where you finalize everything and move on to the implementation stage. Depending on the above metrics, you can choose one of the aforementioned strategies.

We have already discussed the different pricing strategies. Pick one after you have thoroughly analyzed your market, competitors, production costs, and overarching business goals.

Here’s a quick cheat sheet for choosing and implementing the right strategy for you:

• Value pricing: Understand the value for your customers and their willingness to pay. Also, understand what alternatives they have.
• Competitive pricing: Set the price equal to what your competitors are charging and win the service game.
• Psychological pricing: Price products or services in a way that triggers action. For example, charging .99 instead of $1.00.
• Promotional pricing: Discounts over a period of time or one-time deals.
• Price skimming: Enter the market with a high price, but once your competitors follow, lower your cost and implement other pricing strategies.
• Economy pricing: Everyday low price with a focus on low manufacturing/delivery costs.
• Penetration pricing: Set a price artificially low to break into the market.

Step 6: Keep refining and be flexible with your approach

Don’t stress over finding the absolute perfect price. Instead, come up with a few options and give them a test run with your customers. You might be surprised to find that you can actually sell at a higher price than you thought with the right strategy.

But you won’t know until you try it out with potential customers. If the price doesn’t seem to work, take a look at any feedback you receive, tweak your pricing, and give it another shot

Tips to keep in mind:

• Try to Communicate with and understand your target customers. Know how much they can pay, what they are interested in, and how you can give them the best value. A good way is to use feedback forms.
• Always be flexible. If your pricing strategy doesn’t work, it’s time to research, experiment with different prices and adapt.

Bain and Company’s original research on pricing strategies also suggests useful tips. Make sure your sales staff is a part of your pricing and marketing strategy. If your pricing strategy is truly flexible that must also translate to better incentives for your sales team so they can sell more and sell better.

Get Started With Your Own Business Plan With Upmetrics

We just covered everything about pricing strategies. They are so critical to business planning as they help formulate your business goals, organize inventory plans, and increase your chances of achieving business goals.

However, there is so much more to a business plan than just pricing. If you want help creating a business plan from scratch, consider Upmetrics. It offers a collection of 400+ sample business plans for ideas and inspiration. Furthermore, AI assistance and automated financials make the process even easier for new users.

Interested? Try Upmetrics today!

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Frequently Asked Questions

A pricing strategy is a method used to determine the price of products or services, taking into account factors like market conditions, competition, production costs, and perceived value to customers.

How does a pricing strategy benefit you?

A pricing strategy helps in making profits, competing against competitors, optimizing conversion, and lead generation. It also draws in more customers, balances pricing, determines profitability, and assists in meeting customer expectations.

How should you choose the best strategy for your company?

To choose the best pricing strategy for your company, you should secure your business goals, analyze market pricing, understand your target audience, analyze competitors, draft a pricing strategy, and plan to implement it based on factors like value, competition, product positioning, and customer behavior.

About the Author

Upmetrics Team

Upmetrics is the #1 business planning software that helps entrepreneurs and business owners create investment-ready business plans using AI. We regularly share business planning insights on our blog. Check out the Upmetrics blog for such interesting reads. Read more

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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?)

A pricing strategy is a strategic plan for how you will price your products or services and earn a profit. The right pricing strategy considers costs, the perceived value of your offering, market research, and a competitive analysis

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 SMBs, 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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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

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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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

What Are The Top 9

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.

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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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16 pricing strategies and examples (and how to set yours)

Hopefully, you enjoy what you do, and that's why you do it. But if you're running a business, I'd guess that part of why you love doing it is because it allows you to make a living. And 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. A good pricing strategy can keep your customers coming back for more, while a poor or nonexistent strategy can send them running for the hills.

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

Table of contents:

Why is it important to pick 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.

An effective pricing strategy is an extension of your marketing. It affects customers' perception of your product and contributes to their willingness to buy. Savvy businesses know that pricing is just as important as the product itself, and an effective strategy can boost revenue, increase customer loyalty, and help your business stand out in the marketplace.

An ineffective pricing strategy makes your customers confused at best and offended at worst. If you went to the Porsche dealership and saw the brand-new 911 priced at $25,000, your first thought might be, "What's wrong with it?" Similarly, if you went to the Toyota dealership and saw the new Corolla priced at $90,000, you'd probably laugh your way out of the building. Poor pricing strategies can hurt your brand reputation, lower profit margins, reduce overall sales volume, and increase customer churn.

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.

16 common pricing strategies

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 16 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.

Take Rolex, for example. While they also fall into a premium pricing model—a concept we'll touch on later—they absolutely utilize value-based pricing. It doesn't cost $10,000 (or more) to make a watch, but the business knows that's what their customers are willing to pay.

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

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. 

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

5. Penetration pricing

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.

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

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.

16. Subscription pricing

Every month, I find a surprising number of fees hitting my credit card statement. They range from streaming services I may or may not watch and other charges I recognize to the things I've completely forgotten about or failed to cancel—like that domain fee for my failed dogsitting business.

You can think of subscription pricing as a monthly access fee, whether that's access to a virtual space like Hulu or Adobe or a physical space like a gym. Businesses that wish to take advantage of this pricing strategy first need to build something people want to use regularly. Once they have a product or service that will garner demand, all that's left is to charge a monthly fee.

Companies lean toward this pricing strategy whenever possible because it gives them a fairly predictable revenue stream. For example, if you have 500 customers who pay $19.99 per month, your monthly revenue will be $9,995, barring any drastic changes in your customer base. This strategy is growing massively in popularity not just for pure subscription services like SaaS licenses or streaming services but also for physical product sales. One-off product sales often turn into continual sales, and an initial product can be a way to get a foot in the door for forever payments on one single sale, which is a huge win for sellers.

Takeaway: Create something consumers want—then charge them for access.

4 pricing strategy examples that work

Now that you're familiar with some of the most common pricing strategies at a high level, here's a deeper dive into how real businesses are using them to their advantage.

For example, Zapier's workflow automation capabilities are free for basic use. In this plan, users can automate simple workflows with 100 tasks per month. But businesses that want expanded functions (or premium integrations) can upgrade or start with a higher-tier plan that fits their unique workflows and tech stacks.

Zapier set their pricing this way because they're confident that once users get a taste of the power of Zapier with a free plan, they'll see the value of expanding it with paid pricing tiers. After all, if 400 AI-automated activities are good, then 1,500 AI-automated activities are even better. And if the free tier gives users all the automation they need, it's still a win-win: they get the efficiency they need, but they might find there's a paid tier of another Zapier product that helps them optimize their workflows even better.

As with many products, Apple was the tech that launched a thousand ships—and in 2014, it was wearable fitness gear. Fast forward to today—many companies have joined the space and are trying to stand out. One example is Oura.

The wearable fitness ring is one of many in the industry that utilizes subscription pricing . First, the company emphasizes the design and quality of its ring and the accuracy of its fitness readings, thus building demand. Once consumers are fully bought into the product, they're met with a $300 initial price—combining a premium pricing strategy—and $5.99 per month thereafter. This subscription approach keeps customers on the Oura books long after the initial purchase.

Ask your average American what they know about Sweden, and they'll likely reply with some variation of meatballs, furniture, and fish (Swedish Fish, that is)—and they can thank retail goliath IKEA for the first two. Since the brand's inception, consumers have been captivated by its shopping experience and hypnotized by its expert pricing structure.

While the brand deploys several different pricing strategies, one of the most impactful is economy pricing . While some economy brands cut costs in the product itself, IKEA cuts costs in everything but the product. The company follows a repeatable design process, has world-renowned supply chain management, and operates with a self-service shopping experience—all things that save money. The result is decent-quality furniture at affordable prices. 

When most people think of dynamic pricing , they relive memories of paying for a $167 Uber to get home from the bar or a $2,500 plane ticket they had to book at the last minute. But dynamic pricing is present in the B2B world, too, and you don't need to look further than Google Ads.

Factors to consider when pricing a product

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

Competitor pricing, 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.

Customer profiles

For example, let's say you’re starting a business that sells running shoes. After intensive research, you may find that your customer profile is a middle-class woman in her 30s who lives in California and mostly finds time to run in the evenings after work. In that case, your pricing strategy should best appeal to middle-class women in their 30s who live—well, you get the idea. The more specific you can get with these profiles, the more effective your pricing will be because you'll gain insights into what they can afford and what they're willing and able to pay for a product.

Tips for setting a pricing strategy that sells

You can have all the information in the world, but without the right action plan, you run the risk of falling flat. Here are some tips to guarantee you get off on the right foot when setting your pricing strategy.

Review your historical data

Start your pricing strategy methodology by analyzing historical sales data to identify patterns in sales volumes and pricing figures. If you've experimented with pricing in the past, take note of how that related to revenue over that period. Or, maybe you can glean information from that surge of sales in April 2019 that your staff tells campfire stories about to this day. When you review past data, you can gain insight into what caused increases or decreases in sales—and what prices correlate with those figures.

Consult your customers

Customers are the lifeblood of your organization—if you don't appeal to them, you're out of business. So, be sure to make every move with your customer profiles in mind. Would that middle-class woman in her 30s be able to afford $299 running shoes? If not, be sure to adjust pricing to match her expectations (so long as it falls within the WTP price range).

Another technique to understand optimal pricing is to conduct surveys, focus groups, or other ways to gather customer feedback. You can ask them questions related to how much they're willing to pay, what factors influence their purchasing decisions, their perceived value of your product, and more. This can not only improve your pricing strategy but show your customers that you value their thoughts.

Nail your value proposition

Gordon Ramsay could cook the most perfect beef Wellington in history, but if he's serving it to a lunchroom full of first graders, they're going to want chicken nuggets instead. The takeaway is that you need to appeal to your audience, and you can do that by developing an expert value proposition.

In all marketing materials, highlight your unique benefits, features, and why your product is perfect for your customers and their budgets. Maybe your running shoes are the most comfortable on the market—transforming that middle-class California woman's after-work run from a workout to a relaxing meditation session. Once you catch your customers' eye, your pricing strategy will be that much more effective.

Experiment with different models

Don't be afraid to experiment with different pricing models to find what works best for your business. For example, you might start with a cost-plus pricing model and then pivot to a value-based model. Or, you may decide to experiment with limited-time promotions and sales or delve into tiered pricing. By testing different approaches, you can gain useful insights into what resonates with your audience. 

Sell more with automation

Businesses need to nail their pricing strategy to win more business and drive revenue. But it's not as simple as throwing a dart and hoping it sticks—you need to be methodical to ensure you resonate with your customers. Once you perfect that approach, you can supercharge it with Zapier.

Pricing strategy FAQ

What are the major pricing strategies.

Successful businesses may use several different pricing strategies, but some of the most popular include:

Value-based pricing

Cost-plus pricing

Economy pricing

Premium pricing

Freemium pricing

If you skipped this entire article just to get to the FAQs, scroll up for 11 more.

How do you set your product pricing?

You should set your product pricing based on factors like how much it costs to make your product, what your competitors are charging, your brand positioning, your customer profile, and any economic or marketplace trends. You also want to align your pricing strategy with your goals to help your business grow and achieve profitability.

What makes a pricing strategy successful?

There are too many factors to name for successful pricing strategies, but two of the most important are understanding your customers and revenue goals. If you're in tune with your customers' expectations and their perceived value of your product, you're more likely to develop an effective pricing method.

Keeping your revenue goals in mind can also help guide you on what you should be charging. If your customer expectations and revenue goals aren't aligned, you'll want to assess the discrepancy—maybe that means engaging in different product marketing or cutting production costs.

Related reading:

This article was originally published in December 2020 by Norm Mclaughlin and has also had contributions from Ben Lyso. It was most recently updated in July 2024.

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Cecilia Gillen

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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How to Build a Better Pricing Strategy

Hint: It’s all about good market research.

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With rapidly changing markets and emerging technologies, setting the right price is harder than ever. But pricing strategy consultant Rafi Mohammed tells HBR IdeaCast host Sarah Green Carmichael that it’s possible to make better decisions about pricing if you understand how pricing and demand interact in your business and you have good market research to guide you.

“The front line really has a lot of intuition on what customers are willing to pay. [They have] a lot of market research that they can share with the people who set prices to help set the right price,” he explains.

Key topics include: pricing strategy, dynamic pricing, market research, supply and demand, innovation, media, entertainment, professional sports, and the travel and tourism industry.

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

Listen to the original HBR IdeaCast episode: Pricing Secrets of Ticket Scalpers (July 2011)

Find more episodes of HBR IdeaCast

Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more: HBR.org

ANNOUNCER: HBR On Strategy.

HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. With rapidly changing markets and emerging technologies, how can you make sure you’re setting your prices right? Today, we bring you a conversation with pricing strategy consultant Rafi Mohammed.  In this episode, you’ll learn how pricing and demand interact, and how dynamic pricing differs across a range of industries – from music and sports to airlines, hotels, and even online shopping. You’ll also learn why your frontline workers can be a valuable source of market research to help you set the right price.  This episode originally aired on HBR IdeaCast in July 2011. And just a note — we recorded this by phone. While the audio quality isn’t great, the conversation is. I think you’ll enjoy it.  Here it is.

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. Today we’re talking about something that affects every business, pricing. But we’re looking to the fringes of ticket scalping for some advice. I’m talking with Rafi Mohammed, who is a pricing strategy consultant and author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow . He also blogs for HBR.org, and, so I hear, gets a lot of great tickets on the secondary market. Rafi, thanks so much for joining us today.

RAFI MOHAMMED: Sarah, thank you. It’s always enjoyable to discuss pricing.

SARAH GREEN: Yes, especially when it’s something as much fun, I think, as either summer concerts or playoff tickets. But before we get into the ins and outs of that, I have to ask, why is there a scalping market at all? Shouldn’t sports teams, musicians, shouldn’t these people be charging more in the first place?

RAFI MOHAMMED: It’s a great question. Why should the people who should be getting the revenue, why aren’t they capturing it? And there’s a couple of key reasons.

And the first is, there’s just a great deal of uncertainty when a ticket price is set, whether it’s for a baseball game that the Red Sox are doing well or not, or even a rock concert. The Rolling Stones can be very hot in some cities and not so hot in other cities. And so, one of the key reasons is due to this uncertainty, many sports teams and musicians tend to be conservative, and set a low price. The second key reason is there’s generally a hesitancy to set prices too high, because there’s a brand or goodwill associated with these entities, and they don’t want to set prices too high to damage that.

And the third sort of interesting thing is that demand comes in waves. So, when tickets go on sale, there’s a lot of demand initially, but there’s also more demand over time. So, for instance, in the music market, the sort of rule of thumb is whatever you sell in the first five days, you double that, and that’s going to be your total attendance. So, there’s this disconnect between selling and when the demand arrives. So, a lot of times people just speculate and buy tickets, and they buy it up when tickets go on sale and later sell them to people who want tickets at a later date.

And finally, it’s important to remember that the scalping market, while generally people think of it as a way to capture higher prices, the scalping market also does set lower prices when demand is low, and that’s a good way for ticket prices to be lowered. And generally speaking, teams and musicians are somewhat wary of lowering prices once they’ve set it. So, for those four key reasons, that’s why there’s an existence of a scalping market today.

SARAH GREEN: So that’s interesting. And it’s a good point at the prices can also be lower from a scalper sometimes. But isn’t there a way for teams to learn from the scalping market, and to implement that kind of flexible strategy on their own?

RAFI MOHAMMED: Exactly. And this is the new wave of ticket pricing in the future. And so, for instance, now the scalping market is about $3 billion a year. So, if there’s some way the teams and musicians can capture that, that’s great extra revenue to make. And so. the new way of thinking about pricing for these events is dynamic pricing. So, much like an airline or a hotel, you fluctuate price based on how demand is going. And so, it makes intuitive sense, but I think what most people miss on this is demand is very different. So. for instance, demand for a flight from Boston to LA, there’s actually nine non-stops a day. And in fact, I looked for Thursday. The prices for these non-stops range from $369 to $2,278. So, what happens is if I’m an airline and I have low capacity, I can just lower my price, and steal customers from other flights. And so that’s how dynamic pricing typically works for hotels and airlines. So, you have to remember, for rock concerts or sports teams, you’re not stealing demand from other places. So, generally there’s a fixed demand, and what you try and do is get the right price given the current demand structure. You can’t steal customers from– it’s rare to steal it from other events. So, that’s a key difference.

SARAH GREEN: That does seem like a key point. Like, for instance, if I’m a Red Sox fan, I wouldn’t necessarily go to see the Yankees just because they were cheaper.

RAFI MOHAMMED: Exactly. Exactly. But if you were going to LA, and there was a price difference between $369 to $2,278, if you’re keeping your eye on your budget, you might, instead of going on your favorite flight, go on an earlier light and save a lot of money.

SARAH GREEN: So how should people in the entertainment industry, who are in this event-driven business, how should they try to implement some of this knowledge on dynamic pricing?

