The ultimate guide to pricing strategy

Prices are a major determinant of business revenue - they determine whether a business earns a profit on sales and how much. Therefore, pricing potentially has the highest influence on business success.

However, setting appropriate prices can be challenging for businesses because there are many things to think about. For instance, sellers not only have to consider their production costs when setting prices but also how consumers perceive their products and the prices set by other sellers in their market. Pricing strategies help businesses overcome these challenges and are a game-changer in the B2B markets.

For sellers wanting to learn how to set better prices, this article is a step-by-step guide to pricing strategies. It will assist you in determining how much to charge for your products or services. You'll learn what pricing strategies mean, the types of price tactics, steps to develop a successful pricing strategy, and tips to choose the best strategy for your business.

What is a pricing strategy?

A pricing strategy is a plan of action set by a business or company to accomplish its price objectives and business goals. Businesses can adopt a variety of pricing strategies to accomplish their goals. These pricing objectives have several advantages and disadvantages, as well as some common applications. An effective pricing strategy, however, constantly prioritizes the customers by taking into account their demands and purchasing patterns.

Pricing strategies play a big role in how the market perceives the company and its products and are used by every major brand that comes to mind. If you've always believed that product prices are merely numbers, you're in for a shock because a lot of effort and consideration goes into setting a product's price.

8 common types of pricing strategies

Business pricing strategies differ depending on the business model and the buying behavior (purchasing habits) of their target market. The four main pricing strategies are value-based pricing, cost-plus pricing, competition-based pricing, and dynamic pricing.

However, businesses can also employ more targeted strategies to influence consumers' behavior. These are price creaming and skimming, charm pricing, loss-leader pricing, and loyalty pricing. We'll explain each of these strategies below.

1. Value-based pricing strategy

Using a value-based pricing strategy, businesses set their prices for goods and services in line with what they believe their customers should pay for them. Value-based pricing techniques prioritize the utility that clients receive from the product over the product's explicit quality.

Value-based pricing techniques are often used to sell products with high intrinsic value. Apple is an excellent example of a brand that employs a value-based pricing strategy. Apple uses value-based pricing methods across all of its products, capitalizing on its loyal client base.

2. Cost-plus pricing strategy

When the objective of price setting is to set a price that provides the business with a particular profit margin, the cost-plus pricing strategy is used. A cost-plus price is usually expressed as a percentage of the production cost.

Most manufacturers use the cost-plus pricing strategy. For example, if the cost of production is $1,000 and they have set a cost-plus percentage (markup) of 50%, they'll sell the products at $1,500.

3. Competition-based pricing strategy

A competition-based pricing strategy means setting prices in line with those of competitors. This pricing strategy is often evident in the fast-moving consumer goods industry, where competition is very high and the offerings of sellers are very similar.

A notable brand that sets prices based on a competitive-based pricing strategy is Pepsi. We can see this when we compare the prices of Pepsi soda with those of Coca-Cola.

4. Dynamic pricing strategy

A dynamic pricing strategy is an active pricing strategy where the prices of products and services are flexible and change with the surge in demand and other market conditions.

Dynamic pricing helps businesses quickly respond to opportunities and threats in their market. It is very useful where external market conditions would affect the costs involved in the production or delivery of services. Popular examples of dynamic pricing are airline tickets and Uber rides.

5. Price creaming/skimming

When businesses introduce a unique product with special features to a market, they often use price creaming or skimming to turn over their investment quickly.

Price creaming or skimming is the practice of charging a high price for your products at launch or pre-launch, knowing that you sell in a competitive market and that a competitor will soon release a similar product, forcing you to lower your price. Price creaming/skimming is evident in the pharmaceutical and technological sectors.

6. Charm pricing

Charm pricing is also known as psychological pricing, and it maintains that the price of the product affects its sales. It believes that prices have a psychological impact and thus are used to influence customer behavior.

Examples of charm pricing tactics are; tiered pricing - most expensive products first; odd-number pricing - $599 instead of $600; even number pricing to represent luxury; and decoy pricing - individual at $4.99, premium at $8.99, and business class at 9.99.

Tiered pricing conveys the impression that customers will save money by purchasing the less expensive items, which are usually the best sellers. Odd-number pricing gives the idea that the product is being sold at a discount.

Decoy pricing, which includes a less desirable choice like the "premium," in this case to make "business class" look more spectacular, is used to steer clients to your preferred plan. It is frequently employed for subscriptions and service offerings.

7. Loss-leader pricing

This pricing strategy is often used when a business is just entering a new market. They sell at a loss in an attempt to gain more customers and increase their market share in the new market.

Shopping malls can also use the loss-leader pricing strategy on specific products, typically products with well-known prices such as milk or eggs, to give the impression that everything else in the store is selling at a cheap price.

8. Loyalty pricing

Loyalty pricing often entails rewarding customers with each purchase. Businesses using loyalty pricing can offer incentives to customers who make their first purchase, three purchases in a row, or provide their customers with coupons for a discount on their upcoming purchase.

