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

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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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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.

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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
• Labor (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 clamoring 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. Analyze 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.

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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.

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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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Pricing Strategy in a Business Plan: Deep Dive

• September 4, 2024

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 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.

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. Largely 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. 

Which pricing strategy is best? 

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

How do you determine the selling prices of a product?

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

What is the simplest pricing strategy?

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

What is a pricing curve?

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

What are the 4 major pricing strategies?

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

Related reading

• Business Planning

How to Write Pricing Strategy for Your Business Plan

Written by Vinay Kevadiya

Published Sep. 4 2024 · 13 Min Read

Pricing products and services is a sensitive matter. You must strike the right chord to drive consumer demand and remain profitable.

To achieve this feat, you need a flawless pricing strategy for your business plan.

However, you may find it hard to price your offerings as a business owner—and you’re not alone. In fact, according to a survey, 85% of the companies believe there’s always room for improvement in pricing decisions.

But, no need to worry. This guide helps you create a solid pricing strategy so you can cater to your target audience while making enough to run a successful business. We’ll also discuss different pricing strategies and models.

Let’s begin.

What is a pricing strategy in a Business Plan?

Pricing strategy is the procedure to determine the price of products and services. These include variables like business goals, value proposition, demand and supply, financials, competition, market trends, and buyer personas.

Considering all these factors may sound confusing but creating an efficient pricing strategy is possible if you follow a stepwise procedure to arrive at a price point.

Importance of pricing strategy in a business plan

People often believe pricing strategy is mostly about selling a product or a service at the right price. Well, it’s more than that.

Here are some of its noteworthy benefits:

Clarity about financials

You get a clear view of all financial aspects including income, expenditure, and profit. This helps you to price your products or services reasonably.

Effective brand positioning

A buyer associates the price of a product with the perceived value, whether it’s related to utility or status. Hence, pricing strategy has a direct impact on brand value, credibility, and customer loyalty.

Gain in market share

The perfect pricing strategy for your business can prove to be a game changer, especially if you want to grab a large portion of the target market to maximize revenue and profits.

Edge over your competitors

According to an Accenture and GE study , gaining a competitive advantage is one of the top three priorities of 57% of enterprises. The right pricing strategy can help you achieve it.

Insights of market conditions

While creating a business plan , especially pricing strategy, you must consider external factors before arriving at a conclusion. As a result, you’re aware of all upcoming changes in the market and industry.

Pricing strategy vs. pricing model

Pricing strategy and pricing model—these two terms are often used interchangeably, leading to utter confusion.

While pricing strategy is an approach to setting the product prices, the pricing model is the way you implement the pricing strategy.

For example, the freemium pricing model is based on the penetration pricing strategy. You offer a free trial, limited access at a low price, or a forever-free version to attract prospects and then try to enroll them in a paid plan.

Source: Brevo

Let’s take another example of the hourly pricing model. It’s based on the value-based pricing strategy where you get paid for your services. The more experience you have, the more you get paid.

Similarly, we’ve other pricing models, also called pricing methods, that businesses use to generate revenue. The most important ones are:

• Bundle pricing
• Subscription pricing
• Project-based pricing
• Tiered pricing
• Flat pricing
• Promotional pricing

Pick the model best suited for your goals and the one delivering maximum perceived value to the customer.

10 Types of pricing strategies with real-life examples

Now that we know the importance of the pricing strategy in a business plan, let's explore various strategies deployed time and again to entice customers, destroy competition, and maximize profits.

We’ll also showcase real-world examples of companies utilizing a particular strategy to sell their products or services.

1) Value-based pricing

As the name suggests, value-based pricing is a pricing process based on the customer’s perceived value of a product or a service. The higher the value, the higher the product price. Therefore, we can say value-based pricing, also called value-added pricing, adopts a customer-centric approach.

The selling price is irrespective of the production and operating costs. Think of fine dining restaurants, luxury cars, art galleries, and haute couture. A business knows the product is unique, enhances the client’s self-esteem, and provides an unparalleled experience.