RAFI MOHAMMED: It’s a great question. So, first of all, obviously when demand is a little higher than what you expected, that’s the best case scenario. So, all of a sudden the Rolling Stones come to town and demand is much higher. Well, you can constantly, over time, play with prices to capture the highest amount of revenue. So, in that case, that’s fine. But getting to your Yankees game analogy, when demand is low, and it’s lower than expected, what do you do? And there’s two key things. The first is that you’re getting people coming to your site, the existing demand coming to your site. And if demand is low, intuitively people might think to make all prices cheaper. But I think if people are coming to the site to buy a ticket, they’re interested, and I would focus on trying to upsell into higher-priced seats. So they’re interested. They wouldn’t normally sit in the best seats, but if you have an attractive price, you might be able to get more money out of people who have an interest, who have a demand. And the second thing that you have to do, and I haven’t seen anyone discuss this, is that for low demand events, you have to have a way to let consumers know that, gee, we’ve lowered our prices. So, if I’m interested in going to a rock concert, I’m not going to go to the website 10 or 12 times to see what the prices is. But if I know, much like on Broadway, that the day of, that they lower prices for some Broadway shows, there has to be an event that consumers will know, oh, maybe I should go back and check and see what the price is. So, those are the two ways to think about dynamic pricing when demand is high or demand is lower than expected.

SARAH GREEN: That’s interesting. So, I want to, if we can, get into an example here of maybe a team or a musical act trying to implement this and see how well it’s working. Is there anyone on your radar screen who’s either doing something that’s working, or maybe doing something that you’d want to avoid?

RAFI MOHAMMED: Right. Sure. Well, the classic example is that the San Francisco Giants did a test market for dynamic pricing a couple of years ago. And what they did is, in certain sections, they would lower and increase price. And what they found is that, in these sections, the revenue increased by 20%. So that sounds like a really great figure, doesn’t it? But here’s where I think that they missed the boat on, is this notion of cannibalization. And it’s not just for tickets. It can be for any product. People tend to say, oh, well, we lowered the price, and we got more people to buy. But what you have to take into account is the fact that some people would have bought at the higher price. So, let’s go back to the San Francisco Giants. If they have an experimental section and they drop the price, why would I buy a ticket in the next section over that’s at a much higher price? So, if I were going to buy that ticket, I would say, well, gee, I can save $10 by going to the experimental section. Why not? So, my hunch is that there was a lot of cannibalization going on, and that 20% figure really didn’t represent new revenue, getting people price sensitive, in the door. My hunch is that the majority of this increased 20% came from people who would have actually paid a higher price. That’s a negative of dynamic pricing that I don’t think has been satisfactorily accounted for.

SARAH GREEN: So, we’ve been talking about dynamic pricing across a range of industries, sports, music. You mentioned hotels. You mentioned airlines. And I think it has seeped even further, even more than we know, into other industries, especially since online shopping makes it pretty easy for online retailers to figure out what kind of shopper you are, and what you might be willing to pay. Is there any industry that you think if safe from dynamic pricing, or are we just going to be all getting different prices all the time in the future?

RAFI MOHAMMED: Well, Amazon. In my experience with Amazon, they do change prices. So, by the day, for instance, I see that my book price goes from $18 to $20. And so, they definitely change prices. Several years ago, they did get caught up in a pricing scandal, where they were offering different prices to different consumers at the same time. So, people are like, gee, I just bought this DVD, and I paid this. And someone else would say, I bought it at the same time. I paid a very different price.

And so after that, there was a lot of discussion about this. Amazon came out and said that, we aren’t going to offer different prices to different customers at the same time. So, what they didn’t say is that, we are not going to vary prices over time. They just said they were going to stop that practice. So, what you are seeing on the web is that, since it’s a great experimental venue and you could see how people react, you are going to see on the web more price experimentation by all types of retailers, to try and figure out what is exactly the right price for products.

SARAH GREEN: So as companies like that start experimenting, I think part of the reason it’s useful, for instance, to talk about ticket scalping is that it becomes obvious when you’re leaving money on the table, because, well, either people are willing to pay more or they’re not, or, as you mentioned at the beginning, they’ll pay less. So, it’s sort of easy to see how close you are to the mark by how close you are to that secondary market. But if you are in a business where your product or service doesn’t get quote, unquote “scalped,” how do you know if you’ve got it right?

RAFI MOHAMMED: I always ask people on the front line, because they deal with customers. And oftentimes people on the front line can tell you a lot of people would have paid a lot more, or we’re getting a lot of people who are very interested, they take the product off the shelf. They’re interested, but once they see the price, they put the product back. So, there’s the two ways of doing it, one, a market research type, which we discuss on the Amazon by varying prices. Or second, I feel that the front line really has a lot of intuition on what customers are willing to pay. And that front line has a lot of market research that they can share with the people who set prices to help set the right price.

SARAH GREEN: That’s interesting. It’s always interesting to know how much of this always comes back to those people on the front line. So, I can’t let you go without going back to ticket scalping, and just asking the question that I know is on everyone’s minds. How do I get the best deal on tickets that I want?

RAFI MOHAMMED: Well, you know, we can’t tell all the secrets, but I’m happy to share some of the key secrets. And it really comes down to uncertainty, and how you deal with uncertainty. And it’s been my experience that the closer you get to an event, whether it’s a rock concert or a sporting event, you see prices go down. And so obviously, if you’re taking a significant other, or celebrating a very important event, or going out with clients, you really don’t want to be sweating it out until the last second and hoping that prices are going to go down. So, that goes back to the notion of value. So, I value the certainty of having great tickets to the Rolling Stones or the Red Sox versus the Yankees. So, I’m willing to pay a premium just to get that certainty. But much like what you see in life, and in pricing in general, if you’re willing to wait it out and deal with the uncertainty, you can get the best tickets at face value, if not lower, if you wait until the very last minute.

SARAH GREEN: So, just a little negotiating ploy there.

RAFI MOHAMMED: It’s not really negotiating, but it’s sort of as events get nearer, I have this theory that people often buy tickets for their friends. And I think the older that you get, the more of life’s obstacles that you face, and at the end, oftentimes friends can’t make it. And so I often see, when I’m going to a show or a sporting event, people are like, oh, my friends were supposed to come, but now we have two extras. And since there’s so many people in that situation, the market has set a lower price. So that’s really the key to getting the best tickets at the lowest price. And what’s always surprising to me, when I go to these events or I’m looking for tickets at the last minute, is how good of a seat comes up. It’s shocking that, generally speaking, the day of, or two days before, you’ll see on craigslist or eBay, tickets in the first 10 rows that you can get at face value, and if you bargain a bit, even lower.

SARAH GREEN: Well, it’s excellent, excellent advice. Rafi, thanks so much for talking with us today.

RAFI MOHAMMED: Thanks so much, Sarah. I appreciate it.

HANNAH BATES: That was pricing strategist Rafi Mohammed – in conversation with Sarah Green Carmichael, former host of the HBR IdeaCast . If you liked this episode, check out HBR Ideacast on Apple Podcasts, Spotify, or wherever you get your podcasts. They release new episodes every week. HBR On Strategy will be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. And in the meantime, we have another curated feed that you should check out: HBR On Leadership . And visit us any time at HBR.org, where you can subscribe to Harvard Business Review and explore articles, videos, case studies, books, and of course, podcasts, that will help you manage yourself, your teams, and your career. This episode of HBR On Strategy was produced by Anne Saini [“Sanny”] and me, Hannah Bates. The show was created by Anne Saini, Ian Fox, and me. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Anne Bartholomew, and you – our listener. See you next week.

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5 Easy Steps to Creating the Right Pricing Strategy

The easy steps you need to know to make pricing a key component of your company's marketing mix.

You can have the best product or service in the world, but if you don't have a solid and contextually based go-to-market (GTM) strategy and execution plan, you will fail. Marketing plays the critical role in building brand awareness, lead generation, prospect and customer nurturing. Business schools and countless business books discuss the importance of the 4 Ps (Product, Place, Price, and Promotion) as the key components to a solid marketing approach. While all four Ps are important to a founding team's marketing strategy, the "P" I get asked the most about is pricing. Pick the right pricing model and you can transform your goals from concept to reality. Chose the wrong pricing strategy and you risk immediate failure.

Miriam Christof, principal at JustJump Marketing , and pricing coach Jenny Wholly recently hosted a pricing workshop for entrepreneurs. Creating the right pricing strategy can be excruciating. It is a complex endeavor that brings out insecurities in the best of us. Christof and Wholly cut through the potential rat-holes of pricing discussions and recommended an easy to follow five-step process:

Step 1: Determine your business goals. How you make money determines everything about your marketing and sales GTM strategy. Christof and Wholley outlined the following business goal considerations for startup founders to use as a determinant for the basis of pricing:

• Increase profitability
• Improve cash flow
• Market penetration
• Larger market share
• Increase revenue per customer
• Beat the competition
• Fill capacity and utilize resources
• New product introduction
• Reach a new segment
• Increase prospect presence
• Increase prospect conversion

Step 2: Conduct a thorough market pricing analysis. While the first step is grounded in your business goals, this step ensures that your pricing strategy considers the context of the market in which your product or service will compete. "Low cost providers like Walmart often market to a broad audience while high cost providers like Tesla market to a specific audience." If your market and product are broader with many players who offer similar products or services, chances are you will compete on price. You will "need to do everything to keep operational costs down to ensure a maximum profits margin," says Christof. Conversely, if you have a high value, highly differentiated product or service, your offering may be more conducive to premium pricing, which lends itself to a different form of targeted marketing. "With a superior product, it is important that you are able to place emphasis on high quality marketing and customer service," says Christof.

Step 3: Analyze your target audience. This steps enables you to answer why, what, and how customers will use your product or service based on their specific and urgent needs . "Be guided by the most important question: what perceived and real value does my product or service bring to the customer. What is the task they are facing? How does my product or service ease the pain associated with this task? What does my customer have to gain by using my product or service?" says Christof. Your pricing model and promotional campaigns must align with why your customer would buy your product. For example, if you have a best-of-breed product that uniquely fulfills a customer's urgent needs, value-based premium pricing may be the best strategy. Creating low-cost promotions and giveaways will confuse your customers, undercut your value, and shrink your profit margin.

Step 4: Profile your competitive landscape. Whether you are a low-cost provider or a differentiated vendor, the pricing model and price point of your competitors is a significant pricing strategy influencer. Christof suggests the following approach for direct and indirect competitors:

• Identify at least three direct competitors. Study the structure of their pricing. For example, do they have component pricing and allow for heavy discounts? Do they bundle with other products or solutions? Or, do they employ value-based pricing where clients pay a percentage of the total perceived ROI.
• Consider the substitutes a customer may use to solve the task or problem that your product or service addresses. Find out how much these indirect competitors cost the customer. And remember, sometimes your indirect competitor is the word "no". Consider of self-solutions, or no resolution, as well as other indirect vendor alternatives.

Step 5: Create a pricing strategy and execution plan. At this point, you have gathered enough information to formulate an action plan. Christof identified 10 pricing strategies to consider based on your market, customer, and competitive analysis:

• Penetration pricing: Price is artificially low to break into the market
• Economy pricing: Everyday low price with the focus on low manufacturing/delivery cost
• Premium pricing: High price for high value
• Price skimming: Go into the market with a high price, but once your competitors follow, lower your cost and implement other pricing strategies
• Promotional pricing: Discounts over a period of time, one-time deals
• Psychological pricing: Price products or services which triggers action. For example, charging .99 instead of $1.00
• Versioning: Offer different tiers for your services or products: good, better, best
• Sandwich pricing: High, medium and low priced item with the intent to drive customers to the medium priced item
• Competitive pricing: Set the price equal to what your competitors are charging and win the service game
• Value pricing: Understand the value for your customers and their willingness to pay. Also understand what alternatives do they have

After you have completed the five steps, take the time to work the steps backwards. This will help you ensure that the GTM actions you chose to take give you the best shot at successfully competing in your target market segments, gaining revenue and market share.

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Run » finance, 7 smart pricing strategies to attract customers.

An effective pricing strategy is essential for continued sales success. Here's how to determine the right tactic for your business.

Setting your business’s prices may seem simple: List your product for higher than it costs you to manufacture or acquire it, and you’ll make a profit.

But your prices are more than just numbers. The way you price your products or services can be a reflection of your business’s identity, how you view and treat your competitors and how you value your customers. That’s why it’s important to have a carefully planned pricing strategy.

What to consider when setting your pricing strategy

Setting your product or service’s prices shouldn’t be a haphazard decision focused entirely on profit. It should be a calculated, informed choice in which your business identity, brand and financial stability are considered.

As with any business decision, determining your pricing strategy starts with assessing your own business’s needs and goals. This involves some commercial soul searching — what do you want your business to contribute to the economy and world? This could mean embracing a traditional retail strategy, establishing a service business mindset or emphasizing personal customer relationships in your offering.

Once you define your goals and needs, do some research on the market you’re entering. Determine three to five main competitors in the industry by conducting online research or scouting out local businesses. No matter what pricing strategy you adopt, what your competitors are doing will impact your business’s success and future decisions. Understanding your competitors’ strategies can also help you differentiate your business from other businesses in the market. In an economy where there are thousands of small businesses providing the same products and services, an effective pricing strategy can help you stand out.

A good final stage in your research is speaking with potential customers to get a feel for how they value your brand, product or service. This can give you valuable insight into how to set your pricing. This kind of research can range from casual conversations with friends and family to formal surveys of potential buyers.

While you may have already done some of this legwork when developing your business plan , it’s good to have as much insight and information as possible before you decide what pricing strategy to adopt.

Pricing strategies to attract customers to your business

There are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy. Consider these seven common strategies that many new businesses use to attract customers.

1. Price skimming

Skimming involves setting high prices when a product is introduced and then gradually lowering the price as more competitors enter the market. This type of pricing is ideal for businesses that are entering emerging markets. It gives companies the opportunity to capitalize on early adopters and then undercut future competitors as they join an already-developed market. A successful skimming strategy hinges largely on the market you’re looking to enter.

2. Market penetration pricing

Pricing for market penetration is essentially the opposite of price skimming. Instead of starting high and slowly lowering prices, you take over a market by undercutting your competitors. Once you develop a reliable customer base, you raise prices. Many factors go into deciding on this strategy, like your business’s ability to potentially take losses upfront to establish a strong footing in a market. It’s also crucial to develop a loyal customer base, which can require other marketing and branding strategies.

3. Premium pricing

Premium pricing is for businesses that create high-quality products and market them to high-income individuals. The key with this pricing strategy is developing a product that is high quality and that customers will consider to be high value. You’ll likely need to develop a “luxury” or “lifestyle” branding strategy to appeal to the right type of consumer.

If you’ve already launched your business, you can experiment with these strategies until you determine what works best for your business. You can also vary strategies between products depending on the market for each good or service.

4. Economy pricing

An economy pricing strategy involves targeting customers who want to save as much money as possible on whatever good or service they’re purchasing. Big box stores, like Walmart and Costco, are prime examples of economy pricing models. Like premium pricing, adopting an economy pricing model depends on your overhead costs and the overall value of your product.

5. Bundle pricing

When companies pair several products together and sell them for less money than each would be individually, it’s known as bundle pricing. Bundle pricing is a good way to move a lot of inventory quickly. A successful bundle pricing strategy involves profits on low-value items outweighing losses on high-value items included in a bundle.

6. Value-based pricing

Value-based pricing is similar to premium pricing. In this model, a company bases its pricing on how much the customer believes the product is worth. This pricing model is best for merchants who offer unique products, rather than commodities.

How do you know what a customer perceives a product to be worth? It’s hard to get an exact price, but you can use certain marketing techniques to understand the customer’s perspective. Ask for customer feedback during the product development phase, or host a focus group. Investing in your brand can also help you add “perceived value” to your product.

7. Dynamic pricing

Dynamic pricing allows you to change the price of your items based on the market demand at any given moment. Uber’s surge pricing is a great example of dynamic pricing. During low periods, Ubers can be quite an affordable option. But, when a rainstorm hits during the morning rush hour, the price of an Uber will skyrocket, given that demand is also likely to rise. Smaller merchants can do this too, depending on seasonal demand for your product or service.

Which pricing strategy is right for you?

Each of these seven strategies offers different advantages and downsides. At the very least, you must make sure your pricing strategy covers your costs and includes a margin for profit. Determining your needs upfront can clarify which strategies are ideal for your business.

Focus on finding the right range of costs, rather than pinpointing a specific number. “Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you,” wrote Profitwell .

Regardless of which tactic you choose, pricing your inventory properly is essential for continued business success. You may have the best product in the world, an excellent team and a beautiful storefront, but if you can’t price your products effectively, your sales will ultimately struggle.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Pricing Strategies for Small Business

Darrell Zahorsky is an expert in search engine optimization (SEO) and marketing. He has worked for companies and clients such as Blackberry, ADP, and Subway.

• Don't Compete on Price Alone

Choosing a Price Strategy for Your Business

Avoiding a price war, the bottom line, frequently asked questions (faqs).

