A well-thought-out pricing strategy is key to the success and growth of a company.
With the right pricing model, you can enhance profitability, increase your market share, and develop your competitive edge.
The best pricing strategy aligns with your marketing strategy and target market. It will also consider factors like variable costs, competitor pricing, and consumer demand. Therefore, your prices will either be cost, value, or competition-based.
This article delves into an exhaustive list of different pricing strategies. By understanding the concepts, you can pick the right pricing strategy and maximize profits. This, in turn, will help you become a leader in a highly competitive market.
Cost-Plus Pricing
Cost-plus pricing or markup pricing is one of the most common pricing models. You get to determine the selling price by adding a fixed percentage markup to the product production cost.
You have to calculate product costs and set a desired percentage of earnings. Regardless of market fluctuations, your profit stays the same, thanks to the fixed percentage.
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And that’s precisely what many retail stores do to keep their profit margins steady and predictable. These suitable costs make budgeting and forecasting easier. Online stores with stable production costs and price-sensitive customers enjoy this strategy best.
Let’s say, for example, that you were selling shirts, and the production and extra cost is PKR 1,200. If you were to get your profit, you could decide to add 25% markup. This makes it PKR 1,500, which is PKR 1,200 + 300.
A high markup can make a cost-plus pricing strategy uncompetitive. This is a result of ignoring consumer demand or competitors.
Thus, relying solely on this pricing method isn’t ideal. So, a hybrid approach where market conditions and competitor pricing fall within the calculations is recommended.
Value-Based Pricing
Value-based pricing is based on the idea that potential customers are willing to pay a higher price for a product that they perceive has higher value. In other words, it aligns the price and the perceived value.
This means you need to know your target customers’ needs to determine their willingness to pay. Luxury brands use the value-based pricing strategy to set a premium product price.
Think of any clothing or accessories store recognized as a luxury brand. Many of them are relevant pricing strategy examples because they combine perceived value and high pricing.
Value-based pricing requires targeting price-conscious consumers who need a specific value in the product. However, it doesn’t work unless you align the price with your brand image and market positioning.
In contrast to cost-plus pricing, value-based pricing doesn’t rely on production costs. Nevertheless, it focuses on market demand (like surge pricing) and premium pricing.
Penetration Pricing
The penetration pricing strategy aims to capture market share by entering the market with a low price point. New businesses or new product launches use this approach.
The initial steps set products and services at a lower price to attract as many people as possible. That way, they can gain a foothold in the market. Later, once the market is penetrated and a significant market share is captured, prices may go up.
SaaS and subscription businesses use a penetration pricing strategy to gain subscribers quickly.
Then, they gradually offer more expensive options or eventually raise prices. In addition, it’s easier to build brand awareness at a faster pace with this strategy.
An example is offering your subscription service, which is meant to be PKR 299 at PKR 99. You will see a spike in sales at first.
Initial profit margins might be low since it’s pulling in consumers interested in low prices. Even if the sales volume is high, that won’t guarantee that you’ve attracted your target customers.
Penetration pricing emphasizes volume rather than profit margins, which makes it more short-term oriented. It’s the opposite strategy of skimming pricing, where prices start high and are reduced over time.
Skimming Pricing
The skimming pricing strategy, a.k.a. price skimming, is the opposite of price penetration. It’s about setting high initial prices and gradually lowering them over time. Companies use this strategy regularly, especially when launching new products.
For example, a brand can launch a new phone or laptop at premium prices and later reduce them. Early-stage profits can be maximized with a price-skimming strategy until the competition catches up.
For early adopters to be okay with the price, the product must equally have high qualities and features. However, those not willing to pay a higher price won’t buy. Thus, the initial market share is limited, even though the profit margins tend to be on the higher end.
A price skimming strategy works well with value-based pricing strategies. They’re all connected, as the psychological aspect is in play when employing them.
Psychological Pricing
This pricing strategy is based on buyers’ emotional response to specific price points. It’s a model that makes products appear more affordable or valuable.
By setting prices at specific points to trigger a positive psychological response, the product or service is perceived as a better deal. The .99 price tag, for example, uses the psychological pricing model (e.g., PKR 0.99 instead of PKR 1.00).
Retail stores target price-sensitive customers with decimal numbers to make them seem more affordable. They’re not, but it seems to be effective. That’s the trick. Price-conscious buyers can be easily swayed by something as simple as this. And you’ve probably been, too, even without your noticing.
It’s a play on the natural human tendency to look for the best and most optimal option. Our mind is tricked because we think that PKR 9-PKR 9.99 falls within our budget, unlike PKR 10-PKR 10.99.
In reality, the price difference is hardly there, but we feel it when there are more digits or when the digit is just slightly above our range.