Real-world example: Starbucks, in comparison to other coffee beverage brands, is the most expensive . It charges a premium for its upscale image, relaxed and comfortable interiors, and sit-as-long-as-you-want policy.

2) Economy pricing

In economy pricing, you sell the products or services at low prices due to low production costs and negligible advertising costs.

Since the profit margin is thin, it can be successful only if you sell offerings in plenty (sales volume-based strategy). Examples comprise generic groceries, medicines, and budget airlines available at the lowest price to potential customers.

Real-world example: Amazon deploys economy pricing to sell multiple products at discounted prices under a generic brand called AmazonBasics.

Source: Amazon

3) Competitive pricing

Do you know for 87% of consumers , “getting a good deal” is important when choosing between brands or retailers? Buyers will always compare before spending.

This indicates the power of competitive pricing, also known as market-oriented and competitor-based pricing, a marketing strategy where a business prices its products or services based on competitors’ prices.

Real-world examples: Uber and Lyft, Amazon and Walmart, McDonald’s and Burger King, and so on.

4) Premium pricing

When you charge a higher price for a product or service than competitors to provide better quality and value, it’s called premium pricing. Businesses that opt for premium pricing often have few or no competitors. Luxury brands, for example.

However, premium pricing, also called prestige pricing, can backfire if a business’s equity doesn’t support its perceived value. In short, brands should be able to justify the premium price.

Real-world example: Rolex, the Swiss watch manufacturer. Their watches are of top-notch quality, robust, and as precise as possible. Hence, they demand a higher price for their products.

5) Cost-plus pricing

Also known as markup pricing, this strategy is one of the simplest pricing mechanisms. Simply add the desired profit, or markup, to the production cost to arrive at the selling price.

Formula: (Production cost) × (1 + Desired profit in %) = Selling price

Cost-plus pricing is ideal for products and services that are inelastic or less elastic, i.e., their demand remains unchanged in case of a price change. Gasoline, for example.

Source: Iowa State University

Real-world example: Everlane is one company that believes in transparent pricing. The retail store shares overhead costs and operating costs, allowing you to easily calculate the markup.

6) Penetration pricing

If you’re planning to launch a new product or service, a penetration pricing strategy should be your go-to to take the market by storm. This happens when you launch a product or service at a low price.

The penetration pricing should be used for a limited time as it restricts profit margins due to low selling prices. However, if the strategy delivers excellent economies of scale , you can keep the price unchanged.

Real-world example: Hulu, a streaming service, offers bundle packages at discounted prices. With its fierce pricing and unparalleled value, Hulu has been growing consistently .

7) Dynamic pricing

The practice of varying the price of products and services based on current market conditions such as demand, supply, seasonality, and time is called dynamic pricing.

Also referred to as time-based pricing, surge pricing, variable pricing, and demand pricing—dynamic pricing strategy works best to maximize revenue because it offers multiple price points for customers at different times.

Real-world example: Airbnb is a classic example of dynamic pricing. The prices go up when the demand goes up. Like when the holiday season is around the corner, or the prospect wants an immediate booking.

8) Skim pricing

Also called price skimming and high-low pricing, skim pricing is a marketing strategy wherein you launch a product or service at a high price, and then decrease it over time.

Source: FEEDOUGH

Price skimming is a short-term pricing strategy, targeting early adopters who are usually loyal customers and ready to pay a high price. The price decrease works best during sales to clear inventory.

Real-world example: Apple adopts the price skimming strategy. The newly launched iPhones attract early adopters. The older iPhone models are sold at lower prices, attracting price-sensitive customers.

9) Psychological pricing

Psychological pricing plays with human psychology to increase sales volume by altering buyer perceptions and decisions. For example, businesses place price tags ending with $9.99 or $9.95 instead of $10 to create a perception of lower prices.