Kentaroo Tryman / Getty Images

Pricing strategy for your small business will set the standard for your product or service in the marketplace, and is an important dimension to both your bottom line and your competitive edge. Early in the life of your small business, research your intended market as deeply as possible, and pay close attention to past fluctuations in competition and demand.

Key Takeaways

• Small businesses should avoid competing on the lowest price, as they lack of economies of scale required to drive down costs.
• Pricing strategies for small businesses to try include value-based, cost-plus, and competitive pricing.
• Small businesses can avoid a price war by building their brands, offering niche products or services, and conducting diligent market research to understand customer needs and price sensitivity.

Don't Compete on Price Alone

When developing a business plan, owners often make the mistake of setting their pricing strategy to match the lowest-price provider in the market. This approach comes from a cursory understanding of direct competitors, and the assumption that the only way to win business is by having the lowest price.

However, having the lowest price is not a strong pricing strategy for small business, as it invites customers to see your product or service as a commodity, and obscures the value of your offering. If you're operating within a niche market, larger competitors with the ability to lower operating costs may eventually enter your segment, and can destroy any small business attempting to compete on price alone—including yours.

Avoid the low price strategy through research on the market you intend to enter, and by repeatedly analyzing the following variables:

Ceiling Price

The ceiling price is the highest price the market will bear, which can be explored by surveying both experts and consumers, and by asking questions regarding pricing limits. Keep in mind that the highest price available on the market may not necessarily be the ceiling price.

Competitive Analysis

Don't exclusively look at your competitor's pricing; look at the whole value of what they're offering. Are they serving price-conscious consumers or an affluent niche? What are the value-added services, if any? How do you compare?

Price Elasticity

Price elasticity tells you about the responsiveness, or elasticity, of the demand of a product or service when nothing changes but the price. Jill Avery, a senior lecturer at Harvard Business School told the Harvard Business Review that "marketers need to understand how elastic, sensitive to fluctuations in price, or inelastic, largely ambivalent about price changes, their products are when contemplating how to set or change a price. Some products have a much more immediate and dramatic response to price changes, usually because they’re considered nice-to-have or non-essential, or because there are many substitutes available."

Once you understand consumer demand within your market, review your own costs, supply chain, and profit goals as a way to inform your choice on pricing strategy. Below are a few pricing models to consider:

• Premium or Value-Based Pricing : The price is based on the perceived or estimated value of a product or service. There are few or no competitors for the product or service.
• Cost-Plus Pricing : The selling price is determined by adding a markup to the unit cost. The goal is to cover costs and generate profit without exceeding customer expectations for price.
• Competitive Pricing : Setting a price based on the price of the competition. This is commonly seen with commodity products.
• Price Skimming : Setting the price high initially and then lowering as additional competitors enter the market.
• Penetration Pricing : The price is set low to rapidly enter a competitive market and provoke word-of-mouth recommendations, only to be raised later.

A price war is when competitors continually lower their prices to undercut one another and gain market share. This almost never works out in a small business's favor, especially when competing against globalized pricing. According to Wharton School marketing professor, Z. John Zhang, the outbreak of a price war is considered a legitimate and effective business strategy in China. “In a growing market, there are all different companies competing—some good, some bad—and the industry finds a way to consolidate. The only way to do that is a price war, where you bring down the prices and squeeze out the inefficient [companies].”

But in the U.S. Zhang said, the markets are more mature and they offer, “oligopolistic competition among mostly equals and [therefore] encourages more finesse in devising marketing strategies.”

Oligopoly markets are markets in which a few suppliers dominate, which can reduce competition.

Below are tips to avoid a price war with your competitors:

• Develop your brand name to build recognition of your small business and to build resilience if a price war ensues.
• Find unique values which your business can add to stand out in the marketplace.
• Provide products or services that are exclusive to your business to ensure further protection from falling prices.
• Conduct diligent market research to understand customer needs and price sensitivity.

If you create sound market research habits early in your journey as a small business owner, you will have greater foresight when setting prices for your products or services, and an ability to adjust when necessary . Research will help you avoid taking a problematically low price-position in the market, and will provide valuable insights into how your future customers will spend money.

What is the simplest pricing strategy?

Cost-plus pricing may be the simplest strategy for small business. With this approach, you determine the breakeven point for your product, and then add a percentage-based premium or markup to arrive at the final price.

Why is pricing important for small business?

Pricing is the simplest and the fastest way for any business, including small business, to increase profits. According to McKinsey & Company, a 1% increase in price leads to an 8.1% increase in operating profit for firms listed in the S&P 1500. Meanwhile, a 1% decrease in price leads to a corresponding decrease in operating profit of 8.1%. Getting pricing right can have a significant effect on the success of a small business.

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University of Missouri Extension. “ Selecting an Appropriate Pricing Strategy .”

Harvard Business Review. " A Refresher on Price Elasticity ."

Z. John Zhang. " How and Why Chinese Firms Excel in ‘The Art of Price War' ." Knowledge at Wharton .

OECD. “ Oligopoly Markets .”

McKinsey & Company. “ The Power of Price .”

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How To Develop, Implement And Review A Pricing Strategy

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​​This knowledge is brought to you by Giancarlo Sponza , just one of the thousands of top business management consultants on Expert360.

Your customer value proposition (CVP) is a critical element of your pricing strategy. Although pricing is an innately cross-disciplinary function, your value proposition will inevitably be the crux of your pricing.

Throughout this piece, I will outline some recurring topics around pricing, and approach them through a value based lens that looks at your key value propositions and those of your competitors' as the basis to develop your pricing strategy .  

Pricing is highly dependent on the specifics of the business that you are dealing with.

This piece will address some of the more common topics that need to be looked at, without aiming to be prescriptive but aiming to put forward a general view of pricing across different types of businesses and industries. The topics in this piece could also be dealt with in a different order. For example, one could start from review financial results and then exploring the market segments as a consequence.  

This piece consists of three broad sections: developing, implementing and reviewing a pricing strategy.  

How to develop a pricing strategy

One of the first issues to address in an organisation that wants to adopt a good pricing strategy and practice is to understand which company function is supposed to carry such activity.

As a discipline, pricing is part of marketing, but it's often done by either finance, strategy or sales, sometimes with a bit of friction between them. If the founders are still involved in running the business, they may be the ones making price decisions. Alternatively, an organisation could engage an external pricing consultant.  

The legacy talent management model inherited from the past, involves staffing numerically skilled people in finance and corporate strategy, and creatively skilled people in marketing.

Maybe that's one of the reasons why in the past, pricing evolved a bit separately from the other components of a traditional marketing mix (4Ps: Product, Pricing, Place, Promotion).

One other reason is related to the ICT revolution.   In the next sections, I'll go through the main topics that may be considered when planning and developing a pricing strategy.  

Mapping markets, customers and value propositions

The exercise of understanding markets, segments, customers and value propositions is crucial to pricing. Pricing models have a strong dependency on the customer value proposition (CVP).  

A simple image I keep in mind while going through such an exercise is fishing. Mapping markets, customers and value propositions are like understanding in what lake the company is fishing, in which of its area, with what rod & bait, and what are the commercial results.

Since the choice of markets and segments is part of a broader marketing strategy, in this paper I consider them an input to design pricing options. Note that the CVP - Pricing relationship can also work in the opposite direction: a CVP or product can be designed around given pricing, especially if the price point chosen is a high one.

If well done, this can impose a disruption or a new category to the market. Designing a CVP around a low price point usually works well for temporary initiatives such as discounts and offers. If not, a new CVP around a constantly low price is riskier and must be planned carefully. If the new CVP turns out to be undifferentiated in the customers' perception, it may lead to unhealthy price wars.  

The approach of designing pricing around a CVP should be the preferred one. Hence the importance of understanding what exactly is the CVP in the customers' perception.  

The importance of competitor and market pricing

One of the key aspects in devising a pricing strategy is to compare our CVP with other alternatives that the targeted customers can obtain. This means looking at:

• Substitute products and services
• Their characteristics
• Their purchase process

It is important, in this exercise, not to limit our view to direct competitors, but to think about any other alternative that customers may have. This is moreover important in a general environment with lots of disruption, as has been the case in recent years.  

My advice would be to complete such a comparison regardless of prices and then to look at prices in a second step.

It just helps in concentrating on the CVP and customer experience or journey. Such work should be done in conjunction with marketing and sales. This may sound like a strategic marketing exercise rather strategic pricing, but again, pricing is most closely linked with marketing. Once customer options have been listed, analysed and compared, then prices should be compared.  

The goal is to dig out which sensitivity factors are likely to play in customer's purchase decisions (switching costs, difficult comparison, expenditure, price-quality, end-benefit, etc.) and their price sensitivity or elasticity.

The outcome of this activity should be more insight into how customers decide to buy and perceive value propositions with their price.  

The difficulty here is to be as objective as possible and to really reflect the customers' mindset. The more objective the information, the better.

I won't get into market research and survey techniques, but the main risk here is to follow what management thinks is happening in the marketplace, instead of what's really happening out there.  

Generating pricing options

What I refer here as a pricing option, is, in fact, a possible pricing strategy. There are lots of possibilities: versioning, bundling, variable, dynamic, premium, penetration, skimming, freemium, etc., the list is long and it is not possible to conclude that any of them are generally better or worse.

Each of them has been historically devised to take the opportunity of a specific price insensitivity in targeted customers. The most typical examples are when alternatives are hard to compare for customers, either because the product/service is complex or because of a lack of information at points of sale.

Other examples come from perishable products/services such as food or tickets. It really depends on the specific business at hand.   The good news is that pricing options can be combined and added up to create new strategies.

They don't necessarily exclude each other. Versioning, penetration, premium and dynamic pricing can be done at once. To generate possible options, we should look at:

• Customer needs
• Key sensitivity factors and then associate pricing strategies that may work with them.
• CVPs offered

I omitted the value propositions and listed very brief needs for the sake of synthesis. I then listed sensitivity factors in decreasing order: first the most likely to play a role in the purchase decision, then the second most likely,... and so on.

The key here is to be as specific as possible. The better purchase processes and decisions are understood, the more specific and tailored the pricing can be, and the more the opportunity to increase revenues.

Choosing how to structure markets, segments and channels is marketing strategy or corporate strategy. I won't discuss that in this article. What I'm highlighting here, is the work of associating pricing ideas or options with each CVP.  

A sophisticated tool to analyse pricing / CVP options is Conjoint Analysis.

This is a statistical method used to analyse and model customer preferences for various product/service versions at various price points. It works well with versioning and static pricing. Unfortunately, it also requires a large customer base (i.e. B2C or B2B with lots of customers), tends to be prone to customer bias, complex, expensive and requires a specialised dedicated project.

Conjoint Analysis can also be used to design a CVP around a price. Keep in mind what I mentioned previously about the CVP - Pricing relationship.  

Analysing costs, cost attributions and unit margins

No one wants to end up with negative margins.

Checking costs and margins is very important, but it must not become the pricing strategy alone. I cannot put enough emphasis on the importance of avoiding a blind “cost plus” practice. Looking at costs must be done only to verify prospective margins. It's not the basis of our pricing and not its starting point.  

Another issue that may come across in looking at costs is what to do with fixed costs or sunk costs. In Pricing, fixed costs and sunk costs should be ignored. Those are related to the very fact of being in that business, market or segment. It's about investment. There is no logical connection between a sales decision and a cost that does not depend on sales volumes, such as salaries or rents.

Trying to include fixed costs in pricing means we're dealing with a strategic decision on whether to be in that business or a related calculation such as an ROI, NPV, IRR, payback or break-even. This can be done, obviously. But it's not pricing, it's corporate strategy or finance.

Pricing is about optimising revenues once there's a decision to compete in a given market or segment.  

The next obvious thing to do is to analyse variable costs to arrive at unit costs. This has to be done with finance and it's essentially a management accounting topic. It's worth keeping in mind that the more industrial the business, the more variable costs there should be.

Service businesses tend to have very few variable costs.

To arrive at unit costs, dollar costs may be divided into volumes. Depending on the company's financial reporting, discounts may also be reported in the PL.

In that case, care must be taken in differentiating the types of effective revenue and pocket prices from nominal items. Identifying price components and market data to track.

There are usually two types of information to track:

• Unit costs.
• Exchange rates.

Every single item in any of these sets may be worth to track depending on its likely impact on the final price. Capturing competitors' prices can be a delicate issue. Getting such information through non-public sources may be considered collusive behaviour. The general rule is to use market data from publicly available sources or publicly listed prices accessible to anyone.

If not, my advice is to check with the legal counsel whether data about competitors' prices can be used for pricing purposes.  

Historical data should be analysed to understand each component's movements in time. The greater or the more unpredictable the movements, the more is going to be worth tracking that component.   

How to implement a pricing strategy

The topics that may recur in making a pricing strategy operational are:

• Analysing feasibility.
• Choosing a pricing option or strategy.
• Controlling the pricing.

In order to estimate the success of a pricing strategy, comparable data about price-volume relationships (i.e. elasticity) should be considered.  

The more innovative the CVP, the less it will be comparable to past or present products, and the less we will be able to rely or even find relevant information on elasticity. In such cases, information has to come from market surveys or other comparable information that the organisation has obtained before deciding to launch a new product.  

If not, experiments and building knowledge with a trial and error approach remain the only options. For established products with variable costs - typical in commodity businesses - margins and prices are also strongly dependent on input costs.

In such cases, past data on prices and volumes may not be relevant because of different types of price levels that were observed in the market at that time. One way to work around this issue is to take unit margins as a proxy of prices and to look at the unit margin to volume relationships instead of price-volume.

Assuming that the market is competitive, volumes obtained against given unit margin levels should give insight into elasticity.  

In terms of feasibility, commercial and legal risks, as well as technical feasibility and cost of implementation, need all to be verified and confirmed by working with subject matter experts.

Chances are that the commercial risks would already be discussed with marketing or sales functions while generating the pricing idea. Legal risks should be assessed with the legal counsel: pricing can be a delicate area in terms of law and regulations.  

Technical and operational feasibility is about the organisational assets, resources and competencies available in a company. These aspects must be assessed with Operations and IT functions.

At this point, the pricing options must be very well described in terms of what information would be needed, with what frequency, and how prices would be updated. This is increasingly important if the pricing option under consideration is different than what the organisation has done so far.  

The outcome should look like an attractiveness/cost table.  

Choosing an option. Planning customer feedback

The choice of a pricing option as a pricing strategy should be a cross-functional effort with contribution from marketing, sales, IT, operations, finance and legal.  

Marketing and sales should be the main stakeholders that bring expert judgement and commercial advice on how attractive or viable a pricing model is likely to be. The others should provide advice on feasibility and costs.  

In case there's a matrix similar to the one described previously, my advice is to keep on working with that table until a consensus or decision is reached on the pricing option(s) to go ahead with.

Generally having more options under discussion is better: it avoids choosing a poor option just because it happens to be the easiest or the only thing to do. For example, the last row in the previous table is not a good candidate to go ahead with. In such a case we should come up with better ideas than a very unattractive option, even if it's easy to do.

Only the options that are judged attractive and feasible should go ahead for project initiation. Pricing is too delicate to have a “so and so” idea realised. On the other hand, highly attractive but too expensive options should be retained, kept in a strategic plan and be periodically reviewed or reassessed.  

At this point, there's a decision to propose a new CVP and/or pricing to our customers. Changing the pricing or introducing a new one is always going to carry some risk. That's why a preliminary experiment may be designed and implemented, similar to a marketing campaign, in order to confirm the assumptions made so far. Such an initiative wouldn't differ much from a marketing campaign and related feedback with the tools and methods used to measure its success.  

When implementing or changing a pricing strategy, it's useful to have a customer feedback process. Such a feedback loop will allow the business to continuously adjust, react and, in the worst case, learn from failures and avoid the same mistakes in the future.

The difference is that this time we're not dealing with a temporary experiment such as a campaign, so the feedback is not one-off but a continuous and permanent process that brings richer information than just a volume increase or decrease.

The way of achieving this depends a lot on how customers interact with the company and/or product:

• In B2B, there's usually a Sales / Account Management team or Customer Support.
• In B2C, getting customer feedback is usually harder, but probably the organisation has staff monitoring the activity at retailers.
• In unattended or digital B2C businesses, having a customer relationship is still hard, but the product or service may lend itself well to interactions with customers.

No matter the context, establishing a feedback channel that includes pricing in the information fed back, can go a long way.  

Initiating, executing, monitoring and controlling a pricing strategy

There's a bit of PMP® conditioning in me. I tend to think of change initiatives as projects. Clarifying goals and expected benefits in changing a pricing strategy is usually well spent time and should always be done. In doing this:

• Subject matters experts and stakeholders should be identified and involved.
• A charter containing the necessary internal information should be written, as well as the external marketing message, information or banner to inform customers. The range and possibilities in crafting these pieces is very wide and heavily depends on the specific business, management style and expected size or impact of the change. The owner of the initiative must be directly involved in preparing such information with marketing for the external information, and with the assigned project/implementation manager for the internal charter.

