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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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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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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.

• Small business
• Sales & business development

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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.

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

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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.

Don't forget to share this post!

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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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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 Strategy in a Business Plan: Deep Dive

• September 4, 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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Five good pricing strategy examples and how to benefit from them

• By Jonas Timonen

Pricing strategies are the main profit drivers in eCommerce.  As price is the key detail consumers compare in eCommerce, pricing strategies should be your number one focus area. Building winning pricing strategies is easy: find out how your customer value is delivered and ensure your pricing is part of it.  In this article we introduce five best  pricing strategy examples  that are simple to follow and implement.

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Does your pricing strategy deliver customer value?

Are your customers in search of low prices or a premium service and experience?  Customer value is the core of your pricing and you should integrate your  pricing strategy  into your marketing strategy. 

Let us assume you are an eCommerce company. You have decided your position in the market, you are clear on  customer value  and how your pricing delivers it. Now you must consider some tactics to make your prices and strategy work. You can consider aspects like competitor actions, market conditions, consumer trends, and other variables, including product costs, to account for the pricing model of your goods. It is vital and something we have seen multiple times: sticking to a simple pricing strategy works best if it delivers the value the customer wants. You can easily win your competitors over by creating a simple, understandable pricing plan that includes customer value at the core. 

As a retailer or an e-commerce player, you must decide right pricing strategies before advertising products to customers. In the list below, we will review five most common pricing approaches. You need to determine the best pricing strategy for your business.

Need Expert Guidance on Your Pricing Strategy?

Explore our pricing solutions to enhance your ecommerce strategy., 1. competition-based pricing strategy.

Competition-based pricing utilizes pricing data of competitors for similar products to set a base price for their products. Rather than focusing on production costs or the item’s value for the customer, this pricing method relies heavily on market data.

Think of it in this way. You have five competitors who sell the same product as you, and you categorize the products from the most high-end brand to the affordable brands. Then, you decide where you fit in.

What is the ideal situation for using competition-based pricing?

The reason companies rely on competition-based pricing or market pricing is simple. Market-based pricing strategy is an easy strategy, and you have complete control over your market position. In addition, market information gathered on competitors can give more insights than just pricing, which you can implement in your brand to replicate similar results.

The disadvantages are that it is hard for companies to sustain only competitive pricing if they are not actively adding value to customer experience and are lacking quality products. Also, one of the major pitfalls is that selling based on a competitor’s pricing can undermine your product and cost you revenue.

Analyse competitor pricing strategies

Insert information about your competitors to get clear dashboards and a comprehensive analysis of your competitors.

2. Cost-plus pricing strategy

Cost-plus pricing strategy or cost-based pricing strategy is an essential strategy that takes into account the total cost of making a product and adds a markup to that to determine the real price of a product. Although it is a good and straightforward strategy, as a business owner, you must understand the costs involved in production: material, labor, warehousing, machinery, utilities and such.  The markup price added to the top of production cost is what the company makes in profit.

Here’s how cost-plus pricing works:

• Step 1 : calculate the entire production cost for x units of a product.
• Step 2 : divide the cost by x units to get the unit cost.
• Step 3 : multiply unit cost by markup percentage. If unit cost is $10 and markup percentage is 20, then the profit margin is $10 X 20/100 = $2. The price of the product is $12.

Based on the products that are offered, they can charge different markups. However, this is not ideal for example software service companies and music producers as the product price is significantly higher than the product cost.

Understand your pricing

Get valuable insights on how different discounting techniques, costs and marketing will affect your profitability.

3. Dynamic pricing strategy

The simplest way to describe  dynamic pricing is that your prices are not static but they change based on other factors. These factors can be, for example, segments, time, market changes or competitor prices. In eCommerce, the use of dynamic pricing in  market-based pricing strategies  is very common.

Dynamic pricing in different segments

Companies use algorithms and Dynamic Pricing Software to derive their prices for different groups based on statistics. Let’s look at an example. Y ou own a car rental company and use AI-algorithms for pricing. You designed those to raise prices at locations with many pubs and bars. If this sounds highly illegal and impractical, we can assure you it is not. We are just describing Uber. Dynamic pricing, also known as adaptive pricing, is standard practice to raise profitability.

