Understanding Pricing Strategies: A Guide for Business Growth

How much do you charge for your products or services? Are you making steady profits? What’s your current market share?

These questions—and more—form the backbone of price strategies. Businesses throughout the Philippines spend thousands of pesos developing the perfect pricing and costing approaches every year. But why?

Well, your pricing strategy is fundamental. It will not only determine your market share, but also your profitability as a business. Ultimately, it’ll also affect your bottom line.

But there’s much that goes into the perfect pricing strategy. You’ll have to consider a myriad of moving parts, like customer preferences, market trends, competitors, and production costs,

So join us as we explore the different types of pricing strategies and how to implement yours.

What are pricing strategies and why are they important?

In business, strategy is everything. And that includes pricing. Businesses don’t just put random price tags on their products or services. They spend many hours and pesos deciding on exactly the right price.

When it comes down to it, it’s a balancing act. Businesses have to balance costs, customer demand, market conditions, and more, to come up with the perfect figure. And in the Philippines, where price sensitivity is high, choosing the right price strategies is vital.

Pricing and costing directly help Filipino SMEs to:

• Drive sales
• Maximise profitability
• Strengthen market competitiveness
• Build customer loyalty
• Build market share
• Ensure sustainable growth

Key factors that influence pricing decisions

In the Philippine market, where consumers are price-conscious yet value quality, understanding what factors influence a pricing strategy helps businesses choose an approach that really packs a punch.

Here are a few things to bear in mind when developing your pricing strategy:

• Production costs: How much do raw materials, labour, and logistics cost you per unit? This will determine the minimum price needed for profitability.
• Market demand: Ultimately, it all comes down to how much consumers are willing to pay. Higher demand is great news as it allows for premium pricing.
• Competition: Consider what your competitors are charging.
• Customer perceptions: This is a little trickier to grasp, but your brand image (how consumers rate you on quality and value) will determine how your pricing and costing is received.

Different types of pricing strategies used in business

So, we know that pricing strategies are important, but there’s a catch. Not all pricing strategies are the same, businesses will use different strategies for different results.

Here’s a brief breakdown:

• Cost-plus pricing: Fairly straightforward, the production cost of a unit plus markup, ensuring profit.
• Value-based pricing: Sets prices based on perceived customer value, ideal for quality-focused brands.
• Penetration pricing: Starting with low prices to draw customers in and gain market share as quickly as possible.
• Skimming pricing: The opposite of penetration pricing. Starts with high prices to maximise early profits before lowering them over time. 

Let’s take a closer look at each type of pricing strategy in detail:

Cost-plus pricing

Cost-plus is perhaps the easiest and most common pricing strategy (especially among SMEs in the Philippines), as it’s quick to calculate and easy to implement. Here’s an example of this pricing strategy:

A local bakery spends ₱100 to make a cake, it might add a 40% markup, pricing the cake at ₱140.

Simple, right? However, it’s worth noting that this approach could overlook customer demand or competitor pricing, so it's best suited for stable markets with predictable costs and less price-sensitive consumers.

Value-based pricing

Value-based pricing sets product prices based on the perceived value to customers, rather than production costs. It works well for brands offering unique benefits or strong emotional appeal.

A good example of a pricing strategy based on value is clothing. Take Bench/, for instance. They tend to price some items higher due to brand reputation, style, and perceived quality, even if production costs are low. And customers queue up to pay because they value the brand experience and image. 

If your brand is strongly differentiated in some way, value-based pricing could be for you.

Penetration pricing

The best way to make a splash in a new market could be with penetration pricing. This approach involves setting a low initial price to attract customers and quickly gain market share, especially in new or competitive markets.

For example, a new local milk tea brand may offer drinks at ₱50 (lower than competitors) to generate a buzz and build brand awareness.

Now, this can lead to losses over time, which is why it’s important to gradually increase prices once you have a loyal customer base.

Skimming pricing

Think of skimming pricing as the opposite of penetration pricing. Businesses set high initial prices for innovative new products and gradually lower them to attract a broader market. The idea is to target early adopters willing to pay more as soon as possible, so the business can make high early profits and invest in growth.

You may be feeling skeptical about skimming pricing, but we actually see this used every day. For example, when a global giant like Samsung releases a new smartphone, it often enters the market at a premium price. And tech-savvy Filipinos who want the latest features buy early, while everyone else waits a while.

Examples of pricing strategies in business plans

Pricing strategies affect everything, including your ability to build your brand and invest in growth. It impacts revenue, market positioning, and customer perception, too. 

But the type of pricing strategy you choose should align with your broader business goals to truly work. Let’s see how that looks in practice:

• Cebu Pacific: This famous budget airline uses penetration pricing to attract price-sensitive travelers and expand market share.
• Rags2Riches: This luxury brand applies value-based pricing, focusing on quality and social impact. 
• Small retailers: Your local small retailers probably use cost-plus pricing—it’s simple and offers stable margins.

Example of pricing strategy in a business plan

Ever heard of Jollibee? We’re almost certain you have—especially if you’re Filipino! Well, this leading fast-food chain uses value-based pricing to great effect.

