Pricing Strategies Guide: How to Price Your Products for Profit ($$$)
Pricing is one of the most important aspects of your business. If you price it too high, you will miss out on a lot of sales. Also, if you price it too low, you may struggle to reach a good profit margin.
Striking the perfect pricing point for your product is essential if your business is to enjoy maximum profits. Thankfully, there are lots of great and proven pricing strategies that you can model for your business. These strategies have worked and are still working for countless businesses.
Before you can adopt any pricing strategy, you need to understand your audience and the psychology behind the strategy. Avoid basing your decision solely on the number of businesses using it and receiving results. A pricing strategy that works for a manufacturing company may not work for a service-based company.
In this article, you will learn the meaning of pricing strategy, the benefits of executing a thorough pricing strategy, and the types of pricing strategy. You will also learn how price setting impacts your profit and get access to multiple pricing strategy examples.
Let’s get started.
What is a Pricing Strategy?
A pricing strategy refers to the method of pricing that businesses use to determine the selling price of their goods or services. It is used to establish the best price for a product or service.
Despite pricing being recognized as one of the most important aspects of a business, it is common for businesses to overlook its significance. Many businesses do not pay attention to this undervalued revenue lever (pricing) which directly affects their profit margins.
Business owners often focus more of their attention on business factors such as Cost of Goods Manufactured (COGM), Cost of Goods Sold (COGS), and competitor pricing. While the Cost of Goods Manufactured (COGM), Cost of Goods Sold (COGS), and competitor pricing are important, they are a smaller piece of the larger picture (pricing strategy).
The Right Pricing Strategy
Choosing the right pricing strategy for your business requires you to deeply understand three crucial factors: your product, your market, and your customers. The right pricing strategy is the one that finds that sweet spot that pleases these three entities (your product, your market, and your customers).
The perfect pricing strategy will help you maximize your profits and revenue, and shareholder value. It maintains a price point that the market and your customers are willing to pay.
There is a lot that goes into selecting the perfect pricing strategy for your business. Your business pricing strategy is an all-encompassing term that accounts for multiple factors. They include market objectives and conditions, brand positioning, revenue goals, product attributes, input costs, consumers’ willingness to pay, trade margin, production and distribution costs, and variable costs.
External factors such as competitor pricing, consumer demand, and market trends such as the seasonality of products can greatly influence your pricing strategy.
Pricing strategies vary from one company to another. Businesses can adopt more than one pricing strategy, especially when they sell multiple products or services. They can also sell a single product with different pricing strategies to different target audiences.
Balancing Your Pricing Strategy
Although businesses generally use pricing strategies to maximize their profit and revenue, it is not the only purpose it can be used for. Some companies like Amazon have used pricing strategies to maintain their hold on market share by lowering the selling price of their goods or services. You can also use pricing strategies to keep competitors out of the market.
As a small business owner, you have to be careful about sacrificing your profit margins. You can take control of a sizable market share by focusing on low prices but note that it can end up bankrupting your company.
Remember that although your customers will not purchase your product or services if the price is too high, your business will not foot its bills if the price is too low. Striking a balance between these extremes is best for your business and your target audience.
Benefits of Executing a Thorough Pricing Strategy
Executing a thorough pricing strategy for your products and services is essential for businesses that want to enjoy long-term success.
Many businesses do not take time to implement a thorough pricing strategy, rather they price their products and services based on impulse. Executing a thorough pricing strategy involves researching your competitors, understanding your target audience, and following market trends and changes as they occur.
Businesses, irrespective of size, can enjoy immense benefits from implementing a thorough pricing strategy. Here are some of the benefits.
1. Higher Rate of Success
Businesses that execute a thorough pricing strategy have a higher rate of success than those that do not. If you want your business to grow and become a roaring success, you have to properly execute the right pricing strategy. It is not unusual for businesses to experience a quick bump in sales and profits from simply adopting the right pricing strategy.
The results of implementing a thorough pricing strategy are usually clear after a short period. Business owners have to be able to assess the long-term implications of their pricing strategies. Failure to execute the right pricing strategy will more often than not prevent you from reaching your financial goals.
By simply implementing a thorough pricing strategy, businesses gain information about their industry and relevant competitors. How? It is impossible to execute a thorough pricing strategy without doing deep research about the market and your competitors. Executing the right pricing strategy will keep your business from attracting poor results.
2. Prevents Market Loss
One of the advantages of executing a thorough pricing strategy is that it helps prevent market loss. You can lose your customers and market share to the competitors if you use the wrong pricing strategy.
A thorough pricing strategy allows you to set a price that your target audience can afford and can compete with the prices of your competitors. With the right pricing strategy, your customer will be less inclined to buy your competitors’ products and services.
Businesses that implement the right pricing strategy maintain and grow their market share. Tracking your competitors’ pricing changes and responding to them can prevent possible market loss.
3. Improve Profit Margin
Executing a thorough pricing strategy helps you improve your profit market. You do not always have to price your products or services at the lowest point in the market. Low prices will more often than not make the market assume that your product or service is low-quality.
Pricing your products and services right will improve your profit margin. As a business owner, you want to win over as many customers as you can, but you want to do this while making a sizable profit margin. The sweet spot you want to attain is a middle pricing range relative to your competitors.
4. Generate More Sales
Every business owner, irrespective of size, has one main financial goal, which is to generate more sales. KPIs and OKRs are designed to help meet this goal. For almost all businesses out there, it is the number one reason why they adopt any pricing strategy.
5. Makes the Product More Appealing
Lots of businesses have seen a rise in purchases for their products and services from simply executing a thorough pricing strategy. You do not necessarily have to change or improve on the product or services before you can experience this rise in customers’ interest.
Businesses can use the right pricing strategy to direct their buyers’ attention to targeted items, ranges, or services. Implementing a thorough pricing strategy can make the product more appealing to customers, which helps boost the sale of the product.
6. Ability to Compete with Competitors
Adopting a thorough pricing strategy allows you to compete on a more equal plane with your competitors for customers and market share. You do not necessarily have to price your products and services at the lowest price point in the market.
7. Create Customer Loyalty
Executing a thorough pricing strategy can create customer loyalty for a business. Once your customers perceive they are getting a bargain or a great pricing deal from you, they will keep coming back for more.
A happy and satisfied customer is the best marketing tool any business can have. Your satisfied customers will spread information about your product through word-of-mouth (WOM) marketing. They will readily recommend your products to their friends, family, work colleagues, and even strangers.
Types of Pricing Strategies
Pricing is one of the most important aspects of your marketing strategies. There are tons of pricing strategies that can help businesses attract customers, generate more sales, and increase their profit margins.
Here are 18 of the best pricing strategies used by different businesses across industries, including dropshipping. They are all proven to work and produce tremendous results when executed thoroughly.
1. Cost-Plus Pricing Strategy
A cost-plus pricing strategy refers to a simple pricing method where you add a fixed percentage to the cost of producing a unit of your product. The price you get from this addition becomes the product’s selling price.
Another name for the cost-plus pricing strategy is the markup pricing strategy. It is the oldest and simplest method of setting prices for a product.
A cost-plus pricing strategy embodies the basic idea behind doing business, you make a product and sell it for more than your production cost to generate a profit. This pricing strategy involves very little market research.
The focus of this pricing method is on the cost of producing your product or your COGS (Cost of Goods Sold) rather than at what price competitors set on similar products. It ignores consumer demand and competitor prices and does not consider external factors.
Retail stores, especially grocery, clothing, and department stores use this pricing strategy to price their products.
Businesses who want to pursue a cost-leadership strategy can use a cost-plus pricing strategy to perfection. They can use their cost-plus pricing as an integral part of their value proposition to attract and build transparency and trust with customers.
A cost-plus pricing strategy is not a good fit for service-based companies such as those that sell software as a service (SaaS). The reason is simple, the cost of producing services is usually hard to determine or lower than the value your product provides.
Cost-Plus Pricing Formula
You can calculate the price of your products using the cost-plus pricing strategy by adding the labor, material, and overhead costs, and then multiplying the total by (1 + the markup amount).
Cost-Plus Pricing Formula = Labor Costs + Material Costs + Overhead Costs x (1 + Markup Amount)
Cost-Plus Pricing Formula = Cost + Markup Percentage
Labor costs refer to the money you pay to workers who contribute to the production of your product. Material costs refer to the sum of money spent on materials to produce the product. Overhead costs refer to operational costs incurred when creating a product that is not directly traceable to materials or labor costs.
Markup refers to the percentage difference between the unit cost of a product and its selling price. You can calculate it by subtracting the unit cost of a product from its sales price and dividing the result by the unit cost. Then you multiply the result you get by 100 to arrive at the markup percentage.
Markup = Sales Price – Unit Cost / Unit Cost x 100
Real Life Cost-Plus Pricing Formula Example
Let’s assume Harry Line, a retail clothing line company, wants to calculate the selling price for their new collection of jeans using the cost-plus pricing formula. Here are the average costs that Harry Line incurs to produce a pair of jeans.
Labor costs – $30
Material costs – $15
Overhead costs – $15
The total costs spent on producing a pair of jeans is $60.00. Let’s use the cost-pulsing pricing formula to find out how much a pair of jeans will cost.
Cost-Plus Pricing Formula = Labor Costs + Material Costs + Overhead Costs x (1 + Markup Amount).
Let’s assume our markup percentage according to industry standards is 50%, which means our markup amount is 0.50. Now that we have all we need, let’s find out the cost of a pair of jeans using the cost-plus pricing formula.
Cost-Plus Pricing Formula =$30 + $15 + $15 x (1 + 0.50)
Cost-Plus Pricing Formula = $60 x (1.50)
Cost-Plus Pricing Formula = $90
Harry Lines will price a pair of its jeans for $90.
