As a marketer, one of the most important decisions you’ll make is pricing your product or service. Get it wrong, and you could be leaving money on the table. Get it right, and you could be raking in the profits. But how do you know which pricing strategy to use?There are many different pricing strategies out there, and each has its own advantages and disadvantages.
In this blog post, we’ll take a look at eight pricing strategies and when to use them.
Different Pricing Strategies
Pricing Strategies for Startups
For startups, there are some basic guidelines when deciding on a pricing model:
If you are a new startup, there are some basic guidelines you can follow when deciding on a pricing model. If gaining a large share of the marketplace is your main priority, then adopt the “grow” model. This will require a lot of capital, but if you’re successful, you’ll win big.
If you’re able to differentiate your offering and target a clearly defined and relatively narrow market segment, then adopt either the “skim” or “premium” pricing models. If you’ll be competing with a dominant competitor, or if there is some factor that will determine the value of your product or service, then go with the “market follower” approach.
9 Types of pricing strategies you can use
Here are 9 different strategies for selling products in a market where competition is high.
Premium Pricing Strategy
Premium pricing is a strategy employed by businesses to mark their products at a higher price than industry standards or competitor products. The goal is to encourage buyers to perceive the product as having more utility or value.
The idea is to sell a product by convincing buyers that the product is worth more simply because it is more expensive.
The main benefits of the premium pricing system are that it leads to increased revenue and can build a “premium” image. This, however, requires a lot of investment into creating the perception of quality. By spending a lot of money on branding, you can make it harder for your competitors to enter your market.
If you want to create a barrier to the competition and establish a perception of value around your products, you’ll have to spend money on marketing. This can help consumers understand the unique value of your offerings and make it more difficult for your competitors to commoditize your market.
Premium Pricing Example
Consumers often buy more expensive products thinking that they must be of higher quality. However, this isn’t always the case.
Penetration Pricing Strategy
Penetration Pricing can be an effective strategy to attract customers who are searching for a deal. By offering a lower price than competitors, you can gain a larger share of the market. This strategy may result in short-term loss, but can lead to long-term gains.
Penetration Pricing is a strategy where you offer your product at an extremely low price in order to attract as many consumers as possible. This may seem counterintuitive, but the idea is that you will gain so many more customers that you’ll make up for the money you lost.
After a company has established a loyal customer base, they can then increase their product’s price to the point where they still make a healthy profit without driving away their customers.
Penetration Pricing Example
The OnePlus 5T, which launched in November 2017, is priced at $499. The flagship phone from 2016, the 3T, is now priced at $399.
The recently released OnePlus 6T smartphone is priced at $549.99.
Economy Pricing Strategy
This tactic is used by generic food and grocery suppliers as well as by discount stores. By keeping marketing costs low, they attract consumers who are more cost conscious.
This strategy is used to appeal to price-conscious consumers.
The strategy works best when selling large volumes of products and services at lower prices. This strategy is best suited for large retailers such as Wal-Mart and ALDI.
Economy Pricing Example
By keeping operating costs down, and by only stocking items which have a high-demand, and by keeping their products in original containers, ALDI is able to keep their overhead expenses to a minimum. This allows them to offer their customers the lowest prices possible.
Price Skimming Strategy
When your product is unique, you can charge a higher price for it because there is less competition. This is called “price-skimming”.
The objective is to make as much money as possible off of early customers before competition enters the market and drives down the price.
The strategy is called “skimming” because it involves successively charging lower prices as time goes on. This is similar to how cream is skimmed off the top of milk.
The high cost of the product helps it recover its research and development costs and gives it the perception of being a premium and exclusive item.
Price Skimming Example
When smartphones first hit the market, both iPhones and Androids were introduced at a higher price. However, as time has passed, the price for these devices has been reduced. This is likely due to advancements in technology and an increase in competition.
Have you ever heard of the term “psychological price”? It refers to how companies manipulate consumers into buying their products by triggering their emotions.
A psychological pricing model uses emotional triggers to encourage customers to make a purchase. For example, charm prices involve reducing the price of a product by a small amount, making the product seem cheaper. Prestige prices are set higher for exclusive and high-end items.
By purchasing a bundle of products or services, you can save money! This is a great way for businesses to save money on their next purchases.
This strategy of bundling less popular products with more popular ones can help clear up space on store shelves and increase sales.
Bundled products work great when two or more complementary items are packaged together for a discount.
Bundle Pricing Example
The McDonald’s Happy Meal is a great example of bundling.
Freemium Freemium Strategy
The ‘freemium’ pricing model is a great way to get people to try out your product. By offering free versions of your software, you can attract customers and get them addicted to your platform. Once they’ve become addicted, you can then charge them for additional, more advanced options. This is different from ‘the ‘premium with free trial’ approach, as you don’t have to pay for the basic version.
For example, the freemium game, “Candy Crush”, has users pay to unlock new levels.
Pay What You Want
The “pay-what-you-want” pricing model is one in which a customer can decide what amount they want to purchase the product for. This could mean paying nothing, or it could also mean paying more than what it costs to produce. This surprisingly leads to increased profit and marketshare, as most customers are more than happy to pay more.
This strategy is often used by companies to increase profit margins and increase their marketshare. While it may be profitable, it is important to set a minimum amount that consumers will pay.
Many businesses use partial versions of this pricing model, but very few actually set a bottom limit.
Example: How One Company Uses “Pay What You Want” to Sell Their Services
The restaurant chain, “Panera,” is opening a new store in the “St.”
The famous example of a successful business using this strategy is that of the restaurant, “Louis”.
Predatory pricing is price cutting designed to drive competitors out of the market. It is often not profitable in the short term, but the goal is to monopolize the market and then raise prices.
A never-ending battle among competing companies may lead one to adopting an aggressive pricing model in order to force the rival out of the market.
Predatory Pricing Example
An example of a company that adopted a predatorial pricing model is Amazon.com, which in 2013, used this market penetration strategy to sell books for less than the manufacturing cost. They even delivered the books free of charge just so they could steal customers away from traditional bookstores.
Product pricing strategies can be a great way to increase profits and sales. However, it is important to understand when to use each strategy in order to get the most out of them. By understanding the different pricing strategies and when they should be used, you can become a smart marketer and make sure your products or services are priced correctly.