Hopefully, you enjoy what you do, and that's why you do it. But if you're running a business, I'd guess that part of why you love doing it is because it allows you to make a living. And making money means pricing your products or services correctly.
For your business to be sustainable, you'll need a pricing strategy that generates adequate income while also being attractive to customers. A good pricing strategy can keep your customers coming back for more, while a poor or nonexistent strategy can send them running for the hills.
Here's a guide to creating a pricing strategy that will keep your profits moving up and to the right.
Table of contents:
- Why is it important to pick a pricing strategy?
- 16 common pricing strategies
- 4 pricing strategy examples that work
- Factors to consider when pricing a product
- Tips for setting a pricing strategy that sells
- Sell more with automation
- Pricing strategy FAQ
Why is it important to pick a pricing strategy?
A pricing strategy is a plan for setting the best price for your products or services. The goal is to set a price that will entice customers to buy but that isn't so low that you're not making a profit.
An effective pricing strategy is an extension of your marketing. It affects customers' perception of your product and contributes to their willingness to buy. Savvy businesses know that pricing is just as important as the product itself, and an effective strategy can boost revenue, increase customer loyalty, and help your business stand out in the marketplace.
An ineffective pricing strategy makes your customers confused at best and offended at worst. If you went to the Porsche dealership and saw the brand-new 911 priced at $25,000, your first thought might be, "What's wrong with it?" Similarly, if you went to the Toyota dealership and saw the new Corolla priced at $90,000, you'd probably laugh your way out of the building. Poor pricing strategies can hurt your brand reputation, lower profit margins, reduce overall sales volume, and increase customer churn.
Sure, you could just trial-and-error a bunch of prices until you find the price that maximizes profit without deterring potential customers—and there will probably still be some of that even after you choose a pricing strategy for your business. But you'll spend a lot less time and money starting with a pricing analysis than you will taking a complete shot in the dark.
16 common pricing strategies
Your core pricing strategy has to do with what you're selling: a luxury, a bargain, or just a good product for a good price. Once you have that figured out, you'll move on to choosing a pricing method, which is the how of your pricing strategy.
Pricing methods are sort of like plays in a playbook. Your product probably isn't going to switch from being a luxury to a bargain and back again, but you can (and, in some cases, should) switch up the pricing method you're using to better meet your market demands.
Here, we'll look at 16 of the most common pricing methods, plus how and when to use them.
1. Value-based pricing
The first pricing method is probably the one you're most familiar with: value-based pricing. You might think of it as the "default" pricing method since it consists of finding what the customer is willing to pay (the WTP price), making sure it's higher than the cost of production, and setting your price somewhere in between.
If you need to make a price adjustment, you can do so as long as the new price falls within the WTP range. If the new price surpasses this range, you'll need to explore avenues to expand the WTP range. You can do this by incorporating additional value into your product or service to increase the customer's willingness to pay the new price.
Take Rolex, for example. While they also fall into a premium pricing model—a concept we'll touch on later—they absolutely utilize value-based pricing. It doesn't cost $10,000 (or more) to make a watch, but the business knows that's what their customers are willing to pay.
Takeaway: Charge what you can without turning off the customer to your product.
2. Cost-plus pricing
A very similar method to value-based pricing is cost-plus pricing. Instead of basing prices on what the customer is willing to pay, businesses set prices by determining the cost of production and their ideal profit margin. For example, if a product costs $100 to make and a company's target margin is 15%, then the product will sell for $115.
Cost-plus prices still need to fall within the WTP range, but they're not chosen based specifically on what the customer is willing to pay. If the cost-plus price falls outside the WTP range, the company either needs to adjust its target margin or find a way to lower production costs.
You can find cost-plus in action at your local grocery store. Grocery stores have
notoriously thin margins and protect profitability by adding a designated markup on their goods. If a store can get potatoes for $2 per pound, for example, they may apply a 2.5% margin and sell them to consumers for $2.05 per pound. Since a store could stock thousands of goods, a standard markup policy adds simplicity to pricing methods and guarantees profitability—no matter how small.Takeaway: Ensure all costs are covered and don't keep you from reaching your desired profit margin.