I didn't mention planning in the titles, but planning a new pricing model is essentially what's discussed in the previous sections. In terms of the work required to change the internal organisation and resources to accommodate a chosen strategy, the planning of that work must be done after a project or implementation manager has been assigned.  

It's always better to assign a project manager before starting to plan activities and intermediate milestones.

The more complex the change initiative looks like, the more important it is to plan with the project or implementation manager. Enough said about project management. Let's go back to pricing. 

Summary of stages, what functions should be involved and for what purpose. These stages are not meant to be in a strict sequence. If a pricing strategy requires a significant project effort, its execution will wait for that project's delivery.  

The execution of a pricing strategy can be a delicate activity where the success of a pricing strategy is made, especially with a variable or dynamic pricing where prices are frequently reviewed and changed.

A company probably won't spend most of the time constantly rethinking strategies , but will probably spend more time in executing and making successful a chosen pricing strategy. The execution must always consider the most updated market information and unit costs, in order to review and update prices according to new information.

A reminder of key market data usually worth tracking:

• Customer feedbacks
• Market prices
• Exchange rates if the business is international.

Sometimes other indices or rates such as CPI/inflation rate, labour or material cost indices or interest rates may be involved in the pricing strategy. In my opinion, considering such rates in a non-financial business is more of a “cost plus” mindset, rather than value-based pricing. Still, many businesses, especially in B2B, review prices according to indices. Often because they find themselves mandated to do so by contractual terms.  

Generally, executing a pricing strategy is about finding the right balance between flexibility to adjust prices that prove not to be working, and a certain discipline to keep the chosen strategy without getting lost in details of customer complaints or problematic areas. Monitoring and controlling the pricing strategy is the way to understand how the strategy is performing and how it is executed.

To achieve good quality, the pricing should be controlled inside the execution process rather than trying to intervene from outside the process.

Quality is achieved inside the process while doing the pricing.   Additionally, the overall target or goal that was originally intended to achieve in the development phase should be broken down into intermediate goals.

The variance of selected KPI compared to intermediate goals should be periodically assessed, and appropriate corrective actions are taken. Such corrective actions may go from minor changes in price levels up to a complete review of the pricing strategy.  

Do's & Don’ts

In this sub-section, I share some advice related to good and bad practices. Problems mostly show themselves at the execution stage. Sometimes they're just related to commercial practices:

• If revenues do not respond as fast as expected to a pricing change, it's better to be patient and wait for more data before concluding that the whole strategy isn't working. Sometimes customers do not react as fast as expected. Additionally, changing the pricing too frequently makes it harder to associate market responses with a change in prices.
• If there is a goal to increase revenues by increasing pocket prices, then change the current value proposition. Don't ask for more if you don't provide more, or different.
• Just increasing prices may work well to temporarily boost revenues in inelastic products or services. Customers' loyalty level and longer-term impacts should also be considered.
• Before dropping a price, always consider the best alternative that a customer has. Do not drop prices unless there is convincing proof that volumes are going (or will go) elsewhere.
• Don't expose or discuss details of unit costs externally as a justification of your price, or price movements. Costs are to be treated confidentially and it's your organisation's business, not your customers'. This kind of situation may happen in B2B, especially in tenders or similar procurement processes. Sell value, not costs.
• Be flexible enough to change or challenge plans and assumptions. If the KPI chosen has not gone in the right direction for a few periods, do question the strategy and/or the KPI themselves. Sometimes all is going well but the KPI may be the wrong one.
• The ability to charge prices and obtain revenues is always a result of customer satisfaction and how the market evaluates the value proposition, company, brand, service and relationship. If that market consensus lacks, there's no pricing alone that will save the boat.
• Mind the communication on new prices. Disclosing new prices externally in advance can be anti-competitive behaviour. My advice is to minimise communication on this topic and stick to the essential, even internally. Safer.

How to review a pricing strategy

If the previous sections sound familiar, then reviewing a pricing strategy should come naturally too. We already mentioned that:

• A continuous customer feedback processor channel is important for market sensing.
• Market price data is a piece of key information to execute and control a pricing strategy.
• Defining KPIs, intermediate goals and monitoring variances between KPI and goals is how to keep track of execution.

These are all enablers that may trigger a review. Reviewing a pricing strategy is done outside of execution and should look at how the results obtained by pursuing the pricing strategy compared to the original intent and to the broader performance of the company.

In order to achieve this, there are two main approaches that do not exclude each other:

• Starting from financials.
• Going through the assessment work described in this article.

When starting from financials to compare performances, meaningful comparisons should consider and adjust the performance obtained in a period, with an event that was not originally predicted and that was unrelated to just pricing.

Examples may include variations in the product portfolio, in the points of sale, merger & acquisitions, partnerships, and so on.

Another good practice is to compare performances with the overall company, area or market trend.

In other words: if revenues declined but the market declined more than us, then maybe the pricing strategy achieved something.   An additional review should be done by ignoring the financial results and going through the assessment work described in this article.

A pricing strategy may look just fine in the financials and still be improved. Worst case, by leaving no stone unturned the organisation will have more confidence in the pricing strategy.  

Conclusions and the future of pricing

I hope you enjoyed the article. Rather than explaining the various pricing strategies, I focused on the “how to” and tried to be practical yet not specific about a given type of product or business.  

The key is to always start from the value for customers, to be considerate in moving a price, and to think ahead of possible responses from competitors.  

I think pricing has a great future as a discipline. The ICT revolution is still running fast. Artificial intelligence & machine learning techniques are no longer pure research topics. Currently, most companies are able to assist pricing decisions with lots of data and insight on margins and market prices. Some companies let algorithms decide their pricing.

The world's biggest e-retailers and technology juggernauts are pricing automatically through algorithms. Airlines have been early adopters of algorithmic pricing and how they handle their pricing masterfully.

As these technologies become more accessible, the pricing skills demanded will become more about planning, monitoring and reviewing pricing strategies, instead of deciding the prices.  

How human and machine pricing activities are (or will be) split by company innovation levels.   The next innovation step is to let the algorithms (i.e. machines) implicitly learn the business rules for pricing decisions, by feeding them with the market and financial data. I suspect these technologies will also present new challenges to regulators: how are they going to monitor and intervene in a marketplace where prices, and ultimately our economic activity are decided by machines? What if machines learn to collude tacitly?

“Anybody can cut prices, but it takes the brain to produce a better article.”

– Phillip D. Armour 

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Giancarlo is outcome oriented and autonomous with broad functional experience in several industries such as cards, payments, software, financial services, medical devices and electronics. He is passionate about innovation and has an intimate understanding of strategy, pricing, product and project management, of technology and business optimisation.

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Strategic Planning

Pricing strategy.

Pricing is one of the classic “4 Ps” of marketing (product, price, place, promotion). It’s one of the key elements of every B2C strategy.

Yet for many B2B marketers, the pricing strategy in their marketing plan is challenging to write; many aren’t even involved in creating their pricing strategy.

There are many factors to consider when developing your pricing strategy, both short- and long-term . For example, your pricing needs to:

• Reflect the value you provide versus your competitors
• Match what the market will truly pay for your offering
• Support your brand
• Enable you to reach your revenue and market share goals
• Maximize your profits

When you offer a truly unique product or service with little direct competition, it can be challenging to establish your price. Define a strong strategy and competitive analysis so you can view:

• What your prospects might pay for other solutions to their problems
• Where your price should fall in relation to theirs

When your price, value proposition and positioning are aligned, you’re in the best situation to maximize revenue and profits.

Deviating from Your Pricing Strategy

If sales are slow, many companies lower their price. That’s not always the best option. Here are three price change examples:

What would happen if these companies used a different pricing strategy?

Do you see your company in one of these scenarios?

Not Sure Where to Start with Your Pricing Strategy?

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Pricing Strategy Key Concepts & Steps

Before you begin.

It’s best to define your positioning, create your brand strategy, and identify your distribution channels before you develop your pricing strategy in the marketing plan. By doing so, you’ll ensure that your pricing reflects your value and reinforces your brand.

For example, if your method for delivering value is product leadership, you shouldn’t discount heavily or compete on price; you should also minimize pricing conflicts with any channel partners.

Your pricing influences how the market perceives your offering. If you’re perceived as a commodity, you must either change the market’s perception via a new positioning strategy, or compete on price and focus on innovating to keep costs low so you can still make a profit. You may need to gather market research and market intelligence – either via your own efforts, via third-party toolkits or applications, or by hiring a market research firm.

Match your pricing strategy to your value proposition

Your price sends a strong message to your market – it needs to be consistent with the value you’re delivering.

• If your value proposition is operational efficiency, then your price needs to be extremely competitive.
• If your value proposition is product leadership or customer intimacy, a low price sends the wrong message. After all, if a luxury item isn’t expensive, is it really a luxury?

Understand your cost structure and profitability goals

Companies calculate these costs differently, so verify the exact calculations your company uses for

• Cost of goods sold (COGS): the cost to physically produce a product or service
• Gross profit: the difference between the revenue you earn on a product and the cost to physically produce it

In addition, understand how much profit the company needs to generate. You’ll be far more effective when considering discount promotions – you’ll know exactly how low you can go and still be profitable.

Analyze your competitors’ prices

Look at a wide variety of direct and indirect competitors to gauge where your price falls. If your value proposition is operational efficiency, evaluate your competitors on a regular basis to ensure that you’re continually competitive.

Determine price sensitivity

A higher price typically means lower volume. Yet you may generate more total revenue and/or profit with fewer units at the higher price; it depends on how sensitive your customers are to price fluctuations. If they’re extremely sensitive, you may be better off at a much lower price with substantially greater volume.

Estimate how sensitive your customers are to fluctuations – it will help you determine the right price and volume combination. More importantly, you can estimate how a price change can impact your revenue.

After Designing Your Pricing Strategy

Once you’ve finalized your pricing strategy in the marketing plan , it’s time to design your marketing campaigns . But first, it’s always a good idea to craft your brand strategy. Learn more about our brand strategy toolkit .

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How to determine the ideal pricing strategy for your business.

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Pricing strategy is a critical aspect of any business, as it directly impacts customer perception, revenue and profitability. However, with so many different pricing models to choose from, it can be challenging for business owners to determine which approach is ideal for their company.

From tiered and introductory pricing to subscription models and more, there's a lot to consider when it comes to understanding the pros and cons of different pricing strategies. A panel of Forbes Business Council members offer their best advice to help business owners make an informed decision on which pricing strategy is best for their product or service.

Members pictured from left to right.

1. Focus On Experiences

I would actually argue now that experiences more than pricing will determine how a product is differentiated in the market. It’s easy to rely on the price or superiority of a product, but many buyers are deciding based on their experience with your brand—whether direct experience as an existing account or indirect through peer reviews or independent research. Giving and receiving value is punctuating almost every buying decision, and experiences are how that value is measured. - Eric Miquelon , Avanade

2. Stay Informed About Industry Trends

Researching comparable businesses and their success rate with different strategies is a great way to understand what works. Conducting market research with potential customers about their willingness to pay for certain services will also provide essential insights. Ultimately, to determine the ideal pricing strategy, it’s important to remain informed on trends and complexities surrounding the industry. - Michael Shribman , APS Global Partners Inc.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?

3. Listen To Customer Feedback

Customer feedback should be taken into account before you make any updates or changes to your current pricing. One effective and easy way to do this is by posting on social media and asking your customers to leave comments. If you are bringing a new product or service to market, take your competitors' prices into account. - Kelley Higney , Bug Bite Thing

4. Balance Quality And Affordability

The best pricing strategy is the balance between what your prospective customers value in terms of quality and exclusivity and what they can afford or are willing to invest into. Essentially, conducting marketing research and creating the business's ideal buyer persona are smart steps in the decision-making process. However, it's also important for the company to keep its already established standard. - Ivan Popov , Vipe Studio

5. Consider Baseline And Growth Tiers

The health of a company stems from the intangible assets woven through it, as well as the tangible ones that are wise to be included in the functional operational costs. Consider what it takes to operate a baseline tier while pricing other tiers for growth without foregoing what has sustained the business thus far. Going too far with pricing may crush the base that was established to begin. - Paul L. Gunn , KUOG Corporation

6. Monitor Customer Response

The best way is to closely measure customer response to any changes in the price strategy. To evaluate the results of any changes in its pricing strategy, a company should continuously monitor changes in its sales, revenue and any customer feedback that it gets. The company can then use this information to make any necessary adjustments in its pricing strategy or make a new price offering. - Beth Worthy , GMR Transcription Services, Inc

7. Trigger Consumer Bias

One way to ascertain the best pricing for service-based businesses is to trigger consumer bias. Although it feels counterintuitive for many business leaders, I recommend a combination of standard A/B testing and decoy pricing. In other words, provide various options where one will obviously be rejected. People will feel they have a choice—but it’s an architectured choice. Retailers effectively deploy this strategy. - Nuala Walsh , MindEquity

8. Experiment With Different Strategies

Determining the optimal pricing strategy for a business requires the consideration of many factors, including competition, costs, perceived value and goals and objectives. Companies can experiment with different pricing strategies such as cost-plus, value-based and competitor-based pricing to find the sweet spot. - Chris Kille , Payment Pilot

9. Conduct Market Research

One of the best ways to determine sustainable pricing is through extensive market research. Organizations must be able to analyze similar products out there, how much they are selling for and whether there is any wriggle room to play around with the price. Special focus should also be placed on researching what customers expect to pay for such products, as well as what price they consider fair. - Erik Pham , Health Canal

10. Use Dynamic Pricing

Dynamic pricing allows you to adjust the pricing of your items based on market demand at any given moment. It's just like the variable express lane trends in the U.S. and Uber’s surge pricing where an affordable option is offered during low periods. When it's a rainy rush hour, the price of an Uber skyrockets and the price of the express lane similarly rises. The size of your organization doesn't matter but reading local trends does! - Dana Neiger , HIVE Talent Acquisition Firm

11. Know Your Audience And Business

Know your customers and know your products or services. Get feedback. Ultimately, determining the ideal pricing strategy will require a combination of research, analysis and experimentation. It's important to continuously monitor the market and adjust your pricing strategy as needed. You will have to break down what will be the most beneficial strategy in the ever-changing market trends. Pivot when needed. - Kirt Linington , Linear Roofing & General Contractors, LLC

12. Consider Your Target Market

Invest time and effort in developing a solid pricing strategy based on your ideal target market. Then, ask the following question: Why did you choose to play in this market in the first place? What are the demographics of who you will serve (clients) and what resources (employees) are needed to meet the needs of the market? With this information, you'll be able to develop a solid pricing strategy. - Francisco Ramirez , The ACE Group (TAG)

13. Analyze The Competition

Conducting market research to understand the target customer's willingness to pay and analyzing the competition's pricing strategies can help determine the optimal pricing strategy. It's also a great idea to test different pricing strategies and monitor their impact on sales and profit with the different products or services and in various territories and markets. - Andrey Kovalev , BusinessInvitee Consulting Group

14. Start With Data

It has to be based on data. Assess your competitor's offerings and price points—or, better yet, see if you can get in front of your competitor's current and former customers to ask what they'd change about what they're currently paying for. Ensure your price point, or at least your contracts, allow for incremental increases (if needed) in the future. - Ty Allen , SocialClimb

15. Test On A Small Scale

The best way to price your products always depends on a couple of factors. Conduct market research and test different pricing strategies on a small scale to find the ideal pricing strategy for your business. Monitor and adjust as needed based on market and business performance. - Udi Dorner , SetSchedule

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Don’t Mess Up Your Pricing Strategy — Here’s How to Do It Right

Capturing market share, staying competitive, and growing profits is often about how you price your goods.

Richard Harris

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Choosing a pricing strategy is one of the most important decisions you can make as a business leader. Get it wrong and your sales will suffer, causing consumers to question the value of your brand. Get it right and you can increase sales, reduce costs, and improve your company’s profitability.

If you’re wondering where to begin, you’re in the right place. Learn about the different kinds of pricing strategies, the benefits of choosing the right one, pricing strategy examples, and how to create an effective pricing strategy for your business.

What you’ll learn:

What is pricing strategy, 5 different types of pricing strategies, benefits of implementing an effective pricing strategy, how to create a pricing strategy: 5 points to consider, tips for setting pricing strategy from 20 years in sales, unify sales, finance, and legal on the #1 ai crm.

When sales, finance, and legal are disconnected, the customer feels the pain. Learn how Revenue Cloud can help.

A pricing strategy is a method to decide what your products and services should cost. Pricing strategy is both an art and a science. It’s about understanding production costs, profit margins, and the competitive landscape, so you can make a profit and keep shareholders happy.