By understanding Filipino tastes and preferences, Jollibee offers meals that deliver great value at affordable prices, such as its best-selling Chickenjoy. Despite strong competition from global brands, Jollibee maintains customer loyalty by aligning price with perceived value—taste, portion size, and local relevance.

This strategy has taken Jollibee to the very top of the pyramid. And not just in the Philippines, but abroad, too!

Optional product pricing

There’s another pricing strategy we haven’t mentioned yet, called optional product pricing.

Optional product pricing involves offering a basic product at a standard price (like a basic smartphone). But the company will then provide the customer the option to buy additional features, upgrades, or accessories (for the smartphone, that might include extended warranties or extra storage, for example).

OPP is a smart strategy. It allows buyers to customize their purchases while also boosting revenue by encouraging them to buy extras.

Example of optional product pricing

Optional product pricing is all around us, even if we don’t realize it. Digital services and tech companies, especially, favour it.

A great example would be Globe Telecom. They offer mobile plans with a basic service package. However, customers can choose to add optional features, like additional data, streaming services, or international call packages, for an extra cost.

In terms of digital services, what better example than Netflix? On streaming services, you can usually upgrade plans at any time for more features. This is optional product pricing in action!

How to choose the right pricing strategy for your business

You’re now probably thinking about which price strategies will work best for your business. To get started, consider a few key factors:

• Target market: Who’s your audience? Are they price-sensitive or willing to pay more for quality?
• Competition: You need to make sure you’re competitive without being unprofitable.
• Business goals: Are you looking to maximize profitability right out of the gate, or slowly achieve growth? Skimming pricing for former, penetration pricing for latter.
• Product type: Innovative products might benefit from value-based pricing. Simple, cost-efficient items may work best with cost-plus pricing.

Steps to develop a pricing strategy

Developing a killer pricing strategy takes time, but it doesn’t need to be painful. Just follow these steps:

1. Market research: Spend time getting to know your audience. Even conduct surveys to gauge demand and value, and so on.
2. Cost analysis: Get the calculator out. Figure out the total cost of production and make sure you know your break-even point.
3. Competitor reviews: Analyze your competitors’ prices and look for openings where you could differentiate your brand.
4. Set final price: Figure out which pricing strategy is best based on your business goals.
5. Adjust over time: Don’t forget to alter your prices as markets and demand change. This’ll help you stay competitive.

Common mistakes in pricing strategies and how to avoid them

We’ll level with you—settling on exactly the right price is never easy. There are a few common mistakes that businesses, especially younger SMEs, often make:

• Underpricing: If you set your prices too low, you lose revenue. It’s as simple as that.
• Overpricing: This could drive customers away to cheaper alternatives, especially if your product isn’t strongly differentiated.
• Ignoring customer perceptions: You might insist your product is worth X, but the consumer doesn’t have to agree. 

Luckily, these mistakes are avoidable. We’d recommend ensuring your pricing aligns with both your goals and the market. Conduct regular market research and try to consider value as well as cost.

How to avoid underpricing and overpricing

Pricing is all about balance. Tip too far one way or the other, and you’re in trouble. Here’s how to avoid that:

• Start with competitor analysis to understand how similar products or services are priced.
• Conduct customer surveys to gauge their willingness to pay based on perceived value.
• Monitor sales performance regularly and adjust prices based on market response. 
• Consider tiered pricing to cater to different segments.

How pricing affects market share and competitiveness

When you’re making a buying decision as a consumer, what factors matter most? Price is almost certainly in the top three (if not number one). So, as you can imagine, pricing plays a fundamental role in a business’ market share.

Competitive pricing ensures a business remains attractive against rivals. A well-thought-out pricing decision affects customer attraction and retention by aligning with their expectations of value. So consistently offering value for money strengthens your market position and helps you remain competitive in a crowded market.

Impact of pricing on market share

Still not convinced pricing plays such a big role in a business’ market share fortunes? Let’s take a look at a real-world example:

Xiaomi is a famous Chinese smartphone brand. No doubt you’ve heard of them. You might have even had one, and that would be down to their penetration pricing strategy.

When Xiaomi entered the Philippine market, it priced its smartphones significantly lower than established competitors like Samsung and Apple, offering high-quality features at affordable prices. 

And it worked, the company saw a rapid growth in market share and now competes against much bigger brands.

Pricing and costing: Understanding the relationship

Of course, the first step towards developing a great pricing strategy is costing. Pricing and costing are closely linked:

• Costing involves calculating production expenses (like raw materials, labour, overheads, and so on).
• Pricing has to reflect costs in balance with market demand and competition.

Some pricing strategies are directly linked to costing, like cost-plus pricing.

However, some aren’t so dependent on costs. For example, penetration pricing or value-based pricing might focus more on competition. 

That said, costing is still vital if you want to ensure profitability.

The role of costing in setting prices

There’s more to costing than meets the eye. Businesses have to consider all the following expenses (and more):

• Production costs: Materials, labour, manufacturing, etc.
• Distribution costs: Logistics and delivery.
• Marketing expenses: Advertising, promotions, sales efforts, etc.

Adding these up gives you a baseline from which to work. From there, you can establish your break-even point and how much you need to charge to make a profit.

The easiest way to get instant sales data and gather the necessary figures to make better pricing decisions is with QuickBooks accounting software—try it for free for 30 days to see for yourself!