The Pricing Strategy Guide: Choosing Pricing Strategies That Grow (not sink) Your Business
ProfitWell Mar 16 2021
Too many businesses set their pricing without putting much thought into it. This is a mistake because right from the beginning you are leaving money on the table. The good news is that taking the time to get your pricing right can act as a powerful growth lever. If you optimize your pricing so that more people are paying a higher amount, you'll end up with significantly more revenue that a business who treats pricing more passively. This sound obvious, but it's rare for businesses to put much effort into finding the ideal price.
1. Definition of pricing.
2. What are pricing strategies?
3. Importance of your pricing strategy.
4. Top 7 pricing strategies.
5. Examples of pricing strategies.
6. How to set your pricing strategy.
7. Pricing strategies by industry.
8. Pricing FAQs.
Definition of pricing
Pricing is 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.
What are pricing strategies?
If pricing is how much you charge for your products, then pricing strategy is how you determine what that amount should be. It's important to understand the different pricing strategies that are common and which of them best fits your business model and goals. Some common pricing strategies are listed below. We'll discuss each of them in more detail later.
- 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 getting pricing right. There's a missed opportunity in the business world to see immediate growth for relatively little effort.
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, getting your pricing right 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 strategy:
The word cheap has two meanings. It can mean lower priced, but it can also mean poorly made. There's a reason people associate cheaply priced products with cheaply made ones. Built in to the higher price of a product is the assumption that it's of higher value.
Convinces customers to buy
A price that's too high may convey value, but if that price is more than a potential customer is willing to pay, it won't matter. A price too low will seem cheap and get your product passed over. The ideal price is one that convinces people to purchase your offering of that of your competitors.
Gives your customers confidence in your product
If higher priced products portray value, 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 strategy:
Doesn't accurately portray value
If you believe you have a winning product, and you should if you are selling it, then you need to convince customers of that. Pricing too low sends the opposite message.
Makes customers feel uncertain about buying
Just as the ideal price is one that customer 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.
Top 7 pricing strategies
Let's now take a closer look at the seven pricing strategies that were outlined above.
With value-based pricing, you set your prices according to what consumers think your product is worth. We're fans of this pricing strategy for SaaS businesses.
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.
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.
This is one of the simplest pricing strategies. You just take the cost of creating your product and add a certain percentage to it. While simple, it is less than ideal for anything but physical products.
In highly competitive markets, it can be hard for new companies to get a foothold. One way some companies attempt to do so is by offering prices that are much lower than the competition. This is penetration pricing. While it may get you customers, you'll need a lot of them and you'll need them to be very loyal to stick around when you need to raise prices in the future.
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.
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.
Pricing strategies in the real world: 3 examples
Streaming servicesHave 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.
SalesforceWhen 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 large enterprise, Salesforce could charge what they wanted. Later, after they'd grown, they were able to lower prices so smaller businesses could sign up. This is a classic example of price skimming.
Dollar Shave ClubAt 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 that level of marketing and advertising 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 and choose a winning pricing strategy
Know thy customer
Although there may be minor taste differences, the biggest difference between name brand soda and generic is the price. The products are similar, but name brand soda is targeted towards people willing to pay more for the price, and generic soda is targeted toward people looking for the best value. This is an oversimplified example, because for most products there is more than one variable involved in what range of prices customers are willing to pay. But it does illustrate the importance of understanding who you are marketing to.
In order to understand your target audience, you need as much data as possible. Collecting data also helps determine and clarify your value proposition, which in turn, helps you market accurately. Without quantified buyer personas, you can't truly understand who your successful customers are. This information can also help you determine which price range your customers are likely to find most attractive. Ideally, the data you collect will contain surveys of people in your target demographic that tell you more about what they value and what they are willing to pay for.
Analyze your data
Once you've collected your data, it's important to analyze and understand it. Part of that is looking at what potential customers are directly telling you about their motivation and needs. In the age of big data, you can glean even more information. Using today's advanced algorithms, it's possible to get a very granular look at what features, functionality, and positioning adds to, or takes away from, your product and your ability to charge for it.
Create some price points
The survey data isn't an exact science, but it's going to do a great job of giving you a starting point for the types of prices and pricing tiers that you should be trying out. Use the data you've analyzed to create a few price points that you think may be winners.
Choose a pricing strategy/point that works
Choosing the best pricing strategy should be based on several different factors—the scale of your company, the size of your public profile, your finances, and most importantly, your product. It will all dictate which pricing strategies make sense. Keep in mind that over time, your product's value will change. You may add additional features that people would be willing to pay more for, or you may do the opposite and let the product stagnate, reducing its value relative to a forward thinking competitor. Either way, you should revisit your pricing frequently to match the current value of your product.
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/SubscriptionsFor 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.
B2BWe 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. Price Intelligently 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, competitor-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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