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When you choose the right pricing strategy for your business, you can feel confident that the prices for your products or services are competitive while ensuring profitability. In my experience, these are five of the most popular strategies:

1. Cost-plus pricing

The cost-plus pricing strategy only looks at the unit cost and ignores prices set by competitors. Also known as markup pricing, this strategy is a simple way to determine the sales price of a product. Start by adding up your production costs. Then determine your desired profit margin, or markup, to set your selling price. Here’s an example:

A former aerospace engineer sells a line of high-end boomerangs for collectors, handmade with balsa wood imported from Ecuador. Here are the costs to produce one boomerang:

• Material: $5
• Labour (based on industry averages): $20
• Overhead (for manufacturing space and utilities): $10

The total cost to produce a single boomerang is $35. The engineer then adds a markup of 300%. The formula to set the price looks like this:  Production costs ($35) x markup (300% or 3) = selling price ($105)

When to use:  Government contractors are well known for using cost-plus pricing because there isn’t similar competition on the market. Retailers, such as supermarkets and department stores also use the strategy, because it’s a relatively simple formula and provides a consistent rate of return.

2. Competitive pricing

This method looks at competitors’ pricing as a benchmark. Instead of using production costs or customer demand, companies set prices at, below, or above their competition.

Here are the different types with examples and when to use them:

• Above the competition:  This method uses higher-than-competition pricing justified by additional or unique benefits customers receive, like convenience. Here’s an example: Four gas stations are all located at the same intersection. But the gas station closest to the freeway on-ramp charges $0.25 more per gallon than the other three, and customers seem happy to pay the higher price for the convenience.
• Below the competition:  Also known as the loss leader strategy, this pricing scheme deliberately sets an item’s price point below the market rate. The business then gains a larger overall profit when customers purchase additional items. Printers are a great example of this strategy. A lower-cost printer might attract customers, but they also need to purchase paper and ink cartridges. This increases the total cost and leads to repeat purchases when ink and paper run out.
• Matching the competition:  When a company sets prices equal to its competitors, the focus shifts from price to the product or service itself. This can happen in industries heavily regulated by the government, as U.S. airlines were before 1978. Before deregulation, U.S. airlines differentiated themselves from the competition by offering perks such as free champagne or gourmet meals.

3. Price skimming

Price skimming is a strategy where a company initially charges a high price for its products or services and then gradually lowers the price to attract a wider audience. Companies employ this strategy when they want to recover sunk costs upfront.

Fashion companies have long used price skimming for unique specialty products in the marketplace. When an innovative new product is released, the price is initially expensive. The company is targeting a smaller pool of consumers willing to pay the high price at launch.

Once the company captures all of the buyers it can at the launch price, it begins to slowly lower the selling price over time. This strategy captures price-sensitive customers while putting pressure on other fashion retailers that enter the market.

When to use:  This strategy is used when you have a buzzworthy product in your industry, with early adopters clamouring to get it first. It also helps you create an air of exclusivity; only those with certain budgets can afford your product.

4. Penetration pricing

In contrast to price skimming, penetration pricing is when a business enters the market with a product or service offered at an exceptionally low price. This strategy initially draws attention and attracts hordes of cut-rate customers. For this to be sustainable for the business — and ultimately profitable — prices must eventually be raised.

When to use:  Many software companies launch using penetration pricing to make a splash in the market, and then move to competition-based pricing after they’ve gained some brand recognition. This disruptive strategy may incur early losses for businesses that use it, but the hope is that the customers initially attracted by a bargain will stay loyal once the price creeps up.

5. Value-based pricing

With this strategy, companies set a price based on what customers are willing to pay for their products or services — in other words, what they perceive as valuable. You can see value-based pricing in luxury products such as leather handbags, automobiles, and high-end makeup brands.

While the quality may not be measurably different from its lower-priced competitors, luxury brands use marketing to become status symbols for consumers and send the message that their products are high value. When this is successful, buyers are willing to pay a premium.

When to use:  With value-based pricing, you need to build a brand focused on value — conveying unique benefits, features, and offerings of your products.

Luxury brands do this well, but the actual value of the product doesn’t always match the perceived value; their pricing is often based on how much their customers  think  they’re worth rather than on production costs or competition. A substantial investment in marketing, research, and PR is required for this to be a successful formula.

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If you choose the right pricing strategy, it can mean the successful launch of your product and fast market penetration. But these are just some of the big wins from pricing correctly.

Here are additional benefits of choosing the right pricing strategy:

• Conveying the value of your brand:  The perception consumers have of your brand will help determine how much of their current pain they are willing to tolerate in relation to the relief your product or service offers them. Think about when you use a delivery service instead of going out and buying something yourself. How much is it worth to you for that convenience? 
• Adding new customers:  Expanding your customer base can increase sales, which leads to increased profits.
• Increasing the value of current customers:  It’s a lot easier to  upsell  or  cross-sell  a current customer a new feature or service than it is to find new customers. Pay close attention to your pricing with your best customers to encourage additional sales. 
• Building brand ambassadors:  People who believe in your brand are more likely to become advocates, leading them to recommend your products or services to friends and family. They may also offer positive reviews online or tag your brand in social media posts.
• Improving sales:  When products or services are priced well, you’ll see an uptick in sales. This is where research into your target audience can pay off.

If your pricing strategy falls short of supporting your business goals, you might attract the wrong kind of customers, leading to mistrust and diminishing the perceived value of your brand. That’s why it’s vital to find a fair, reasonable price in the exchange of goods and services that the market will bear.

Choosing the best pricing strategy for your business doesn’t have to be a headache. Here’s how to get started:

1. Understand your goals

Think about what you want your business to achieve. Do you want to grab customer attention quickly with an enticing new product launch? Then maybe you’d go with penetration pricing. Are you trying to build a reputation for your luxury brand? Value-based pricing might be best.

2. Analyse the competition

Make sure you understand what your competition is offering in the marketplace and how much they are charging. This will help you set your pricing because it will give you an idea of what others are willing to pay for similar products.

If you notice outliers, those charging much higher or lower than most, check them out to see how they justify their prices. All research is good research when it comes to understanding the marketplace.

3. Research your target market

Knowing your target audience is a key step in determining your pricing strategy. Understanding who your target audience is, including their age, gender, location, likes, dislikes, and values, gives you a better shot at appealing to the right people with the right offer at the right price.

4. Weigh the pros and cons of each pricing approach

To determine which strategy is right for your business, look at the different pricing approaches and consider their benefits and drawbacks. Keep in mind that some strategies, such as penetration pricing, may be effective during a product launch but are typically not a sustainable long-term strategy.

If you choose to enter the market with this type of pricing, you’ll need to consider what you’ll shift to once the initial product launch period stops drawing in new customers.

5. Test your prices, then learn and adjust

Once you’ve picked your pricing strategy, keep in mind that it’s not set in stone. If sales are slow or there are shifts in the market, you may need to adjust your prices to compensate. Think of this as an opportunity to test and tweak the true value of your product. And if you are an early-stage start-up, expect that in the first year or two you may make deals you would never make again as you gain traction. And in those moments, that’s okay.

If you want to see what dollar amount works, try A/B testing your price on a product page. For example, if you’re selling a book, you could create two landing pages — one priced at $11.99 (with a low-cost add-on, perhaps) and the other at $9.99. Then, you can measure which price attracts the most buyers to inform your strategy.

With an equal number of people visiting each page, how many convert? The page with the most conversions tells me how much most people are willing to pay.

As the founder of The Harris Consulting Group and with more than two decades of experience in sales, I know what the market bears and I price right in the middle. I don’t ever want to be the most expensive, because when someone turns around and asks for a discount, which everyone does, I can easily come back and say, “My price is based on what the market will bear. How would you like to proceed?”

If you want to see your business grow and flourish, you must first develop an effective pricing strategy that’s appropriate for your goals. Hitting the right price won’t just attract customers; it will also convey the value of your brand. If the price is right, your customers will feel like your products or services meet their expectations. And the price you decide on will ultimately determine the sales revenue and profitability of your company.

When creating a pricing strategy, the first thing I encourage people to do is to understand the economic impact based on the pains they are experiencing in their current ways to solve their problems. This includes what they would be able to do better and faster once they implement your solution. As human beings, we are all comparison shoppers.

Understanding your production costs is also key, of course. This will help you set a price that allows you to not only break even — but also eventually turn a profit. When you create your pricing strategy, consider things such as overhead; how much you pay in rent, salaries, and insurance; and manufacturing costs, services, and labor.

Invest in the right pricing strategy

Getting your pricing strategy right is critical for the health of your business, so it can be an intimidating idea to tackle. Luckily, it’s not a one-and-done motion. Pricing strategies are all about testing what the market will bear, then adjusting based on what you learn. For the health and growth of your company, investing time, money, and resources into your pricing strategy will never be a gamble — it’s an investment in your future.By leveraging Salesforce’s Revenue Cloud, businesses can gain a competitive edge in pricing strategy optimisation, driving revenue growth, profitability, and customer satisfaction.

Every channel and revenue stream on one platform

See how Revenue Cloud goes from quote to cash on one platform, giving sales and finance one customer view. 

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Richard has more than 20 years of SaaS experience and teaches revenue teams how to earn the right to ask questions, which questions to ask, and when to do it. Richard’s clients include Zoom, Salesforce, Google Cloud, PagerDuty, DoorDash, Salesloft, and Gainsight. He’s also the co-founder of Surf ... Read More & Sales. Learn more at theharrisconsultinggroup.com.

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Top Pricing Strategies and Their Implementations

• August 20, 2024

Pricing, often overlooked as a strategic lever, is essential to business success. It is more than just slapping a number on a product or service, it is a delicate balance of art and science that influences revenue, profitability, and customer perception.

In this article, I will cover pricing strategies in detail and teach you how they can be used by businesses to optimise their pricing decisions. We will explore various pricing models, the implementation of these pricing strategies and real-world pricing strategy examples.

Also, we will touch upon the psychological aspects of pricing and offer practical guidance on pricing for different business models with the help of case studies. 

The Critical Role of Pricing in Business Success

Pricing is a potent tool that can significantly impact a business's bottom line. A well-crafted pricing strategy can differentiate a product or service, increase revenue, and improve profitability. Conversely, suboptimal pricing can erode margins, hinder growth, and damage brand reputation. The challenge lies in finding the optimal price point that maximises revenue while considering costs, competition, and customer value.

Defining Pricing Strategy

A pricing strategy is a comprehensive plan that outlines how a business will determine the prices of its products or services. It involves a systematic analysis of various factors, including costs, target market, competition, and value proposition. The goal is to set prices that align with the business objectives, generate revenue, and create value for customers. A robust pricing strategy is essential for achieving long-term success.

Understanding Your Product or Service

Before delving into the complexities of pricing, a profound understanding of your product or service is paramount. This knowledge serves as the bedrock for crafting effective pricing strategies.

Conducting a Comprehensive Product Analysis

A meticulous examination of your product or service is essential. This involves dissecting its features, benefits, costs, and target market. By understanding the intrinsic value and production intricacies, businesses can make informed decisions about pricing. Identifying the core functionalities and supplementary features helps in determining the product's positioning and potential price points.

Furthermore, a detailed cost analysis is crucial. This involves breaking down fixed and variable costs to ascertain the minimum price required to cover expenses. By understanding the cost structure, businesses can avoid pricing products below the break-even point.

Identifying Unique Value Propositions

Every product or service possesses distinct qualities that set it apart. These unique selling points, or value propositions, are the core reasons customers choose a particular offering. Identifying these differentiating factors is vital for effective pricing. By understanding what makes your product or service unique, you can justify premium pricing and build a strong brand identity.

Moreover, understanding the problem your product or service solves for customers is equally important. Clearly articulating the benefits and outcomes customers can expect helps in positioning your offering and determining its perceived value.

Assessing Customer Perception of Value

Pricing is subjective and influenced by customer perception. Understanding how customers perceive the value of your product or service is crucial for setting appropriate prices. Market research and customer feedback can provide valuable insights into customer expectations and willingness to pay.

By analysing customer preferences, behaviours, and buying patterns, businesses can identify price sensitivity and adjust pricing strategies accordingly. Additionally, understanding customer segments with different value perceptions can help in implementing tiered pricing models.

Cost-Based Pricing Strategies

Cost-based pricing is a foundational approach where prices are determined by adding a markup to the product's or service's cost. While straightforward, it requires a deep understanding of cost components and their impact on profitability.

Detailed Breakdown of Cost-Plus Pricing

Cost-plus pricing is a classic method where a predetermined percentage or fixed amount is added to the product's total cost to arrive at the selling price. This approach ensures covering production expenses and generating a profit margin. However, it's crucial to accurately calculate costs, including direct materials, labour, overhead, and desired profit.

Markup vs. Margin

Markup and margin are often confused but represent different aspects of profitability. Markup is the percentage increase over the product's cost, while margin is the percentage of the selling price that constitutes profit. It's essential to understand the distinction to accurately calculate prices and assess profitability.

Advanced Cost-Based Pricing Models

Beyond simple cost-plus pricing, more sophisticated models exist. Activity-based costing (ABC) is a method that assigns costs to products or services based on the specific activities involved in their production or delivery. This approach provides a more accurate cost picture, especially for complex products with multiple cost drivers.

When to Use Cost-Based Pricing and Its Limitations

Cost-based pricing is suitable for businesses with a clear understanding of costs and operating in markets with limited price competition. It provides a baseline for pricing and ensures profitability. However, it has limitations as it doesn't consider customer value or competitor pricing. Overreliance on cost-based pricing can lead to missed opportunities and pricing products above market levels.

Value-Based Pricing Strategies

Value-based pricing is a strategic approach that centres on the customer's perceived worth of a product or service. Unlike cost-based pricing, this method prioritises customer needs and desires to determine optimal pricing.

The Concept of Perceived Value

Perceived value is the subjective assessment customers make about a product or service's worth relative to its cost. It's influenced by factors such as brand reputation, product features, customer benefits, and competitive offerings. Understanding and quantifying perceived value is crucial for effective pricing.

Customer Segmentation and Value Tiers

To optimise value-based pricing, businesses often segment customers based on factors like demographics, needs, and willingness to pay. This segmentation allows for tailored pricing strategies. Value tiers can be created within each segment, offering different product bundles or features at varying price points to match customer preferences and budgets.

Implementing Value-Based Pricing

The "good-better-best" approach is a common implementation of value-based pricing. It involves offering three tiers of products or services with varying features and price points. The "good" option caters to budget-conscious customers, the "better" option offers enhanced features, and the "best" option provides premium value and experiences.

Case Studies of Successful Value-Based Pricing

Numerous companies have successfully implemented value-based pricing strategies. For instance, Apple has excelled in creating a premium brand image and charging premium prices for its products. Subscription-based services like Netflix and Spotify have tiered pricing plans to cater to different customer segments. Analysing these case studies can provide valuable insights into the practical application of value-based pricing.

Competition-Based Pricing Strategies

Competition-based pricing involves setting prices in relation to competitors' offerings. This strategy requires a deep understanding of the competitive landscape and careful consideration of various factors.

Analysing the Competitive Landscape

A comprehensive analysis of competitors is essential. This involves identifying direct and indirect competitors and understanding their product offerings, target markets, and pricing strategies. By benchmarking against competitors, businesses can gain insights into market dynamics and consumer preferences.

Price Leadership vs. Price Followership

Price leadership involves setting prices for an industry and influencing competitors to follow suit. This position requires a strong market share and a differentiated product. Conversely, price followership involves aligning prices with industry leaders to avoid competitive disadvantages. The choice between these strategies depends on a company's market position, competitive advantage, and overall business objectives.

Competitive Parity and Its Implications

Competitive parity involves setting prices at the same level as competitors. This strategy aims to avoid price wars and maintain market share. However, it's essential to consider other factors beyond price, such as product differentiation, customer value, and brand image. Relying solely on competitive parity might hinder a company's ability to stand out in the market.

When to Use Competition-Based Pricing

Competition-based pricing is suitable for businesses operating in highly competitive markets with similar products or services. It can be effective in maintaining market share and preventing price erosion. However, it's important to avoid becoming overly reliant on competitors' pricing and to consider other factors that influence customer purchasing decisions.

While competition-based pricing is a valuable tool, it should be used in conjunction with other pricing strategies to achieve optimal results.

Dynamic Pricing Strategies

Dynamic pricing or demand-based pricing is a strategy where prices are adjusted in real-time based on various factors. Dynamic pricing is also referred to as surge pricing and this strategy allows businesses to optimise revenue and respond to market changes effectively.

Understanding Price Elasticity of Demand

The price elasticity of demand measures how sensitive customers are to price changes. Understanding this concept is crucial for dynamic pricing. Products with high elasticity have a significant price sensitivity, while those with low elasticity are less affected by price fluctuations. By analysing price elasticity, businesses can determine the optimal price adjustments for different products or services.

Yield Management and Its Applications

Yield management is a sophisticated form of dynamic pricing often used in industries with limited capacity, such as airlines, hotels, and rental cars. It involves allocating different price points to inventory to maximise revenue. By carefully managing inventory and pricing, businesses can balance supply and demand to optimise profitability.

