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Everything you need to know about pricing strategy

Your pricing should not be too high. But at the same time, it should not be too low for you to bear losses or have no profit at all. Your pricing strategy should bring balance to your books as well as to your customers. 

In either case, here’s what will happen: 

If your price is too high, you will miss out on valuable sales. Whereas if your price is too low, you may have adequate sales but may have to miss out on revenue. 

Hence, to find the right pricing for your product or service, you need to have the right pricing strategy. And in this blog post, we are talking about a few pricing strategies that you can implement for your product and service. Along with that, we have also put together a short and actionable guide for you. 

What is a pricing strategy?

A pricing strategy is a model you use to determine the best price for your product/service. The ideal pricing strategy allows you proper profit margins, goes along with the industry standards, and fits in your audiences’ budget. 

However, it is not as easy as it sounds and the process is rather long and sometimes perplexing. 

While deciding your pricing, you need to account for many different factors like revenue goals, marketing adjectives, target audience, brand positioning, and product attributes. Other than that, some other external factors like consumer demand, competitor pricing as well as market and economic trends. 

But that’s not it. Entrepreneurs like you have to compare your pricing with your cost price as well as competitors’ price. However, while deciding the most profitable pricing model, your focus should be on offering value and increasing your revenue. 

Price elasticity of demand

With time, you may have to change your pricing. The change of price largely affects your target audience. And in turn, affects your profit margins and revenue. To determine such a change you use a factor called the price elasticity of demand. 

If your audience still buys your product or enrolls in your services despite the increase in price, then your product is called inelastic. On the other hand, if you see a change in the buying pattern of your consumer after increasing or decreasing the price, then your product is called elastic. 

Now, this is all about theory. But do you know that there is also a formula to calculate your elasticity? 

It goes something like this- 

% change in quantity ÷ % change in price = Price elasticity of demand.

Price elasticity helps you to understand if your product or service is sensitive to price fluctuations. 

Ideally, companies want their products/ services to be inelastic. So even when the price fluctuates, the demand remains stable. 

Now let us discuss different pricing strategies: 

1. Competition based pricing 

Here, your pricing is solely dependent on your competitors’ and industry trends. 

Your Product price < Your Competitive Product price

This pricing strategy focuses on existing pricing trends in the industry. In this model, you may or may not consider the production or processing price. At the same time, you don’t have to look at the demand-supply chart.

Benefits: You stay in line with your competition and industry standard. Hence, your product appears to be more relevant to your target audience. And this relevancy can help you add to your sales and revenue. The process could be slow but sustainable. 

When to use? When you are working in a highly saturated industry. 

How to apply this strategy? See, you can bring down your pricing slightly lower than your competition. This can help you lure more customers/clients. And then, with time, you can bring your pricing at par with your competitors. Along with that, you can even implement a launching scheme that not only brings you enough attention. But adequate profits. 

2. Cost-plus pricing

This pricing model is solely based on the production cost of your product/service or your all-inclusive cost price. A lot of times, it is also called mark-up pricing. 

Your Product price = Overall Product Cost + Profit Margin

In this pricing model, it does not matter what your industry trends are or what your competitors’ price is life. You simply decide your profit margins and put up your pricing.

Implementing this pricing model is quite easy. Decide on the profit margin you want to make, calculate it with your cost price or all-inclusive cost price. The resultant amount is your market selling price.

Benefits: You get to maintain your individuality. Besides, as you get to decide on your profit margins, you can claim all the profit for yourself. 

When to use? Cost-price pricing is best for you if you are a retailer. It gets even better if you are selling physical products, When you can bring down your production, sales, and transportation price. 

3. Dynamic pricing 

In this pricing model, you keep changing the price with respect to demand.

Your Product price ∝ Product Demand

You keep the pricing low as long as the demand is low. But just when the demand starts to hike, you increase the pricing. 

Benefits: You make the most of the peak points. Sometimes, you make enough profits to survive even while the demand is low. 

When to use? You can use this pricing model if you are into the tourism, airlines, hospitality, and FnB industry. Along with that, you can use this model even if your business falls into the utility and event-based industry. 

How to apply this strategy? You can reap the most benefits of this pricing model if you implement the automatic algorithms. These algorithms help you shift your pricing intuitively whenever the graph of demand changes. 

4. Freemium pricing 

Basically, freemium is the mixture of two words: Free + Premium. Hence, the explanation lies in the word itself. With this pricing model, you offer your premium services for free for a certain period of time. 

There are two ways of implementing this pricing model: 

  • You offer your premium services for free for a certain time (let’s say, three days, a  week, a month, three months or so on) And then, after that period, if your user likes your offers, they can pay and enjoy it again. 
  • Another way of implementing the freemium is to offer certain basic services for free forever. And if your user base wants to use your premium services, they will have to pay and upgrade their plans. 

Benefits: It helps you to boost your user base. Other than that, you get a chance to build a relationship with your audience before offering to make a sale. 

On the other hand, even your customer gets a hang of your product. Hence usually, companies who offer this pricing model have awesome conversions if their product is found valuable. 

When to use? It is the best pricing model if you have a SAAS product and OTT platforms. A lot of times, even telecom service providers use this pricing model to gather the user base. 

How to apply this strategy? In the beginning, you should offer your services at a lower price or free. And gradually with increasing users, you should increase the price with respect to the features they use. Other than that, you can even offer multiple packages. 