3. Competitive pricing
Another recognizable pricing method is the competitive pricing model, in which a business sets prices based on what competitors charge for comparable products. If your product offers something your competitors don't, you don't always need to set prices competitively. But if you're selling a bargain product, you need to be able to
beat the competition.When Norm McLaughlin formulated the pricing model for his business,
Norm's Computer Services, he decided that he wanted to be considered competitive but not cheap. That meant his pricing was on par with his peers, but he avoided the use of any terminology like "budget," "cheap," or "cheapest" in hissmall business's marketing.One of the things he tried early on was offering the first 15 minutes of work free of charge—if he solved the issue within that first quarter of an hour, the job would be completely free. It worked. Clients told him they wanted to pay even if he solved the issue in under 15 minutes because they didn't feel good about paying nothing for a service that involved someone coming to their home. It was an attractive offer that increased his competitive edge without negatively impacting his bottom line.
Takeaway: Maintain or gain market share from your competitors.
4. Economy pricing
Similar to competitive pricing, economy pricing involves setting the lowest prices among your competitors to attract bargain buyers. But unlike competitive pricing, economy pricing specifically targets people who will consciously sacrifice quality in exchange for a cheaper price. Knowing this, you can source cheaper supplies, eliminate extra features, and make other changes to lower your production costs so that you can offer extremely low prices while continuing to make a profit.
The fast fashion industry is infamous for its reliance on economy pricing. Clothes are created quickly using cheap (and often ethically questionable) labor, and they wear out quickly. This allows stores to sell highly trend-conscious clothing, since customers need to replace their clothes more frequently. Unfortunately, it also causes
major environmental damage—and usually doesn't even save customers money compared to buying more expensive but longer-lasting clothing.Takeaway: Attract price-sensitive customers while achieving high sales volume and cost efficiencies.
5. Penetration pricing
As a
new business, you may find that you need to set your prices toward the lower end of the spectrum. Penetration pricing is when a business sets the price of a product or service low at the beginning, then raises the price once the company is more established.Businesses that provide a service can draw customers in with low pricing, then win their loyalty with great service. Introductory offers can be a great way to entice new clients or customers. For example, you could offer a fixed price or percentage off the first job, or a portion of free labor. At least one of Norm's competitors offered a 10% reduction on labor for returning customers. In Norm's view, a better approach to
customer retention was to offer them that 10% off the first job—and then do such good work that they wouldn't mind paying the full price for subsequent jobs.Takeaway: Gain market share and attract customers quickly with low initial prices, then raise prices once you've established a strong customer base.
6. Dynamic pricing
Have you ever pulled out your phone intending to grab a rideshare on a busy weekend night or (I wince just thinking about it) a holiday? Those jaw-dropping price surges are the result of what's called dynamic pricing, or pricing that changes fluidly according to availability and demand.
Truly dynamic pricing requires an algorithm that can automatically adjust prices according to purchasing activity. Uber's CEO isn't sitting behind a Wizard of Oz curtain declaring price surges; the app automatically increases prices when demand is higher than the number of drivers on the road. A less immediate version of dynamic pricing can be seen at the gas pump, where prices change frequently in response to demand but aren't automatic (in some states, like New Jersey, they can't change more than once per day).
For small businesses, dynamic pricing works best with services or custom products that require a price quote, since customers expect prices to be different depending on the project and circumstances. If your prices are listed on your site and you change them constantly, you'll drive away potential customers who perceive you as unpredictable or unreliable.
Takeaway: Maximize revenue while adjusting for real-time factors like demand,
competition, and market conditions.7. Price skimming
Price skimming is the opposite of penetration pricing, where you start by setting the maximum price and gradually lower it over time. This strategy works best with products that have major releases, like laptops or cars. By price skimming, you'll be able to capture early buyers willing to pay top dollar for the latest and greatest; then, as you gradually lower the price, you'll be able to sell the maximum number of products at each price before dropping it again.
One of the most well-known price skimmers is Apple, which has made its product launches into full events with tickets and fans to build as much hype as humanly possible. Mega-fans buy the newly unveiled products the moment they're available, even waiting in lines overnight outside Apple Stores to do so. As each new product is released, the older models get shunted down the pricing ladder to capture buyers with lower WTP points.
Takeaway: Capture early adopters and maximize revenue with high initial prices before gradually reducing prices to attract more price-sensitive customers.
8. Hourly pricing
Often used in service-based industries, hourly pricing establishes prices based on the time spent on a particular task or service. This aligns the price directly with the effort or resources dedicated to the project. It's a straightforward method for you and the client to understand and agree upon the service's value.
Having said that, if your projects' complexity or required resources vary quite a bit, a flat hourly rate may not be best for your business.
Takeaway: Ensure customers are billed fairly based on the actual hours worked.