Dynamic pricing by time

Sales-based companies, like a car or insurance dealerships, are in a rush to close deals at the end of the month. As a result, dealers offer lower prices on products to match the sales quota compared to the start of the month. In today’s world, we see this happen all the time. For example, Amazon, Uber, and aviation companies use dynamic marketing based on supply and demand.

Read our latest post on dynamic pricing

Read  “How to use competitor pricing to improve your profitability” and use our 15-step guide to get started and better understand your competition. 

4. Penetration price strategy

Penetration pricing is used to  capture market share by setting product prices at a below-market level to gain customers. Once you get a sizeable market share, you readjust your pricing accordingly.

Here’s how penetration pricing works

Let’s look at an example of penetration pricing. Consider company X, a small to a medium-sized soap maker, that sells lavender soap bars at $10. An international company Y, with a higher production capacity, enters the market and begins to sell a similar lavender soap bar at  $5. 

The goal of Y is to run the small-sized competitor X out of business even if at $5 company Y makes a low minimal profit. Still company Y is confident that company X cannot match their prices . As customers begin to buy from Y, X will eventually run out of business. This extreme form of penetrative pricing is also often called predatory pricing.  World-renowned Walmart is known for relying on this practice  and has been the bane of smaller local businesses due to their unmatchable price. 

Learn how to build pricing strategies

With the help of our article on an introduction to pricing strategies, easily fine-tune or build your pricing strategy from scratch.

5. Price skimming strategy

The practice of charging a higher price point for a product when launching it is known as price skimming.  Instead of this, you can leverage market demand and then lower or readjust the price based on price elasticity later.

We see this often at the launch of celebrity product lines or new product launches from a reputed brand. In these cases, customers are willing to pay considerably higher prices. Whether the price reflects the actual value of the product is not essential. Customers want the anticipated product, w hether it is Rihanna’s Fenty Beauty or the newest Playstation, when the demand is high.

Lowering the price of products attracts price-sensitive customers . Therefore, you can charge the maximum amount for each customer segment by skimming off the top of these customer segments and  get higher profits as a business owner. Monitor if you need to lower the price in a few months.

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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.

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Pricing Strategy Examples

Starting a new business or launching a new product or service requires detailed thought and planning. A critical piece of that planning is deciding how you should price your products and services. The pricing strategy you choose dramatically impacts the profit margins of your business, and determines the pace at which your business can grow. Several pricing strategies exist for products and services, and choosing the best for your business depends greatly upon your overall long-term business strategy.

What are Competitors Charging?

Competition-based pricing strategies focus solely on what the competition is charging and strive to meet or beat those prices. Sometimes this strategy is referred to as a rock-bottom pricing strategy, or a low price leader strategy. The goal is to best your biggest competitors based on pricing alone.

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Competition-based pricing strategy is a popular choice among many large retailers on the internet. Because the same products are available from multiple sources, the consumer buying decision is simply to select the retailer with the lowest price.

More For You

What is the purpose of the "loss leader" strategy, objectives of the product life cycle, markup vs. profit margin, differentiation strategy with a product life cycle focus, long-term pricing strategy.

This pricing strategy is a difficult one for small businesses to maintain, however. That's because it provides very narrow profit margins that make it challenging for the business to achieve enough momentum to grow.

Penetration Strategy Strategy

A penetration pricing strategy is used as a loyalty-building or market-entry tool. The penetration pricing strategy offers a high-quality product at a much lower than expected price. This combination helps the business enter a new market even when strong competitors exist, and it builds loyalty with new customers from the beginning.

The penetration strategy can dramatically increase the lifetime value of customers, because they're "hooked" with the outstanding first product offering and – assuming future products are just as high quality – they are more willing to buy additional products from the company long into the future.

Pricing a Loss Leader

Also known as a promotional pricing strategy, the goal of the loss leader pricing strategy is to get new customers even if you do not make a profit from the initial sale. By taking a loss on the first sale, businesses can offer related products or upsells at normal prices. Despite loosing profits on the promotional product or loss leader, enough profits are normally made from the additional regular-priced products and services to sustain the strategy for the long term.

