Pricing products can be a tricky business, but it’s one of the most important activities an enterprise can do. Finding the right pricing strategy is crucial to locking in sales while ensuring your revenue levels are healthy enough to stay afloat.
So, which pricing strategy is best for your business? Here we’ll look at a range of options to help you make the right choice, covering off:
The 7 main product pricing strategies
- Value-based pricing
- Competitive pricing
- Price skimming
- Cost-plus pricing
- Penetration pricing
- Economy pricing
- Dynamic pricing strategies
Why product pricing strategies are important
A good product can flourish or fail in the market depending on its price.
If it’s deemed too high, customers will look for cheaper alternatives, and sales will be lost. If it’s too low, you may sell a decent number, but your profit margins will take a hit.
The cost of an item also helps define its perceived value to potential buyers, and the value of your brand. It can help paint a picture about a product’s desirability, usefulness, popularity, or quality. Underpricing a product can be worthwhile from a competitive point of view, but for the wrong product, it can also make consumers think less of its value. Additionally, if you’re relying on retail outlets like supermarkets to stock your products, they may give preferential shelf space to higher priced competitors because they bring in more margin – despite offering less value for money to customers. This is one situation in which dropping your pricing can make you less competitive, rather than more.
So finding the sweet spot will depend on a variety of factors, like the type of product you’re selling, to whom, and in which market conditions. High end clothing and electronics, where customers expect a high price point, will differ from run of the mill items such as household products.
And of course, in today’s age where consumers can buy their products from a huge array of sellers and platforms, a multichannel selling approach is important to consider. If you’re only selling in-store, consider whether online could work as well. If you’re already selling across platforms, consider whether your price points can vary on each. And if a multichannel approach is right for you, make sure you adopt a strong multichannel order management system to help keep track of and streamline your activity – otherwise things could get complicated quickly!
The wrong pricing strategy can see your competitors chosen ahead of you.
The 7 main pricing strategies
Value-based pricing does what it says on the tin. A business using this approach will price their products based mainly on what the actual or perceived value of the goods or service is.
It often works best for tailor-made goods, bespoke or expert services, and craft products – for example, jewellery, high-end fashion, or premium alcohol. It can also work well for items that come with ‘extras’ or those made popular because of associations with high-profile people or events.
This strategy is the opposite of the ‘undercut the competitors’ approach, and more about making a statement about why your product is worth the higher price. That doesn’t mean you won’t want to know what your competitors are selling for and where you fit in. But once you’re comfortable with the lay of the land, it’s about knowing how your product will improve your customers’ lives – whether it’s helping them achieve their goals, saving them time and hassle, or adding to their social status and perceived desirability.
If you get it right, value-based pricing means you’ll be winning with higher profits. But it can be a complicated and time-consuming approach, so weighing up the balance is important.
Premium alcohol products are often priced using a value-based strategy.
Competitive pricing is all about setting a price-point in relation to similar products sold by other companies – one that will give you a competitive advantage. This strategy is often used in saturated markets and with mass-sold goods that are well-established – for example, chewing gum, ‘big box’ beer, household products, or services like cleaning or dinning.
It can also work for businesses with a wide range of goods who want to use the price-point of one product as an entry point for customers to buy other products.
Competitive pricing means you’ll need to keep a close eye on your competitors, constantly. You’ll want to know when they drop their prices or offer promotions. And you’ll want to think about how to use creative marketing techniques to give your products an edge – especially at times when undercutting isn’t financially viable. If you go with this approach, particularly if your competitor pool is large or aggressive, you’ll need a good tracking system to keep you abreast of their movements so you can react quickly if need be.
Price skimming is about setting the price of a new product high to capitalise on consumer demand, and then eventually lowering it over time. It works best for products that are highly anticipated, innovative, or of the moment – and which have no real competition.
Electronics and gaming is a big one for price-skimming. Think about the new Apple products selling at a premium, or the latest PlayStation that customers are willing to pay top-dollar for – even knowing the price will eventually drop, or that a new version will be released 1-2 years down the line.