9. Project-based pricing
Project-based pricing is also common in
service-based industries. This method determines prices based on the scope, complexity, and resources required for each project. Rather than charging a fixed or hourly rate, companies assess the unique needs of each project and provide a tailored quote. That way, businesses are accounting for factors like resources, expertise, and time commitment required to complete the project successfully.This pricing model is common for architects. When a client approaches an architecture firm with a request to design and construct a building, the firm will assess the project's scale, complexity, materials, and other specific requirements to provide a project-based quote. Obviously, the process and requirements for designing a public bathroom vs. a skyscraper will be very different, beyond just time discrepancies.
Takeaway: Make sure profitability and effort are accounted for in your pricing structure.
10. High-low pricing
I've taught all my loved ones that we don't walk into Michael's without a coupon or buy anything at JOANN that hasn't been marked down to at least 40% off.
These stores use high-low pricing, where they offer products or services at a higher price initially and periodically discount them. This approach attracts price-sensitive customers who are motivated by discounts (me) while also maximizing revenue from customers willing to pay higher prices to get their hands on the product before it starts flying off the shelves once it's been discounted.
Companies can maintain a balance between profitability and reaching a larger range of customers by driving traffic to their stores or websites during promotional periods.
Takeaway: Create a perception of value to encourage customer purchases.
11. Bundle pricing
You've probably seen the Progressive commercials practically begging you to bundle your car and home insurance for a better deal. Or maybe you bundled your cable and phone services back in the day.
Bundle pricing is when a company combines multiple products or services and offers them at a lower overall price than what each item would individually cost. This creates a perception of added value, convenience, and savings for customers. If you sell a lot of small items or are trying to spread the love to an overlooked service, this pricing strategy may help you increase your sales.
Takeaway: Sell items together in a package deal that's slightly cheaper than if you were to sell the items individually to increase sales and customer satisfaction.
12. Geographic pricing
I follow a candy shop on TikTok with the most delicious-looking candy I've ever seen. They're located in the U.K. and I'm in the U.S., which means I'd have to pay outrageous prices to account for the shipping costs.
Geographic pricing involves setting prices based on different geographic regions or markets, considering factors like local market conditions, competitive landscape, and transportation costs like shipping. While this strategy makes it harder for a candy lover like me to get their hands on some delectable sweets, if you want to expand outside of your own geographic region, this strategy may be inevitable to keep your profits stable.
Takeaway: Maintain profitability across all your geographic markets by adjusting for variable factors.
13. Psychological pricing
A book priced at $20? I'll pass. A book for $19.99? I'll take 10. This common phenomenon that we all fall for time and time again is called psychological pricing. Also known as charm pricing, this strategy leverages consumers' perceptions and emotions to make them think they're getting a better deal than they actually are.
Making the price seem more appealing or affordable to customers effectively influences customer behavior and increases sales, even if the price difference is negligible (and even if the customer knows in their heart of hearts that it's negligible). You can combine this strategy with another method since it's a common standard in many industries.
Takeaway: Create the illusion of a lower price so customers perceive your price as fairer.
14. Freemium pricing
If you're like me, you started out with the free version of Spotify until the ads were so grating on your soul that you gave in and shelled out the cash for the paid ad-free version. This method of offering a basic version of a product or service for free and charging for additional premium features or advanced functionality is called freemium pricing.
By offering a free version, companies can give customers a taste of the value their product or service offers, build brand awareness, and create a larger user base. They then monetize their user base with an enhanced experience for a subscription fee or one-time purchase. If you're new to the market, this is a great way to get buy-in from people who would otherwise be unwilling to convert.
Takeaway: Attract a large user base and convert some into paying customers.
15. Premium pricing
Some people enjoy the prestigious vibe and social appearance of luxury brands. For example, luxury car companies, like BMW or Mercedes-Benz, position their vehicles as high-end, offering advanced technology, luxurious interiors, and superior performance. (Although I'd love to see what they have that my Honda CR-V doesn't.)
With those high-end features comes a high-end price tag, otherwise known as premium pricing. This strategy positions the company as exclusive and superior in value in comparison to lower-priced competitors. It appeals to a target market willing to pay a premium for the perceived benefits. If that's your target market, then this is your ticket.
Takeaway: Target affluent customers and generate higher profit margins.
16. Subscription pricing
Every month, I find a surprising number of fees hitting my credit card statement. They range from streaming services I may or may not watch and other charges I recognize to the things I've completely forgotten about or failed to cancel—like that domain fee for my failed dogsitting business.