Advantages of Cost-Plus Pricing Strategy
1. Simple to Use
The cost-plus pricing strategy is an easy method to implement. It does not require extensive research into market trends, consumer demands, or competitor pricing. All it requires is for you to analyze your business production costs such as labor, materials, and overhead, and use it to set a price for your product.
2. Easy to Justify Your Price
Another advantage of the cost-pricing strategy is that it is easy to justify your price. You can easily communicate to your consumers why you increased the price. An explanation of why you increased your price can easily be justified.
3. Consistent Rate of Return
The cost-plus pricing strategy helps businesses to generate a consistent rate of profit return. When you calculate your cost-plus pricing properly, it covers all your production costs and helps you attain your profit margin.
Disadvantages of Cost-Plus Pricing Strategy
1. Possibility of High Price
Since the cost-plus pricing strategy does factor in competitor prices and willingness to buy at a particular price range, it can cause you to attach a selling price that is too high for the market.
Selling at a high price can make you lose a lot of sales. If your competitors are selling at a lower price, they will attract a larger share (if not all) of the market.
2. No Guarantee All Your Costs Are Covered
One big problem with the cost-plus pricing strategy is that it projects sales volume before pricing the product and shares the cost among the units. Many times it is difficult to estimate the production costs accurately.
A problem arises when you overestimate the sales volume that the market is ready to expect and end up selling only a few products. You will not cover your production costs and end up hurting the finances of your company.
3. No Incentive to Operate Efficiently
Using a cost-plus pricing strategy takes out any incentive for your business to operate more efficiently. Since you base your selling price on your production costs, even when the production costs rise, there is no incentive to reduce it because you still make the same profit by raising the price.
When your business does not take up the opportunity to operate more efficiently, your competitors will pounce on this and take massive advantage of it.
2. Competitive Pricing Strategy
The competitive pricing strategy refers to a pricing method that is based on what the competition charges. Other names for the competitive pricing strategy are competition-based pricing, competitor-based pricing, and strategic pricing.
According to Investopedia, “competitive pricing is the process of selecting strategic price points to best take advantage of a product or service based market relative to the competition.”
This pricing strategy has its focus predominantly on the selling price your competitor set for their project and services. Unlike the cost-plus pricing strategy, the competitive pricing strategy does not pay much attention to the production cost of their products. And like the cost-plus pricing strategy, It also does not factor in customer demand.
The benchmark for pricing your products and services using the competitive pricing strategy is the competitors' prices. This pricing strategy is ideal for businesses that operate in highly saturated industries.
Keeping and attracting customers in such an industry requires you to keep an eye on what your competitors are doing with their prices. A slight price difference is usually the deciding factor for customers.
The overarching goal of the competitive pricing strategy is to price your products slightly lower than your competitors or in the same price range to gain a competitive advantage.
For example, let us assume you own a company that sells accounting software for small businesses, and your competitors’ subscription plans range from $9,99 – $49.99. The cost of your software should be in a range between those two price points and definitely not above the $49.99 mark.
Competitive pricing keeps your pricing dynamic and helps you stay on top of your competition. You can choose to offer better payment terms than what your competition offers instead of selling your products at a lower price point.
This pricing strategy requires extensive research on competitors’ pricing to work. It's a simple and low-risk way of gauging the market.
Many businesses use competitive pricing strategies to test product pricing, especially startups. In the online space, with the increase in eCommerce platforms such as Shopify and BigCommerce, pricing is a crucial factor for an e-commerce store.
Before you can gain an advantage in the massive e-commerce space, you need to research your competitors to choose the best price point.
Online shoppers are known for comparing prices among different options before buying. Your price needs to be competitive to stand a chance of attracting more sales and increasing your profit margins.
Types of Competitive Pricing Strategies
Competitive pricing strategies make it possible to adjust your pricing strategies according to your financial goals. There are three types of competitive pricing strategies, they include penetration pricing, promotional pricing, and captive pricing.
Startups may use penetration pricing to get the attention of the market. Established companies may use promotional pricing to boost their sales volume and increase their revenue. Businesses that want to increase sales on their products may use captive pricing to reach their sales goals.
1. Penetration Pricing
Penetration pricing refers to a type of competitive pricing strategy where a business sells its goods and services at a lower point than its competitors. The goal is to make consumers take notice of the company and make sales. It is often used by new businesses to gain a share of the market.
For example, if you start an accounting software, and your competitor charges $99 per month, pricing your service at $79 per month will get you the attention of consumers. Businesses use this strategy to gain a foothold on consumers who are price sensitive.
2. Promotional Pricing
The idea behind this type of competitive pricing strategy is to sell products and services at a discount for a specific period. Since consumers love a good sale and a chance to reduce their costs, it often leads to increased sales and boosts overall revenue when done right.
Large establishments or businesses with high-volume products can decide to take smaller profit margins to leverage the benefits of promotional pricing. For example, a web hosting service such as Bluehost and other Bluehost alternatives can offer its shared hosting plan for $9.99 instead of the usual $19.99.
3. Captive Pricing
Companies utilize this type of competitive pricing strategy to sell branded or licensed accessories along with their core product to boost revenue and profit. For example, Apple sells the iPhone and then other accessories for it such as iPods and chargers.
Buyers often trust the manufacturers’ recommendation to get these accessories that make the main product purchased better. Thus businesses can use this method to steer their buyers towards compatible and licensed ancillary items at premium prices.
Advantages of Competitive Pricing Strategy
1. Highly Efficient
The competitive pricing strategy can easily be combined with other pricing strategies to maximize results. It is a highly efficient pricing strategy because it leverages the basic human psychology that makes them want to buy, greed.
By selling at prices equal to or lower than your competitors, it causes the market to take notice of your offering.
2. Stable Customer Base
You can have a stable customer base, especially for e-commerce stores, when you leverage the competitive pricing strategy. Online shoppers have the habit of comparing the prices of different stores selling the product that they want. Keeping your price similar or lower than your competitors will help increase your sales and provide you a stable customer base.
Disadvantages of Competitive Pricing Strategy
1. Difficult to Implement for Small Businesses
The competitive pricing strategy works best for companies with large sales volume and capital that can operate efficiently even with a lower profit margin. Small business owners find it difficult to implement the competitive pricing strategy because they can not operate on the same level as their bigger competitors.
A lower profit margin for a small business using the competitive pricing strategy can lead to the company encountering serious financial challenges. Competitor prices are not static, they change, and it can be difficult and costly for small businesses to keep track of the price changes.
2. More Prone to Failure
With the competitive pricing strategy, you depend 100% on your competitors’ pricing to reach a profit. If your competition does not set a profitable price, you stand the chance of failing along with them.
3. Difficult to Attract Customers Through Price
The competitive pricing strategy makes it difficult for businesses to attract customers through price. The reason is that your prices are so close to your competitors that pricing no longer counts as an attractive advantage. Your customers will look for other additional advantages to base their decision on other than price.
3. Value-Based Pricing Strategy
Value-based pricing strategy refers to the method of setting the price of a product and service based on the price the customer you are selling to is willing to pay. This type of pricing strategy is highly influenced by the customer.
When used properly, a value-based pricing strategy can help you retain customers longer by boosting customer sentiments and loyalty. The strategy helps you prioritize your customers not just in the pricing of your products but in other areas of your business such as customer service and marketing.
If you are using the value-based pricing strategy, you need to constantly track your customers. You have to stay in tune with your various customer profiles and buyer personas. Staying abreast of your ideal customers can help you vary your prices in situations where your customers vary.
As a business owner, if external factors are causing your sales to decline, a value-based pricing strategy can help boost your sales. A value-based pricing strategy is all about offering value to your customers.
The pricing strategy works even though there is an increase in competition or other external factors. It works because your customers feel they are receiving enough value for the product or service bought.
Value-based pricing strategy recognizes the fact that customers do not care about the production costs that a company occurs, but the value they get from the product.
Real-Life Value-Based Pricing Strategy
The value-based pricing strategy works well in the fashion industry. Fashion companies usually produce two different product options and experience expensive product lines and umbrellas. The expensive product line of high-end dresses can sell for $999 while the umbrellas sell for $99.
Umbrellas may have a higher cost of production than high-end dresses, but they have a lower price. Why is this so? Because consumers perceive the high-end dresses to be worth more than the umbrella ones.
Many pricing strategies do not focus on the customer but use internal and competitive factors to justify the price. Customers do not care about the cost you incur to produce a product or how much your competitors are charging, they only care about the value they are receiving at a particular price.
When businesses utilize the value-based pricing strategy, they get improved customer loyalty and develop higher quality products. Companies in the software and SaaS space such as web and video conferencing software benefit immensely from adopting a value-based pricing strategy.
Innovative companies benefit from such a strategy especially when there is no better alternative. For example, the early years of iPhones saw the company price their smartphones at a high range because customers perceived it to be worth it. No other smartphones in the market had the functionalities that the iPhone had in its early years.
Advantages of Value-based Pricing Strategy
1. Easy Market Penetration
A value-based pricing strategy makes it easy for businesses to penetrate a market. It is suitable for new, innovative, and limited edition items. These items record stronger sales volume when value-based pricing is applied.
2. Higher Price Points
Businesses use value-based pricing to command higher price points for their products. Since customers perceive the products to be valuable, they have no qualms about buying them at a high price. Luxury cars, artworks, collectibles, and fashion wear are typical examples.
When you adopt a value-based pricing strategy, customers perceive your products to have a high value and are willing to pay more for them. What the customer is willing to pay is not just the product but the prestige that comes with buying and owning it.
3. Helps Businesses Develop Quality Products
The value-based pricing strategy encourages constant feedback from your consumers. The information they provide can help you identify ways to make your product better to keep on satisfying their needs.
With value-based pricing, the product has to be high-quality for customers to perceive it as valuable. The wealth of information gotten from customers can also help improve your businesses.
4. Increases Focus on Customer Services
For value-based pricing to work, businesses have to adopt customer-centric approaches to increase customer perceptions of the product. Businesses improve their customer service and offer an amazing customer experience to their consumers.
