Determining the price of a product is a process that requires calculations, research and an understanding of the dynamics in a given product market. However, there are certain pricing strategies that have been popular for years and have yielded positive results for sales. In this article, we outline 10 such reliable pricing strategies that are still being used by businesses around the world and may be ideal to use in your business to determine the selling price of your products. We will try to make it easy for you to choose the right pricing strategy from some most common pricing strategies. Read more What is pricing? Pricing strategies and benefits.
1. Cost-plus pricing strategy💸
This is one of the most popular and simplest pricing strategies. It involves determining the price of a product based on its production costs (or purchase price in the case of redistribution) , including material, labour, market demand, distribution costs and other overhead costs. To apply this strategy, costs must be calculated accurately and, in addition, the desired profit, or margin, must be added to them.
Determining the selling price = margin + purchase price = 5 PLN + 10 PLN = 15 PLN.
For example, if the cost of manufacturing a product is 10 PLN and the profit margin percentage is 33%, the selling price will be 15 USD (10 PLN + 33% of 15 PLN). This strategy ensures that the price covers the cost of production (or purchase if the product is redistributed) while generating a profit for the company. However, it does not take into account market conditions or Customer demand, which may limit its effectiveness in competitive markets.
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2. Competitive pricing strategy👩💼🧑💼
This pricing method consists of determining the price of the product based on the price offered by competitors. To apply this strategy, you need to study the market thoroughly and know the prices imposed by your competitors. You should then set the price of your product slightly higher or lower depending on your desired market position. This strategy is used both in the e-commerce industry and in stationary sales. In the e-commerce industry, a popular method of capturing competitor prices is data scraping. This involves the automated extraction of data from the internet.
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One example of a price-competitive strategy is setting an attractive price for a product or service that is the lowest price in the market. This type of strategy aims to attract target Customers by offering lower prices than other competitors, and to discourage competitors. This allows the company to capture a larger share of the market and gain a competitive advantage. In this way, the company can increase its revenues and profits, even if margins are lower. Remember, however, that a low-price strategy often leads to a price war. If you cut below the competitor’s price, you may reach a product price below the level.
3. Penetration pricing strategy 📊
This strategy involves setting a low price for the product to attract new potential Customers and increase sales volume. This is then called penetration pricing. The business owner can extend the low price in order to maximise the opportunity to gain new Customers. This method is often used in the e-commerce industry.
For example, an electronics company may introduce a new TV with similar features to competing brands but at a lower price to convince Customers to choose their product over the competition. Such a strategy can be effective in increasing sales and gaining new Customers, especially if the company is new to the market or wants to gain more market share.
Opposite of the penetration pricing is price skimming strategy (high-low pricing) when price is the highest (initial price) on the beginning and lowers over time.
4. Value-based pricing strategy 🪙
In a value-based pricing strategy, the price is set based on the value of the product or service to the Customer, rather than on the cost of production or competition in the market. It is calculated on the basis of how much the Customer, who is part of the target market, is willing to pay for the product/service. Customer preferences vary in this respect and require confirmation that the product/service is worthwhile. This is an approach that benefits both the Customer, who receives a product or service that is tailored to his or her needs and expectations, and the company, which can gain more profit by providing valuable solutions. It is a strategy that is also used in the e-commerce industry.
An example of such a strategy is the price for software, which is set based on the features and usability of the programme for the Customer.
Another example is the price for a consultancy service, which is determined by the value that this service delivers to the client in the form of time savings, increased efficiency or solutions to specific problems.
5. Premium pricing strategy 📈
This strategy consists of setting a higher price, premium price for a product in order to differentiate the product from the competition and give it a prestigious character. To apply this strategy, the product must have additional features such as high quality, unique design or an eco-friendly approach.
An example of this strategy could be a luxury car brand that offers models equipped with the latest technology and luxury extras, and which are priced significantly higher than similar models from other brands. Such a strategy aims to create an image of exclusivity and high quality, attracting Customers who are willing to pay more for unique and exclusive products.
6. Bundle pricing strategy 📚
This strategy involves offering products in a bundle at a lower price than if the Customer bought them individually. To apply this strategy, you need to know your Customers’ needs thoroughly and use them to create attractive bundles.
For example: Buy 3 packets of crisps and pay for 2 packets, meaning one is free
Or bundles with individual products sold as a kit. An example would be a kit to make a candle: wax + wick + dye + fragrance. It is important that the price of the bundle is lower than the regular selling price of the individual products.
7. Dynamic pricing strategy 📨
This strategy involves real-time pricing decisions based on changing demand or need. To apply this strategy, special analytical tools must be used and market movements must be monitored. A dynamic pricing strategy allows companies to flexibly adjust prices to maximise profits and adapt to prevailing market conditions.
An example of such a strategy would be dynamic airline ticket pricing. Airlines can adjust ticket prices based on factors such as demand, seasonality, flight distance and even booking time. If demand for flights is high, ticket prices can be higher. Conversely, if demand is falling, prices may be lowered to attract more passengers.
8. Anchoring pricing strategy ⚓️
In this strategy, you set a high price for the product and then reduce it to a lower price. To apply this strategy, it is necessary to focus on Customer psychology and create the impression that the product was originally more expensive.
For example, assuming that the selling price of the product is £100, the manufacturer can use a price anchoring strategy by introducing a promotion in which the price is reduced by 20% to £80. The Customer, comparing this reduced price to the reference price of PLN 100, may find the offer attractive and be inclined to buy.
The price anchoring strategy is an effective tool to influence consumers’ perception of product value.
9. Charm pricing strategy ✨
This pricing strategy involves setting the price at the end of the tens or hundreds of the number 9, e.g. £9.99 instead of £10. It is also called psychological pricing. To apply this strategy, focus on Customer psychology and take advantage of the fact that people often react more positively to prices ending in 9.
An example would be shelf prices in grocery shops, very often ending in 99 cents, or in any online shop.
10. Promotional pricing strategy 💯
This pricing strategy consists of lowering the price of a product for a limited period of time, e.g. during holidays or seasonal sales. In order to apply this strategy, it is important to understand the needs of Customers and use them to create attractive promotions. The aim of such a pricing strategy is to increase sales and build Customer loyalty by providing attractive offers.
For example, a clothing shop may reduce the price of its clothes by 20% for one week in a stationary shop or online shop to encourage Customers to buy.
This strategy can also be used by telecoms companies that offer lower prices for a service package for the first three months.
Summary
There is no universal pricing strategy that will suit every company and every product. Therefore, it is important to have a good understanding of the market and the needs of your Customers and then choose the pricing strategy that will be most effective for your business. It is worth noting that it is very common to use more than one of the strategies described above at the same time. Choosing the right pricing strategy needs to be well thought out and tailored to your product and industry. Before you choose the right pricing strategy, bear in mind that it may change as your business grows or market conditions change. Choosing the right strategy will increase sales of your product or service.
Not sure what strategy to choose for your business or want to find out more? Get in touch with us now!