You can think of subscription pricing as a monthly access fee, whether that's access to a virtual space like Hulu or Adobe or a physical space like a gym. Businesses that wish to take advantage of this pricing strategy first need to build something people want to use regularly. Once they have a product or service that will garner demand, all that's left is to charge a monthly fee.
Companies lean toward this pricing strategy whenever possible because it gives them a fairly predictable revenue stream. For example, if you have 500 customers who pay $19.99 per month, your monthly revenue will be $9,995, barring any drastic changes in your customer base. This strategy is growing massively in popularity not just for pure subscription services like SaaS licenses or streaming services but also for physical product sales. One-off product sales often turn into continual sales, and an initial product can be a way to get a foot in the door for forever payments on one single sale, which is a huge win for sellers.
Takeaway: Create something consumers want—then charge them for access.
4 pricing strategy examples that work
Now that you're familiar with some of the most common pricing strategies at a high level, here's a deeper dive into how real businesses are using them to their advantage.
Zapier
Zapier has adopted a freemium pricing model across all their products, including
Zaps,Tables,Interfaces,Chatbots, andCentral. The goal is to cater to everyone regardless of budget: those who have basic needs can start on the free plan, while those who know exactly what they want can start with a paid option.For example, Zapier's workflow automation capabilities are free for basic use. In this plan, users can automate simple workflows with 100 tasks per month. But businesses that want expanded functions (or premium integrations) can upgrade or start with a higher-tier plan that fits their unique workflows and tech stacks.
Zapier set their pricing this way because they're confident that once users get a taste of the power of Zapier with a free plan, they'll see the value of expanding it with paid pricing tiers. After all, if 400 AI-automated activities are good, then 1,500 AI-automated activities are even better. And if the free tier gives users all the automation they need, it's still a win-win: they get the efficiency they need, but they might find there's a paid tier of another Zapier product that helps them optimize their workflows even better.
Oura
As with many products, Apple was the tech that launched a thousand ships—and in 2014, it was wearable fitness gear. Fast forward to today—many companies have joined the space and are trying to stand out. One example is Oura.
The wearable fitness ring is one of many in the industry that utilizes subscription pricing. First, the company emphasizes the design and quality of its ring and the accuracy of its fitness readings, thus building demand. Once consumers are fully bought into the product, they're met with a $300 initial price—combining a premium pricing strategy—and $5.99 per month thereafter. This subscription approach keeps customers on the Oura books long after the initial purchase.
IKEA
Ask your average American what they know about Sweden, and they'll likely reply with some variation of meatballs, furniture, and fish (Swedish Fish, that is)—and they can thank retail goliath IKEA for the first two. Since the brand's inception, consumers have been captivated by its shopping experience and hypnotized by its expert pricing structure.
While the brand deploys several different pricing strategies, one of the most impactful is economy pricing. While some economy brands cut costs in the product itself, IKEA cuts costs in everything but the product. The company follows a repeatable design process, has world-renowned supply chain management, and operates with a self-service shopping experience—all things that save money. The result is decent-quality furniture at affordable prices.
Google Ads
When most people think of dynamic pricing, they relive memories of paying for a $167 Uber to get home from the bar or a $2,500 plane ticket they had to book at the last minute. But dynamic pricing is present in the B2B world, too, and you don't need to look further than Google Ads.
Google Ads has been a mainstay for organizations looking to profit off the company's hundreds of millions of daily users. Itspay-per-click (PPC) model of advertising operates on an auction system. Advertisers can bid for ad placements based on keywords, target audiences, and other factors and set a maximum price for a click they would like to pay for. Google takes that information and charges a fluid PPC fee based on consumer demand, ad quality, and other bidding companies. The result is a dynamic pricing structure that ebbs and flows with the market.Factors to consider when pricing a product
You likely know off the bat that you'll need to consider your own business costs and
competitor prices so that you can find a price that earns a profit but isn't so high that it drives potential customers to other businesses with better deals. But unfortunately, it's not that simple: there are a lot of factors you'll need to consider in order to determine the best pricing strategy for you.Cost
I know I just said cost wasn't the only factor to consider, but it is the most important one to start with. If your prices aren't higher than your costs, you'll be out of business before you even get your company off the ground.
When calculating costs, make sure you include:
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Product materials
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Employee wages (that includes what you pay yourself!)
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Overhead costs (rent, insurance, utilities, taxes, etc.)