5. Promotes Customer Loyalty
Value-based pricing helps businesses attract customer loyalty. By providing quality products and services that match your customers’ perceived value, your customers get satisfied and attached to your brand.
6. Increases Brand Value
One of the biggest benefits of a value-based pricing strategy is that it helps increase your brand value. With this strategy, you put your customers first and provide high-quality products and services that match their expectations.
Customers can justify buying your products and services even at a high price because of the superior quality you provide.
Disadvantages of Value-based Pricing
1. Difficult to Justify Commodity-Based Products
If your business sells commodities, you will find it hard to use the value-based pricing strategy. It is hard to justify the added value of your products because of the abundance of competition in the market. Except there is something special about your product or service, you will find the value-based pricing strategy unsuitable for you.
2. Perceived Value Can Change
A value-based pricing strategy thrives on your customers’ perceived value of your product or service. However, perceived value is subjective, and can change due to factors you cannot control such as social, cultural, technological, and economic factors.
Humans are fickle. Customers that perceived your products as valuable can suddenly start to see lesser value in your products.
Your competitors can come up with a better offer than the target audience perceives as having a higher value than yours. In this situation, to rescue your falling revenue, you lower the price which will lead to even more losses.
3. Difficult to Set Price
Different consumers even among a hyper-targeted customer avatar perceive the value of your products and services differently. It is hard to set a standard price that works for every customer.
Market research, competitor analysis, and customer feedback can help. However, amid varieties, it can be difficult to choose a price point.
4. Niche Market
One of the obvious disadvantages of a value-based pricing strategy is that you limit yourself to a particular niche market. Although it can bring about customer loyalty, you get limited market access. This small market share can prove a problem when competition arrives.
5. Requires Extensive Market Research
Value-based pricing strategy requires ample research, time, and resources to execute properly and enjoy the results. Small businesses can find the method to be time-consuming and resource-draining.
6. Difficult to Scale
Value-based pricing is not suitable for a large audience, which makes it difficult to scale your business. Instead, it works best for small businesses and those that sell highly specialized products.
4. Price Skimming Strategy
Price skimming strategy refers to the method of setting a high price, then lowering it according to how the market responds to the product. Companies use this pricing strategy to set the highest possible price for their products, and when the product becomes less popular, they lower the price over time.
There is a difference between a price skimming strategy and high-low pricing. The price skimming strategy refers to the method of lowering prices gradually while the high-low pricing refers to the swift movement of prices from a high point to a low one.
Technology products such as video game consoles, DVD players, and smartphones use the price skimming strategy. When a new iPhone is launched, the price is set high, but over time the price reduces, especially as Apple gets ready to launch another product.
Big technological companies like Apple and Samsung use the skimming pricing strategy to recover their production costs and help sell products well beyond their peak periods. However, the skimming pricing strategy can piss off customers who bought at the full price. Competitors can also pounce on the ‘fake’ pricing margin and price their products at a lower price to attract market share.
The price skimming strategy helps businesses maximize sales of new products and services. Innovative companies that offer novel products that no other competitors in the market have can use this strategy to maximize their products.
For example, a company that sells 8K TV when its competitors only produce 4K TVs and HDTVs. They can set the price high at the initial product phase, and then lower it as their competitors start offering the same product.
Price skimming strategy is associated with luxury items and only works for highly valuable products or services, or those perceived as valuable. Examples of brands that use the price skimming strategy include Rolex, Louboutin, and Mercedes-Benz.
Advantages of Price Skimming Strategy
1. Higher Return on Investment
The price skimming strategy which allows businesses to charge the highest initial price at its launch helps these businesses recoup their costs. A lot of resources go into creating an innovative product beyond its production cost. There are research and development costs, and promotional expenses.
With the price skimming strategy, businesses can easily recover these costs by charging high in the short term. Companies like Apple when they launched the breakthrough iPhone touchscreen technology benefited from a high price at the initial period. It helped them recoup most of their research costs in the short term.
If you have invested your cash flow and resources in the development of a product or service where you have no competition, you should charge high for it to help recover your investments and gain as many profits as possible
2. Helps Create and Maintain Your Brand Image
Another advantage of the price skimming strategy for businesses is that it helps create the perception of your product as high quality. It is especially true when your product is novel and innovative.
Tech companies and those that deal in luxury items use this strategy to attract status-conscious consumers. Customers often associate high quality with a high price. Thus when you set a high price at the beginning of a product’s life cycle, it helps you build a good brand image.
Lowering the price at the beginning of the product’s life cycle makes it hard to increase the price in the future. It can lead to reduced orders, whereas pricing high initially, and then lowering it can spur more orders for your product.
With the price skimming strategy, businesses can maximize their profits by selling at a high price to early adopters and then gradually reducing the price to attract more price-sensitive consumers.
3. Segments the Market
Pricing skimming strategy helps businesses segment their customer base. This strategy helps businesses get the maximum possible profits from different customers with varying projects. Starting at a high price means you attract high-end customers and early adopters who buy because of the exclusivity of your product.
As you gradually reduce the price, you start to attract more price-sensitive consumers who were reluctant to purchase due to the initial high price.
Disadvantages of Price Skimming Strategy
1. Encourages Competitors to Join the Market
When you use the price skimming strategy for a product and get a high gross profit margin, you attract competitors into your space.
For example, Apple recorded high gross margins when it first introduced the iPhone in 2007. The attractive profit margins witnessed the arrival of new phone companies to compete in the lucrative smartphone market.
2. Damaged Reputation
Companies that use the price skimming strategy too often will get found out sooner than later by their target market. In a saturated market, the price skimming strategy is highly ineffective as customers can compare the product price from one company to another.
If your company fails to have standout features from your competitors that can justify the initial high price, it can ruin your company’s reputation.
3. May Attract Slow Sales
Using the price skimming strategy puts you in danger of overpricing your product or service beyond what the majority of your target audience can afford. You may witness slow sales which will force you to reduce your pricing earlier and more drastically than you anticipated initially.
5. Penetration Pricing Strategy
The penetration pricing strategy refers to the method of setting an initial low price to break into a competitive market and raise it as your popularity increases. It is the opposite of the skimming pricing strategy.
Many small business owners use this method to penetrate a market by dangling an extremely low price at entry. Once the business starts to draw attention and take some market share away from its higher-priced competitors, it starts to increase its pricing gradually.
This strategy best works in the short term and it is not sustainable in the long run. The penetration pricing strategy best works for new businesses in need of customers or those businesses who need to break into a competitive market.
What makes this strategy effective in the short term is that it causes disruption and temporary loss. For example, if you want to break into the CRM industry, and the existing companies that offer CRM tools are charging an average of $50 per month, you have to charge less. Offering your CRM services starting at around $10 per month will get you the attention of the market.
In the short term, you are not making much profit because you are pricing your products at the lowest possible margins. For this strategy to work, the customers you attract have to like your products or services enough to stick with it when you raise prices.
Penetration pricing strategy is an effective strategy to draw attention away from your competitors’ products or services to yours. It helps increase your brand awareness and can lead to long-term customers when done correctly.
This strategy is common in the telecommunication industry. For example, established business internet service providers face competition from new companies who enter the market with low prices to gain some market traction.
These telecommunication companies first charge a lower-than-market rate for a period to entice customers to use their services. This strategy is risky because it eats into your profits, and when you eventually increase your price, some customers will not sign up at the higher price.
Advantages of Penetration Pricing Strategy
1. High Adoption and Diffusion
The penetration pricing strategy helps startups and struggling companies break into a competitive market. Pricing your products at a lower rate than what the market charges (while maintaining the same or superior quality) will get your products or services quickly accepted by the market.
2. Take Customers Off Competitors
When done properly, the penetration pricing strategy is an effective method for shaking the market and attracting customers from your competitors. Competitors are usually caught off guard when new companies use these strategies, it gives them little time to react.
3. Economies of Scale
The penetration pricing strategy encourages you to sell large quantities to get more profit from the sales you attract. It helps you work actively towards reducing your marginal cost and realize economies of scale.
4. High Inventory Turnover
With your prices at the lowest point in the market, you get an increased inventory turnover rate because customers purchase more at a lower price. High inventory turnover keeps your vertical supply chain partners happy.
Disadvantages of Penetration Pricing Strategy
1. Pricing Expectation
One of the biggest problems with the penetration pricing strategy is that it conditions customers to expect low prices. When you gradually increase the price, it can piss off customers who may stop purchasing your product or service.
2. Low Customer Loyalty
Another problem of penetration pricing strategy is that you attract customers who have very little attachment to a product, customers who are always after a bargain.
You can easily lose these customers when another competitor offers a better and more affordable deal than yours. Penetration pricing strategy does not make the best case for customer loyalty.
3. Damage Brand Image
Once you get branded as a cheap service, many people automatically associate your services with poor quality. It is difficult to escape such perceptions for your brand.
4. Price War
One of the dangers of the penetration strategy is that it can trigger a price war. The strategy supposes that your competitors will not react in a like manner, but what happens when they do? Some competitors have the liquidity to decrease the overall profitability of the market just to get you to quit.
Only strong companies can survive a price war. The new players who triggered the price war are usually the ones least likely to survive it.
5. Not a Suitable Long-term Strategy
The penetration pricing strategy is not a viable long-term pricing strategy. Your business model cannot keep up with the low prices over the long term. Financial distress can put your business at the risk of folding up.
Although the strategy makes room for a gradual price increase, it will serve your new businesses better to adopt a more suitable long-term strategy.
6. Dynamic Pricing Strategy
The dynamic pricing strategy is a flexible method of pricing products and strategies where the price changes based on market and customer demand. It is also known as demand pricing, surge pricing, or time-based pricing.
