You know that feeling when you find a product you want to buy, but the price just seems too high? Or maybe it actually seems suspiciously low? As a customer, price plays a huge role in your purchasing decisions. Well, the same goes for customers buying from your business. Setting the right price is crucial, but a shocking number of companies just wing it without having a pricing strategy in place. Let’s talk about why you need one, what it is, and how to develop one for your unique business.
What is a Pricing Strategy?
A pricing strategy lays out how you determine the prices for your products and services. It acts like a blueprint, guiding your price-setting decisions so you land on prices that make sense for your profit goals, competitive landscape, and customer demographic.
Without a plan, you risk setting prices that are too high or too low. Customers might see right through prices that don’t align with the value you provide. And with profits on the line, you can’t afford to learn these lessons through trial and error! That’s why many businesses turn to competitor pricing software to gain insights into market trends and ensure their pricing remains competitive while maximizing profitability.
Why Bother With a Pricing Strategy?
You might be wondering if it’s worth sweating all the small details of your pricing. Can’t you just charge what feels right? While that approach may work when you’re selling lemonade as a kid, grown-up businesses need to be more strategic to succeed.
A strong pricing strategy leads to the following:
- Prices that entice more sales from your ideal customers;
- Healthier profit margins that fuel growth plans;
- Competitive edge from pricing that communicates the value of your offerings;
- Overall confidence that your hard work determining prices will pay off!
Let’s explore a simple way to build that pricing strategy.
The Nuts and Bolts of Building Your Strategy
At its core, pricing comes down to covering costs and achieving specific profit goals. So the foundation of your strategy should include an in-depth understanding of your expenses and targets.
Here’s where to start:
- Calculate your product/service cost. What does it cost you to produce each item or deliver your service? How much time and operational expenses are involved?
- Establish your desired profit margin. As a business owner, decide what percentage of the sale price represents acceptable profit.
- Research competitor pricing. Know how your prices stack up against competitors so you can position yourself appropriately.
- Weigh customer willingness to pay. The maximum price customers will accept depends heavily on the value they perceive.
Armed with answers in those areas, you can crunch the numbers to set initial pricing. But pricing rarely comes down to math alone. You still need to think about positioning.
Setting Prices to Drive Different Goals
Beyond covering costs and hitting profit targets, pricing can be strategically used to support other business goals. Common goals that impact pricing decisions include:
Increase market share. Set low, competitive prices to rapidly gain customers even if margins are slim. Makeup profit over time with higher volume.
Support premium branding. High prices communicate exceptional quality, prestige or exclusivity if supported by other branding elements.
Promote new products. Initially, low prices for new products/services help overcome resistance and hesitation from buyers. Raise over time.
Match competitor prices. Carefully track and match key competitor prices to remain price competitive in customers’ minds.
Adjusting Prices Over the Product Lifecycle
The optimal price for a product or service may shift over time as it moves through its lifecycle from introduction to eventual decline. Pricing strategies also shift in response.
Introductory pricing. Low initial prices to spark interest and overcome resistance to an unknown product.
Price skimming. High prices target early adopters willing to pay a premium for the “hot new thing.” Prices decrease over time.
Product bundle pricing. Offering packages/suites of products may allow price increases over individual products.
Value pricing. As products become outdated, maintain appeal through lower prices that offer value.
Advanced Pricing Models
As an alternative to fixed, cost-based pricing, some companies adopt more advanced models:
Dynamic pricing. Prices change in real-time based on supply, demand and competitor pricing. Common for airline tickets.
Value-based pricing. Prices are directly based on the perceived value delivered rather than internal costs.
Subscription pricing. Customers pay a recurring fee for ongoing access rather than owning a product outright.
Freemium pricing. Basic products/services are free, while advanced features or premium versions come at a cost.
The Psychology Behind Pricing
Pricing strategy goes far beyond calculations and number crunching – customer psychology plays a central role. Prices influence perceptions, spark emotions, and drive buyer behavior in some key ways:
- Anchor effect. Initial prices presented to customers become an anchor or benchmark that frames their perception of value. This anchor impacts willingness to pay when prices change.
- Price inferiority. Low prices can backfire by giving the impression of inferior quality, while ultra-high luxury pricing attracts status-seeking buyers.
- The 9-ending effect. Odd prices ending in the number 9 feel like temporary sale prices rather than permanent ones.
- Pay what you want. Give customers complete freedom to pay anything they want. Success depends on customer goodwill and loyalty.
Implementing Testing & Optimization
Rather than a single launch-and-leave event, pricing is an ongoing process of refinement and optimization:
- Test incremental variations in pricing with A/B testing or minimum viable product launches to gauge response.
- Analyze conversion rates, customer segments and sales data to identify optimal prices.
- Tap into behavioral economics principles to influence customer perceptions.
- Maintain flexibility to run short-term sales, discounts and promotions to boost conversions.
- Rethink pricing approaches entirely as markets, tech and buyer expectations evolve over time.
Conclusion: Pricing as an Evolving Strategy
Pricing rarely comes down to a single “right price.” Instead, develop an adaptable pricing strategy based on your business context, customer insights, and financial goals. Set initial benchmark pricing, launch fast experiments, monitor response and optimize. A smart, ever-evolving approach to pricing will serve your business well through the ups and downs to come!
