While various factors can affect a business’s revenue potential, one of the most important factors is its pricing strategy. To get this right, it’s critical to use financial reporting and insights to guide your decisions. You also need a good understanding of the many different pricing strategies that you can choose from for your products and/or services.
In this guide, we’ll look at 12 common pricing strategy examples to help you find the right approach for your business.
A pricing strategy refers to all of the various methods that small businesses use when setting prices for their goods and/or services.
It’s an all-encompassing term that can account for things like:
Pricing strategies play a crucial role in business success, though their importance can vary depending on your goals. Setting the right price for a product or service can help you maximise profit margins – if that’s your objective. However, pricing isn’t always just about profits. Sometimes, businesses set lower prices to maintain market share and keep competitors at bay.
In such cases, sacrificing profit margins can be a strategic move, but it comes with risks. While a competitive price strategy can strengthen your market position, it could also put financial strain on your business if not managed carefully.
Here’s a good rule of thumb: If your prices are too high, customers may look elsewhere. If they’re too low, your business may struggle to cover costs. Striking the right balance is key.
There are a number of factors that can affect your chosen product price. Common factors include:
These factors should be considered when determining which pricing approach is right for your business.
Here, we’ll explore 12 different pricing strategies that encompass a number of common approaches. When aligned with your broader business goals, these pricing strategies and examples could help to facilitate growth and long-term profitability.
Penetration pricing helps small businesses attract customers by offering lower prices than competitors. Offering low prices will help you stand out from the crowd and, ideally, broaden your customer base.
Once you’ve used this pricing strategy to successfully penetrate the market, you can increase your prices to better reflect the state of the product’s or service’s position within the market.
The primary risk with penetration pricing is it can result in an initial loss of income for your business. Another risk is that it might affect the overall perception of your brand; creating the impression that your brand is ‘cheap’. While penetration pricing is a good strategy for breaking into the market, you’ll need to weigh up these risks before deciding to go ahead with it.
For instance, imagine a competitor sells a product for $100. You decide to sell the product for $97, even if it means you’re going to take a loss on the sale. Penetration pricing strategies draw attention away from other businesses and can help increase brand awareness and loyalty, which can then lead to long-term contracts.
This pricing strategy is a ‘no-frills’ approach that involves minimising marketing and production expenses as much as possible. Economy pricing aims to attract the most price-conscious consumers, while still turning a slight profit. It’s used by a wide range of businesses, including generic food suppliers and discount retailers.
While economy pricing is incredibly useful for large companies like Kmart and Target, the technique can be dangerous for small businesses. Because small businesses lack the sales volume of larger companies, they may find it challenging to cut production costs. Additionally, young companies may not have enough brand awareness to forgo custom branding.
Imagine a competitor sells a basic household item for $20. With an economy pricing strategy, you decide to set your price at $18 by minimising production and marketing costs. This approach appeals to budget-conscious consumers and allows you to compete on price alone. While profit margins are lower, the focus will be on high sales volume to maintain steady revenue.
With premium pricing, businesses set costs higher because they have a unique product or brand that no one can compete with. You should consider using this strategy if you have a considerable competitive advantage and know that you can charge a higher price without being undercut by a product of similar quality.
Because customers need to perceive products as being worth the higher price tag, a business has to work hard to create a perception of value. Along with creating a high-quality product, business owners should ensure that their product’s packaging, the store’s decor, and the associated marketing strategy all combine to support the premium price.
Examples of premium pricing can be seen in the luxury car industry. Companies like Tesla can get away with higher prices because they’re offering products that are unique (such as, for instance, autonomous cars), compared with anything else on the market.
Designed to help businesses maximise sales on new products and services, price skimming involves setting rates high during the initial phase of a product. The company then lowers prices gradually as competitor goods appear on the market.
One of the benefits of price skimming is that it allows businesses to maximise profits on early adopters before dropping prices to attract more price-sensitive consumers. Not only does price skimming help a small business recoup its development costs, it also creates an illusion of quality and exclusivity when you first introduce your product or service to the marketplace.
An example of this is seen with the introduction of new technology, like an 8K TV, when currently only 4K TVs and HDTVs exist on the market.
Psychological pricing is a strategy designed to influence consumer perception and encourage purchases by leveraging pricing tactics that appeal to emotions rather than logic. This approach takes advantage of how customers perceive value, creating an impression of affordability or exclusivity.
For example, setting the price of a watch at $199 is proven to attract more consumers than setting it at $200, even though the actual difference here is quite small. One explanation for this trend is that consumers tend to put more attention on the first number on a price tag than the last. The goal of psychology pricing is to increase demand by creating an illusion of enhanced value for the consumer.
With bundle pricing, small businesses sell multiple products for a lower rate than consumers would face if they purchased each item individually. Many small businesses choose to implement this strategy at the end of a product’s life cycle, especially if the product is slow selling.
Not only is bundling goods an effective way to reduce inventory, it can also increase the value perception in the eyes of your customers – because it can make them feel that they’re receiving more value for money.
Small business owners should keep in mind that the profits they earn on higher-value items must make up for the losses they take on lower-value products. They should also consider how much they’ll save in overhead and storage space by pushing out older products.
A useful example of this occurs at your local fast-food restaurant where it’s cheaper to buy a meal than it is to buy each item individually.
If you expand your business across state or international lines, you’ll need to consider geographical pricing. Geographical pricing involves setting a price point based on the location where it’s sold. Changes in prices include factors like taxes, tariffs, shipping costs, and location-specific rent.