Hospitality or tourism-based businesses such as hotels, event centers, and airlines use dynamic pricing to determine the pricing of their products and services. Utility companies also make use of the dynamic pricing strategy.
These companies make use of price algorithms to determine the price of their products and services at any period. The algorithm considers the demand level, competitor pricing, and other factors to arrive at its price point. Thanks to these algorithms, companies can shift their prices quickly to match what their customers are willing to pay at the point they want to make the purchase.
Dynamic pricing strategy accommodates the charging of different prices for customers depending on who is buying your product or service or when they are making the purchase. This strategy takes into account changes in demand and supply.
A good example of a dynamic pricing strategy that occurs daily all over the world is the pricing model utilized by airline companies in the airline industry. If you take flight frequently, you would have noticed how the price ranges change depending on when you book. It is the dynamic pricing strategy at work.
This strategy is common in eCommerce and the transport industry. However, it is not a suitable fit for all businesses. The biggest risk associated with this strategy is that it does not work when applied to products or services that price-sensitive customers buy. A price increase can trigger a demand reduction.
Dynamic pricing is a variable pricing strategy instead of a fixed one. It is extremely prone to price fluctuations caused by external factors.
Time is a factor that causes pricing fluctuations when using the dynamic pricing strategy. During the holiday seasons, hotels and airlines charge higher rates because the consumer demand is high, but once the demand lessens in the off-peak seasons, the prices drop.
Advantages of Dynamic Pricing Strategy
1. Boost Sales
The dynamic pricing strategy can help businesses boost their sales. Businesses can use it to increase their prices and as well as to lower their prices. Lowering prices can help businesses to meet their sales revenue targets. A good example is the use of flash sales.
2. Maximize Profits
You can maximize your profits with a dynamic pricing strategy. If your competitors offer a product you sell at a higher price, you can use a dynamic pricing strategy to maximize your profit margin.
Dynamic pricing strategy allows you to adjust the price of your item based on potential customers’ shopping patterns. For example, if a customer wants to buy a pen and your competitor sells it for $2 apiece, while you sell it for $1 apiece. With a dynamic pricing strategy, you can increase the price of the pen to $1.5.
Since your price is still cheaper than your competitors, the customer will get the perception that they have saved money from purchasing from you.
3. Higher Levels of Demand
Dynamic pricing strategy can be used to maximize whatever demand and revenue are available to a business at any point in time. Event centers, cinemas, and airlines sell their tickets for higher prices when there is a large demand for them. But if the day arrives and there are still empty seats, they may lower the price to accommodate more customers.
Disadvantages of Dynamic Pricing Strategy
1. Price Discrimination
Dynamic pricing strategy is all about selling goods or services at different prices to different customers depending on the time purchased. Customers view it as price discrimination especially when they find out that they purchased the product at a higher price.
Ecommerce, airline, and hotel businesses use the dynamic pricing strategy to charge customers as much as they are willing to pay.
2. Irritated Customers
Customers get irritated or angry at your business when they find out that you subject them to price discrimination. It can have a ripple effect beyond just the loss of one customer. That customer can spread negative remarks about your business to others.
3. Less Customer Loyalty
Customers will trust your company less when they discover the discrepancies in your pricing structure, especially when they pay more than others for the same product or service. Instead of repeatedly buying products or services, they can consider other alternatives in the market that charges lesser,
4. Increased Competition
Businesses that use the dynamic pricing strategy encourage competition in the field. These competitors can comfortably charge lower to attract your customers. Price-sensitive customers will not hesitate to switch from one business to another in search of the best deals.
7. Freemium Pricing Strategy
The freemium pricing strategy refers to the pricing method where companies offer a basic or free version of their product. This pricing strategy aims to get users interested enough to want to pay for a premium version of the same product.
Companies use this pricing strategy to get their target audience to start using their product. Consumers will naturally want to try out the product because of the free tag. There is no risk of losing money attached. If the consumer likes the product, the company will upsell that consumer to upgrade to access more features.
SaaS and other software companies such as e-commerce website builders commonly use this strategy to attract consumers with free trials and limited memberships. It is only natural for the consumer to want access to the software's full functionality once the free version meets or exceeds expectations.
Companies use the freemium pricing strategy to build trust with potential customers. It is the thinking of these companies that once their target audience tests their products for free and likes them, they will want to purchase the premium (better) version.
When using a freemium pricing strategy, you have to price your products to reflect their perceived value for them to work. For example, an inventory management software company offers a free version of its software to users. Asking users to pay $100 to get the full features as part of their transition to the paid version may scare away prospects.
Instead, offer them a lesser plan even if you have to withhold some features. You can even offer them as many pricing plans as possible to give your potential customers more options to ease their transition.
Businesses, both the new and established ones, also use the freemium pricing model to break into new markets or to introduce new products.
Project management software such as Slack and Trello use this model to offer a free version of their services to users. If users enjoy it and want more features, they have to upgrade to a paid account. Potential customers can easily upgrade to paid accounts because they are already sold on the free product.
Advantages of Freemium Pricing Strategy
1. Low Marketing Cost
People are easily attracted to free things. The lack of a price for the product is in itself a great marketing tool that companies can use to collect email addresses for their email newsletters.
When you use the freemium pricing strategy and your product solves your target audience’s problems, your customers will help spread the news about your product and company for free.
2. Potential Paying Customer Base
One of the advantages of using the freemium pricing strategy is that it opens you to a large pool of potential paying customers. It is an easy method businesses use to get customers in the door and then upscale them on their paid offers. Many businesses use freemium pricing in their sales funnel to attract additional paid customers.
Disadvantages of Freemium Pricing Strategy
1. Fixed Cost Coverage
Every business has costs it incurs in producing products, even the ones it gives for free. For the freemium pricing strategy to work, the company has to make enough revenue from its premium-priced packages otherwise it will fail.
2. Value Perception
Using the freemium pricing strategy, you stand the risk of causing the market to perceive your product as low value. Since the basic package you offer is free, customers expect very little from it.
The freemium pricing strategy attracts lots of competition because it is one strategy that any of your competitors can use. When many competitors are using the freemium model, it will increase the price competition for the premium version.
8. Promotional Pricing Strategy
The promotional pricing strategy is a sales strategy used by businesses to temporarily reduce the price of a product to attract more customers. It is a form of competitive pricing strategy. Another name for the promotional pricing strategy is discount pricing.
With this pricing strategy, businesses offer incentives on a particular product such as discounts to get customers and prospects to make a purchase.
For example, a company that specializes in providing SEO tools to improve Google search ranking can provide customers with vouchers or coupons that allow them to purchase at a lower price.
The famous “Buy One Get One” campaign is an excellent example of the promotional pricing strategy. Companies can offer some discounts on the total cost when customers buy one or more products.
By temporarily reducing the price of a product or service, a company can artificially increase the customers’ perceived value of the product or service. It works because by reducing the price for a short time, the company is creating a sense of scarcity. Customers are compelled to act fast to take advantage of the discount or risk missing out on it.
The promotional pricing strategy is highly effective in helping businesses acquire customers. It encourages the price-sensitive shoppers to purchase before the price rises to its ‘normal’ level. When used properly, it can increase revenue, improve cash flow in the short term, and build customer loyalty.
This pricing strategy works best in the short term. If you use it for longer periods, it can significantly reduce your profit margins.
Businesses use the promotional pricing strategy through promotions and discounts to add more noise about their products in a crowded space.
For example, an online store selling children’s toys may run a promotional pricing strategy over an extended holiday throughout the Christmas month. This strategy can generate buzz and excitement about the product, it plays directly to a consumer’s fear of missing out.
The promotional pricing strategy will reduce your profit margins, but it operates on the idea that some profit is better than no profit. It is best to use this strategy in periods when there is a high volume of demand for your product.
Advantages of Promotional Pricing Strategy
1. More Traffic
Businesses use the promotional pricing strategy to attract more customers to buy their products or services. If you sell products for high-income people, you can use promotional prices to attract budget-conscious customers who form a larger target market.
2. Increased Value Perception
The promotional pricing strategy can increase the perceived value of your product. Customers on seeing the promotion will hurry to make a purchase, and perceive it to be cheaper than what other competitors are offering. In reality, many companies only offer a slight discount off their regular prices which can even be higher than the price their competitors charge.
Customers associate a red or yellow sale tag on a product to mean that it has a better value proposition than what is available anywhere else. This basic human psychology allows businesses to adopt the promotional pricing strategy to make more sales and take home a decent profit margin.
3. Revenue Growth
Businesses use promotional pricing strategies to increase their revenue and cash flow in the short term. This pricing strategy is a go-to one for companies who are hard-pressed for cash and need a quick cash injection to cover short-term expenses.
A promotional pricing strategy is also used by companies to maintain steady revenue growth. It appeals to analysts, stakeholders, and company owners.
4. Retention and Loyalty
A promotional pricing strategy is not just about offering discounts on products. Companies can use it to offer customer retention or loyalty programs. Here, they reward loyal customers with unique promotional discounts for their longevity and frequent purchase. Rewarding customers will help you retain them and easily gain their loyalty.
Disadvantages of Promotional Pricing Strategy
1. More Complicated Calculations
The promotional pricing strategy poses a lot of calculation headaches for businesses. You have to assess a lot of factors such as the duration of the offer, the expected sales volume, and others before you arrive at a discount price. If you fail to time your promotional pricing at the right time, it can lead to lower profits.
2. Price Orientation by Customers
Using a promotional pricing strategy can condition the minds of some of your customers to wait until there is a discount available before they purchase. These price-sensitive customers will be reluctant to purchase at the normal price when the promotional period is over.
3. Low Perception by Consumers
Customers can perceive promotional prices for your products to mean your product is of low quality. The promotional pricing strategy may work for some products but it is not suitable for every product.
9. Bundle Pricing Strategy
The bundle pricing strategy is a pricing strategy where the seller puts two or more complementary products or services in a bundle and sells it for a fixed price.