Real-Time Pricing Adjustments

Surge pricing is a well-known example of dynamic pricing, commonly used by ride-sharing services during peak demand periods. Personalised pricing involves tailoring prices to individual customers based on their preferences, purchasing history, and other relevant data. These real-time adjustments allow businesses to capture additional revenue and optimise pricing strategies.

Ethical Considerations in Dynamic Pricing

While dynamic pricing offers significant benefits, it also raises ethical concerns. Transparency is crucial to build trust with customers. Clearly communicating pricing changes and the reasons behind them can help mitigate negative perceptions. Additionally, businesses must avoid exploiting vulnerable customers or engaging in unfair pricing practices.

Psychological Pricing Strategies

Psychological pricing leverages consumer psychology to influence purchasing decisions. By understanding how customers perceive prices, businesses can strategically manipulate these perceptions to drive sales.

The Psychology Behind Pricing Decisions

Consumer behaviour is significantly influenced by psychological factors. Price perception is subjective and influenced by various elements, including reference points, loss aversion, and the perception of value. By understanding these psychological underpinnings, businesses can craft pricing strategies that resonate with consumers.

Odd-Even Pricing and Its Effectiveness

Odd-even pricing involves setting prices just below a round number, such as $9.99 instead of $10. This tactic creates the illusion of a discount, making the product appear more affordable. While its effectiveness can vary, odd-even pricing remains a widely used technique to influence purchase decisions.

Premium Pricing and Luxury Branding

Premium pricing involves setting high prices to create a perception of exclusivity and superior quality. This strategy is often employed for luxury brands. By associating high prices with exceptional value, businesses can build a strong brand image and command premium margins.

Price Anchoring and Its Impact on Consumer Behavior

Price anchoring occurs when consumers compare a product's price to a reference point. This reference point can be a previously seen price, a competitor's price, or an internally generated price. By strategically introducing higher-priced items, businesses can influence consumers' perception of value and make lower-priced options appear more attractive.

Implementing and Monitoring Pricing Strategies

Effectively implementing and monitoring pricing strategies is crucial for maximising revenue and profitability. This requires a structured approach and ongoing analysis. Let us learn how to implement pricing strategies and monitor them.

Developing a Pricing Strategy Roadmap

A comprehensive pricing strategy roadmap outlines the steps involved in implementing and managing pricing decisions. It includes defining pricing objectives, identifying target markets, conducting market research, selecting appropriate pricing models, and establishing key performance indicators (KPIs). This roadmap serves as a blueprint for aligning pricing efforts with overall business goals.

Conducting Price Testing and Analysis

Price testing involves experimenting with different price points to assess customer response and revenue impact. This data-driven approach helps identify optimal pricing levels and optimise profitability. By analysing sales data, customer feedback, and competitor pricing, businesses can make informed pricing adjustments.

Using Pricing Software and Tools

Pricing software and tools can streamline the pricing process and provide valuable insights. These tools automate tasks, such as calculating costs, analysing market data, and conducting price simulations. They also facilitate price optimisation and help identify pricing opportunities.

Continuous Price Monitoring and Optimisation

The pricing landscape is dynamic, requiring constant monitoring and adjustments. Tracking competitor prices, market trends, and customer behaviour is essential for staying competitive. Regularly reviewing pricing performance and making data-driven optimisations ensures that prices remain aligned with business objectives and market conditions.

Pricing for Different Business Models

Now that we have learnt how to implement pricing strategies, let us find out how to change our pricing approach based on the business models we are working with. The choice of pricing strategy is significantly influenced by the underlying business model. Different models necessitate distinct approaches to maximise revenue and customer satisfaction.

Pricing Strategies for Subscription-Based Businesses

Subscription-based businesses rely on recurring revenue from customers. Key pricing strategies include tiered pricing, offering different subscription levels with varying features and costs. Freemium models, where a basic version is free and premium features are paid, can also be effective. Additionally, bundling complementary products or services into subscription packages can increase customer value and revenue.

Pricing for Freemium Models

Freemium models offer a basic product or service for free to attract users and convert them into paying customers. The challenge lies in striking the right balance between free and paid offerings. Tiered pricing structures with incremental value propositions can encourage upgrades. Understanding customer behaviour and identifying key conversion points is essential for maximising revenue from freemium models.

Pricing for E-commerce and Digital Products

E-commerce and digital products offer unique pricing opportunities. Dynamic pricing, adjusting prices based on demand and other factors, can be effective. Psychological pricing techniques, such as odd-even pricing and price anchoring, can influence purchasing decisions. Additionally, bundling products or offering discounts can increase average order value.

Pricing for B2B vs. B2C Markets

B2B and B2C markets have distinct characteristics that require different pricing approaches. B2B pricing often involves longer sales cycles, volume discounts, and negotiated pricing. Building strong customer relationships and understanding specific needs is crucial. B2C pricing focuses on consumer psychology, perceived value, and competitive pressures. Leveraging branding and creating a strong value proposition is essential for B2C success.

Tailoring pricing strategies to the specific business model is key to optimising revenue and customer satisfaction.

Pricing and Customer Lifetime Value

Customer Lifetime Value (CLTV) is a metric that quantifies the total revenue a business can reasonably expect from a single customer account. It's a pivotal metric that underscores the interconnectedness of pricing and customer retention.

The Link Between Pricing and Customer Retention

Pricing directly influences customer retention. Competitive and fair pricing enhances customer satisfaction and loyalty, reducing churn. Conversely, overpriced products or services can erode customer trust and lead to attrition. A delicate balance must be struck between profitability and customer retention.

Price Optimisation for Customer Loyalty

Optimising prices for customer loyalty involves considering factors beyond immediate revenue. By offering tiered pricing plans or loyalty programs, businesses can reward long-term customers and encourage repeat purchases. Analysing customer segmentation and identifying high-value customers allows for tailored pricing strategies to maximise CLTV.

Pricing Strategies for Upselling and Cross-Selling

Upselling and cross-selling are effective tactics to increase customer lifetime value. Strategic pricing plays a crucial role in these endeavours. By offering complementary products or upgraded versions at attractive price points, businesses can encourage additional purchases. Understanding customer needs and preferences is essential for successful upselling and cross-selling initiatives.

A holistic approach that considers the interplay between pricing and customer lifetime value is essential for long-term business success.

Pricing in Emerging Markets

Emerging markets present a complex landscape for pricing strategies. The dynamic nature of these economies, coupled with diverse consumer segments, requires a nuanced approach.

Challenges of Pricing in Developing Economies

Emerging markets are characterised by fluctuating currencies, high inflation rates, and underdeveloped infrastructure. These factors create significant pricing challenges. Additionally, political instability and economic volatility can disrupt supply chains and impact pricing decisions. Understanding these complexities is crucial for successful market entry.

Pricing for Different Income Levels

Income inequality is prevalent in emerging markets. To cater to diverse consumer segments, businesses often employ tiered pricing strategies. Offering basic versions of products at affordable prices can capture a broader customer base. Simultaneously, premium offerings can target higher-income segments. Balancing affordability with profitability is essential.

Adapting Pricing Strategies to Cultural Factors

Cultural nuances significantly influence consumer behaviour and pricing perceptions. Understanding local customs, preferences, and beliefs is vital. For instance, certain price points or pricing practices may hold symbolic meaning in specific cultures. Adapting pricing strategies to align with cultural expectations can enhance product acceptance and sales.

Case Studies and Best Practices

Real-world pricing strategy examples and in-depth analyses are invaluable for understanding the nuances of pricing strategies. By studying successful implementations and learning from past mistakes, businesses can refine their pricing approaches and achieve better results. 

In-depth Analysis of Successful Pricing Strategies

Examining successful pricing initiatives provides insights into what works and why. Analysing case studies from various industries reveals common patterns and best practices. Understanding the factors that contributed to pricing success, such as market analysis, customer segmentation, and price elasticity, can inform future strategies.

Lessons Learned from Pricing Failures

Pricing failures offer equally valuable learning opportunities. Identifying the root causes of pricing mistakes helps businesses avoid repeating errors. Analysing unsuccessful pricing strategies can uncover hidden challenges and refine decision-making processes. By understanding what not to do, businesses can mitigate risks and improve their pricing performance.

Real-world Pricing Strategy Examples from Various Industries

Exploring real-world pricing strategy examples from different industries broadens perspectives and showcases the versatility of pricing strategies. Analysing how companies in diverse sectors have approached pricing challenges provides valuable insights into adapting strategies to specific market conditions. Identifying common themes and industry-specific best practices can inform a comprehensive pricing approach.

Future Trends in Pricing

The pricing landscape is constantly evolving. Emerging technologies, changing consumer behaviours, and economic shifts will shape future pricing trends. Artificial intelligence and machine learning will play a crucial role in optimising pricing decisions, enabling real-time adjustments based on vast amounts of data.

Personalised pricing and dynamic pricing models will become increasingly prevalent. Additionally, sustainability and ethical considerations will influence pricing strategies as consumers become more conscious of environmental and social impacts. By embracing a holistic approach and staying informed about emerging trends, businesses can navigate the complexities of pricing and achieve long-term success.

Wrapping Up

Pricing is a multifaceted discipline that requires a holistic approach. By considering various factors such as costs, customer value, competition, and market dynamics, businesses can develop effective pricing strategies that drive revenue and profitability.

The best way to approach pricing is a holistic approach. A holistic pricing approach involves integrating different pricing strategies and considering their interdependencies. By combining elements of cost-based, value-based, competition-based, and psychological pricing, businesses can create a comprehensive framework that maximises pricing effectiveness. This approach ensures that pricing decisions are aligned with overall business objectives and customer expectations.

If you wish to learn about more management concepts such as pricing, a comprehensive leadership program can definitely help. IIM Lucknow’s Senior Management Programme offered in collaboration with Imarticus Learning can help you become a successful senior management professional.

Frequently Asked Questions

How do I determine the right pricing strategy for my business?

The optimal pricing strategy depends on various factors like your product/service, target market, competition, and business goals. Conduct thorough market research, analyse your costs, and understand customer value perception. Consider a combination of cost-based, value-based, and competition-based strategies.

What is the role of psychology in pricing?

Psychology plays a significant role in pricing. Techniques like odd-even pricing, premium pricing, and price anchoring can influence consumer perception. Understanding how customers perceive value and make purchasing decisions is crucial for effective pricing.

How can I measure the success of my pricing strategy?

Key performance indicators (KPIs) like revenue, profit margin, customer acquisition cost, and customer lifetime value can help measure pricing success. Monitor sales data, customer feedback, and competitor pricing to assess the effectiveness of your strategy. Make data-driven adjustments as needed.

How often should I review and adjust my prices?

Regular price reviews are essential. Monitor market conditions, competitor actions, and customer behaviour. Adjust prices as needed to optimise revenue and profitability. Consider seasonal fluctuations, economic trends, and product lifecycle stages when determining review frequency.

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• Dynamic Pricing

How to Implement a Dynamic Pricing Strategy (With Examples)

• July 31, 2024

To succeed in eCommerce, strategy is central. From content creation to keyword research, every aspect of your approach needs to be on point—and that includes pricing. Unfortunately, pricing products isn’t a set-it-and-forget-it part of a sales process; to stay competitive, it’s important to set prices that make what you have to offer as appealing as possible.

These dynamic pricing strategies and tips can help you present prices that always work in your favor.

What is Dynamic Pricing?

Dynamic pricing is a method of optimizing product pricing based on internal and external business goals and marketplace factors. Rather than setting a price once and never looking back, dynamic pricing relies on regular changes to respond to shifting market landscapes.

For most of sales history, pricing was seen as rather static. Products had prices, and they tended to stay at those prices unless something notable happened, like rising costs of living or more expensive manufacturing demands. However, this began to change in the 1980s, largely due to the airline industry. By adjusting the cost of flights based on factors like the time of year, the route in question, and the time of departure, airlines were able to raise profits without doing anything significantly different in day-to-day operations.

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How Does Dynamic Pricing Work?

To properly function, dynamic pricing requires implementing strategies to change prices throughout a sales cycle. There’s no right answer for how to approach the process; with multiple ways to handle price changes and numerous types to choose from, making dynamic pricing work for you will depend on what your business prioritizes and the models that make the most sense in your industry.

Regardless of approach, how to implement dynamic pricing requires understanding that pricing needs to change over time as well as a method to make that happen.

Benefits of an Effective Dynamic Pricing Strategy

Dynamic pricing offers a lot of benefits to companies, regardless of sector or industry. These include:

• Greater control over pricing based on real-time trends in your own business as well as in the context of the performance of competitors.
• Ways to change pricing perspectives without compromising on the value of your brand.
• Cost savings via maximizing profit and driving sales at the most critical times.
• An opportunity to boost your bottom line without changing anything fundamental about the back-end operations of your company, like product production and fulfillment.
• Easy management opportunities with the right pricing tools in place.

To what extent these benefits will apply to your company will depend on factors such as your particular industry and your ability to implement the right strategies at the right time.

Types of Dynamic Pricing

Dynamic pricing comes in numerous forms, some more popular than others. Not all dynamic pricing models will be appropriate for all applications, so it’s important to understand all of the available opportunities when assessing options.

• Time-based pricing : Time-based pricing refers to pricing strategies that fluctuate based on time of the year. For example, travel resources, like airlines or trains, will often raise rates during the holiday season as they know demand will be high.
• Peak pricing : Most commonly seen in spaces like rideshare apps, peak pricing refers to increased rates in periods of highest demand.
• Inventory-based pricing : This form of pricing fluctuation is driven by inventory availability; the less inventory available, the more customers may be willing to pay.
• Competitor-based pricing : Competitor-based pricing is centered on remaining competitive in a marketplace. It can work in several different ways, including raising prices in response to market demand or attempting to offer the best value for customers.
• Customer behavior pricing : Unlike competitor-based pricing, this strategy ignores what other players in the market are doing and instead focuses on customers’ activity, like how much shoppers are willing to pay and the trends in demand.
• Segmented pricing : Segmented pricing is, simply put, a form of legal and permissible pricing discrimination in which certain populations that aren’t legally protected are offered different pricing, like lower pricing for college students.
• Geographical pricing : This form of dynamic pricing focuses specifically on where a customer is located; this can lead to higher pricing in regions that have a higher cost of living.
• Personalized pricing : As the name implies, this form of dynamic pricing requires setting individual pricing benchmarks for individual customers or customer demographics. This might mean lower prices on frequently purchased products or coupon codes based on prior buying behaviors.
• Event-based pricing : Event-based pricing focuses on pricing products or services appropriately based on customer expectations or demand. This might mean pricing sports tickets higher when a particular game is a match-up between rival teams.
• Market conditions : In this strategy, pricing is dependent on the state of the market, which might relate to trends in purchasing or economic upturns and downturns.
• Loyalty-based pricing : Loyalty pricing is a very common way of rewarding regular customers and is generally offered through rewards programs or discount codes provided to members of an email list, for example.
• Penetration pricing : Most commonly seen in new businesses trying to enter a competitive space, penetration pricing is focused on setting desirable prices, often significantly cheaper than other players, in order to change current buying behaviors.

3 Ways to Implement Dynamic Pricing

Just as there are different approaches to creating a dynamic pricing strategy on Amazon , there are also different ways to implement these strategies. Which one is right for a particular company will depend on scale, objectives, and available resources.

Manual Price Adjustments

While cumbersome and time-consuming, manually adjusting pricing is indeed an option. This method involves selecting products or services from an inventory list and changing pricing based on updated needs. However, approaching pricing from a manual perspective generally means more arbitrary decision making without the insights a pricing tool can provide.

Code Your Dynamic Pricing Model

For tech-savvy sellers, it’s possible to code your own dynamic pricing model. This kind of project ensures complete ownership of the process and can incorporate all of the facets of an industry that are most influential. As a personalized opportunity, self-established pricing tools can help a company tap into resources or processes that may not be available elsewhere.

Use Dynamic Pricing Tools

For many companies, leveraging dynamic pricing tools will be the easiest and safest way to make intelligent pricing choices. Leveraging third-party resources means less time invested in the process and more opportunities to fine-tune your pricing strategy.

These platforms often incorporate a wealth of analytics related to a given market. Some tools allow users to implement a particular strategy on an ongoing basis, while other AI-driven tools incorporate an element of machine learning to determine a customized approach to optimizing pricing based on trends and other data.

Examples of Dynamic Pricing

Dynamic pricing comes in numerous shapes and sizes, so it’s not surprising companies and industries of all kinds employ strategies to their advantage. These are some of the most notable dynamic pricing industries, followed by concrete examples and how these businesses benefit.

Dynamic pricing on Amazon and other eCommerce platforms can be a good way to increase revenue. By finding a sweet spot for product pricing at any given time, these retailers can ensure they’re offering an appropriate rate under any circumstances. The factors eCommerce retailers tend to evaluate include:

• Supply and demand
• Competitor pricing
• Learned customer behavior
• Sales requirements
• Seasonality

As one of the largest eCommerce platforms in the world, Amazon is a leader in driving profits through dynamic pricing. The site leverages dynamic pricing significantly, with pricing on products shifting in real time throughout the day. This is a default feature for Amazon’s own inventory but is also an option for third-party sellers. Sellers can utilize the built-in pricing tools in Seller Central or employ third-party resources for a more robust approach.

