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How to choose a pricing strategy for your business
According to the 2023 Intuit QuickBooks Small Business Index, small businesses account for nearly 44% of all jobs and represent 99% of all business entities.
Data shows that around 60% of startups fail within the first 3 years (Fundsquire) with around 15% claiming this was due to pricing and cost issues, and around 38% citing cash flow issues (according to a study carried out by CB Insights of 111 small businesses).
Pricing is one of the key factors that impacts business revenue, and can make all the difference when it comes to the success of your small business. Which pricing strategy is best for you will depend on your business model and industry. Utilising data and insights from your accounting software could help ensure you get it right. We’ll look at what pricing strategy is, why it's important and some of the most common methods and suitabilities of each. Discover which one is right for your business.
This article is not intended to provide financial or business advice. Please consult a financial advisor before committing to a pricing strategy.
What is a pricing strategy?
Definition: a pricing strategy is the method by which a business sets the price for its goods and/or services.
‘Pricing strategy’ refers to all of the various methods that small businesses use when setting prices for their goods or services. An all-encompassing term taking into account factors including:
Market conditions
Actions that competitors take
Account segments
Trade margins
Input costs
Consumers’ ability to pay
Production and distribution costs
Variable costs
Brand positioning
Target audience
Why is a pricing strategy important?
For many small businesses, pricing is an afterthought. All too often, business owners look at the Cost of Goods Sold (COGs), competitor prices and desired profit margin in order to make pricing decisions. Whilst these are important factors, they are not always the most important. Pricing strategies are useful for numerous reasons, though those reasons can vary from company to company. Choosing the right price for a product can allow you to maximise profit margins if that’s what you want to do.
In some cases, you may be willing to sacrifice profit margins in order to focus on competitive pricing, but you must be careful when engaging in an action like this. Although it could be useful for your business, it could end up negatively impacting your cash flow.
Pricing is a balancing act. A good rule of thumb to remember is that your customer base won’t purchase your products if they’re priced too high, but your business won’t be able to cover expenses if they are priced too low.
Having a strong methodology behind your pricing can help you to avoid issues such as this. Discover some of the most common business pricing strategies, the pros, cons, and suitabilities of each.
Pricing strategy methods
The different types of pricing strategy include:
Economy pricing
Premium pricing
Bundle pricing
Promotional pricing
Value pricing
Captive pricing
Dynamic pricing
Competitive pricing
Cost-plus pricing
Freemium pricing
Economy pricing
Economy pricing is a pricing strategy that aims to attract the most price-conscious consumers. A wide range of businesses use this strategy, including generic food suppliers and discount retailers.
This is a no-frills approach that involves minimising marketing and production expenses 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: small businesses that sell commodity goods that want to keep their overhead costs low.
Pros:
Easy to implement
Keeps customer acquisition costs low
Attracts price-sensitive customers
Best strategy to use during an economic downturn or recession
Cons:
Can be challenging to cut production costs
Small businesses may not have enough brand awareness to forgo custom branding
Only works if there is a steady stream of customers
Potential to negatively impact brand perception
Economy pricing example: businesses that utilise the economy pricing strategy include budget airlines and supermarkets. Budget airlines will use economy pricing to fill any empty seats and lower the cost per unit.
This strategy also applies to generic food brands that are sold in supermarkets—they’re priced lower because they require minimal promotion and marketing expenses.
Premium pricing
A premium pricing strategy allows businesses to set costs higher when 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 the perception of value. Along with creating a high-quality product, business owners should ensure that the product’s packaging and the marketing strategy associated with the product all combine to support the premium price. If you have a physical shop, or webshop, these should also reflect your premium price point.
Best for: small businesses that have a considerable competitive advantage, or well known brand, and know that they can charge a higher price without being undercut by a product of perceived similar quality.
Pros:
Makes your brand appear more desirable
Higher profit margins
Provides a competitive advantage
Cons:
Higher cost of production and marketing
Smaller target audience
Reduced sales volume
Premium pricing examples: this strategy can be seen in the luxury car and tech industries. Car companies like Tesla can get away with higher prices because they’re offering products, like autonomous cars, that are more unique than anything else on the market.
Additionally, tech giants like Apple can sell their products at a premium price compared to their competitors because of their name and brand perception.
Bundle pricing
The bundle pricing strategy refers to selling multiple products for a lower rate, than if selling each item individually.
Customers feel as though they’re receiving more bang for their buck. Many small businesses choose to 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 the higher-value items must make up for the losses they take on the lower-value products. They should also consider how much they’ll save in overhead and storage space by pushing out older products.
Best for: small businesses that want to create large margins while offering a lower price than competitors.
Pros:
Increases the value perception in the eyes of your customers
An effective way to reduce inventory
Lowers marketing and selling costs
Cons:
Could result in product cannibalisation when bundling lowers the demand for individual products or reduces the profit margin.