This strategy benefits both the seller and the consumer. The seller can sell more products quickly, while the consumer gets lower prices on each unit in the bundle compared to when he or she buys them separately.
Retailers, direct-to-consumer manufacturers, and service providers are the common categories of people that use the bundle pricing strategy. They use it to increase their overall sales volume by offering complementary products or service packages.
Offering two or more complementary products or services together to sell them at a single price is a great way for businesses to rid themselves of slow-moving inventory.
For example, a company sells writing materials but struggles to sell its sharpeners. It can use the bundle pricing strategy to create a bundle containing complimentary items such as exercise books, biro, pens, erasers, and sharpeners.
When using the bundle pricing strategy, you can opt to sell your bundled products or services only as a single item or sell themselves as individual items and part of the bundle.
Bundling products or services together is a great way to add value to your customers through your offerings. Customers willing to pay extra upfront for the bundled items can become hooked on more of your products faster.
The bundling pricing strategy is a great way to reduce your inventory and increase the value perception of your products. If your bundle pricing is done properly, customers will take you up on the offer. Many small businesses use this strategy to speed up sales at the end of a product’s life cycle.
Although you are technically offering a discount by using a bundle pricing strategy, you have to make a profit.
Advantages of Bundle Pricing Strategy
1. Pricing Transparency
One advantage of using the bundle pricing strategy is that customers can easily compare the bundle cost against individual items in it.
2. More Sales
Bundle pricing strategy allows companies to sell lesser-known products with popular ones, or old and slow-moving products with new and fast-selling ones. Businesses that adopt a bundle pricing strategy use it to clear out their dead inventory and generate profit from unpopular products.
3. Eliminates Customers’ Confusion
Selling complementary products in a bundle can help eliminate the paradox of choice that many customers face when purchasing. A customer may want to buy a computer system and may not know what else he or she needs.
If you introduce them to a bundle that contains a computer system (monitor, CPU, mouse, and keyword), UPS, printer, and scanner, you have made their buying decision easier.
4. Attracts Different Kinds of Buyers
The bundle pricing strategy is a magnet for attracting different kinds of buyers. You attract price-sensitive buyers looking to buy on a cheap and you attract buyers looking for convenience. You attract buyers looking for deals and those looking for advice on products that complement the main product they want to buy,
When customers see the value of buying the complementary products offered in the bundle, some will end up spending more than they initially budgeted.
5. Lower Marketing Costs
Selling products in a bundle helps businesses to reduce their marketing costs. Instead of launching different marketing campaigns, you promote the different items in a bundle as one with less effort and resources.
Disadvantages of the Bundle Pricing Strategy
1. Higher Price Can Scare Away Customers
On the surface, bundle pricing makes individual items in the bundle cheaper and appeals to customers. However, if the customer has a fixed budget to pay for a single item in the product, he or she may not want to pay extra for the bundle no matter how enticing it is.
Offering bundle pricing without the alternative of buying the product they want as a single item will scare the customer or prospect away.
2. Unclear Value and Pricing
If customers do not have price information of other products in the bundle, they will not likely see the value of buying the bundle instead of the one product they want. Also, if they cannot see how the other products in the bundle can help them achieve their goals, they will be less impulsive to buy the bundle.
10. Premium Pricing Strategy
The premium pricing strategy is a pricing strategy where you artificially set a high price on your product so that customers or the market can associate it with luxury, high-value, or premium quality. It focuses on the perceived value of a product or service and not its actual value.
This pricing strategy is a form of psychological pricing, it aims to appeal to the ideal buyer’s psyche. Although the premium pricing strategy may dissuade a large section of the market because of its high price, it attracts status buyers.
Status buyers are those buyers who buy a product, not for its surface value but its perceived value. It is the belief by proponents of the premium pricing strategy that setting a high price for your product will create a high-quality market perception that will generate more revenue for you.
Premium pricing strategy is also known as luxury pricing, premium pricing, and prestige pricing strategy. What the buyer is buying when buying a premium-priced product is not just the product but the status that comes with it.
Brands that use the premium pricing strategy are known for offering high value and status through their products. It is the justifiable reason why they charge higher than the majority of their competitors and still attract customers. Examples of such companies are Apple, Audi, and Ferrari.
The fashion, luxury cars, and technology industries use the premium pricing strategy to market their products and services as rare, luxurious, and exclusive.
For the premium pricing to work, customers have to perceive the profit as high-value. It has to have a unique product advantage that no competitor can compare with.
The premium pricing strategy can work for your business if you have a clear advantage over your competitors. It can work if you know your product is hot cake and cannot be undercut by another competitor or product of the same quality.
Because you need to perceive your product as high-value for the premium pricing strategy to work, you have to give your product that perception of value.
Creating a high-quality product or service alone will not create that high-value perception of your product. The way you package the product, the marketing strategy used, and the store’s decor and other factors combine to create that perception of value.
For example, Tesla gets away with charging premium prices because of their unique product, electric cars, and the high brand perception the brand has in the automobile market.
Using the premium pricing strategy guarantees that you will sell lesser products than if you would have charged cheaper, but the smaller customers paying premium prices will more than justify the lower sales volume.
Advantages of the Premium Pricing Strategy
1. Competitive Advantage
One advantage of the premium pricing strategy is that it discourages competitors from competing with you. These competitors will find it difficult to enter into the market and charge your premium prices, they will be forced to charge lower to have any hope of attracting any market share.
As a result, they will pose very little threat to your target audience, high-value perception customers. Instead, they attract price-sensitive customers.
2. Brand Awareness
The premium pricing strategy is an effective strategy for raising awareness about your brand. High prices make your products more desirable as customers assume that high prices equal high quality.
3. Improved Profits
When you charge higher for your product, you increase your profit margin and revenue. For this premium pricing strategy to work, you need to adequately market your services to your ideal target audience (those who can buy your products without batting an eye).
Disadvantages of the Premium Pricing Strategy
1. High Marketing Cost
The premium pricing strategy requires you to expend lots of resources on marketing. Small businesses without the right funding will struggle to promote their goods and services using the premium pricing strategy.
Customers do not just visit a physical or online store and pay for a product because it is the most expensive. They buy because they have heard of the product and have attached a high value to it.
2. Unsuitable for Competitive Market
If you have lots of competitors, and the product or service you sell is similar to what your competitors sell, the premium pricing strategy will prove unsuccessful. Customers will easily navigate to your competitors that charge cheaper.
3. Limited Customer Base
Premium pricing strategy may give you a higher return on investment per product sold, it leaves you with a limited customer base. Charging premium means you eliminate a whole section of customers, the price-sensitive buyers.
11. Loss Leader Pricing Strategy
The loss leader pricing strategy is a pricing strategy where a business deliberately sells a product or service at a price below its profit margin and not necessarily its production cost. Businesses that use this strategy aim to use it as bait to get buyers to visit their online or physical store.
The product or service that you sell at a loss to use to simulate other purchases is called the loss leader item or product.
Although the loss leader item is deliberately sold as the loss, the business uses it to lure customers to make other purchases at regular or higher prices. In this way, businesses recover the loss on the loss leader item and make a profit.
The loss leader pricing strategy is commonly utilized by retailers. Software services can also use this strategy to boost their sales.
Types of Loss Leader Pricing Strategy
There are several ways a business can use the loss leader pricing strategy, they include introductory pricing, store placement, inventory management, and free samples.
1. Introduction Pricing
Introductory pricing is when a company entices buyers by offering an initial discount for the purchase of an item and later charges the normal price for it.
2. Store Placement
Store placement is when a store deliberately places its loss leader item close to the rear of its store so that interested customers will pass through several items before getting there. It is the hope of the store that buyers will on their walk to get the loss leader item see other items that will interest them to buy.
3. Inventory Management
Inventory management is important for businesses that sell products. If a company has old inventory items that are not sold immediately, they will go out of season or expire. The company can use the inventory as the loss leader item by selling it at a lower price to attract more customers.
4. Free Samples
Free samples are common loss leader items. Businesses use free samples to build a positive brand image with their target audience. Offering valuable stuff for free is a great way to endear your customers to your brand. The free sample provided can trigger a customer to be more receptive to making a paid purchase.
Advantages of Loss Leader Pricing Strategy
1. Easier to Break Into a New Market
The loss leader pricing strategy makes it easier for you to break into a new market. You can use the lure of a lower price to break into the market, attract customers, and make more sales.
2. Increasing Sales
The loss leader item is designed to increase sales in the store. Companies use it to attract traffic to their businesses, who can get enticed by other products, and increase the number of products they want to purchase.
3. Brand Loyalty
Offering products of great value to consumers at a lower cost than what the market regular price is can win your brand loyalty from customers. They may perceive your brand as a place where to get bargain deals, causing them to maintain a long-term relationship with you.
Disadvantages of Loss Leader Pricing Strategy
1. When Buyers Only Buy Loss Leader Items
If your customers end up only buying loss leader items and not other products sold at a regular price, it amounts to a significant loss for your business. The act of purchasing a loss leader product without buying other products is called cherry-picking.
2. Low-Value Perception
When a business uses the loss leader pricing strategy to the extreme, customers can start to predict or anticipate when the price will drop and only buy during that window. Not only does this kill any hope of profit, but it also gives the company a bad image.
Customers will start seeing it as a place where they can go during discount sales and not when they need products.
3. Quick Depletion of Stocks
Ordinarily, this should be an advantage. The primary reason why we do business is to sell. However, when the loss leader item finishes without much sales for other products, you have effectively made a loss and very little profit.
4. Negative Brand Perception
If you sell luxury goods and real estate for a wealthy audience, adopting the loss leader pricing strategy can damage the reputation of your company.
These buyers are used to buying expensive products and derive great value and prestige from doing so. Reducing prices on a scale that the loss leader pricing strategy suggests can make buyers start viewing your products as lacking in quality.