Grocery store sales utilize the loss leader pricing strategy on a regular basis. They discount one or more items on their shelves to the point of taking a loss of profit, with the intention of getting customers into their stores. Once there, the customers are likely to buy more than just those products that are on sale.

High Quality at a Premium Price

Premium pricing takes advantage of a segment of consumers who believe high quality comes at a premium price. Instead of trying to have the lowest price among competitors, businesses who use the premium pricing strategy attempt to price their products and services at the highest in their market. This strategy limits the customer base available to market products and services to, but also provides much higher profit margins for each sale.

• Different Pricing Strategies: Which Is Right for Your Business?
• Investopedia: Penetration Pricing

Kathy Burns-Millyard has been a professional writer since 1997. Originally specializing in business, technology, environment and health topics, Burns now focuses on home, garden and hobby interest articles. Her garden work has appeared on GardenGuides.com and other publications. She enjoys practicing Permaculture in her home garden near Tucson, Ariz.

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.

Understanding your options: Proven pricing strategies and how they work

“The single most important decision in evaluating a business is pricing power,” Warren Buffet, CEO Berkshire Hathaway, once said. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

As the quote reflects, pricing is the most powerful lever for driving or destroying the operating margins of a company. In our experience, effective pricing strategies and tactics can deliver a 2 to 7 percent increase in return on sales.

In an analysis of hundreds of companies and pricing approaches, we found four pricing strategies that deliver sustainable results (see Exhibit 1). Not every strategy will be relevant or even feasible for every company – much depends on the market context, the business strategy, and your own capabilities. Still, we’ve found that periodically reviewing strategic options is helpful in challenging established thinking and sparking new ideas about how to approach pricing.

A. Margin Expanders

For many companies in mature markets where there is heavy competition, the prudent and realistic pricing strategy involves small, incremental steps to improve margins, usually within the existing segments, products, and pricing structure. This can mean expanding margins through small regular price increases, defending against unnecessary giveaways, segmenting the offering, applying surcharges, passing on changes in cost to serve, and pricing in additional sources of value (e.g., service).  This approach allows companies to expand their profitability over time without disrupting competitive dynamics or customer expectations. To succeed, margin expanders must have clear insight into margin leakage (i.e., where, when, and how the “pennies roll off the table” and what the impact of that is) and relentless discipline in rectifying the issue.

Example—Dow Corning: Price and brand differentiation.

In the late 1990s and early 2000s, the silicone industry was seeing declining margins due to commoditization, unfavorable changes in legislation, and increased competition. As the company’s web site explains, Dow Corning did a deep analysis of their customer segments and discovered a large and emerging group of price-sensitive customers who were pulling prices down. Instead of succumbing to price pressure, Dow Corning introduced a different brand (Xiameter) with different service levels, different customer experience and lower price points. The tiered pricing and positioning strategy allowed Dow Corning to target a much broader part of the market while protecting the profits of its existing offering. 1

B. Pricing Disrupters

Companies in new categories or in categories under significant threat often look to bolder, disruptive pricing strategies to define or defend their business model. These approaches are often founded in a belief that more value can be unlocked for the customer and the supplier through a new model that reduces the downside or increases the upside for either party. These models can include profit sharing with customers, pricing agreements that factor in risk (e.g., cost-of-materials triggers), and changes in the unit sales model (e.g., per hour of use vs. per box). To succeed with this strategy, companies need to conduct in-depth analytics and model scenarios to understand the range of outcomes for both sides. In addition, they need to be thoughtful about how to manage the downside, how competitors will respond (disruptors can face dramatic reactions from competitors), and what to do if / when others follow suit. Companies can gain an early advantage by disrupting the pricing model, but keeping that advantage can be difficult.

Example—BASF: Change in business model by moving to a pay-for-results pricing model

BASF, like many of its competitors, used to sell car paint at a price per gallon to OEMs and automotive dealerships. Quite naturally, workshops wanted to keep paint consumption at a minimum to reduce costs, which led to lower-quality paint jobs, reflecting poorly on the customer and, by extension, on BASF. As BASF’s web site details, the company decided to go from being a paint supplier for automotive OEMs to a solutions partner with its customers to improve the final product, so they moved from price per gallon to price per painted car. Taking over the OEM’s paint shops to deliver painted cars also removed a distraction from the customers’ core business, allowing the car-painting process to become better managed. The impact? With the new pricing model, BASF reduced paint consumption per car by 20 percent and saw 20 percent higher margins and a 40 percent increase in its European market share.