It’s about capitalising on popularity, buzz, and scarcity. It can be a great strategy for the right product, but it can also go badly wrong for your brand and sales if it backfires. Before you go with price skimming as your option, explore whether your product can be easily and quickly replicated by competitors. And make sure you have the highest confidence in its uniqueness. If you’re forced to drop the price soon after launch, you might end up with angry customers and a tarnished brand.
Cost-plus pricing is one of the more common pricing mechanisms used – often by grocery and department stores with a wide range of common products, as well as smaller businesses who aren’t able to spend huge amounts on market research. The idea is as the name says – calculate the cost it takes to make a product (or deliver a service) and then add a mark-up depending on what you hope to make as profit.
It’s a simple way of calculating costs and can also help brands justify their prices because of the easy-to-understand pricing system.
Businesses using a cost-plus pricing strategy must beware of hidden production costs. Because this approach relies heavily on the actual cost of making a unit, it’s imperative to get that right, or those missed costs will likely eat into your profit margin. Make sure you account for things like materials, as well as labour, and overheads.
If you get it right, it can be a beneficial approach, especially for businesses looking for stability and consistency in their returns. It’s also helpful if you don’t have much budget for market research.
Cost-plus pricing is often deployed in a grocery environment.
Penetration pricing uses the opposite approach to price skimming. It’s when a business looking to break their product into a market offers a low initial price point in order to reel buyers in and lure them away from competitors. The idea is that once the product has a following and has established itself in the market, the price can gradually be adjusted upwards.
It can be an effective marketing tool to introduce a large audience to the product or brand. It’s a common approach with online subscriptions where you might be offered one month free, or 50% off the regular price in the hope that you will remain with the service once your offer period ends. We also see it used with taxi services like Uber and its competitors.
It can be a useful strategy for generating high sales volumes in a short period of time, and building a buzz as customers flock to check what the fuss is about. The risks, of course, are that savvy customers take you up on your initial offer but return back to their usual brand – or find another discounted offer – once their trial period is over or their curiosity has been satisfied. It can also kick-off price wars with competitors, meaning you’ll need to live with lower profits for longer.
Economy pricing is where budget items live. Production costs are kept low so that prices can be kept low too. This works best with products manufactured at scale – and is something big business like pharmaceutical companies or airlines can easily take advantage of to sideline the competition and drive sales.
Grocery stores often use economy pricing by producing their own no-frill lines of common products such as biscuits or condiments. It can be incredibly effective when done right as there is always a market for thrifty consumers, or those tightening their purse strings to save or get out of debt.
It’s also an effective way to grow deeper into a market, or weather economic downturns, as customers ditch premium products for the basics. It can be a tough business though. Competition can run high, and for bargain hunters who care more about price than product, they will likely switch when another brand offers a discount.
Revenues will rely heavily on high sale volumes – so it’s important to stay vigilant around your production costs and market demand.
Dynamic pricing is an agile pricing system to help maximise profits. It’s where a business will change the price of their products depending on who they’re selling to, where, and when.
Even though dynamic pricing can benefit customers, they often don’t like this approach. It has been known to cause backlash amongst buyers who find out they’ve been sold a service or item at a higher price point than someone else – even though they themselves may have gotten a better price than someone else.
That said, it’s becoming an increasingly common approach for businesses thanks to multichannel selling and artificial intelligence. Take Uber, for example. Customers who rely on the service regularly might be used to a certain low fare for their journey home from the train station, but when the weather is bad, or rush hour hits, the car service will jack up prices to capitalise on demand. The same approach is used in the travel and hospitality industry during peak travel season, or in sports when a big game comes up.
While this approach can be successful, it’s important to understand that aside from brand risks, it can be resource intensive and costly, which is part of the reason big businesses can take advantage of it while smaller businesses may struggle to. The cost of the AI, data analysis, and the required resources should be thoroughly considered before adopting this approach.