5. Legal Issues
Many U.S states such as Colorado, California, and Oklahoma banned the use of loss-leading pricing strategies by businesses to sell products in their territory. Europe and Australia have also followed suit in banning it.
12. Predatory Pricing Strategy
Predatory pricing strategy is the practice of using low-cost pricing to discourage or eliminate competitors to gain an unfair market advantage. Another name for this pricing strategy is the aggressive or undercutting pricing strategy. In some countries, this pricing strategy is illegal. It is considered an anti-competitive pricing strategy.
Companies that use this pricing strategy set a below-cost price that other competitors can not compete against. The aim is to gain monopolistic control of the entire market by forcing out competitors. New entrants will find it impossible to break into a market where the practice of predatory pricing is rampant.
A company that practices this aggressive pricing strategy is ready to incur losses. However, the losses will be worthwhile when it has driven all its competitors out of business. It can now raise prices to recover the losses and make profits.
The predatory pricing strategy gives birth to monopolies who have ungodly control over the market for an extended period. A good example is Amazon’s dominance of the book industry. Amazon’s low price for printing and self-publishing options is slowly reducing the number of publishers in the industry.
Critics of the predatory pricing strategy point out that it is an anti-business practice. The core purpose of why a business is set up is to make profits. Predatory pricing aims to cut off competitors and dominate the market.
Only businesses with substantial resources can successfully carry out predatory pricing. The company has to have larger resources than its competitors unless it will lead to a protracted price war which will lead to major losses and very little profit margins.
Companies that can afford to incur losses and are way stronger than their competitors will gain an unfair market advantage in the long run if they implement the predatory pricing strategy.
Advantages of Predatory Pricing Strategy
1. Elimination of Competitors
The predatory pricing strategy is effective at hurting and eliminating your competitors. For it to work, you have to be able to endure the losses till the number of your competitors reduces.
2. Barriers for New Entrants
Companies that use the predatory pricing strategy make it hard for new entrants to enter the market. Except the new company has enough capital to take on the monopolistic company, it will fend off from such a tussle.
3. Market Dominance
The end product of the predatory pricing strategy is the complete dominance of the market. Once all major competitors are eliminated, the predatory company will have a monopolistic environment where it can control the price and in many cases the supply of its products and services.
With no competitors, the predator company will have a higher profit margin and naturally charge higher to recover the losses incurred to eliminate its competitors.
Disadvantages of Predatory Pricing Strategy
1. Not a Long-term Strategy
On paper, the predatory pricing strategy looks easy to implement, lowering the prices of your products or services till your competitors can no longer compete. However, in reality, it is not so easy to implement.
There is no effective way for a company to gauge how far its competitors are willing to fight for the precious market share. If competitors are strong enough to withstand the price war, it will end up as a gigantic failure. It is not effective in the long run.
Every company can only absorb losses for a certain period even if they have lots of capital and resources.
2. Predatory Pricing Strategy Is Illegal
Many countries in Europe, Australia, and some states in the US have outrightly banned the practice of predatory pricing. The pricing strategy promotes monopolistic market behavior, a dangerous market situation that no responsible government can allow to take a foothold in its territory.
The illegality tag on predatory pricing makes it a less attractive option and reduces its chances of success.
13. Hourly Rate Pricing Strategy
Hourly rate pricing strategy also known as hourly pricing or rate-based pricing is a pricing strategy utilized by self-employed individuals such as freelancers, consultants, and contractors. It also includes individuals who provide services for businesses.
The underlying philosophy behind this pricing strategy is the trading of one’s time for money. Here, the client pays a fixed price for each individual or laborer. The hourly rate paid is agreed to by both parties.
Among freelancers all over the world, the hourly-based pricing strategy is the most popular for billing clients. Some clients may be reluctant to use this pricing strategy because it can lead to inefficiencies and manipulation. Freelancers can intentionally extend the hours spent on doing the project just to get a higher paycheck.
For this hourly rate pricing strategy to work, clients and freelancers have to agree to an hourly rate and then estimate the duration the job will take. The total amount paid to the freelancer will be the hourly rate agreed multiplied by the number of hours spent on the job.
Here is a real-world example of an hourly rate pricing strategy. A client needs a freelance writer to ghostwrite some blogs. He finds his ideal freelancer after searching freelance job websites such as Upwork and Fiverr and agrees to pay $40 per hour. Together the freelancer and client estimate the hours to be spent to be approximately 10 hours. The client will pay a total of $400 for the job,
Consultants and contractors also commonly charge per hour for their services. Booking an appointment with a Facebook ads consultant will see you pay the number of hours they spend consulting for your business.
Advantages of Hourly Rate Pricing Strategy
1. Appeals to Clients and Service Providers
The hourly rate pricing strategy is common to both clients and service providers. In many cases, they are both comfortable with the pricing structure
2. Great for Unclear Projects
For projects where freelancers and clients find it hard to assign a fixed value, the hourly rate pricing strategy is a better alternative.
3. Opportunities to Increase Rates
The hourly rate pricing strategy opens the door for service providers to earn more by increasing their rates as they grow in experience and skill.
4. Covers Extra Hours
Another advantage of the hourly rate pricing strategy is that it prevents service providers from grossly underestimating the time it takes to complete a project. If the project takes longer to complete, they can renegotiate with clients to cover the extra hours needed to complete the job.
Disadvantages of Hourly Rate Pricing Strategy
1. Limited Earning Potential
Although service providers can increase their rates per hour, there is always a limit to the number of hours they can work. Eventually, they will reach their peak and find it extremely difficult to earn more using this pricing strategy.
2. Encourages Slow Work
The hourly rate pricing strategy encourages service providers to take as much time as possible to complete the task. They earn more when they spend longer to complete the project. Fast and efficient work will reduce their earnings potential.
3. Need to Track Your Hours
Tracking hours using time tracking apps is one of the conditions that many clients give service providers charging hourly rates. They do this to prevent service providers such as freelancers and laborers from deliberately manipulating the number of hours worked.
However, this strategy is counterproductive especially for creatives as it can cause mental blocks.
4. Possible Discrepancies Over Time Spent
Clients may agree with your hourly rate but have no way of telling how long it will take you to finish the job. The next best thing is to set an estimated time for the project.
If you spend more than the estimated plan, clients may not be so happy to pay you the extra money as they often treat the estimated time as fixed. If you finish earlier than expected, clients may feel you did not put in your best effort.
14. Time-based Pricing Strategy
A time-based pricing strategy is a pricing strategy where you charge for your products or services according to the time. It is different from value-based pricing where companies charge customers based on the value delivered.
Companies that have products or services that have last-minute purchases or high seasonality use this pricing strategy. The tourism and aviation industries use the time-based pricing strategy a lot.
During the peak seasons, you will notice that the price of a plane ticket is more expensive compared to when you are traveling during the off-season. Airlines use the high demand during the peak seasons to raise their ticket prices, and then reduce it when the demand reduces.
Also, if you buy your plane ticket early, the price will be cheaper than if you purchase it close to the travel date.
For time-based pricing to work, you need to use an algorithm or system that will track all the time factors at play and adjust the prices accordingly.
Companies use the time-based pricing strategy to charge more for providing services at a faster pace to clients or if they won’t work done in non-work periods. For example, a video editing service will charge more for a same-day video editing delivery date. But if the delivery date is in a week, the video editing service will charge less.
Service-based businesses and professionals will naturally charge higher for their services in the periods when it is in high demand. When there is a low demand for their services, they reduce their prices to attract patronage.
The tourism industry also uses a time-based pricing strategy. Hotel rates fluctuate depending on the time and season you book. If you book during the peak season when there is high demand, you will pay more than what you would pay in the off-season.
Advantages of Time-based Pricing Strategy
1. Maximize Profits
The time-based pricing strategy allows businesses to take maximum advantage of high demand for their products or services to maximize their profits. Selling at a high price during the peak seasons where there is high demand helps increase the company’s profit margins.
2. Allows Pricing to Reflect Demand
The time-based pricing strategy does a fantastic job of reflecting demand in the pricing of your product. It supports charging high prices for your products and services during periods of high demand and reducing the prices during periods of low demand.
3. More Sales
Businesses that use the time-based pricing strategy enjoy lots of sales all year round. Although they make the most of their sales during the peak season, they also attract sales during the off-season.
Lowering your prices during periods of low demand can serve as an incentive to encourage price-sensitive buyers to purchase your products.
Disadvantages of Time-Based Pricing Strategy
1. Customers May Feel Cheated
Customers that purchased your products or services during the peak season when the price was high may feel cheated when they find out it was sold to another at a cheaper rate during the off-season.
2. Opens the Door for Competition
The time-based pricing strategy encourages new entrants to enter the market. Competitors can easily spot an opportunity in the market and charge lower to snatch some market share from businesses using the time-based pricing strategy to charge higher in the peak season.
15. Project-Based Pricing Strategy
The project-based pricing strategy is a pricing strategy where individuals or businesses charge a fixed or flat price for a specific project. It is the opposite of the hourly rate pricing strategy which involves charging per hour for a project.
Freelancers, consultants, contractors, laborers, and other service providers use the project-based pricing strategy. A project-based pricing strategy is a reflection of the value of the project. Prospective clients can know upfront the amount they are going to pay for the service
For example, a freelance website designer charges $5,000 to create a website for a payroll software provider. The flat fee charged is an example of a project-based pricing strategy at work. Everything that goes into the project such as the hours spent is incorporated in the flat fee of $5,000.
The project-based pricing strategy works best for projects where the requirements, scope, and specifications are definitive and easy to measure. There are service providers who use the project-based pricing strategy in tandem with the hourly rate pricing strategy.
Advantages of Project-Based Pricing Strategy
A project-based pricing strategy allows both clients and service providers to know exactly the price of the service rendered upfront. The pricing details and agreement is explicitly defined and clear to both parties.