5. Skimming pricing 

With this pricing model, you sell your product/service at a high rate and then bring it down with time when the hype goes down. 

You hype up about your product/service before the launch. With the rising hype, the demand naturally goes up. And to take the advantage of the high demand, you put up your highest possible price for that product/ service. 

And gradually, with the hype going down and decreasing demand, you bring down the price. 

Here, the pricing may not fluctuate. It straight away falls from high to low. Or, a lot of times, some companies would even have a mid-range price before it falls down to the low. But, the direction of the pricing graph is all the same, without fluctuations. 

Discounts, clearance sections, and year-end sales are few examples of the same. 

Benefits: With this pricing model, you keep a grip on your audience’s attention towards your company. Hence, they always keep a tab on your offers and are more likely to buy from you. 

When to use? Tech, auto-mobile, clothing, decor, furniture, beauty, and other retail industries take a lot of benefits of such pricing models. Such a pricing model works the best for you when your company is already an established brand. 

6. Penetration pricing 

Penetration pricing is the opposite of skimming pricing. With this pricing model, you keep the pricing low in the beginning. And with the rising popularity, you increase the price. 

You introduce your product with a launching price. Or sometimes, you don’t label it anything. You simply put out the product/service at a low price in order to grab attention. And just when you have enough sales and revenue with respect to your graph and goals, you increase the price. A lot of time, there is no certain pattern when it comes to the increasing price. Some companies would increase the price gradually whereas, some might prefer to increase the price tag number all at once. 

Benefits: You give your product and your company enough time to get accustomed to the market. A lot of people believe that this pricing model is not sustainable in the long run. However, the notion is quite debatable as many others believe that this model is decent enough if you run it strategically. 

When to use? You can use this model if your industry is highly saturated and your audience has a low attention span. 

How to apply this strategy? Firstly, by giving the best possible value. Secondly, by announcing that a certain low price is your launch price. And that, you will eventually increase the pricing. Other than that, you can apply this model if you have high-end as well as low-end products for your audience. Where in, you will lure your audience with the low-end product and eventually, release the high-end products. 

7. Value-based pricing 

This pricing model is customer-centric. Wherein your customers will pay purely based on the value they receive. 

Companies study their buyer persona, apply the algorithm, do complete industry research before setting a price.  Just to make sure that the customer is satisfied by the value and price and the product. 

Benefits: 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.

When to use? You can use it if your product is service-based. Or, you can apply the same model in the education and coaching industry. Only apply this pricing model if you are confident in your product and customer research. This pricing model is mostly seen in small to medium businesses. 

8. Bundle pricing 

A bundle is when you offer two or three products/services together and decide on single pricing. 

In this model, you also offer single products as well as a bundle.  You become intuitive about your audience’s needs. And accordingly, you put all the related services/products in one bundle. And to make it easier for them as well as for you, you price on the bundle. 

Benefits: 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. 

When to use? You can use this pricing model if you are in the service industry, clothing, furniture, and so on. 

9. Psychological pricing 

You simply take the help of psychology to boost your sales. However, it is not as much as exclusive as it sounds. Because, in every pricing model, you consider your buyer persona’s psyche. 

In this pricing model, you simply play the game of number. Like, putting $99 instead of $100. 

Other than that, you can also put a more expensive product right next to not-so-expensive products. This will help you drive the sales of a product that is not so expensive. 

Another way of using this pricing model is luring your customer with discounts and deals. 

Benefits: You grab your audience’s attention and drive them to make a sale for you. 

When to use? Depending upon the industry and target market, every company can use such psychological hacks to boost its sales.  

How to apply this strategy? Let research and implementation be your strong point. With every implementation, analyze. Be open to ideas, you only get better with time.  

Pricing Analysis 

Pricing analysis is when you evaluate your current pricing strategy against market demand. You perform a pricing analysis to identify your opportunities and threats with respect to change in the pricing model.

When to conduct pricing analysis? 

  • When you are considering new product ideas
  • When you are developing new positioning strategies 
  • When running marketing tests 
  • When you are analyzing your pricing against your competitors. 
  • When you are trying to determine and meet your consumer price expectations. 

By running the price analysis regularly you- 

  • Actually know the exact price of your product/service 
  • Understand how your target market respond to your pricing model 
  • Analyze your price with respect to your competitors 

How to decide the right pricing strategy for your business? 

Price is what you pay for the value you receive. So, whatever price you decide on your product should justify your offer. That’s the customer-centric approach. But at the same time, your pricing should suffice your production and processing cost and bring you profit. 

Other than that do detailed research with respect to the target market and the industry your product is based in. Allow yourself to think out of the box so that your pricing can be your competitive advantage.

For which, you can research the following aspects that affect your pricing and profits: 

  1. The production/processing of your product/service 
  2. The complete cost of your product/service: 
  3. The marketing and branding cost: 
  4. The industry standards

So which one is the best pricing strategy? 

We can not pinpoint one pricing strategy and call it the best for you. You have to try it and analyze it. Research well on your product, target market and develop a strategy that regulates your sales and revenue goals. After implementing the strategies, analyze. See whatever suits you and your customer base and go ahead with it. 

Aayushi Mistry
Aayushi Mistry
Since childhood, I was in awe of the magic that words bring. But while studying computer science in college, my world turned upside down. I found my calling in being a copywriter and I plunged into a world of words. Since then, there is no looking back. Even today, nothing excites me to find out the wonders the words can bring!
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