Some customers may not want all products offered in the bundle, resulting in an unwanted or unused product
May cause a negative perception of the brand due to customers assuming the product is of lower quality since it’s bundled
Bundle pricing examples: fast food restaurants often use bundle pricing, making it cheaper to buy a meal than it is to buy each item individually.
Internet service providers also often use this strategy, bundling with TV packages and sometimes mobile phone plans.
Promotional pricing
Promotional pricing is a competitive pricing strategy that involves offering discounts on a particular product. These strategies are often run on specific occasions, such as at Christmas, Easter or as part of a ‘Summer Sale’.
By offering these deals as short-term offers, business owners can generate buzz and excitement about a product. Promotional pricing campaigns often consist of short-term efforts and incentivises customers to act now before it’s too late. This pricing strategy plays to a consumer’s fear of missing out.
Best for: small businesses that want to generate quick demand for their products or services.
Pros:
Increases sales volume in the short term
Increased inventory turnover
Promotions can build customer loyalty
Cons:
More calculations are required to ensure the sales volume compensates for the discounted prices
Lowered perception by customers due to “cheaper” prices
Customers may be reluctant to purchase again if you don’t keep offering promotions
Promotional pricing examples: an example of promotional pricing can apply to a retail store that implements a “Buy One Get One” campaign during events such as Black Friday or Cyber Monday.
Loyalty programs also apply here - retailers will offer rewards to their loyal customers for a limited time.
Value pricing
Value pricing is a way of setting your prices based on your customer’s perceived value of what you’re offering. This 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 though they are receiving an 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 an excellent value by purchasing it.
Best for: small businesses that specialise in SaaS, subscriptions or service based businesses
Pros:
Potential for high profit margins
Increased perceived value in your brand and services
Increased customer loyalty
Cons:
Requires additional market research to determine what is of value to your audience
Markets that work well with this strategy tend to be very niche since they’re high-end
Goods may cost more to produce, and overheads may be higher
Value pricing examples: an example of value pricing can be 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 more value for the product.
As most people would not pay £1,000 for an umbrella, external factors like customer perceptions are guiding the price.
Captive pricing
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 go along with the core product you’re selling.
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: small businesses that have a product that customers will continually renew or update.
Pros:
Increases flow of traffic to the core product
Boosts sales each time the upgraded accessory is released
Customer loyalty increases
Cons:
Customers may begin to feel unsatisfied with having to update their products repeatedly
High-priced accessories can lead to a loss of sales
You’ll need to continuously offer new and improved products each time to maintain revenue and customer interest
Captive pricing example: reusable razors are a great example of captive pricing. If a customer purchases a razor handle, they must continue to purchase new razor heads in order to continue using the original product.
Companies tend to make the accessory products unique to their brand so that alternatives are not able to be used, therefore holding the customer ‘captive’ until they decide to break away and buy a razor handle from another company.
Dynamic pricing
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 takes many factors into account - particularly changes in supply and demand.
You might have heard dynamic pricing referred to as:
Demand pricing
Surge pricing
Time-based pricing
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 variable prices are applied to products or services that are typically bought by price-sensitive customers.
Best for: small businesses looking to maximise their profit margins and boost declining sales
Pros:
Allows for pricing to reflect the market demand for the product or service
Provides more insight into customer demand and purchase patterns
Enables you to maximise your profits by matching your price to the demand
Cons:
Customers may be scared off by prices that are always fluctuating
Higher risk of price wars
Increases competition within the industry
Dynamic pricing example: a good example of dynamic pricing comes from the airline industry. Flight prices change depending on when you book, demand and number of sales made so far.
For example, an airline may lower prices to fill empty seats on a plane to make the flight more economical. Similarly, if there is increased demand for flights to a certain location, flight prices may also increase.
Competitive pricing
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.
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 the assistance of pricing software, you can analyse and update price data continuously to ensure you are always on track.
Best for: small businesses that are just starting out
Pros:
Simple implementation
Can be combined with other strategies such as cost-plus pricing to make efforts more rewarding
Cons:
Not a good long-term solution as competitors may catch on and modify their strategy
Not a strategy to use if you want to stand out since your competitors are likely using the same methods
Competitive pricing examples: an example of a company that takes advantage of competitive pricing is Amazon. Amazon will compare the prices of products sold on their platform and utilise that information to offer the lowest price in the market.
This can also be seen in the tech industry with Apple and Samsung using competitive pricing for their phones.
Cost-plus pricing
Cost-plus pricing is a strategy of marking up (adding a fixed percentage) the cost of services and goods to arrive at your selling price.
As a seller, you would use a calculation that includes fixed and variable costs that will be incurred in manufacturing your product, and then apply the markup percentage to that cost. This strategy is widely used since it’s easy to justify and is typically fair and nondiscriminatory.