Since customers know the full price they are to pay upfront, they can easily decide whether they can afford it or not.
2. Rewards Productivity
The project-based pricing strategy encourages service providers to focus on productivity. Service providers can focus more on delivering high-quality projects since they get paid the full price no matter the number of hours spent.
Since they get paid a flat fee for completing the project or service, there is an incentive for them to finish the job in the shortest time possible.
Disadvantages of Project-Based Pricing Strategy
1. Unexpected Difficulties
Using a project-based pricing strategy can be a massive disadvantage when the project turns out to be more difficult than estimated, amounting to more work and time to be spent on it. It reduces income potential as the agency or individual has to do the extra work or cancel the contract if the client refuses to increase the payment price.
2. Poor Quality of Services
Service providers (agencies or individuals) are incentivized under the project-based pricing strategy to deliver projects as quickly as possible to maximize earnings. Shortcuts can be taken to get the project completed faster. The problem with this is that it can lead to poor output.
16. Geographic Pricing Strategy
Geographical pricing strategy involves the adjustment of prices of a product or service based on the geographical location of the buyer.
Originally the pricing strategy was conceived to help offset the high costs of shipping to distant locations. However, in more recent times, the pricing strategy is used to pounce on sales opportunities in different geographical locations. Companies that practice this pricing strategy seek to match the varying supply and demand curves, and marketing demands in different areas.
Pricing products or services differently based on geographical location or market is a reflection of the differences in cost of living and the level of competition present in those markets.
The geographical pricing strategy is suitable for situations when a customer from a different country is purchasing your product. Within the same country but different locations, this pricing strategy can be used if there are disparities in factors such as wages or the economy of the seller and the buyer locations.
Businesses that have an international presence or looking to expand their presence to the international market need to consider using the geographical pricing strategy. It allows them to set different price points for different locations.
The difference in price between different locations is caused by one or more factors. Some of the common factors include taxes, legislation, shipping costs, location-specific rent, and tariffs. Local businesses are not a great fit for geographical pricing.
Advantages of Geographical Pricing Strategy
1. Diversified Revenue Channels
The geographical pricing strategy allows businesses that serve multiple locations to maximize their profits. By selling your products at a price suitable for the local market in different locations where you sell, you diversify your revenue channels across markets.
2. Builds Credibility Across Different Markets
When you treat customers more than just entities from which you extract money through sales, you build credibility on a local level. The geographic pricing model supports localizing your pricing which helps the foreign audience easily warm up to your products. It tells the customer that you care.
3. High Return on Investment (ROI)
Companies that use the geographical pricing strategy properly can easily see a higher return on investment quickly. With the power of research, understanding of the market, and a market-friendly price, profits from the different locations will keep pouring in.
Disadvantages of Geographical Pricing Strategy
1. High Cost
The geographical pricing strategy can be an expensive pricing method as it involves costs such as market research, local rent, shipping costs, and bookkeeping.
2. Not Suitable for Local Businesses
Local businesses can not use the geographical pricing strategy because they have no external market to service.
17. Psychological Pricing Strategy
The psychological pricing strategy is a pricing strategy that uses specific techniques to create a psychological impact on customers that gets them to buy your products or services. It is a business practice of integrating sales tactics with a price.
A popular psychological pricing strategy is the setting of prices lower than a whole number. The idea behind this is to use a slightly lower price that customers will subconsciously read or treat as lower than what it is.
For example, one of the best office phone systems, RingCentral charges $19.99 for its essential plan. The customer will treat $19.99 as a lower price than $20,00, seeing it as a good deal and closer to $19 than $20. Businesses use this pricing strategy to target human psychology to boost their sales.
Another psychological pricing strategy used by businesses is to deliberately place more expensive items close to the product you want to sell.
People who enter your online or physical store will see the more expensive items and compare them to the cheaper price of the item near them. It makes it easier for them to make the buying decision you want them to make.
Businesses also offer a “buy one get one free or buy one get a 50% discount on the next purchase” deal to entice customers to buy more than they initially planned to buy. Customers will view this deal as too good to pass up on and most likely grab the offer.
In many cases, changing the font, color, and size of their pricing information triggers a subtle psychological manipulation and more customers buy the product.
Businesses use the psychological pricing strategy to encourage customers to respond to their emotional impulses rather than the logical ones.
This pricing strategy is proven to boost sales for companies. For example, an email marketing service for small businesses set its plan for $19. It will attract more subscribers than if it was set as $20 even though the price difference is almost insignificant.
Humans are emotional by nature. The reason why a $19 price will sell more than a $20 price is that customers tend to focus more on the first number in the price tag than the last ones. Psychological pricing strategy creates an illusion of enhanced value in the minds of consumers.
Advantages of Psychological Pricing Strategy
1. Simplified Decision-making Process
The psychological pricing strategy makes it easy for customers to make buying decisions. Using price discounts will help customers make buying decisions quickly without having to worry about the price.
2. More Sales
Businesses that use psychological pricing strategies experience increased sales from their promotions and discounts. The pricing speaks to the emotional side of customers and compels them to make a purchasing decision. The price does the selling on your behalf.
3. High Return
The psychological pricing strategy is used for one-time sales during periods of high demand such as the holiday season to boost revenue. Offering a pricing discount will attract more customers and at the end of the day, you will most likely acquire higher returns than if you had not used the strategy.
4. Sense of Urgency
The psychological pricing strategy can trigger a sense of urgency, causing customers to buy now or miss out on such a good deal later. Strategies such as the “Buy One Get One Free” and other price discounts with an expiry date triggers customers to make an impulsive buying decision. Customers will FOMO (Fear of Missing Out) their way to buy your products.
Disadvantages of Psychological Pricing Strategy
The psychological pricing strategy does not always work for all your target audience. When you use it frequently, some people may recognize your ‘deceitful’ strategy and not buy your products. Others may see it and recognize it as a part of getting sales.
2. Not a Long-term Solution
Using the psychological pricing strategy can bring about quick conversion in the short term but in the long term, it is not the best solution. Both B2B and SaaS businesses will profit from using a more stable pricing model in the long term.
3. Misperceived Value
There is the danger that your customers can misinterpret your pricing to mean that your product is low-quality, especially status-conscious buyers.
Also, if you use a low price to trick customers to buy more, they can become accustomed to these deals. When you raise the price back to its normal levels, they may not be receptive to buying at a higher price.
18. Captive Pricing Strategy
Captive pricing strategy is a pricing strategy that businesses use to sell both the core product and accessory products (the captive product) to consumers.
The accessory products are necessary for the core product to function. Both the core products and accessory products cannot be separated from each other because of their intertwined functions.
Usually, consumers buy the core product once and purchase the accessory products over and over again as needed. It is a pricing strategy used by businesses to record high sales and attract a large volume of customers.
The captive pricing strategy is popular among physical products. A good example is businesses that sell printers and ink. SaaS companies like online store builders use this strategy by offering add-on features as the captive product in addition to their normal subscription package (the core product).
Companies usually price the core product at a low price but cover for it by pricing the captive products at a higher rate. This pricing strategy attracts customers as it helps them save money on the core product. The business profits by selling the core product with the captive product (which it sells at a higher rate).
If there are gaps in the market for the captive products, businesses can gain an additional revenue stream by selling the captive products in addition to the core product.
Since customers come to you for the core product, you are guaranteed a continuous return for the captive product. Customers will perceive you to sell high-quality accessory products since you sell or make the core product.
For example, a small business sells printers as its core product. Customers come to buy printers from it. But they also need a captive product to operate the printer effectively, the ink. That small business can sell both the printer and ink together since customers know they won’t be able to operate the printer without the ink.
The captive pricing strategy can increase your profit margin and boost sales. Selling accessories needed for the core product to function is a great way to attract customer loyalty to your brand. It is a competitive pricing strategy that helps you retain customers.
A good example of the captive pricing strategy is seen in video game console companies. The Xbox gaming console is the core product but users cannot enjoy it without buying accessories such as games. Since games from other brands are not compatible with the Xbox gaming console, users of the Xbox gaming console can only buy Microsoft-supported games.
Advantages of Captive Pricing Strategy
1. More Sales
The captive pricing strategy takes advantage of the need of customers to buy the captive product to enhance the core product. Businesses record more sales as they sell both the core product and the captive product to users.
2. Increases Revenue and Profits
Businesses use the captive pricing method to sell more products and increase their revenue and profits.
Apart from purchasing both the core product and captive product together, customers will often return regularly to buy more of the captive product since they do not last as long as the core product. This continuous flow of traffic guarantees more revenue and profit for businesses.
3. Increases Customer Loyalty
Selling captive products in addition to the core products is a guaranteed way to attract loyalty from your customers. Customers feel more comfortable buying the captive products from the stores where they bought the core products.
The long-term relationship it brings between customers and your company can be helpful and lead to the purchase of non-related items.
Disadvantages of Captive Pricing Strategy
1. Customer Fatigue
In the long run, customer fatigue may set in as customers will get tired of purchasing the captive product repeatedly.
2. High Cost
Selling the core product and the captive product together can be expensive and lead to the loss of a sale. The high prices of the captive product can hurt the brand’s image.
Customers who entered because of the low core product offer can feel dumped as they have to keep paying perpetually to use it through the continuous purchase of captive products.
How Price Setting Impacts Your Profit Margin
Pricing is the most vital company when it comes to making a profit. However, a lot of business owners miss out on its importance and do not take time to find out the right pricing strategy for their product. They simply set a price that reflects their costs and the competitors’ price tag.
Although the production cost and competitors’ pricing tag are important factors to consider when pricing your products or services, they are not the only factors to consider. Confining your pricing model to these two factors will see you miss out on opportunities to strategically increase your company’s profit margin.
The price of your products or services can determine if your business is on the long road to success or a quick path to self-destruction. Price them poorly and you will leave out lots of money on the table. Price them well and you take maximum profits while beating your competitors and increasing the perceived value of your brand.