The psychological pricing has many variants—charm pricing, prestige pricing, anchor pricing, decoy pricing, center stage pricing, buy-one-get one (BOGO), and so on.

Real-world example: Louis Vuitton, the French luxury fashion brand, deploys whole number pricing to render an expensive touch to their line of products. Their prices mostly end at 0.00.

Source: Louis Vuitton

 10) Geographical pricing

Geographical or geographic pricing strategy revolves around adjusting the price of a product or service based on the buyer’s location and other geographic factors like regional culture, regulatory norms, income levels, and buyer behavior.

While local businesses can easily nail the pricing, a global enterprise needs to research properly before arriving at a price point. For example, differences in shipping costs have a major impact on product sales.

Real-world example: Adobe, a US-based software company. In India, the Adobe Creative Cloud Apps is available at a discounted price. Whereas in the US, it’s a little more expensive.

How to make an effective pricing strategy for your business plan?

Hope you got a complete understanding of how different pricing strategies work. It’s important because you will use one or more of these to come up with a strategy of your own.

Here’s the stepwise procedure to create a pricing strategy for your business :

1) Know your business goals

The ultimate aim of a pricing strategy is to mint money; every business wants increased revenue and profits. However, you can’t just focus on money. You need to have a goal that fuels your business.

Perhaps you want the largest market share, to attain new levels of brand equity, or to achieve the highest sales target ever. Whatever your goal, pricing is the pathway to achieve it. Therefore, before you begin to write the pricing strategy, note the goals.

2) Identify target audience

While pricing your products, you must know who your customers are and how much they’re willing to pay.

Create buyer personas to overcome the first obstacle of knowing your customers. Here’s everything you’ll learn about your target customer base:

• Demographic information like age, gender, location, language, education, relationship, preferences, etc.
• Psychological information like values, interests, challenges, pain points, fear, motivations, etc.

The answer to your second question lies in conducting a customer survey to gather data about prices. For this, check out the Van Westendorp Pricing Model . It’s a set of four survey questions that help you determine a range of acceptable prices for your product or service.

Source: Forbes

3) Study your competitors

Know what your competitors are charging from your target audience before you make a pricing move. Otherwise, it can be fatal for your business as the competitor will erode your market share.

Based on the information you have, proceed with a suitable pricing strategy.

For example, adopt a competitive pricing strategy if you’re providing the same value as your competitors. Choose value-based pricing when you know no one can match your value proposition.

If it's about more than just the price, you need to dig deeper. Competitor SWOT analysis and Porter’s Five Forces are excellent models to gauge your competition and other forces before finalizing a pricing strategy.

(Source: 7 SWOT analysis examples )

4) Calculate the costs

You can’t arrive at a price point unless you know the expenses associated with your business. Most pricing strategies are completely dependent on business costs, such as cost-plus price and penetration pricing.

Ensure you have access to complete data related to costs of goods sold (COGS), operating expenses (fixed costs and variable costs), and non-operating expenses. Once you have the information, you can add a markup or profit margin to set a selling price.

The value you provide to the end user at the expense of higher costs has a major impact on the pricing.

If you offer unique features, better quality, and outstanding customer support, opt for a premium pricing strategy. Conversely, economy pricing is apt for generic quality products manufactured at a lower price.

5) Write a pricing strategy for your business

Based on the criteria laid out above, you can start drafting a pricing strategy for your business plan. A few questions to ask while doing the job:

• Is the pricing aligned with your revenue goals?
• Are you providing enough value for the price you ask?
• Do you have a competitive advantage?
• Are all costs and expenses taken into consideration?
• Does the strategy help you with brand positioning?

If you get clear answers to these questions, your pricing strategy is in tandem with your business goals.

If you’re stuck somewhere, you can always seek expert help or use a credible AI business plan generator to ease your pain.

Conduct pricing analysis of existing products or services periodically based on sales performance and external factors. It helps you stay aligned with your goals. If anything seems off track, there’s always room for restructuring.