Using psychological pricing with a discount for high-low pricing also works. It’s usually part of a broader marketing strategy rather than a standalone approach.
Dynamic Pricing
A flexible approach to pricing is a dynamic pricing strategy. It prompts businesses to change prices in real time due to market demand, competition, and other external factors.
For example, the prices for flights and shared rides vary depending on the time, weather conditions, and demand. By adapting to market changes, businesses can match the demand and provide appropriate services.
On the other hand, customer dissatisfaction can increase if prices change too frequently or without clear justification. You should invest in sophisticated technology before striving to implement it effectively.
Data-driven pricing analysis and technology are the cornerstone of the dynamic pricing model. This strategy is highly effective when used with elements of demand pricing, competition-based pricing, and others.
Price Bundling
Price bundling is also called bundle pricing. It is the strategy where multiple products or services are packaged together and sold at a lower price than if bought separately. This encourages customers to buy more by offering perceived savings.
Fast food restaurants, for example, employ bundle pricing as a standard. This is especially true if they sell burgers, fries, and a drink. They package them together at a lower price than if purchased individually.
In addition to increasing sales volume, this also helps move excess inventory or promote lesser-known products. However, if not managed well, bundling can affect profit margins or lead to a perception of low quality.
Careful pricing is important. So, pair product bundling with promotional pricing for powerful results.
Freemium Pricing
In a freemium pricing strategy, the basic version of a product or service is offered for free, with premium features available for a fee.
When you’re just starting up, getting stuff for free is appealing. However, the free version in the freemium pricing model usually has a limited array of functions.
Software companies do this all the time. They give you a free starter pack version and ask you to pay for additional features or benefits. It could be that customers want to add their team members to the platform or pay for uninterrupted music.
The good part is that this freemium model quickly attracts a large user base and allows a try-out of the app before committing. However, there can be conversion difficulties to the paid version.
But you can solve this problem. Using the freemium games, for example, they rely on the “whales” who make purchases regularly to advance their characters within the game.
In itself, freemium pricing can stand alone. So, it often complements subscription pricing, where the paid version is enjoyed at a monthly or annual fee. Generally, a hefty marketing investment is required to reach as many people as possible in a short time.
Pay-What-You-Want Pricing
PWYW pricing is an unconventional strategy where customers can pay any amount they choose for a product or service, including nothing. Sounds weird, right? It works, depending on how you use it.
Buyers decide the price they’re willing to pay, but there’s usually a suggested price. However, the final decision is up to each person. Restaurants and cafes do this on certain days or for specific items so that customers pay based on the perceived value of the meal.
Online content creators that provide free value add this as an option. This encourages those who wish to express their gratitude to pay them.
The pay-what-you-want pricing structure creates goodwill and enhances customer loyalty. It also increases the average transaction value if customers perceive high value. The risk is, obviously, low revenue, but this specific strategy isn’t one to rely on as a sole pricing option.
PWYW pricing works as an addition to value-based pricing and extra weight to the rest of your products. It’s the most appropriate pricing strategy for promotional purposes rather than a long-term plan.
Geographic Pricing
Geo pricing is about setting the prices of products and services based on the geographic location of buyers.
This is a strategy that considers local competition, cost of living, shipping cost, and other location-based factors when setting prices. It highly benefits users who live in countries where income is lower.
Companies who tailor prices to local marketing conditions reach a wider audience and can possibly gain market share in a competitive market. A geographic pricing strategy is most profitable when selling digital services because there won’t be any need for logistics. That is unlike products that rely on logistics, which makes the delivery process more costly.
Some customers paying the standard prices who discover and compare prices in other markets might become frustrated. This makes being transparent a priority if you employ this approach.
Promotional Pricing
Promo or discount pricing is a temporary reduction in prices to rapidly increase sales for a particular product or service. Prices drop to attract price-sensitive customers.
Retail stores often use this tactic during holiday sales, driving sales and moving inventory numbers efficiently. New customers looking for “bargains” also flock. If the quality of the goods is high enough, some people will become loyal to the brand.
Always having stuff on sale is fine, but it can be risky if not communicated properly. A tag should always indicate the discount or offer is there and will change back to the original price at one point or another.
Still, if selling at a discount is the only way to drive sales for your business, you should reconsider your approach. Psychological pricing, which aims to trigger a positive response, can support this strategy well.
Subscription Pricing
Subscription pricing involves charging customers a recurring fee for continuous access to a product or service. The subscription model is the hallmark of our digital world, and it has proved to be effective over time.
Whether streaming and cloud services or even professional services — everything can be productized and subscriptionized.
And while it’s a way to create ongoing relationships with buyers, it’s limited to only those willing to commit. The price must be carefully set to reflect the value that your audience perceives. If used with the freemium pricing strategy, your customers can start with a free version and then upgrade.