Buy-one-get-one-free (BOGOF) promotions and members-only pricing can also be viewed as a form of loyalty pricing. Starbucks is a well-known company that uses loyalty pricing, and it has the most well-known consumer loyalty program in the world. Customers of Starbucks receive free coffee and drinks in exchange for earning stars as part of the rewards program.

How to create a pricing strategy?

Creating a pricing strategy can be complex, and businesses are often tempted to take the blanket approach or simply trial and error to see what works. But that's not always beneficial or profitable.

This simple four-step guide will save you a lot of time and help you create the right pricing strategy for your business.

1. Determine your business objectives

Evaluate your business and its environment to identify your business needs, objectives, strengths, and weaknesses. All of these can help you set a pricing objective, which can be product differentiation, market penetration and dominance, profit maximization, and brand loyalty.

Product differentiation strives to set your product or service apart to increase its appeal and attract a specific class of customers. It conveys the idea that a product or service is exceptional and high-end. Market domination and penetration strive to boost a company's market share and customer base in an already-existing market.

A brand loyalty objective concentrates on strengthening the bond between your company and the clients, whereas a profit maximization objective aims to set a price that generates the most profit possible.

2. Conduct market research and analysis

The pricing strategy is often dependent, to a large extent, on your business-specific needs. However, there is a need to consider the external environment in which your products will be sold. A market with similar products and high competition would mean that you would be competing based on price.

On the other hand, a market that offers high-value products would mean that you would be competing based on product quality and that you would need to differentiate your product.

3. Analyze your target market

A target market analysis, which is also very helpful for developing new and efficient tactics will in this case, help you set a price that reflects customer expectations. Consider how your target market could view the product. Regardless of how much it costs to make, customers could view your product as high-end owing to the value it provides.

In this circumstance, you should charge a high price to adequately represent its value. Offering discounts or cheap prices could mislead buyers and create the impression that they valued your product wrongly.

If your products are identical to those of competitors, the situation will be the opposite. Because they can get the same quality for cheaper elsewhere, customers are unlikely to pay more. They'd probably think you're trying to take advantage of them if you opt to sell at a higher price. Studies show that 20% of in-store buyers compare prices on their mobile phones while shopping.¹

4. Create a pricing strategy and an execution plan

The fourth and final phase is to develop a pricing strategy, which comes after considering your business objectives, doing market research, and analyzing your target market. The information collected during the preceding phases is used to construct the pricing strategy.

Outline your business's goal, highlighting your unique selling point, strengths, and weaknesses, then decide on a price strategy based on that goal. Finally, describe the steps you will take to put your selected plan into practice, evaluate the results, and restrategize as needed.

5 tips for choosing the right pricing strategy for your business

Choosing the best pricing strategy for your business can be a herculean task, but if done right, it can accelerate the growth of your business. Here are five tips that can help you make the best decision on the right pricing strategy for your company:

1. Create a buyer persona

A buyer persona is a fictional representation of who you want your customers to be, based on your business evaluation and target market research.

With the help of a buyer persona, you can test out several pricing strategies by constructing a flow that shows how your target market will react to each pricing strategy, and then you can choose the plan that produces the most fruitful outcomes.

2. Understand the intrinsic value of your product

Products with intrinsic worth are frequently valued higher than similar products with lower perceived intrinsic worth. Understanding the intrinsic value of your product can assist you in determining the best pricing strategy.

For instance, a product with a high intrinsic value would be underpriced if the business adopted a competitive pricing strategy or a loss-leader strategy. While the business may turn a profit, by not charging more, they are essentially throwing some money away.

3. Understand the psychology of pricing products

Product prices can have an impact on customer buying behavior. Knowing your clients and learning about their psychology will help you specify the best pricing strategy for your business.

For example, rich consumers frequently opt for more expensive goods over more affordable ones. This knowledge will help you set prices accordingly.

4. Pricing strategies are not a one-size-fits-all solution to pricing problems

The effectiveness of the pricing strategy depends on the pricing objective of the business. The right pricing strategies for profit maximization are cost-plus pricing, charm pricing, and dynamic pricing. A market penetration and domination objective will require that a business employ loss-leader pricing, price creaming/skimming, and competition-based pricing.

Similarly, if the objective of the business is price differentiation, the pricing strategy that would seamlessly fit is value-based pricing, which focuses on the implied value of the product rather than its explicit quality.

For businesses whose objective is brand loyalty, the perfect pricing strategy is loyalty pricing, which entails reward programs, buy-one-get-one-free, free coupons, and discounts after several purchases.

5. Maintain price flexibility

Similar to how operating costs for running a business are not fixed, product prices are also not fixed. To prevent negative customer reactions to price changes when they occur, implement flexible pricing plans.

Sell on Alibaba.com

As a result of the high inflation rate, B2B vendors are currently having trouble keeping their prices stable and, consequently, their market share. If this describes you, you might want to think about selling on a B2B e-commerce platform like Alibaba.com.

Alibaba.com provides businesses with an inclusive marketplace to sell their products. Its sellers get 400,000 sales requests a day on average, and they have 40 million or more active buyers who are wholesalers or merchants eager to make large purchases.

Alibaba.com offers a free seller account that allows you to list up to 50 products and incurs little to no additional charges for sellers. All you have to do is open a seller account to become a seller.