It’s worth noting however that tools enabling SME product business to be more dynamic with their pricing strategies are becoming more easily available and affordable. Unleashed’s B2B eCommerce store, for example, includes flexible pricing features such as customer-based pricing, as well as volume pricing – which encourages larger purchases with a better price-per-unit when buying in bulk.
New product pricing strategies
How you price a product will vary depending on where it is in its life cycle, but getting it right for launch is crucial. As we’ve explored above, pricing too high can turn customers off – unless it has the right kind of buzz or air of quality to it. Likewise, pricing it too low without the right kind of marketing can give potential buyers the idea that its value is low. This is why doing your homework is key – and you should examine all of the following areas.
Explore the market:
- What similar products are out there and how are they performing?
- What makes them popular or unpopular?
- What makes customers willing to pay the price for them?
- And importantly, what makes your product different?
Know your audience:
- Why do they want a product like yours in the first place?
- What value does it add to their lives?
Find out what they are willing to pay:
- Set up focus groups to understand what potential customers see as reasonable.
It’s important to have a clearly defined idea of your target market and of what the product represents. Once you do, work out the pricing strategy that fits those best.
Pricing strategies for product launches are different than those deployed for end-of-lifecycle items, such as aged tech.
Product life cycle stages and pricing strategies
Products go through various life cycle stages, including launch, growth, maturity, and their eventual end (or reinvention). For some products, this cycle is short, for others, it may take many years. So when you consider which pricing strategy to adopt, it’s also important to think about which to use at each stage of your product’s life.
Product launch pricing strategies
For the launch of the product, we’ve seen that several strategies can work depending on what your product is – for example penetration pricing, price skimming or competitive pricing.
Mid life cycle pricing strategies
Once your product is out there and sales are growing, you might consider capitalising on demand and bringing prices up. Consider things like the level of competition you’re facing and how popular your product is to work out what you can reasonably charge without turning customers off. The strategies at play here include dynamic pricing, value-based pricing, and competitive pricing.
Later life cycle pricing strategies
The later stages of your product’s life cycle is often when competition becomes stronger as rivals have had time to catch up with alternative versions, potentially at lower prices. To remain competitive, so too must your pricing – or at the very least, what you’re offering. If lowering the cost isn’t an option for you, consider adding extras to your product to make it worth the customer’s money. Here you’ll be looking at competitive and / or cost-plus pricing.
End of life cycle pricing strategies
When you reach the decline of your product’s life cycle, you may be at a point where customers no longer need your product because they already have it; competitors are selling something similar for a lower cost; or it may simply be out of fashion. Do what research you can to work out who is still buying your product and why – and then, work out how to maximise what sale potential you have left. You may find economy pricing a relevant strategy at this point. Or you can consider selling at a discount, in bundles, or with added extras to eke out what you can before you pull it completely.
The pharmaceutical and supplements industries have specific and unique product pricing strategies.
Pharmaceutical product pricing strategies
Pricing pharmaceutical products can be a minefield, particularly from a brand point of view. When products are new and unique, they can command high prices, but the industry often comes under fire in these instances, accused of taking advantage of desperate would-be customers, so it’s important to get the balance right.
If your product is unique and perceived as revolutionary, price skimming or value-based prices might be considered to capitalise on demand and the lack of competition. Something that is unique to the industry is using data to price a product based on the potential savings patients will make by using it, or the value of time that will be ‘given back’ to them in the case of life-prolonging drugs. This can be complicated to calculate and not always easy to translate, but may be worth considering.
For commonly used drug types, like those for colds or heartburn, competitive pricing will almost certainly need to be considered as the market is highly saturated. In such conditions, penetration pricing might also work to cut through the saturation and lure customers in with attractive price points.
Article by Greg Roughan in collaboration with our team of inventory management and business specialists. Greg has been writing, publishing and working with content for more than 20 years. His writing motto is ‘don’t be boring’. His outdoors motto is ”I wish I hadn’t brought my headtorch’, said nobody, ever’. He lives in Auckland, New Zealand, with his family.