C. Revenue Drivers

Pricing improvements that focus on growing revenue look at the pricing strategy as an enabler to bring in more business and drive deeper penetration in the existing customer base. This can mean providing introductory offers to bring in new customers, subscription models to build on an installed base, contracting to extend the lifetime value of a customer, and bundling to increase revenue per customer. Success in this model requires maintaining profitability (i.e., not giving away too much), keeping churn low, managing customer acquisition costs, and monitoring competitive dynamics to avoid price or share wars. “Freemium” pricing has quickly emerged as a popular pricing model in online service offerings. With the Internet pushing the marginal cost of content distribution close to zero, and a large number of new players competing for users, freemium pricing (giving the basic offering for free and charging for a premium version or additional content) has quickly caught on.

Example—Expensify: Freemium subscription model enabled fast market penetration.

Expensify, an online expense-reporting and management system established in 2008, uses a subscription model offering customers 10 free scans per month for its receipts-scanning and transaction-organizing service. Users can elect to upgrade to one of the tiered subscription models based on their needs. The service became hugely successful; by 2012 Expensify was used by over 100,000 companies.

D. Sales and Pricing Pioneers

Perhaps the most radical pricing strategy is to go after large-scale sales growth and radical margin change simultaneously. This is about more than just finding a new channel or replicating an established model from another sector; it’s a new way of thinking about pricing. Sales and Pricing Pioneers drive top-line growth by implementing completely different ways of working to find new pockets of growth and value, such as introducing new services or new business models that integrate new portions of the value chain. This approach is most often used in relation to new technological advances (e.g. tablets, apps, cloud computing) with the potential to disrupt the business environment. To succeed in this model, companies need to pay constant attention to balancing the objectives of sales growth with margin attainment while making selective adjustments to strategy when necessary.

Example: Rolls-Royce: New software advances to lure risk-averse customers.

The term “power-by-the-hour” first appeared in aircraft engine vocabulary in the 1960s. Rather than selling capital-intensive engines, Rolls Royce sold airlines “power-by-the-hour” contracts that charged a fee for every hour a plane flew. According to the company’s annual reports, it was an answer to the airlines’ capital shortage and its frustration with unpredictable service costs. It was a win for airlines since the more the plane flew, the more revenue they earned. Rolls Royce considered it a win, too, since the company had bolstered aircraft engine performance by acquiring software companies to collect cockpit data and monitor engines, allowing them to develop predictive maintenance technologies that kept aircraft flying more. In addition, Rolls Royce differentiated its services, offering four packages with increasing degrees of service. According to the company’s annual reports, the bundled solution increased customer loyalty with a more tailored offering (“Pay only for what you want”). This radical approach to pricing provided the company with underlying services revenue growth of 9 percent per year between 2004 and 2011 and led to a greater than 30 percent improvement in average time between engine removals.

Moving up the curve

While these four models show different pricing strategies, which strategy to choose depends on the depth of a company’s commercial capabilities, its customers, the marketplace, and the appetite for risk.

We have found that companies generally progress along three phases of a maturity curve, each with its own set of goals and necessary capabilities:

• Phase 1: Ticket to play. These companies have emerging-to-strong analytic capabilities that help them form and execute against a pricing strategy. They are aware of the pricing situation in the market and understand the pricing schemes of their competitors and of companies they aspire to emulate. This basic competitive intelligence, however, does not necessarily extend deeply into pricing, and companies at this level rarely have experts dedicated to pricing analytics and insights about pricing behaviors.
• Phase 2: Pushing the boundaries. Here companies are masters of the traditional pricing model and are experimenting with new variations—bundling, segmented offers, partnerships, etc. This approach requires more sophisticated capabilities and tools that move beyond analysis to developing even more granular views of prices and needs by product, customer, channel, and region. Those insights feed into product development, marketing messages, sales-force quotas, and overall company aspirations. These companies have instituted a systematic process for reviewing deal wins and losses, checking competitor pricing, understanding what customers want, and making the necessary price adjustments. Their pricing teams push to understand what is driving the customer. An effective organization in this phase has cross-functional teams who meet at least monthly to discuss pricing, analyze historical data, and decide on actions to take based on the insights derived from analysis
• Phase 3. Pioneering new models. Companies at this level have stretched the traditional pricing model as far as they can (or want to), and have decided to differentiate themselves with a new model. This requires a common commitment to the importance of pricing, dedicated pricing leaders, well-defined pricing processes, and performance management that supports those goals. These more innovative companies embrace a test-and-learn approach, where new pricing models are quickly tested on the front lines, results reviewed, and adjustments made. They understand that innovation doesn’t happen in a vacuum so they invest in experiments, learn from them, and develop a comfort with failure. In many cases, there are dedicated and nimble cross-functional teams tasked with driving innovation. When ready to commit to a new opportunity, for example, these companies are able to identify and secure the necessary talent (either from within the organization or outside) and get them on the job quickly. Speed and action are at the heart of these organizations.

Companies considering evolving and deepening their pricing capabilities need to understand how pricing fits into the business’s overall strategy. Only at that point does it make sense to evaluate various pricing models and develop a forward-thinking commercial organization that sets prices, and doesn’t just take them.

• Gary, Loren, " Dow Corning's Big Pricing Gamble ," Harvard Business School, Mar. 7, 2005.

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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.

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Home » Blog » Tips » 5 Pricing Strategy Examples For Different Businesses

5 Pricing Strategy Examples For Different Businesses

by Erin Ollila | Oct 14, 2015 | Tips | 0 comments

5 pricing strategy examples that will boost your profits and put your business ahead of the competition

For infant businesses, mapping out a price plan will give you a clear vision of what road you’re preparing to travel through.

A pricing strategy is what a business uses to label the cost of their products (or services) so they can gain as much profit from their sales as possible.

Sometimes it means pricing things at an expensive rate to gain profit, other instances require businesses to lower prices so that customers will flock towards them. Whether your business is a start-up, or you’re an established company that’s offering a new product or service, you’ll benefit tremendously from price plans.

Think about what customers search for during the shopping process.

All shoppers look for the best possible bargain–but do some think that an expensive product or service means the quality is better than a competitors? Or if you implement a fair and affordable increase in a popular product, will customers be accepting of this change?

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5 pricing strategy examples that will help you create your own

1. Discounted pricing

This is probably difficult to do if you’re a newborn company; but if it’s executed properly, the benefits will far exceed your expectations. The basic idea behind a discount promotional strategy is to lower your prices in order to gain new customer, but not gain a large profit.

The products you sell are at a price that’ll generate enough funds so you can break even and maintain your business, but you’ll appeal to a large pool of customers. For example, this is one of the pricing strategy examples that works best for businesses like a grocery or convenient store that offers a variety of products at an inexpensive rate. Combining discounted products and regular-priced products in one location will draw customers into the business for a discount, but indirectly encourages impulse purchasing on regular-priced products.

2. Premium pricing plans

On the flip side, a premium pricing plan will attract an exclusive pool of customers because products and services are given at an expensive rate. Think of Apple, who never discounts or has sales. They maintain their status as a premium product this way. Using premium pricing plans limits your potential buyer pool, but offers a larger profit margin, and the ability to produce a higher quality product. Psychologically, higher-priced products have a higher perceived value by customers.

3. Inverted strategy

A list of pricing strategy examples without an inverted strategy would be incomplete, even though it can be problematic for many companies. What this price plan does, is take a product or service of high quality and put it at a low (say, $1 for the first six months), or free price. Although it seems like you’re devaluing the cost of your product, the inverted strategy is a great marketing tool–especially for new businesses who simply need to build a list of customers to market to. Software-as-a-Service (SaaS) businesses can most easily use this strategy, because it costs almost as much to have 100 customers as it does to have 1.

4. Competitor’s strategy

Like all of the above mentioned price plans, the value you put on your product or service has to be the best fit for your customers. When you have steep competition, some businesses concentrate on pricing your business services at the lowest possible rate. That’s not to say it will be inexpensive, but you want to beat your competitors. You’ve probably seen this strategy at gas stations that are across the street from one another. This strategy isn’t the easiest for most small business who need to profit to survive, however, if you’re a bigger business with many competitors, give your customers and leads a reason to step onto your turf.