Google Ads are a vital business tool for promoting brands and products, and, accordingly, pricing is often fluctuating. The amount advertisers can expect to pay for sponsored ads can vary based on everything from keywords used to location and audience. Advertisers can improve their odds by following trends and adjusting bids accordingly, but at all times, Google is trying to drive as much profit as possible.

Ridesharing

Rideshare companies like Uber and Lyft are notorious for “surge pricing,” or high pricing during peak periods of service. Pricing is always in flux; by using AI, these kinds of services can determine when demand is at its highest and capitalize on that. Points of consideration include:

• Number of drivers available
• Desired routes
• Location and transportation alternatives
• Customer demand

Originally, Uber used a multiplier system for surge pricing, allowing customers context for the price increases. However, this is no longer the case; customers are given an upfront price for a total ride without insight into contributing factors.

The first of the major rideshare players, Uber set the standard for dynamic pricing in this space. Even in its earliest days, Uber was forever changing prices based on many different factors, from driver availability to time of day. Uber embraces a peak pricing model, demanding higher rates at times like weekends or evenings when people may be trying to get home from bars or parties.

While this approach has resulted in customer frustration and the occasional online gripe about truly egregious prices offered, the quick adoption by the competition has solidified this business model as a non-negotiable for riders.

Fast food is a space that has historically held to one set of prices outside of occasional upward shifts year over year, so the inclusion of dynamic pricing would be quite a game changer. While only theoretical currently, utilizing an AI-driven model could allow restaurants to lure in customers with lower pricing during slow periods. This approach could also make certain products more appealing at specific times and charge a premium during popular times of day.

Wendy’s

Dynamic pricing announced by Wendy’s hasn’t gone live yet—and may not at all, based on proposed legislation —but per an announcement by the CEO, the company is planning to unveil a digital menu-board system in 2025 that will use AI analysis to change pricing throughout the day based on customer behavior trends. This was pitched as a good thing for everyone involved, investors and diners alike. However, the unveiled plans sound similar to peak pricing, which could result in customers paying more for the same food if they order during common lunch or dinner times.

As one of the originators of today’s dynamic pricing models, airlines are among the top users in this space. Many airlines change pricing based on things like:

• Flight duration
• Route in use
• Time of day
• Time of ticket purchase
• Frequent flier status
• Competitor flights

One of the most notable ways airlines succeed in this space is by using airport “hubs,” or airports in which one carrier serves significantly more passengers. For example, Newark Liberty International is a hub for United Airlines; nearly 60% of flights from Newark are United. Since some routes are dominated by specific carriers, airlines can raise pricing in response to demand when there are few, if any, alternatives.

Delta Airlines

Delta is not the only airline that leverages dynamic pricing, but the company is certainly a major player in pricing in the aviation industry—a marketplace that played a key role in the evolution of this principle in the first place.

Delta uses several different strategies to determine pricing. These can include raising rates during high-traffic periods, like the holidays, increasing pricing when competition is scarce, and efforts to target frequent fliers, as these individuals will require flights regardless of an elevated price point. By having these measures in place, Delta can demand high pricing without driving customers away.

Hospitality

Throughout the hospitality industry, dynamic pricing can be implemented to boost profits. Hotels, in particular, as well as alternatives like Airbnb, use dynamic pricing to fill rooms at the highest potential price points. This can result in pricing changes based on elements like:

• Seasonality and demand; for example, during vacation seasons or the holidays
• Available rooms
• Local competition
• Market pricing
• Travel trends; during the height of COVID-19, many hotels offered extremely low rates
• Day of the week
• Days left to book

Marketplace-based alternatives, like Airbnb and VRBO, may also consider property satisfaction ratings and reviews, as well as historic performance in relation to similar options.

Airbnb is among the most notable examples of dynamic pricing, and not always in a good way; the company, which once offered a very affordable alternative to hotels, has been the source of significant critique in past years as pricing reaches new highs without necessarily offering commensurate services. Regardless of reputation, Airbnb implements dynamic pricing in multiple ways, including the location of a property, time of year, days left to book, competitor pricing, and duration of a stay. When these factors are used in combination, Airbnb can force high pricing across a significant portion of the country.

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Considerations When Implementing Dynamic Pricing

As with any business-related strategy, making changes to processes needs to be handled with intention. With so many different avenues for potential pricing approaches, it’s important to determine why you’re adopting dynamic pricing and what methods are best for you. 

Business Objectives

Before moving forward with a new approach to pricing, evaluate what you’re hoping to achieve with this change in procedure. Do you want to grow profits? Attract new customers? Cultivate a competitive advantage? Regardless, you’ll want to pick a pricing method that makes the most sense with the objectives your business is working toward.

Data Collection

Data-driven decision making is only as good as the data available. If access to industry information, for example, is flawed or incomplete, you may be basing pricing strategies on erroneous assumptions. Be realistic about the data available to you and how it can be best utilized to make sure what you’re planning actually aligns with your goals.

When evaluating third-party tools, ensure data collection and analysis is a part of the process. Not all resources will have access to the same level of information or be able to properly leverage information in the creation of efficient strategies.

Success KPIs

The KPIs your business relies on should also play a role in your approach to setting prices, particularly when a new strategy will change the kinds of results you can expect to see. For example, if net revenue is a key KPI, you’ll want to analyze pricing strategies that are intended to maximize profit rather than attracting new customers, no matter the cost. If your company is considering using a third-party eCommerce resource, ensure all necessary KPIs can be tracked; collecting information in bits and pieces can make gauging success more complicated.

Type of Pricing Strategy

As demonstrated, dynamic pricing strategies come in numerous forms and functions. In order to make the practice work for you, you’ll need to determine the right method for your identified business objectives. There’s no right answer, and it may be possible to make cases for multiple avenues. As such, you’ll need to carefully assess all of the available options and determine an ideal starting point.

It’s important to note that this isn’t necessarily a finite choice or even the case of picking a single method. It’s possible to employ numerous dynamic pricing types at once based on company needs. For example, a company may rely on event-based pricing for most aspects of doing business but will also implement a time-based pricing model to capitalize on things like the winter holiday season.

Drawbacks of Dynamic Pricing

While dynamic pricing does have many upsides, there are some disadvantages companies should consider when developing a strategy. These include:

• Customer backlash : Many customers dislike the feeling of being price-gouged, so sky-high pricing choices can lead to customers distrusting a brand and looking elsewhere in future sales decisions.
• Reliance on outdated or irrelevant data: Sales strategies are only as good as the information driving them, so if data is sourced improperly or incompletely, approaches to dynamic pricing might backfire.
• Changes in customer behavior : If customers start seeing trends in your pricing, like which days of the week or times of the year pricing tends to be most expensive, they may hold off on buying or choose to purchase from a competitor.

However, most of these drawbacks can be avoided with a well-constructed and reasoned dynamic pricing strategy .

Is Dynamic Pricing Legal?

In most cases, yes, dynamic pricing is fully legal.

However, this is not the case for pricing discrimination against legally protected classes. While the Robinson-Patman Act of 1936 went largely unchecked over recent decades, the tide is starting to turn, with the FTC focusing more intensely on problematic pricing in the last several years. Companies that want to stay on the right side of the law are encouraged to make sure any pricing plans are both fair to customers and implemented legally.

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Implement Dynamic Pricing with Trellis

While manual pricing is possible, and eCommerce platforms like Amazon offer some support in this area, many companies will require tools that go above and beyond the basics. Dynamic Pricing from Trellis supports your eCommerce goals by using AI learning to create specialized pricing strategies that can evolve over time. Ideal for staying a step ahead of the competition, our tools can help you grow your business. Connect with us today to learn more.

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Aug 22, 2024

How to price a product to make a profit

Effective product pricing is an essential part of any business. The right price should cover costs and ensure long-term profitability and sustainability. In this article, we’ll provide strategies and expert tips to help price your product and make a profit.

1. Evaluate costs

Start by understanding the costs of producing and selling your product, whether a physical item or a service. Here are the key cost types to consider:

• Materials . The basic materials to make your product or provide your service. Break these down into individual cost components, not one bulk sum.
• Labor . Fees for workers, consultants, or freelancers to deliver your products or services.
• Marketing and advertising . Costs to promote your business, like digital ads, influencer collaborations, and content creation.
• Shipping or transportation . Costs for delivering products or providing services include packaging, transportation, and logistics.
• Overhead . General business expenses include rent, utilities, insurance, and other non-production-related costs.

It’s important to separate your fixed and variable costs. Fixed costs, like rent or insurance, stay the same regardless of your production or sales volume. Variable costs , like labor or materials, fluctuate based on production levels.

When calculating variable costs, list all expenses that increase with production. Determine the cost per unit and multiply it by the total number of units produced.

For example, if it costs $5 per unit and you make 1,000 units, your total variable cost would be $5,000. Understanding these costs helps you price your products accurately.

Your cost structure might differ slightly for online businesses. While you may save on physical storefront costs, you need to factor in expenses like web hosting and eCommerce platform fees.

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2. Determine desired profit

Once you’ve calculated your costs, the next step is to set a profit margin that aligns with your business goals. For instance, if your industry typically operates with a 20% profit margin, use that as a starting point.

Use the following formula to determine the selling price based on your desired profit margin:

Selling Price = Total Cost / (1 – Desired Profit Margin)

If your product costs $50 and you aim for a 30% profit margin, calculate the final selling price with this formula:

Selling Price = 50 / (1 – 0.30) = 50 / 0.70 ≈ 71.43

In this case, you’d need to set the selling price at approximately $71.43 to achieve a 30% profit margin. This formula helps ensure your pricing covers all costs and reaches profit goals.

After calculating, review the price to ensure it aligns with customer expectations and market trends.

Sphere IT ’s strategy ensures that every item sold covers expenses and contributes to achieving desired profit margins. We start with cost-plus pricing, where the markup reflects the product’s value and current market conditions.

Michael Collins

CEO of Sphere IT

3. Understand your customers

Understanding your customers is key to setting the right price. Identify their demographics, such as age and income level, and what they value most in a product. Do they prefer getting the best deal due to price sensitivity , or do they value quality and are willing to pay more?

As the owner of Adaptify AI , I’ve priced over 50 SaaS products. The key is knowing your customer’s perceived value. In fintech SaaS, after interviewing 50 clients, $149/month was seen as “expensive but worth it” for productivity gains, though costs indicated a $50-200/month range.

Hansjan Kamerling

Owner of Adaptify.ai

Price-sensitive customers focus on getting the lowest price possible. They’re likely to compare prices across different brands and may be swayed by minor price differences.

Value-oriented customers seek a balance between price and quality. These customers are ready to pay a higher price if they receive better value.

Once you’ve identified your customer type, apply psychological pricing techniques . One effective method is charm pricing where you set prices below a round number. For example, pricing an item at $9.99 instead of $10.

This technique appeals to price-sensitive customers by making the price seem lower. Value-oriented customers perceive it as a smart deal, emphasizing their value for their money.

Another helpful strategy is bundle and discount pricing . It involves offering multiple products at a lower price or applying discounts to individual items.

With bundle or discount pricing, price-sensitive customers maximize their purchases with minimal cost. Meanwhile, value-oriented customers appreciate the added value of getting more products or services for a reasonable price.

For discount pricing, you can make the flow more appealing by creating discount vouchers. Offer these to customers who have previously purchased from you or provide them as a promotional deal for first-time buyers on your website.

If your business involves online sales, using a website builder that supports your pricing strategy is crucial. For example, Hostinger Website Builder offers built-in tools for managing product pricing and applying discounts. This makes implementing strategies like bundle and discount pricing easier on your site.

To set your discount, go to Store manager → Discounts → Add discount . Choose between a percentage or a fixed amount, depending on your needs.

Maintain an overall profit margin. Limit the number of use and active dates to ensure the discount doesn’t affect your business’s profitability.

Finally, price anchoring involves showing a higher original price alongside the current selling price, making the current offer appear as a better deal. This technique works well for both customer types.

Price-sensitive customers see the discounted price as a significant bargain. Value-oriented customers view the anchored price as a confirmation that they’re getting a high-quality product at a lower cost.

4. Research your competition

Start by identifying the key players in your market and analyze their pricing strategies. Are they targeting the same customers as you? How do their prices compare to yours?

Conducting competitor and market research will help you better understand the competitive landscape and make informed decisions about your pricing.

Stay updated on your competitors’ pricing and promotions by using tools like Google Alerts and following them on social media. This allows you to quickly respond to any changes they make, whether a new discount or a shift in pricing strategy.

To use Google Alerts, enter your business industry, competitor’s name, or relevant keywords. You can adjust the alert’s frequency, source, and other relevant details.

After researching your competitors, it’s important to see how your pricing and promotions compare.

5. Choose a pricing strategy

Selecting the right strategy can help you achieve profitability, attract customers, and stand out in the market. Here are some popular pricing strategies:

• Cost-plus pricing . Add markup to your cost of goods sold to ensure you’ve covered all expenses and made a profit. This straightforward method is reliable and easy to calculate, making it a popular choice for many businesses.
• Market share pricing . Set lower prices initially to attract more customers and gain market share. This strategy is effective for new businesses or products looking to establish a presence in a competitive market.
• Dynamic pricing . Adjust prices based on demand, location, or market conditions. This approach helps maximize profits by capitalizing on market fluctuations.
• Value-added pricing . Price your product based on the perceived value it offers. This strategy works to highlight your product’s unique features.

One mistake I made for Web Copy Collective ’s pricing was treating it as a time transaction instead of a value transaction. When I started thinking about the value my products bring my clients, I started pricing higher and making more sales because the new prices mirrored the product’s true worth.

Emily Williams

Founder and Content Strategist of Web Copy Collective

• Competitive pricing . Use competitor prices to guide you, but find ways to differentiate and add value to justify your product price.

When choosing the best pricing model for your business, consider whether your goal is to maximize short-term profits, build market share, or position your product as a premium offering.

If you’re launching a new tech gadget and want to quickly gain market traction, market share pricing might be your best bet. If you’re selling a luxury brand of skincare products, value-added pricing could help position your product as a premium choice.

For businesses that operate in highly competitive markets, competitive pricing ensures you stay in line with market rates while differentiating on other aspects like quality or service.

Finding the right fit was a result of both market understanding and substantial trial and error. For instance, ELEHEAR opted for a value-based pricing approach, considering our innovative solutions in the hearing aid technology market.

Elyn-Aisin Lim

Brand Director of ELEHEAR

6. Monitor and adjust prices

Pricing is an ongoing process that requires regular evaluation and adjustment. To stay competitive and profitable, monitor key factors and be ready to adapt your pricing strategy as needed. Key factors include:

• Cost fluctuations . Monitor changes in materials, labor, and overhead costs closely. As these costs fluctuate, you may need to adjust your prices to ensure a profit.

When costs for FusionAuth increase, I evaluate whether we can reduce expenses elsewhere before raising prices. For long-term clients, I negotiate individually to provide the best value while minimizing price hikes when possible. My goal is to keep FusionAuth accessible for companies of all sizes.

Brian Pontarelli

Founder and CEO of FusionAuth

• Market demand . Stay informed about shifts in customer demand. If demand increases, you might have the opportunity to raise prices. Conversely, during periods of low demand, you might consider strategic discounts to maintain sales.
• Competitor pricing . Regularly check your competitors’ prices and promotional activities. This will help you stay competitive and quickly respond to any changes in the market.
• Sales data . Review and analyze your sales data regularly. This helps provide valuable insights into which products or services are most profitable.

If needed, refine your pricing approach to see what resonates with your customers. Gather feedback through surveys and customer interactions to understand how your pricing is perceived.

Regular reviews of our costing structure guide us in making adjustments to maintain healthy profits through a consistent pricing policy.

Be prepared to adjust your prices in response to changes in the market or within your business. This might mean increasing prices to cover rising costs or offering discounts to boost sales during slow periods.

Setting the right price is important for your business’s success. By following these steps, you can ensure your pricing strategy is effective and sustainable:

• Evaluate costs . Understand all expenses to set a profitable base price.
• Determine profit margin . Choose a margin that aligns with your financial goals.
• Understand your customers . Tailor your pricing to meet their needs and expectations.
• Research competition . Stay competitive by analyzing and responding to competitor pricing.
• Choose a pricing strategy . Select the approach that best fits your business objectives.

Remember, pricing is an ongoing process that requires regular monitoring and adjustments. Keep an eye on production costs, market demand, and competitor actions.

How to price a product FAQ

How much profit should i make on a product.

After evaluating your costs, determine a desired profit margin that aligns with industry standards. This ensures your pricing covers all expenses and achieves your financial goals.

How do you calculate prices for handmade items?

Start by evaluating costs, including materials and labor. Then, determine your desired profit and choose a pricing strategy that reflects the uniqueness of your handmade product.