Also, we recommend a customer service team that can facilitate customer decisions. With their efforts, you can keep as many customers as possible subscribed.
Competitive Pricing Strategy
When you set your prices primarily based on the prices of market competitors, it’s called competition-based pricing. It involves studying competitors and choosing the right price for your business model to gain an advantage. This could be either by matching, undercutting, or going above competitors’ pricing.
Online retailers do it by keeping prices almost the same. They stand out by their other offerings like shipping and delivery, customer support services, or something else.
Even if you have the best automated tools to monitor and adjust pricing, you can only gain market share if you are wise about it. Or unless your business takes on large orders to compensate for the thin profit margins in the competitive market.
Dynamic pricing allows for changing prices in real time, so it helps keep up with competitors.
Premium Pricing
Premium pricing means setting a higher price for a service or product to reflect its higher quality, exclusivity, or brand status. Many niche market companies rely on a premium pricing strategy to sell prices well above production costs. With this, they can create an image of exclusivity and separate classes of people.
It’s the one tactic that works well with the psychological pricing method. It targets the perception of the brand and its goods.
Therefore, it’s aimed towards the non-price-sensitive customers. It focuses on those who want to be part of a privileged group of few.
Brand management is vital for the longevity of that perception. That’s also why an economy pricing strategy wouldn’t be an effective companion here.
Loss Leader Pricing
You’re relying on a loss leader price strategy when you sell a product at a loss, expecting that buyers will purchase other, more profitable items.
Supermarkets still do this by offering staple items (e.g., milk, bread) to draw more people into the store.
Online stores sometimes promote these cheap products in terms of performance cost. So they can urge customers to come back for more in the future.
With high-low or promotional pricing, there is a high potential for reducing profit margins. However, this strategy can be effective because it attracts both impulsive and low-end customers.
Odd Pricing
Odd pricing is the so-called charm pricing, where prices are set just below a whole number ending in .99 or .95.
This form of psychological pricing makes a product seem less expensive by setting the price just below a round number, such as PKR 19.99 instead of PKR 20. Retail stores use it relentlessly since it creates the perception of a bargain, even if the difference is a few cents.
Discount and promotional pricing enhance the perception of the deal even further. It’s a simple approach, but it requires cold-headed decision-making based on market research to work well in the long term.
High-Low Pricing
A high-low pricing strategy is where you sell products at a higher price first and then discount them to a lower price after demand has been satisfied. This is an excellent way to cater to price-sensitive and less-priced consumers.
Fashion retailers, for instance, use it when launching new collections at a premium price and then discounting items as the seasons progress. It captures higher margins from early buyers and stimulates sales volume with discounts. Brilliant, isn’t it?
The only catch is that over-relying on it can lead customers to always wait for sales rather than buying at the initial high price, affecting the brand’s perception. That’s why some businesses have campaigns that change up the rhythm and incentivize spending more to get more (e.g., buy two, get one free).
Anchor Pricing
Anchors in pricing serve as reference points, making new prices seem more attractive. Leveraging cognitive bias, anchor pricing relies on the first price being only a decoy for later discounts. Some might call it dirty play, but it’s about consumers’ perception.
If they feel like it’s a deal, they get satisfaction before making the purchase. Electronic retailers, for example, might showcase a high-end model’s price to make lower pricing tiers seem more affordable in comparison.
On one hand, this stimulates sales and increases perceived value. On the other, if this initial price is seen as unrealistic, it can backfire and lead to mistrust. Promo and discount pricing are compelling options that mix well with anchor pricing. The key to success is clear communication to ensure customers aren’t misled.
Your pricing strategy is one of the tools to reach as many buyers as you can or increase profits significantly. You get to make a ton of money when you pick the right one for your business model. But when you don’t, you might lose potential profits.
Choosing the Right Ecommerce Pricing Strategy
It’s necessary to opt for the most suitable ecommerce pricing tactics for your online business. They can determine your sales volume, profit margin, and your customers’ satisfaction.
Although it’s not advisable to drop prices, you also don’t want to charge way too high for a product with low quality.
Let’s see a breakdown of the above ecommerce pricing models. Here, you will know when to choose each one, as there is no one-size-fits-all strategy.
