Whether you’re starting a new business or you’ve had your small business established for years, you know choosing the right price for your products or services is crucial. Nailing down a pricing strategy will allow you to maximize profits and attract a new customer base.
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 you can choose from for your product or service.
In this article, we’ll look at 14 pricing strategies, who they're best for, and their pros and cons.
Best for: businesses that want to build brand loyalty and reputation.
Penetration pricing strategy aims to attract buyers by offering lower prices on goods and services than competitors. This strategy draws attention away from other businesses and can help increase brand awareness and loyalty, which can lead to long-term customer relationships.
Penetration pricing can be risky because it can result in an initial loss of income for your business. Over time, however, increasing brand awareness can drive profits and help small businesses stand out from the crowd.
In the long run, after penetrating a market, business owners can increase prices to better reflect the product’s position within the market.
Best for: businesses that want to keep their overhead costs low.
Economy pricing is a pricing strategy that aims to attract the most price-conscious consumers. Many businesses use this strategy, including generic food suppliers and discount retailers.
This no-frills approach minimizes marketing and production costs as much as possible. Because of the lower cost of expenses, companies can set a lower sales price and still turn a slight profit.
Best for: business with a competitive advantage that can charge a higher price.
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 must work hard to create a perception of value. Along with creating a high-quality product, business owners should ensure that the product’s packaging, the store’s decor, and the marketing strategy associated with the product all combine to support the premium price.
Best for: businesses that have products that are in high demand.
Price skimming is a type of dynamic pricing strategy designed to help businesses maximize sales on new products and services. It involves setting rates high during a product’s initial phase, then gradually lowering prices as competitor goods appear on the market.
Best for: businesses aiming toward short-term goals and quick wins.
Psychological pricing refers to techniques marketers use to encourage customers to respond based on emotional impulses rather than logical ones.
Consumers tend to give more attention to the first number on a price tag than the last. Psychology pricing aims to increase demand by creating an illusion of enhanced value for the consumer.
Best for: businesses that make a profit while offering a lower price than competitors.
With bundle pricing, small businesses sell multiple products for a lower rate than selling each item individually. Customers feel as if they’re receiving more bang for their buck. Many small businesses implement this strategy at the end of a product’s life cycle, especially if the product is slow selling.
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 the lower-value product. They should also consider how much they’ll save in overhead and storage space by pushing out older products.
Best for: businesses that have markets in many different locations.
Geographical pricing involves setting a price point based on the location where a product or service is sold. Factors for the changes in prices include:
If you expand your business across state or international lines, you’ll need to consider geographical pricing.
Best for: businesses that want to generate quick demand for their products or services.
Promotional pricing is another competitive pricing strategy that offers discounts on a particular product. These strategies are common during a holiday, like Canada Day weekend. Business owners can generate buzz and excitement about a product by offering short-term deals.
Promotional pricing campaigns often consist of short-term efforts and incentivize customers to act before it’s too late. This pricing strategy plays into a consumer’s fear of missing out.
Best for: businesses that specialize in SaaS or subscriptions.
Value pricing is a way of setting your prices based on your customer’s perceived value of what you’re offering. It occurs when external factors, like a sharp increase in competition or a recession, encourage the small business to further provide additional value to its customers to maintain sales.
This pricing strategy works because customers feel as if they are receiving excellent value for the good or service. The approach recognizes that customers don’t care how much a product costs a company to make, so long as the consumer feels they’re getting an excellent value by purchasing it.
Best for: businesses that have a product that customers will continually renew or update.
Captive pricing is a strategy used to attract a high volume of customers to a product intended for a one-time purchase. The method behind captive pricing is to generate profits from added accessories that complement your core product.
Small businesses can implement price increases so long as the cost of the secondary product does not exceed the cost that customers would pay a competitor.
Best for: businesses looking to maximize their profit margins and boost declining sales.
Dynamic pricing is when you charge different prices depending on who is buying your product or service or when they buy it. It’s a flexible pricing strategy that considers many factors—particularly changes in supply and demand.
While dynamic pricing is relatively common in e-commerce and the transportation industry, it doesn’t work for every type of business. The greatest risks can come when a business applies variable prices to products or services popular with price-sensitive customers.
Best for: small businesses that are just starting out.
Competitive pricing is when your prices either match or beat your competitor’s similar products. Often, this simply means selling your products or services at a lower price, but you could offer better payment terms instead.
To determine if this strategy is right for you, gather as much information as possible about your target market and what your competition is doing. If you combine this with advanced pricing software solutions, you can analyze and update price data continuously.
Best for: businesses with a cost advantage.
Cost-plus pricing is a strategy of marking up the cost of services and goods by adding a fixed percentage to arrive at your selling price.
As a seller, you calculate your fixed and variable costs during manufacturing and then apply the markup percentage to that cost to make a profit. This strategy is widely used since it’s easy to justify and is typically fair and nondiscriminatory.
Best for: businesses that offer free and paid versions of their product.
Freemium pricing is a strategy that combines both free and premium pricing. Usually, a service or product is given to a customer free of charge unless they want to access premium features or services within that product.
This strategy allows customers to use the basic features of your product and get a sneak peek of what the full package will offer them. Freemium pricing also allows customers to trust your business before making a purchase.
The right pricing strategy for your business will depend on the type of product or service you sell and your goals.
Here are how you can choose a pricing strategy that will provide you the most value:
For example, as a construction business, you’ll price your services based on labor and materials costs. However, you’ll need to consider what your competitors charge and if you’re trying to penetrate the market. If you already have a competitive advantage, the premium pricing strategy could be an option. Otherwise, if you’re just starting, consider a penetration pricing strategy.
Remember that change doesn’t happen in a day—as you roll out your new strategy, be sure to start small so you can easily pivot if you make mistakes. Then, gradually ramp up your strategy.
With these pricing strategies in mind, you can determine the best strategy for your business model. Whether your goal is to set foot in a new market or stand out from the competition, keeping track of relevant data and records is key to keeping the momentum going.
QuickBooks makes it easy to monitor relevant sales data and manage cash flow in one place. This allows you to continually evaluate your pricing method so that you can make price changes in real time, grow your business, and improve customer success.
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