Small business owners looking for the best pricing strategy for their business will be met with different options. It’s no wonder that the question of choosing the best one might leave some people wondering, as there are many different pricing strategies that currently exist, and new ones emerge all the time.
However, after careful analysis, it’s clear that what matters most is the type of business and its goals – just specifying that allows business owners to have a few sound options to choose from.
This article contains the most common pricing strategies with a description of what they are and which types of businesses can benefit from each one of them.
What is a pricing strategy?
Pricing can be thought of as a method (or a combination of methods) used to set the best price for a product or service. It’s necessary to maximize the profits and shareholder value, while adequately understanding the market demand.
Types of popular pricing strategies:
Markup pricing (cost-plus pricing)
The markup method (also called cost-plus pricing method) is used by applying a fixed “markup” percentage to the production cost. For example, if it costs $10 to produce a shirt, you might price it at $15 if you want to make a 50% profit on each sale.
This strategy is typically used by businesses that sell and/or produce physical products, as well as by some restaurants. It is one of the most often used types of pricing strategies in retail, especially in-store retail (where the markup is often higher than in e-commerce due to higher running costs).
Where it’s used: in-store retail, restaurants, manufacturing.
High-Low pricing (discount pricing)
Consumers enjoy discounts, but sometimes they also just need a product and will pay a reasonable price without one – that’s why this strategy works. High-low or discount pricing is used by businesses that operate on a seasonal basis. It sets a high price that gets lowered as the season draws to an end and the business needs to make space for new items.
It isn’t as upsetting to customers as skimming strategy, as the prices go up again once the new product arrives in the new season. Those customers that need a particular item right away will pay a full price. Those that don’t mind it slightly going out of style or simply not being in such high demand can enjoy it at a discounted rate.
Consider using this strategy if you sell clothes, furniture, decor items that depend on fashion or season.
Where it’s used: fashion, interior design items, furniture, holiday items.
Hourly pricing (or rate-based pricing) is commonly used by freelancers, consultants, and other individuals who provide professional services. In a nutshell, it’s about trading your time for money. Whether and how you can use this method depends on a number of criteria, such as your qualifications, market demand, average pricing, and even your geographical location.
Some businesses and clients prefer a project-based approach, as it rewards finishing a task, rather than putting in hours. However, it is still a very commonly used strategy that might fit your business if you provide professional services.
Where it’s used: services, nonprofits, agency work.
This strategy is the opposite of hourly pricing — using this approach businesses charge a flat fee instead of counting the number of hours each time a task is completed. Similar to hourly pricing, it is also used by freelancers, contractors, consultants, and others who provide business services.
Project-based pricing is the result of estimating the number of hours a task demands, resources needed for completing it, and takes into consideration your qualifications for providing a service.
Where it’s used: services, nonprofits, agency work, construction.
Pricing for market penetration (low first, then higher)
This strategy is one of the most popular new product pricing strategies, as it allows companies to get noticed in a new, or a saturated market. It works in the beginning and helps companies draw business from less-affordable competitors, but isn’t sustainable in the long run.
It is, however, proven to be effective if you are just starting and are seeking to attract new customers quickly. Netflix is a classic example of a company using this strategy. Remember when it used to cost under $8? We don’t either, yet we still all use it, and agree to prices being slowly raised because we like the product.
By lowering your price at first, you might get a large enough base of loyal customers who will be able to get to know your product, and over time will be ready to pay more.
Where it’s used: e-commerce, online services, digital products.
Skimming (high first, then lower)
Skimming is the opposite of a market penetration strategy. Using this strategy, companies charge their customers a very high price for a new product and then gradually lower the price as the demand deflates. The difference between skimming and high-low pricing is that prices are lowered systematically, over a period of time.
A skimming pricing strategy can help recover production costs, but is hardly sustainable, as it quickly attracts competitors who recognize a potential for market penetration, and can upset your initial customers who paid the full price.
Where it’s used: technology (game consoles, smartphones), tourism, education.
With premium pricing, businesses can afford to set high costs for their product or service because it’s unique and nobody can compete with it. If you find yourself to have a serious competitive advantage, consider this strategy.
Many customers will make a purchase because of your brand or reputation, and expect premium quality, service, packaging, and consistent marketing that promotes your brand values.
Among primary examples of businesses using this strategy is the luxury car industry, as well as the elite watch market, however luxury consultants or freelancers can also be small business owners.
Where it’s used: luxury, high-level professional services (architecture, art, various types of personal consultancy), restaurants, education, real estate, tourism.
Competitive pricing strategy is implemented when an existing market is analyzed and a slightly lower price is offered. It is used by many businesses, who are looking to attract new customers and are prepared to offer a service or sell a product consistently over a slightly lower rate than is currently available.
For example, you might open a coffee shop selling a coffee for $3 instead of $3.50 that is the normal rate in the area.
When choosing this strategy it’s important to examine whether it would be sustainable, and whether you can combine it with other strategies. One such combined pricing strategy example is Target that is famous for selling many items at a competitive price next to those that are priced higher than usual.
Where it’s used: retail, nonprofits, real estate, education, e-commerce.
This type of pricing is built around the price the customer is willing to pay. Even if as a business owner you understand that you could afford to charge more, using this strategy you consider customer interest and data first, and the markup you are expecting to receive second.
It is a great scientific method to be used with caution and great accuracy that can be used long-term and build loyalty within your customer base.
It requires a regular revisiting of data you have available and a clear vision of your customer persona, as well as systematic adjustments to setting a price to what you sell.
Where it’s used: retail, e-commerce, digital services, events, restaurants, services.
A bundle pricing is used to offer more items for the price of a smaller number of products. This strategy is often used in combination with other strategies, and is especially relevant seasonally.
As a business owner you may choose to offer some products only as a part of a bundle, or create large bundles when the demand is high (5+1 for example). Studying your customer persona (for example whether you cater to families that prefer to shop less often but buy more at once) will help you in deciding whether to implement this method.
Where it’s used: retail, e-commerce, restaurants, beauty services.
Deciding on the best pricing strategy for your small business depends on many factors, chief among them is understanding the market, your goals, and your customer persona. By regularly revisiting your chosen strategies and adjusting them according to new data, you can make sure that you are staying on top of the game.