Criteria for Choosing an Ecommerce Pricing Strategy I
Product-Pricing Strategies | Criteria | Best for |
Cost-Plus Pricing | Adds profit margin to the cost of the product. It may be simple, but it doesn’t take into account competitors’ prices or buyers. | Pricing strategy for small businesses who want simple pricing and have steady costs. |
Competitive Pricing | In this case, you set your price based on rivals. It helps you stay competitive, but It puts you in a price war. | An industry with massive competition. |
Value-Based Pricing | Price is based on value and what customers will think it is worth. You should study your buyers well. | Niche markets and high-value products. |
Dynamic Pricing | Changing prices live based on demand and tight competition. Since it’s not reasonable to manually edit prices all the time, you may need dynamic pricing software. | Fast-moving consumer goods fall in this category. |
Penetration Pricing | This involves starting at a low price and then increasing it later. | New or small online stores looking to get attention and fast reach. |
Skimming Pricing | Starts with a high price that lowers later. This is advisable in low-competition markets that later become oversaturated. | Technology or luxury products where early buyers don’t mind the price. |
Price Bundling | Group products and sell them at a juicy offer or at a discount to get more sales. | Online stores with supplementary products. |
Psychological Pricing | Focuses on the psychology of pricing, e.g.,” PKR 9.99” to make items look cheaper. It sways the customer’s viewpoint. | Online stores that want consumers to buy on impulse or to attract frugal customers. |
Criteria for Choosing an Ecommerce Pricing Strategy II
Common Pricing Strategies | Criteria | Best for |
Premium Pricing | Setting a high price to show quality and limited access. It works best if your product or brand is strong. | Affluent brands or high-end products. |
Freemium Pricing | This type of pricing gives a free and paid version of a product. It convinces users to try out the products. | Digital services or products, e.g., software and apps. |
Pay-What-You-Want Pricing | It allows shoppers to pay what they want, but there is usually a quoted price. It creates goodwill and inspires loyalty. | Promotional motives or content creators who want buyers to show their support. |
Geographic Pricing | Uses the location of customers to set prices. Also, it accounts for local competition, living costs, and shipping costs. | Online stores that sell across countries at different local prices. |
Promotional Pricing | This includes price reductions from time to time. It urges customers to buy quickly. | Online businesses looking to attract new shoppers. |
Subscription Pricing | Charges buyers a regular fee for access to their package. | Digital services, media, and other kinds of businesses like food that can offer constant packages. |
Loss Leader Pricing | Selling one product at a loss to encourage buyers to buy more. | Online stores aiming to attract customers with cheap products. |
Odd Pricing | Prices are set below whole numbers, like PKR 1999 or 1995 instead of PKR 2000. | Ecommerce businesses who want to skyrocket sales. |
High-Low Pricing | Starts at a high price but later sells at discounts. Sells to high-end shoppers initially and later captures price-sensitive ones. | Fashion businesses that want to boost sales and move their inventory. |
Anchor Pricing | Place a high price beside the discounted price to appeal more. | For any business looking to boost sales. |
Understanding Your Business Needs
Now, you should have an idea of the best pricing strategies to choose. You should consider your business needs to pick what would work best for price optimization.
Some of these strategies are temporary, while others are long-term. Choose them according to how well they fit your ambitions. The goal is to have a solid profit maximization pricing plan.
Know Your Customers
While you already have a buyer persona, it is important to look into shoppers further to determine what kind of pricing they can afford. Consider the priority of your product to them and their average income, as well as past spending habits.
Think about customer value-based pricing (how target buyers would price the product) before setting the price. You should be focused on balancing the price between your goals and customers’ needs.
Use Technology
We only shared with you the most common pricing strategies around. So, you still have some work to do. For instance, find out the acceptable pricing or range in your market.
Your fee doesn’t always need to be what your competitors set, especially if the market isn’t tight. Use social media and competitive research to learn the industry prices and set a fair price.
Frequently asked questions
How do I know which is the most effective pricing strategy for my ecommerce business?
If it aligns with your business goals, target market, product type, and competition, then it’s likely to be a good choice for you.
How often should I review and adjust my pricing?
Depends on your strategy. Monitor market trends, competition, and consumer demand to make the best of every situation.
Why would a business ever sell products below cost?
The loss leader strategy attracts buyers, betting on the chance they’ll get additional items that are more profitable or become repeat customers.
Isn’t setting a higher price always better for profits?
Not necessarily. A higher price reduces sales volume, which can lower the net profit than selling more at a lower price. It can be very profitable if you play your cards well from the start, aligning your brand image and marketing strategy with your pricing.
When should I consider using dynamic pricing?
Dynamic pricing is preferable when there is tight competition and ever-changing market prices. It works in industries like travel and retail, where prices often fluctuate.
Therefore, it is advisable to adopt dynamic pricing software. It helps change prices according to demand so you stay competitive.
How can I balance profit margins with competitive pricing?
Exercise care when balancing profit margin and competitive pricing. It’s a case where you want to have a set profit while still meeting market conditions.
One of the best ways to handle it is to drop the cost of production and other costs. You can also use pricing tactics like psychology and anchor pricing to remain competitive. They prevent you from running at a loss, especially if you can’t reduce the costs of production.