With this strategy, if you’re selling the same exact product as the competition, there’s a great chance that they’ll ask why your prices are different. Make an effort to understand and break the pricing down for them, and show why your company is worth it. On the other hand, you could offer the same exact pricing as your competitor rather than driving down prices and perceived value in your industry, a common issue in creative service industries like design and photography.

5.  Internal pricing plan

Of all the pricing strategy examples, this one is the only price plan that is competing with itself. With the internal strategy, you’ll have to check out your inventory and see what products are similar to each other. Say you own a shoe store and hold two types of shoes that (essentially) are identical. You’ll have to price them differently so they sell. Maybe they’re the same shoe from the same designer, but one pair has rhinestones on it and the other doesn’t. Offer the shoe with the rhinestones at a higher price and leave the modest one as it was intended to cost. By comparison, the shoe without the studs on it will seem reasonably priced for people looking for an affordable shoe. If both shoes are priced individually, they’ll be more appealing to your customers.

Are there any pricing strategy examples that you use for your business? Share your answers in the comments!

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Full-Cost Pricing Explained: How to Price Your Products for Profit

A full-cost pricing strategy includes all costs associated with a product or service along with a markup for profit. It’s a practical approach that comes with some downsides.

Imagine you’re about to launch an ecommerce store selling drinkware products—you’ve already identified a target audience and developed a unique eco-friendly water bottle that you’re confident will stand out in the marketplace. But one important question remains: How should you price your new products?

Pricing your goods and services properly can make the difference between a healthy profit margin and a failing business. One of the most straightforward pricing methods is called full-cost pricing, and it uses a simple formula to ensure a positive profit margin. Here’s how this pricing method works and how to decide if it can benefit your company.

What is full-cost pricing?

Full-cost pricing is a pricing method that includes all costs associated with a product or service along with a markup for profit. Full-cost pricing considers direct costs (such as raw materials, wages for production labor, and other production costs) and indirect costs (such as overhead expenses like insurance, utilities, and marketing).

By taking into account all the direct costs connected to the manufacturing process as well as the indirect costs of running a business (like rent), full-cost pricing helps merchants and manufacturers identify a selling price that covers every expense.

Example of full-cost pricing

Say you’re launching an ecommerce company to manufacture and sell mobile phone cases and you want to figure out how to sell them with the full-cost pricing method.

Your market research tells you that you may be able to sell 10,000 units in the first year. You then calculate all direct costs associated with manufacturing: $40,000 for raw materials, $40,000 for labor, $10,000 for shipping expenses, and $10,000 for production equipment. You then calculate indirect costs for the year: $20,000 for rent, $10,000 for insurance, $5,000 for utilities, and $5,000 for marketing. You also keep $10,000 aside for miscellaneous overheads. Divide your total costs ($150,000) by the total number of units you plan to manufacture—in this case, 10,000 cases—to find your cost per unit:

$150,000 / 10,000 = $15 per unit

Next, calculate your ideal profit margin. Assuming you want to make a profit of 40%—meaning $6 extra on top of each $15 unit—your full-cost price will be $21 per phone case.

Advantages of full-cost pricing

Here are some of the main advantages of the full-cost pricing model:

Useful for reporting

The full-cost pricing method complies with generally accepted accounting principles (GAAP) , a set of standards maintained by the Financial Accounting Standards Board (FASB), a non-profit focused on improving the transparency and consistency of financial reporting. Having a detailed list of your complete costs is also important for bookkeeping .

Prioritizes earning profit

The full-cost pricing strategy prioritizes earning a profit margin and making back all of the costs associated with creating and selling a product or service. Ecommerce merchants and business owners can use full-cost pricing to ensure that their prices are high enough to earn a profit. By identifying a price that you know will earn back your costs, you can create distribution plans with the confidence that you are covering your full expenses.

Creates a justifiable price

Using the full-cost pricing method with a reasonable markup, you can use the costs associated with a product to validate its price—especially if you sell high-ticket items like electronics. If you can justify a more expensive price for a particular item, you can build brand equity , a term used to describe the perceived value of a particular brand, product, or service.