How do competitors’ prices impact my product pricing decisions?

Competitors’ prices assist in positioning your product competitively. They also help ensure alignment with your target customers’ expectations and profit goals.

Nurul Siregar

Nurul Siregar has over 3+ years of experience in the tech industry with a passion for writing about digital marketing. Nurul enjoys reading fiction novels and making digital illustration in her free time. Follow her on LinkedIn .

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Ultimate Guide to SaaS Go-To-Market Strategy

Last updated on Thu Aug 08 2024

Whether you’re still validating your SaaS product idea or launching a new feature to an existing product line, thinking about your Go-To-Market Strategy is always relevant. Improving each feature Go-To-Market plan as you grow and receive customer feedback is even more critical.

It’s essential to remember no two businesses are exactly alike, so adopting a copy-paste approach to a GTM strategy is unlikely to yield the desired results. Instead, you can follow this comprehensive guide for go-to-market strategy and product launch plan .

In this post, we’ll share tips and advice on all about SaaS go-to-market strategies, questioning various aspects, things to contemplate, and data to look into so you can launch your business effectively.

What Is a Go-to-Market (GTM) Strategy for SaaS?

A go-to-market strategy is your roadmap for successfully launching a new product in the SaaS market. It enables you to gain a competitive edge in your target market by proposing an irresistible value proposition, supported by a well-developed sales and pricing strategy, and marketing plan.

It should be noted; that a go-to-market (GTM) strategy isn’t a universal plan fit for all businesses. A SaaS, micro-SaaS, eCommerce, or even a brick-and-mortar business each has unique services that make their strategies different from each other.

However, regardless of where your business lies, whether it's a B2B SaaS or a B2C SaaS, developing a detailed strategy can be the game changer between winning or losing. By identifying your ideal customer profile (ICP), analysis of competitors, refined messaging, and more, your business will be prepared for any circumstance and set for victory.

Types of SaaS Go-To-Market Strategies

When it comes to formulating a go-to-market strategy for SaaS companies, there are two main approaches to consider: product-led and sales-led.

Product-Led Go-To-Market Strategy

A product-led go-to-market strategy leans on the concept of customers easily using your product and experiencing the benefits provided by the product. In this approach, the marketing strategy is primarily inbound, letting the product speak for itself.

Product-led go-to-market SaaS strategies generally offer free trials or demos giving users the chance to test the software to decide if it’s a fit for them. With inbound marketing, your go-to-market strategy must center on interpreting the benefits and features of your business that provide users with the vital information they need to decide if the SaaS product is right for them. This self-service type of marketing strategy allows potential buyers to investigate the products themselves.

Sales-Led Go-To-Market Strategy

Sales-led go-to-market SaaS strategy lets your Sales and Customer Success teams take the limelight. Generating market interest and building personal engagement are pivotal contributors to bottom-line revenues.

For instance, a SaaS company offering medical software might find their ICP more receptive to phone calls explaining the product’s benefits and features, as these individuals may lack the resources or time to research useful products. Meanwhile, software for IT experts might succeed more if the customer can explore their alternatives themselves and learn that the software is right for them.

You may be left thinking, must I choose only a product-led or sales-led? It is feasible to use a mix of both, finding your personalized approach to collaborate and fuel growth.

Developing a SaaS Go-To-Marketing Strategy in 6 Steps

You aspire to conceive a robust and well-rounded go-to-market strategy that sets you apart from competitors and helps your customers understand your core value sooner.

1. Determine Your Target Audience

Defining your target audience is a crucial aspect of a SaaS business strategy. Questions like the following can help get you started:

Who is my market? (age, gender, location, demographic)

What are urgent and important customer needs?

Am I creating a new niche or entering an existing market?

By comprehending who your customers are and why they would buy your SaaS solution, you can align your go-to-market strategy better to cater to users’ needs.

2. Research The Competition

Other than insights gained from thoroughly interpreting competitor offerings, here are some additional considerations for refining your go-to-market SaaS strategy:

How does my software or product better suit a user’s needs?

Do I want to be a low-cost option or a luxury choice?

Am I competing with SMB markets, mid-markets, or enterprises?

By investigating your competition, you can better address market needs and align your strategy accordingly. To delve deeper into researching your competition, you can refer to our Feature Prioritization Matrix guide.

3. Price and Value Determination

After studying competitors, you’ll have more insight into your pricing strategy and value proposition. You can learn from market trends and adjust your strategy to meet unfulfilled needs within your target audience.

4. Create A Distribution Plan

With a better understanding of your customers and competitors, it’s time to devise a distribution plan that describes how you intend to spread your brand's influence. As you go about this, ask yourself:

How can I best share my value proposition with my target audience?

Will I focus more on inbound or outbound sales, or shall I strike a balance?

What channels will I use to distribute and advertise my products?

What advertising strategies will most effectively reach my target market?

5. Make Your Messaging Clear

A go-to-market strategy is determined to fail if the message isn't clear. By this stage, with all the information you've collected, you should be well aware of your target market, the need for your product, and the niche within the market you're aiming to serve. This knowledge will enable you to devise an effective message to promote your brand.

By gaining a clear understanding of messaging and brand value proposition, your marketing team will be better equipped to create content that aligns with your go-to-market strategy. This way, external communication on advertisements, and marketing campaigns will establish a trustful connection at every stage of the sales funnel. For further insights, consider our Guide to Product Launch Communication Plans .

6. Develop Metrics And Goals

Growth and success are measured by key performance indicators (KPIs) including website traffic, operations output, financial milestones, or subscription numbers.

After you’ve developed your metrics and goals, share the plans and progress with your team and celebrate victories together. Monitoring and consistently updating your Product Roadmap can also aid in achieving these set goals.

Creating a Product Launch Plan that Compliments Your Overall Go-To-Market Strategy

The excitement of formulating your Go-To-Market strategy resides in its evolution as your product offering expands. Every time you add a new feature, improve an integration, or go big to alter your prices for the subscription packages, your Go-To-Market strategy shifts, for the better.

Below, we’ll outline seven essential steps for creating an exceptional go-to-market strategy;

What Are The Essentials of a Good Go-To-Market Strategy

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While no two GTM strategies are the same, there are some common elements that successful go-to-market strategy examples share.

Market Environment And Rivalry

When researching the competition, you’ll gain insight into the market environment and rivalry. By doing so, you can find your worthy competitors and discover market gaps where consumer needs have yet to be fulfilled. This research will help you identify the vital problem that your product is attempting to solve

Asking Why & Finesse Your Target Market

By refining your target market and deciding on the niche you fit into for your ICP, you’ll be able to better market yourself to a sub-group of buyers that can benefit from your brand or product. The need to understand why this market exists, why there are specific problems that need to be solved, and what these people are trying to achieve by solving these problems will help you provide an ideal solution.

Defining Your Value Proposition

Once you understand your place in the market and who your target customers are, the next step is ensuring your customers understand what you have to offer and how your services are different or better than your competitors. By constructing a clear message around the benefits of your product and how it meets their needs, you can establish a compelling brand value proposition.

Consider The Entire Enterprise

While customers are important for a successful SaaS go-to-market strategy, consider the entire enterprise while planning your strategy. This could be rethinking your company structure or adjusting the strategy to align with the resources you have. For more on creating effective plans, our detailed Product Launch Communication Plan guide might be beneficial.

Create A Customer Success Funnel

Each stage of the customer journey before purchase has significance. To reach the final stage of conversion, you must first determine how to make customers aware of your product, then captivated by it, and finally convinced of its value. This decision takes into account the value proposition, positioning, and messaging that you’ve already established. Reference our SaaS Customer Service strategies for more on engaging customers at every stage.

An Overview To Avoid Mistakes

Always double-check your data, facts, and stats to ensure you avoid mistakes. This could involve a stress test of your ICP to see if there's anything you might have overlooked.

Evaluate Your Product-Market Fit

One of the main reasons a SaaS company fails is that the product doesn’t fulfill a market need or doesn’t better fulfill a need than an existing product. This calls for a Product-Market Fit survey, combining both qualitative and quantitative customer insights. This will help you identify where the gaps are and how your product can fulfill market needs.

From Theory to Practice

Kudos! You’re now armed with the ultimate tool for crafting a winning SaaS go-to-market strategy.

By leveraging your insights on customer needs, market gaps, and pricing dynamics, you’ll be poised to join the ranks of the most successful businesses.

But there’s still more! The key to truly thriving as a SaaS business lies in your ability to emotionally connect with your target market and encourage them to take action. With this guide in hand, you’re ready to unleash the full potential of your business and take the world by storm.

Getting feedback has never been easier and we hope you’ve realized that after reading this article.

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Law Firm Business Plan Guide: From Start to Finish [with Template]

Uncover how to craft a winning business plan for your own law firm tailored specifically for lawyers!

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By Ivan Vislavskiy

Running successful law firms need careful planning, strategic thinking, and a clear vision for the future. A well-crafted law firm business plan can propel your firm to new heights. It helps you clarify your vision, identify your target market, and gain a deeper understanding of your competition. Once you get a glimpse into your firm’s strengths, weaknesses, opportunities, and threats, you’ll be able to make informed decisions and position your practice for long-term success. 

This guide will take you through the process of creating a comprehensive business plan for your own law firm. We’ll discuss what a business plan for a law firm entails, how to construct it in 7 easy-to-follow steps, and the key components that should be included. Additionally, we’ll provide a real-world legal business plan sample to inspire and guide you.

What Is a Business Plan for a Law Firm and Its Purpose

A law firm business plan is a comprehensive document that outlines the strategic vision, operational details, and financial projections for your legal practice. It serves as a roadmap to guide the growth and development of your firm, addressing critical aspects such as your target market, competitive landscape, service offerings, law firm marketing strategies , and financial projections.

The primary purpose of a law firm business plan is to provide a clear and well-researched blueprint for the successful launch, operation, and expansion of your legal practice. By investing time and effort into crafting this document, you’ll gain several key benefits:

Clarity and direction: A well-crafted business plan helps you articulate your firm’s unique value proposition, set measurable goals, and align your team towards a common vision.

Operational efficiency: The process of developing a business plan forces you to address critical operational details, such as staffing, resource allocation, and process optimization, ensuring your firm runs smoothly and efficiently.

Financial planning: A comprehensive financial plan, including revenue projections, startup costs, and cash flow forecasts, allows you to make informed decisions about investments, pricing, and growth strategies.

Funding and investment: A professional-grade business plan can be a powerful tool for securing funding from investors, banks, or other financing sources, as it demonstrates the viability and growth potential of your legal practice.

Competitive advantage: After a thorough competitive analysis , you can develop differentiated services, pricing strategies, and marketing approaches that give your firm an edge.

Ongoing guidance: Your law firm business plan should be a living document, regularly reviewed and updated to reflect changing market conditions, client needs, and your firm’s evolving goals and objectives.

Comrade Digital Marketing Agency can help you with the above if you’re unsure how to go about it. Schedule a free consultation.

How to Build Your Law Firm Business Plan in 7 Steps

Building a law firm business plan involves several key steps, from analyzing your competitors to creating a financial plan and a client retention strategy. Each step is essential to creating a comprehensive and effective plan.

Step 1: Analyze Your Competitors

The first step in developing your law firm business plan is to thoroughly understand the legal scene. Begin the market analysis by estimating the projected size of your target market and identifying your direct and indirect competitors. Look for gaps in their approach that you can exploit or areas where you can innovate, allowing you to differentiate your firm and offer unique value to your clients.

Step 2: Define Your Law Firm’s Vision

With a clear understanding of your competitive environment, the next step is to define your law firm’s vision – a compelling, aspirational statement that encapsulates your firm’s purpose, values, and long-term goals. This statement should guide your law firm’s growth and decision-making. Additionally, identify the core values and principles that will shape your firm’s culture and decision-making processes. Translate these into measurable objectives that will drive your firm’s growth and development.

Step 3: Develop a Detailed Firm Structure

Determine the appropriate legal structure for your law firm, whether it’s a sole proprietorship, partnership, or limited liability company (LLC). Clearly define the specific duties and responsibilities of each partner, associate, and support staff member, ensuring that your organizational structure is efficient and effective. Regularly assess your firm’s structure to identify any inefficiencies or gaps, making adjustments as needed to optimize performance.

Step 4: Outline Your Services and Pricing

Clearly articulate the legal services you will offer, including your practice areas, areas of specialization, and the unique value proposition you bring to your clients. Establish competitive rates for your services, taking into account factors such as your target market, the complexity of the legal work, and the experience and expertise of your attorneys.

Step 5: Develop Your Marketing Strategy

With your firm’s core offerings and structure in place, the next step is to develop a comprehensive law firm marketing strategy that will help you effectively reach, engage, and retain your target clients. Develop a distinctive brand identity, including a logo, messaging, and visual elements, that effectively communicates your firm’s unique value proposition.  

Outline a mix of digital and traditional marketing tactics, such as search engine optimization, content marketing, social media, networking events, and print advertising, to reach and attract your target clients.

Step 6: Create a Financial Plan

A well-defined financial plan is an important component of your law firm business plan, as it outlines your startup costs, revenue projections, profit and loss forecasts, and cash flow statements. This financial roadmap will not only help you secure funding but also guide your firm’s strategic decision-making.

Develop detailed revenue projections based on your anticipated client base, billable hours, and pricing structure, as well as profit and loss forecasts to assess your firm’s long-term viability. Furthermore, create a comprehensive cash flow statement to identify potential cash flow challenges and ensure your firm has sufficient liquidity to meet its financial obligations.

Step 7: Come Up With a Client Retention Strategy

Finally, no law firm business plan is complete without a well-defined client retention strategy. Attracting new clients is essential, but it’s equally important to focus on building long-lasting relationships with your existing clients to ensure the ongoing success and growth of your firm.

Develop targeted initiatives, such as client appreciation events, loyalty programs, and personalized communication, to foster strong, lasting relationships with your clients. Continuously seek client feedback and implement processes to measure and improve client satisfaction, ensuring your firm is meeting or exceeding client expectations. You should also cultivate a culture of client advocacy by providing exceptional service and actively encouraging satisfied clients to refer their friends, family, and colleagues to your law firm business plan.

Key Components of a Law Firm Business Plan

Now that you’ve explored the steps to building your law firm business plan, we will delve into the key components that should be included in this comprehensive document below. 

Executive Summary

The executive summary is a snapshot of your law firm’s business plan, briefly covering the mission statement, the legal services offered, the target market, and the firm’s overall goals. This section should be concise, yet compelling, to provide readers with a clear understanding of your firm’s purpose and direction.

Your Law Firm Description

This section provides a detailed overview of your law firm, including its history, core values, and unique selling points. Describe the specific legal services you offer, your target clientele, unique selling proposition, and the competitive advantages that set your firm apart in the market.

Start-up Budget

The start-up budget section outlines the initial investments and costs required to launch your law firm. This should include detailed projections for expenses such as office space, equipment, technology, hiring, and other operational costs. This information is crucial for securing funding and ensuring your firm’s financial viability.

By ensuring your business plan for attorneys includes these key components, you’ll create a comprehensive and compelling document that can serve as a roadmap for your firm’s success.

Legal Business Plan Sample

The law firm business plan template sample from Rocket Lawyer provides a valuable example of the key components that should be included in a comprehensive law firm business plan. The template covers the essential sections, such as the Executive Summary, Business Description, Products/Services, Funding Request, and Financial Projections.

The Executive Summary offers a concise overview of the firm’s goals, target market, and unique value proposition. This high-level snapshot gives readers a clear understanding of the law firm’s purpose and potential.

The Business Description delves deeper into the firm’s operations, including its legal structure, management team, and competitive advantages. This section allows the firm to showcase its expertise and differentiate itself within the legal industry.

The Products/Services section outlines the specific legal services offered, highlighting the firm’s areas of focus and specialized expertise. This information helps potential clients and investors understand the scope of the firm’s capabilities.

The Funding Request and Financial Projections sections are crucial for securing financing and demonstrating the long-term viability of the law firm. These financial details provide a roadmap for growth and profitability, which are essential for attracting investment and ensuring the firm’s success.

Crafting a Powerful Business Plan for Lawyers

With the steps outlined in this comprehensive guide, you can create a robust law firm business plan that sets your legal practice up for long-term success. Whether you’re a solo practitioner or leading a multi-partner firm, a well-crafted business plan will help you secure funding, attract top talent, and demonstrate your strategic thinking to prospective clients. Remember, it’s a dynamic document that needs regular updates to align with market changes and evolving goals, ensuring your firm’s growth and leadership in the legal industry.

As you craft your law firm business plan, consider partnering with a professional digital marketing agency like Comrade Digital Marketing , to help you develop a strong online presence and implement effective marketing strategies. Our team of experts can provide customized SEO , PPC , and web design services to help you reach and engage your target audience, ultimately driving more leads and client conversions for your law firm. Contact us to learn more about how we can support the success of your law firm through data-driven, results-oriented digital marketing solutions!

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