Setting the price for your product or service can be tricky with the multitude of pricing strategies available to choose from. However, one thing that you should pay attention to when setting the price is value.
If your customers can see the value of your products and services, they will happily pay for it. If they don’t, even if you reduce your price and hurt your profit margins, there is little you can do to convince them to buy. Many times over, they will prefer to buy it at a higher price as far as it matches their perceived value.
Too many business owners are focused on charging low for their products and services and hurting their profit margin. Instead of focusing on using the price to boost their profit margins, they are too concerned about what their competitors are doing.
The ultimate goal of every business is to make a profit, and pricing is one of the most important factors that can impact your profit margin (positively or negatively).
Customers are not just buying a product or service from you but a solution. The price you set on your product or service has to be one that they can afford and not necessarily the lowest possible price. Setting the price for your product or service should impact your profit margin positively.
Examples of How Price Impacts Your Profit Margin
The price you set for your product affects your profit margin per unit sold. If you charge a high price that your target market is ready to buy at, you will enjoy a high-profit margin per item. Setting high prices beyond what your target audience is willing to pay will reduce your sales volume and lower your profit.
Here are some examples of how the price you set for your products can impact your profit margin.
A local furniture dealer sells its sofa for 100 USD. The cost of goods sold (COGS) is 60 USD. What is the dealer’s profit or gross margin?
Profit Margin % = Net Sales – Cost of Goods Sold (COGS) / Net Sales x 100
Profit Margin % = 100 USD – 60 USD /100 x 100
Profit Margin % = 40 / 100 x 100
Profit Margin % = 40%
The local furniture dealer then reduces its price for its sofa from 100 USD to 80 USD and its cost of goods sold (COGS) remains at 60 USD. Here is how to find its new profit margin.
Profit Margin % = Net Sales – Cost of Goods Sold (COGS) / Net Sales x 100
Profit Margin % = 80 USD – 60 USD /80 x 100
Profit Margin % = 420 / 80 x 100
Profit Margin % = 25%
Another example is that of a local car dealer that gains a profit margin of 40% on each Ford car it sells. If the local car dealer decides to offer a price discount to customers, here are some examples of how it will impact its profit margins.
- If it offers a 5% price discount, it will need to sell 14% more Ford cars to reach the revenue it generated before the discount.
- If it offers a 10% price discount, it will need to sell 33% more cars.
- If it offers a 20% price discount, it will need to sell 66% more cars.
- If it offers a 30% price discount, it will need to sell 99% more cars.
- If it offers a 40% price discount, it will never recover the revenue it generated before the discount.
Likewise, if the local car dealer decides to increase the price of the Ford cars, it will need to sell less to reach the revenue it gained with a 40% profit margin.
- If it offers a 5% price rise, it will only need to sell 14% fewer cars to reach the revenue it generated before the price increment.
- If it offers a 10% price rise, it will need to sell 33% fewer cars.
- If it offers a 20% price rise, it will need to sell 66% fewer cars.
- If it offers a 30% price rise, it will need to sell 99% fewer cars to recover the revenue it generated before the price increment.
A small price rise if the number of customers stays constant will increase your profit margin and generate additional profit.
Pricing Strategy Examples
1. Dynamic Pricing Strategy: Uber
Ride-hailing services like Uber implement a dynamic pricing strategy. Uber uses machine learning technology to estimate market conditions and adjust their prices accordingly.
The fares available to users change based on demand and other factors such as public holidays, traffic, and weather conditions. During busy hours, Uber charges increase compared to when there are not a lot of people demanding rides.
Uber does not only use dynamic pricing to increase its transport fares, it also uses it to attract more customers by providing discounts.
2. Freemium Pricing Strategy: MailChimp
MailChimp is an email marketing service that allows users to build an email list, send mails to the email list, and automate their email marketing. The email marketing service uses the freemium pricing strategy to get users to try out its service for free.
There are limitations on the free account such as you can only send emails a total of 12,000 emails per month to 2,000 subscribers. Customers who like the free service and need more functionality will happily pay for its premium plans.
MailChimp did not always use the freemium pricing strategy, it had 85,000 paying users by the time it introduced its free plan in 2009. A year after, its total user base grew five times over and it accumulated 4,000 new paying users monthly.
3. Penetration Pricing Strategy: Netflix
Netflix is a classic example of the penetration pricing strategy done right. It entered the market with low prices for its innovative movie streaming service and then increased the prices over time as its dominance grew. Despite Netflix’s subscription fee increase, it continues to retain and gain customers.
4. Premium Pricing Strategy: Apple
Apple since it launched its smartphones at premium prices has continued to use the premium pricing strategy for all its products. A typical example is its AirPods which range from $159 – $199. Customers purchase Apple products because of the prestige that comes with the brand.
5. Competitive Pricing Strategy: Shopify
Shopify is a popular eCommerce platform that helps businesses sell their products online through their online stores. It adopts a competitive pricing strategy in the competitive eCommerce software market. All three of Shopify’s plans are priced on the same tier or lower than other Shopify alternatives in the market.
6. Project-Based Pricing Strategy: Content Cucumber
Content Cucumber is an on-demand content marketing platform where clients pay a flat monthly fee to get unlimited requests. Clients pay project-based fees once a month or annually which gives them access to Content Cucumber content marketing services.
7. Value-Based Pricing Strategy: Louis Vuitton
The French clothing accessories company, Louis Vuitton, uses a value-based pricing strategy to generate more sales and enhance its brand image. It prices its products based on the perceived value in the minds of its target audience. Customers buy their products because of the style and luxury it is synonymous with.
8. Cost-Plus Pricing Strategy: Walmart
Walmart uses the cost-plus pricing strategy to make a profit from its sales and compete with other competitors. Customers who visit Walmart for their basic commodities already have a good idea of how much each item would cost.
Since Walmart purchases its product in bulk, using the cost-plus pricing strategy makes it easy for it to take its profit while attracting a steady stream of customers.
9. Price Skimming Strategy: Sony
Sony is popular for its TVs and smartphones. When it launches a new innovative product, it sets a high initial launch price. As the demand for the product reduces, or competitors enter the market with similar or better products, or it upgrades the product with a better version, the price gradually reduces.
The price skimming strategy allows Sony to maximize its revenue while the product is still ‘hot cake’ in the market.
10. Promotional Pricing Strategy: Win in Health
Win in Health uses the promotional pricing strategy to attract customers to purchase its products. There are discounts on almost all its products, plus if you sign up for its newsletter, you get a further 10% discount.
11. Bundle Pricing Strategy: Amazon
When you click on a product on Amazon, below the product, the Amazon algorithm tries to upsell you with its “frequently bought together” section. Amazon uses the bundle pricing strategy to increase its profits and get users to buy more.
12. Loss Leader Pricing Strategy: Gillette
Gillette employs the loss leader pricing strategy to attract customers to buy its products. It sells its mechanical razor below the market price to draw new customers to make a purchase. The strategy has worked well for Gillette, it used it to become a leader in selling razor blades and building a huge customer base.
Although Gillette did not make a profit from selling its mechanical razor, it made lots of revenue from selling its recurring sales of replacement blades for the device. The company’s replacement blades are expensive but since it is the only blade that fits the mechanical razor, customers have to buy from the company.
The loss leader pricing strategy also opened the door for new customers to purchase Gillete’s other products such as aftershave and deodorant.
13. Predatory Pricing Strategy: Web Browser Wars
The web browser wars pitted Internet Explorer with Netscape. Netscape was the giant of web browsing before Microsoft introduced Internet Explorer and offered it for free. This move forced Netscape to offer its web browser also for free. Microsoft won because of its use of predatory pricing strategy to defeat its competitor, Netscape.
14. Hourly Rate Pricing Strategy: Upwork
Upwork is a freelance marketplace that connects freelancers with paying clients. The platform supports the use of an hourly rate pricing strategy for freelancers. Clients can also offer hourly payment for jobs they post on the platform.
15. Geographic Pricing Strategy: BP
BP is a British multinational oil and gas company with operations in over 80 countries. The company uses a geographic pricing strategy to price its petroleum products in its filling stations in different geographic spaces.
16. Psychological Pricing Strategy: Vonage
Vonage uses psychological pricing strategy to get buyers to perceive its unified communication pricing plans as cheaper than it is.
Using $19.99 makes the customer think the product pricing is closer to $19 than it is to $20. The reason for this is that customers pay more attention to the first numbers rather than the last ones.
17. Captive Pricing Strategy: Xbox
Xbox uses the captive pricing strategy for its video game console. When you buy the game console, you only get one game controller. If you want to play with family and friends, you need to buy another game controller. Also, you cannot enjoy playing Xbox without buying its games.
The company sells these accessories (captive products) in addition to the core product (Xbox gaming console).
18. Time-based Pricing Strategy: Qatar Airways
Qatar Airways, like other airlines, uses a time-based pricing strategy. When you book a flight during the peak seasons, you pay higher costs than you would in the off-season. Also, if you book your flight ahead, you will pay lower than if you booked it on the day of departure.
Set Your Pricing Strategy for Maximum Profits
Your pricing strategy is vital to attracting more customers and increasing your profits. When setting your pricing strategy, it is important to take a closer look at your business factors so you can choose the most effective pricing strategy for your business.
The fact that a strategy worked for your competitor even in your industry does not mean it will work for you. For you to set your pricing strategy for maximum profits, you have to know that the price is not for you but your target audience.
Properly defining your target audience and doing market research is crucial for choosing the right pricing strategy. One mistake you can make when choosing a pricing strategy is trying to appeal to everyone. Even the best pricing strategies will attract some customers and turn off others.
Setting the right pricing strategy for maximum profits is a continuous process. It is essential for you to continuously evaluate your pricing strategy as pricing factors can change at any point in time. The last thing you want to do is to hold a no longer relevant pricing strategy.