A domestic clothing manufacturer, for instance, might justify its higher prices by emphasizing fair wages as part of its brand identity .

Choose the right price

Determine your markups and profit margin to set the perfect price and increase your bottom line with our product pricing calculator.

Disadvantages of full-cost pricing

There are also disadvantages of the full-cost pricing model to keep in mind when you’re choosing which pricing method is best for your business:

Difficult to account for variations

Full-cost pricing involves knowing the exact expenses associated with each product—something that’s easier said than done. If you have multiple product lines sold at different price points, it can be difficult to determine how rent, utilities, and administrative costs need to be split between them.

In these cases, management teams can use an allocation process to assign specific costs to products, activities, or departments, which can result in a more precise accounting process.

Can create misleading profit margins

When you account for overhead expenses and divide those by the number of goods you think you’re going to sell, you’re making a calculation based on what you think sales are likely to be. But what if not all your items sell? If you manufacture 10,000 cellphone cases but only 7,000 sell, your overhead costs per unit sold go up and may be higher than your sales price.

Ignores competition and price elasticity

Businesses operating in a highly competitive market can experience a lack of accuracy with the full-cost pricing model since it does not consider the pricing choices of direct competitors or the unique customer demand for particular products. For example, you could use the full-cost pricing model to calculate the direct and indirect costs for a product only to discover that your competition is charging substantially more or less for similar products.

Similarly, full-cost pricing does not take into account price elasticity —a ratio used to determine how much the demand for a particular product will change based on its price. If you want to optimize your prices for the specific market you’re in, the full-cost pricing method can have limitations.

Differences between full-cost and variable-cost pricing

Level of complexity.

One of the most popular alternatives to full-cost pricing is variable-cost pricing, a pricing method that sets a sales price proportionally with how much a company produces or sells. The price is determined by adding production cost (determined by sales volume) plus an added markup. Here are some of the key differences between full-cost pricing and variable-cost pricing:

Whereas full-cost pricing takes into account the total cost of direct and indirect expenses, variable costing only includes direct costs, such as raw materials, direct labor, and production costs. Full-cost pricing includes fixed costs, such as insurance and rent, while variable pricing focuses singularly on the expenses that go directly into producing a specific good or service. Since variable-cost pricing is directly tied to the costs of production, it fluctuates greatly based on the number of units produced and distributed.

Variable-cost pricing is simpler than full-cost pricing since it includes only direct expenses, such as production expenses. Businesses with little to no overhead can benefit from a basic variable-cost pricing model, whereas companies with complex operations that incur a range of overhead costs can create a more accurate picture of their total expenses through a full-cost pricing method.

Full-cost pricing can provide a more holistic picture of what it costs to run a business compared to the variable-cost method. However, full-cost pricing also has its limitations. Businesses running complex operations in competitive markets can benefit from using more sophisticated pricing strategies , such as dynamic pricing , which takes into account customer demand, supply, and price elasticity. Another alternative is penetration pricing , which involves setting your initial prices lower than your competitors to gain a larger market share.

Companies with minimal fixed costs can use the variable-cost pricing method to evaluate and compare the production costs of different product lines. However, businesses can use the full-cost pricing method to identify the right price that covers the complete expenses of making a product or service with an added markup on top for healthy profit margins.

What is full-cost pricing FAQ

How do you calculate the full-cost price.

You can calculate full-cost price with this simple formula: Direct costs (such as raw materials) + indirect costs (such as rent) = X . Then divide X by the number of units produced to get the price per unit. Lastly, determine a percentage markup (how much you want to earn per product) and add that number to the price per unit.

Is full-cost pricing or variable pricing a better strategy for ecommerce?

It depends. Full-cost pricing is a more comprehensive pricing strategy than variable pricing, and it can be a useful figure for financial reporting—especially if you have a significant amount of fixed costs, such as rent or insurance. On the other hand, variable pricing is a useful tool for comparing the specific production costs between different product lines.

What is the goal of full-cost pricing?

The goal of full-cost pricing is to provide an accurate picture of the direct and indirect costs associated with producing a product or service to ensure that prices are set high enough to cover expenses and earn a profit.

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