Now you have all the knowledge required to create a foolproof pricing strategy for your business plan.

Using this guide as a reference, come up with a blueprint to conquer the market, generate a continuous revenue stream, and establish a loyal customer base.

At any point, if you require an extra push to sail through the process, allow the AI business plan generator like Bizplanr to draft a robust business plan in a few minutes!

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Answer a few questions, and AI will generate a detailed business plan.

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Frequently Asked Questions

Is pricing strategy a business strategy?

Yes, it is. A pricing strategy is often referred to as a business or marketing strategy because it’s more about maximizing profit, gaining market share, and positioning your brand than just sales and revenue.

What is the pricing structure in a business plan?

The pricing structure in a business plan outlines how you will price your product or service. It includes details like the selling price, discounts, payment terms, and how your pricing compares to competitors. It’s a way to attract paying customers and stay competitive.

Freemium pricing, bundle pricing, and subscription pricing are some of the most used pricing structures.

How do companies formulate a pricing strategy?

Companies create a pricing strategy by researching their market, understanding their costs, conducting competitor analysis, and figuring out what customers are willing to pay.

They also consider their business goals, whether it’s to increase profit, grow market share, or establish a premium brand. Lastly, they choose a pricing model that aligns with these goals.

As the founder and CEO of Upmetrics, Vinay Kevadiya has over 12 years of experience in business planning. He provides valuable insights to help entrepreneurs build and manage successful business plans.

Follow Vinay Kevadiya

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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.

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.

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.

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.

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.

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.

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.

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.

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.

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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Pricing Strategy Plan Template

What is a Pricing Strategy Plan?

A pricing strategy plan outlines the steps required to set and execute pricing strategies in order to achieve business goals. It is a comprehensive plan that covers the entire process of setting, monitoring, and adjusting pricing strategies in order to optimize revenue, profitability, and customer retention. The plan should include a clear outline of the focus areas, objectives, measurable targets (KPIs), related projects, and implementation timelines.

What's included in this Pricing Strategy Plan template?

• 3 focus areas
• 6 objectives

Each focus area has its own objectives, projects, and KPIs to ensure that the strategy is comprehensive and effective.

Who is the Pricing Strategy Plan template for?

This pricing strategy plan template is for marketing and sales leaders, managers, and teams of all sizes and industries. The template provides a comprehensive framework to create a plan to set pricing strategies that are tailored to their unique business goals and objectives. With this plan, teams can build and improve pricing strategies that maximize revenue, profitability, and customer retention.

1. Define clear examples of your focus areas

Focus areas are the broader topics that the pricing strategy plan will address. These areas should be specific enough to provide direction to the team, while being broad enough to accommodate an array of objectives. Examples of focus areas could include Establish Pricing Strategies, Monitor Pricing Performance, and Evaluate Pricing Strategies.

2. Think about the objectives that could fall under that focus area

Objectives are the goals that the team is aiming to achieve. Objectives should be measurable and achievable, and should be closely related to the focus area. Examples of objectives could include Maximize Revenue, Increase Profitability, and Track Pricing Performance.

3. Set measurable targets (KPIs) to tackle the objective

KPIs (Key Performance Indicators) are the measurable targets that teams can use to track the progress of their pricing strategy. Examples of KPIs could include Increase Average Revenue per unit, Increase Profit Margin, and Increase Average Sales.

4. Implement related projects to achieve the KPIs

Projects (or Actions) are the individual activities that the team will carry out in order to achieve the KPIs. Examples of projects could include Develop pricing strategies, Adjust pricing strategies, Monitor pricing adjustments, and Analyze pricing performance.

5. Utilize Cascade Strategy Execution Platform to see faster results from your strategy

Cascade Strategy Execution Platform helps teams create and execute pricing strategies faster than ever with its easy-to-use interface and powerful analytics capabilities. With Cascade, teams can quickly identify areas of opportunity, develop pricing strategies, monitor performance, and analyze the results to maximize revenue and profitability.