A pricing strategy refers to methods that businesses use to price their products. Being smart with pricing isn’t just for big companies and brands. Pricing strategy is an integral part of a business’s success, and small businesses need to learn how to leverage it.
Businesses use a pricing strategy for different reasons, including:
- To maximize profit margins.
- To maximize quantity.
- To maintain a market share and keep competitors at bay.
- To break into a new market.
How Pricing Affects the Success of a Business
Clearly, pricing is important. But it is a tricky aspect of doing business that all business owners have to navigate. Setting a low price for your products might lower your customers’ perceived value, yet high prices may scare off potential new buyers.
So if your price is too low, it can harm the brand. And on the other hand, low prices may cause your business to hit a snag due to a lack of revenue to cover running expenses.
The 10 Best Pricing Strategies for Small Businesses
So now that you’re aware of the importance of pricing strategy, how do you use this to increase your revenue? Whether you are a small business or have been in the game for a longer time, here are ten pricing strategies that will elevate your game.
- Penetration Pricing
In penetration pricing, businesses offer a low price in the market compared to competitors in order to introduce a brand, gain customers, and market share. The initial price provided is bound to go up over time. The sole aim of a penetration pricing strategy is to attract buyers.
Penetration pricing may mean taking a loss on a sale, but it works by drawing attention from other businesses and increasing brand awareness. Penetration pricing leads to an initial loss of income, but in the long run, business owners can recoup once they gain market share.
An example of penetration pricing strategy is when the current market rate for a product is $100, but a new business sells their merchandise at $95. The reduced price point, however small, will get the attention of the buyers in the market, and they might make a switch. Amazon.com has famously used this strategy to attract buyers who would normally shop at other stores.
- Premium Pricing
Some businesses put a higher price on their products as a way to differentiate themselves. A product with a higher rate is perceived as higher quality and better value. It could also allude to luxury and top of the range.
Business owners who use premium pricing need to ensure that their product packaging, customer experience, and marketing strategy align to support their premium pricing.
Apple is an excellent example of this pricing strategy. Despite the availability of cheaper phones, tablets, and computers in the market, Apple prices its products at a high value. This helps Apple to distinguish itself from other competitors in the market and position itself as a premium brand.
- Optional Pricing
Under optional pricing, businesses use this strategy to sell multiple items together. The base product goes for a meager price, but the complementary accessories are more costly. Enterprises intend to make more money from the accessories rather than from the base product. An example is a printer and ink cartridges. The printer goes for reasonably cheap, but the ink cartridges are expensive to replace, and it’s a recurring expense.
- Value Pricing
Value pricing is the opposite of premium pricing. Businesses price their products at a low value and have very thin margins. However, they sell at high volumes and maintain low production costs in order to make a profit. This pricing strategy is aimed at price-conscious customers.
- Competition Pricing
As the name suggests, competing businesses in the same market selling the same product compete against each other by reducing costs in their production and distribution channels. This strategy can be combined with another strategy mentioned here — the idea is that in competition pricing, you look at what your competitors are doing and adjust prices accordingly.
To an extent, this strategy can be detrimental to a business if it turns into a price war. A price war is where two companies compete to offer the lowest price in the market. While this may mean a field day for the customers, it hurts the small business that tries to compete with a bigger business that has better economies of scale and margins. A price war can severely impact the profitability of an enterprise, even to the extent of ceasing operations.
- Bundle Pricing
Under bundle pricing, businesses package products and services and sell them at a discount to increase sales. The customer ends up purchasing items in a bundle at a lower cost compared to if they bought the product or service individually.
A pricing strategy example of this model would be purchasing a television that comes with a TV stand, DVD player, and speaker set. Bundle pricing is an excellent way for small business owners to reduce their inventory.
- Skimming Pricing
This pricing model helps businesses maximize profits on innovations in the market. A product is introduced into the market at a high price point, but then the price drops over time as competition gradually increases. A good example of this pricing strategy is found in the technology industry.
When Apple launched the first iPhone in 2007, the 4GB variant was going for $499, and the 8GB variant was going for $599. They sold 1.4million iPhones in 2007 and 11.6 million iPhones in 2008. Today you can grab the same device for around $250. Skimming pricing creates an image of exclusivity when an innovation is introduced in the market and helps businesses recoup their development costs.
- Psychological Pricing
These are strategies that marketers use to trigger the customer’s emotional impulses in order to make a purchase decision—for example, pricing a product at $99 versus at $100. Irrespective of the marginal difference, customers perceive it to be a bargain for their money.
This is an excellent example of irrational pricing. People are irrational creatures, and view prices both rationally and emotionally. So while the $99 would not rationally make much more sense than $100, it’s because of people’s emotions toward this price (with just 2 digits instead of 3) that they greatly prefer it over the $100 alternative.
- Promotional Pricing
Promotional pricing strategy is a short-term effort that business owners use to generate excitement about their product. It involves offering discounts and offers. Promotional pricing creates urgency for the customer to act in the moment. An example of promotional pricing is the “buy two, get one” free campaign, which would be limited to a certain time.
- Versioning Pricing
Versioning pricing is also known as freemium. This pricing strategy is prevalent especially within SaaS companies and (mobile) games. It involves selling the same software in different versions, such as free, basic, and premium.
The basic level of the product has a low price or is free. This invites the customer to try out the product, after which they are introduced to a better version with more features but at a higher cost.
How to Choose the Best Pricing Strategy
With these 10 pricing strategies in mind, there are several things you need to look out for when designing a pricing strategy for your business. Here are some of the things you need to know:
- Your product: How well do you know your product? Do you know what problem it solves, who it is for, and how to get it to your customers? This is the very first step. Your pricing strategy will be ineffective if you are not able to articulate your product and its features.
- Your competitors: What pricing actions are your competitors taking? It is imperative to watch your competitors, but avoid price wars at all costs.
- Your customer: Determine your customer’s ability to pay. What impact will your pricing strategy have on the demand and sales of your product?
- Your market: Are the conditions favorable for your pricing strategy? What are the legal limitations that affect your pricing strategy? For instance, in certain markets governmental price control may be an existing factor.
- Your business: Input costs, production costs, variable costs, margins. Calculating all the costs involved in making your product will help you determine how much to charge to make a profit from it.
- And lastly, the psychology of pricing. The way consumers see prices is often not rational. Think back to the $99 vs $100 example, or the idea of price anchoring. These are just two biases consumers face among many, and there are many other such behavioral economics examples to find. Get to know this ‘irrationality’ and leverage it to improve your pricing strategy.
Using the psychology of pricing, these 10 pricing strategies, and everything you know about your business, you can truly improve your pricing. If done well, this will result in additional revenue and market share. But just remember, your customers won’t be able to buy from you if your prices are too high, and your business won’t be able to run if your price is too low. So always walk that thin line.