Geographical pricing is often influenced by basic supply and demand. In areas where a product is scarce but highly sought after, businesses may charge higher prices to reflect its limited availability. Conversely, in regions where the same product is abundant, prices may be lower to stay competitive.
For instance, imagine you sell sports clothing; you may choose to set a higher price point for winter clothes in your cold-climate retail shops than you do in your warm-climate shops. You know people are more likely to buy clothes in the winter environments, so you set a higher price to take advantage of the demand.
Promotional pricing is a strategy where businesses temporarily reduce the price of a product or service to attract customers and boost sales. Often used during special events, holidays, or product launches, promotional pricing creates a sense of urgency and excitement – encouraging consumers to make a purchase they might not otherwise consider.
This approach can include discounts, limited-time offers, or bundled deals. It plays into a consumer’s fear of missing out – incentivising customers to act now before it’s too late.
A clothing retailer may offer a ‘Buy One, Get One Free’ deal on select items for a limited time to coincide with a seasonal sale. This promotional pricing encourages customers to purchase more, while also driving foot traffic to the store or website. The promotion creates a sense of urgency, as customers know the deal will only be available for a short period, helping to increase sales and attract new customers.
If you notice that sales are declining because of external factors, you may want to consider a value pricing strategy. Value pricing occurs when external factors, like a sharp increase in competition or a recession, force the small business to provide value to its customers to maintain sales.
This pricing strategy works because customers feel as though they are receiving excellent ‘value’ for the good or service. The approach recognises that customers don’t care how much a product costs a company to make, so long as the consumer feels they’re getting excellent value by purchasing it.
This pricing strategy could cut into the bottom line, but businesses may find it beneficial to receive some profit rather than no profit.
An example of value pricing is seen in the fashion industry. A company may produce a product line of high-end dresses that they sell for $1,000. They then make umbrellas that they sell for $100.
The umbrellas may cost more than the dresses to make. However, the dresses are set at a higher price point because customers feel as though they are receiving much better value for the product. Would you pay $1,000 for an umbrella? Probably not. Thus, external factors like customer perceptions force the value pricing strategy.
Captive pricing is a strategy where a business sells a core product at a low price but charges higher prices for the necessary accessories or complementary products required to use it. If you have a product that customers will continually renew or update, you’ll want to consider this pricing approach.
The goal of captive pricing is to entice customers with an affordable entry-level product while profiting from the ongoing need for related products. Businesses can increase prices so long as the cost of the secondary product does not exceed the cost that customers would pay to leave for a competitor.
A perfect example of a captive pricing strategy is seen with a company like Dollar Shave Club. With Dollar Shave Club, customers make a one-time purchase of a razor. Then, every month, they purchase new razor blades to replace the existing one on the head of the razor.
Because the customer purchased a DSC razor handle, they have no choice but to buy blades from the company as well. Thus, the company holds customers ‘captive’ until they decide to break away and buy a razor handle from another company.
Dynamic pricing is when you charge different prices depending on who is buying your product (or when they buy it). It’s a flexible pricing strategy that takes many factors into account – particularly changes in supply and demand.
You might have heard dynamic pricing referred to as demand pricing, surge pricing or time-based pricing. There are even different types of dynamic pricing, including price discrimination or variable pricing, price skimming (discussed above), and yield management.
While dynamic pricing is relatively common in e-commerce and the transport industry, it doesn’t work for every type of business. The greatest risks can come when variable prices are applied to products or services that are typically bought by price-sensitive customers. This is also known as price elasticity – when small changes in price have a large impact on demand.
A good example of dynamic pricing comes from the airline industry. If you’ve ever noticed how much flight prices can change depending on when you book, you’ve experienced dynamic pricing firsthand.
Competitive pricing is when your prices either match or beat those of similar products that are sold by competitors. Often this simply means selling your products or services at a better price, but you could choose to offer better payment terms instead.
As we’ve seen above, competitive pricing strategies include:
The secret to knowing which of these could work best for your business comes from data. Before implementing a competitive pricing strategy, gather as much information as possible about your market and what your competition is doing.
A coffee shop in a busy city centre may set its prices similarly to other nearby cafés to remain competitive in the market. If most competitors are selling a standard cup of coffee for $4, the coffee shop might price its drinks at $3.95 or $4.05 to attract customers without significantly undercutting the competition. By keeping its pricing aligned with others, the coffee shop ensures it stays competitive while offering a comparable product.
You might be wondering: what is the price strategy that’s most effective?
There’s no one-size-fits-all answer to this question. First of all, the best price strategies start with a solid understanding of your financial situation. Knowing the costs of producing your products or providing your services is essential, and you should continually monitor these costs to stay responsive to changes.
Secondly, external factors are just as crucial as your internal costs. These can include:
All of these elements can have a significant impact on your pricing strategy, and should be monitored closely.
Thirdly, think about your long-term revenue goals. For example, if you’re selling premium products and want to boost demand, consider whether offering discounts might harm the perceived value of your goods or services. On the other hand, if you’re using a loss leader strategy to penetrate the market, be mindful of how long you can sustain this approach before cash flow becomes a concern.
Small business owners need to regularly track their business revenue to stay on top of their pricing strategy’s effectiveness.
No matter what strategy you opt for, keeping track of your finances is imperative to business success.
You’ll want to make sure you’re using reliable accounting software to keep track of relevant data and watch those profit margins. With QuickBooks, it’s easy to manage your cash flow and track sales data – all in one location.
Armed with this information and a quick holistic picture of your business finances, you can make better-informed decisions about your all-important pricing strategy.
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