Best for: small businesses with a cost advantage or an interest in using price transparency as a differentiator
Pros:
May lead to positive differentiation and customer trust
Reduced risk of price wars
Can provide predictable profits
Simple to implement
Cons:
Discourages efficiency and cost containment
Potential for customers to perceive the product negatively
Not guaranteed to cover all costs since much of the calculation is a guesstimation
Can be difficult to change prices when needed
Cost-plus pricing example: Supermarkets work on a cost-plus basis to determine the prices of items such as eggs and milk. They will purchase from a wholesaler or producer and then apply a markup price for the product sold at their store.
The restaurant industry also often uses cost-plus pricing. For example, a restaurant will purchase wine from a supplier and add a % markup to sell.
Freemium pricing
Freemium pricing is a strategy in which a service or product is given to a customer free of charge, unless they want to access premium features or services within that product.
Best for: small businesses that intend to offer both free and paid versions of their product and those that offer free trials
Pros:
Potential to unlock viral growth
Creates a no-risk environment that attracts customers who want to try something for free
Opportunity to monetise on advertising
Cons:
A high percentage of free users may never convert
Cash reserves can be depleted quickly due to a large number of non-paying users
May require additional customer service support for freemium users, which can be costly
Freemium pricing examples: freemium pricing examples include free apps such as Spotify, that require customers to pay a premium price if they want an ad-free experience.
This also includes online magazine and newspaper subscriptions that only give you a certain amount of free articles until you have to pay to receive unlimited access.
How to create a pricing strategy
To create a pricing strategy, there are some things that you should ensure you know first:
The cost of producing your product or service
Current market trends and any threats to your supply chain
Your target audience and consumer base
Who your competitors are and how you compare
Without this information, it will be difficult to assess which methodology will be most effective to help you achieve your business goals.
If you have used different pricing strategies in the past, analyse what worked well and not so well for further insights.
On the whole, the most effective pricing strategy should be a compromise between business profits and value for your customers. Pricing your products or services too high can result in reduced sales that would have been outweighed by increased sales volumes at a lower rate.
Pricing strategy best practices
After deciding on your chosen method, there are a number of factors you should consider whilst creating your business pricing strategy.
It is generally best practice to:
Ensure your pricing manager is experienced: for the most success, it’s important that whoever is driving this strategy is experienced and skilled enough to handle a large pricing strategy roadmap.
Define KPIs ahead of time: setting your KPIs before implementing will help you have a more clear vision and will allow you to easily monitor progress.
Start small: 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 over time.
FAQs
What is the most effective pricing strategy?
The most effective pricing strategy will depend on your business type, products and the market in which you operate. Factors that influence the most effective pricing strategy for your business are rooted in your financial data and market insights.
You should:
Know what it costs to produce your products or provide your services
Continuously monitor these costs so you can quickly react to changes and maintain long-term profitability
Know your market, your competition, and your customers
Stay on top of emerging trends, supply chain threats, and consumer perceptions of your brand
For businesses selling premium goods specifically, you should also consider your long-term revenue goals, such as:
Whether discounts will do more harm than good by damaging the perceived value of your product
The amount of time you can sustain your chosen pricing strategy before cash flow becomes too stretched
Taking into account all of these conditions can help you to rule out certain pricing methodologies and decide on the strategy that’s best for you.
Should I charge more or less than my competitors?
This depends on what you’re selling and your target market. You have to think about all factors before setting a price. For example, if you want your business to expand into a new market, then you may want to charge lower prices to attract new customers.
If your competitors end up increasingly charging more, then you may want to consider increasing your own prices. It all comes down to what your competitors are doing and the goals your business is trying to obtain.
How often should I review my pricing strategy?
You should review your strategy at least once a year. However, you may want to review earlier in the case of:
A new competitor
Changes in legislation or laws that affect your product or service
A need to quickly boost dropping sales
It’s also wise to keep an eye on your competitors’ pricing to avoid any overlooked changes in the market.
What is a pricing curve?
A pricing curve is a graph that shows you the number of people who are willing to pay a certain price for a service or product. This can help you determine how to price your product.
What is the most simple pricing strategy?
The most simple pricing model is cost-plus pricing due to the fact that you only need to take the cost and add a marked-up percentage to it. This tends to work for most business types so can be a good starting point if you’re unsure on which pricing strategy is best for your business.
A variation of this is ‘keystone pricing’ whereby businesses markup products by twice the wholesale cost. This can be a great way to drive initial profits.
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This content is for information purposes only, is provided free of charge and it is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, or tax advice. Additional information and exceptions may apply. No assurance is given that the information provided is comprehensive, accurate or free of errors. Intuit does not have any responsibility for updating ore revising any information presented herein. Any reliance you place on information found on this site or linked to on other websites will be at your own risk. You should consider seeking the advice of independent advisers and always check your decisions against your normal business methods and best practice in your field of business.
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