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Software and services for things like accounting, marketing, and legal
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Shipping and transportation
Economic factors
When costs change, your prices will have to change in order to stay competitive and keep making a profit. Businesses that rely directly on commodities as supplies—so things like lumber, oil, and metals—will be most vulnerable to
economic fluctuations, but all industries are affected in some way or another by global, political, and social changes.Conduct thorough research to identify what economic conditions your business thrives in, and
recession-proof your business. Be proactive about anticipating events that could affect yoursupply and demand. You especially need to incorporate a safety net into your profit margins to ensure you have enough funds tostay in business during slow periods if you're in a more temperamental industry.Competitor pricing
Your prices don't always need to be lower than your competitors', but if they're higher, you need to be able to justify it with added quality. Your products don't always need to be quality, but if they're low-quality, you'll need to be able to justify it with lower prices. Where you fall on either side of this trade-off determines your
value position, which we'll discuss in a bit. But no matter how you decide to position your product, you'll need to stay up-to-date on what your competitors charge, pricing trends in your industry, and what pricing models work best for your market.It's usually not difficult to find out what your competitors charge—either by visiting their websites or by calling them to ask. As you gather information for your
competitor analysis, keep a spreadsheet where you can record prices and note things like introductory offers, loyalty programs, and discounts.Positioning
It's a common misconception that businesses have to sell good-quality products to be successful. There are buyers at every price and quality level; what matters is how your product quality and price are positioned with respect to each other.
One of the easiest industries for demonstrating this concept is the airline industry, because there's no way to mistake the difference between a high- and low-quality purchase when there's a literal curtain dividing them. Normally, price and quality will align with one another. First-class tickets offer high quality at a high price, economy tickets offer low quality at a low price, and everyone else gets piled into coach.
Value prices occur when quality is higher than price—when you fly during off-peak times or get upgraded to first class for free. When demand is high and seats are limited, the airlines can afford to charge higher prices for lower-quality seats, counting on the fact that you'll pay full price for a terrible seat if it's your only option.
When you apply this to your own pricing, ask yourself what kind of value your product or service offers. Are you
solving an urgent problem, or is your product more for comfort and enjoyment? If you sell a first-class product, you'll lose money by selling it at economy prices. If you sell an economy product, you'll need to sell it for a bargain price.As you start off in business, it's important to remember that you can change your pricing strategy as you go along. This is a marathon, not a sprint, so it's more about building a client base of
satisfied customers who will come back to you again and again than it is to make as much money as possible as quickly as possible.And the good news is that you don't have to get everything right from the very beginning. You can try different approaches and make adjustments as you go until you're achieving the outcomes you want. To continue optimizing for success, learn how you can
automate your small business.Customer profiles
Customer profiles, often called
customer personas, are a snapshot of the customers who will experience the most value from your business. These profiles can include age, demographics, location, the name of their childhood dog, and anything else relevant you can muster. The important thing to note is that these customer profiles can help you create a perfect pricing strategy.For example, let's say you’re starting a business that sells running shoes. After intensive research, you may find that your customer profile is a middle-class woman in her 30s who lives in California and mostly finds time to run in the evenings after work. In that case, your pricing strategy should best appeal to middle-class women in their 30s who live—well, you get the idea. The more specific you can get with these profiles, the more effective your pricing will be because you'll gain insights into what they can afford and what they're willing and able to pay for a product.
The good news is that you don't have to create these profiles alone—artificial intelligence can be your second in command. Rather than scanning through customer information by hand, you can use AI to instantly analyze your customer data to find patterns. For example, you can use tools like Google Analytics to analyze your web traffic and give you automated insights into emerging customer trends. You can then use these insights to train
AI chatbots and then ask them to create customer profiles for you based on real data.Tips for setting a pricing strategy that sells
You can have all the information in the world, but without the right action plan, you run the risk of falling flat. Here are some tips to guarantee you get off on the right foot when setting your pricing strategy.
Review your historical data
Start your pricing strategy methodology by analyzing historical sales data to identify patterns in sales volumes and pricing figures. If you've experimented with pricing in the past, take note of how that related to revenue over that period. Or, maybe you can glean information from that surge of sales in April 2019 that your staff tells campfire stories about to this day. When you review past data, you can gain insight into what caused increases or decreases in sales—and what prices correlate with those figures.
Consult your customers
Customers are the lifeblood of your organization—if you don't appeal to them, you're out of business. So, be sure to make every move with your customer profiles in mind. Would that middle-class woman in her 30s be able to afford $299 running shoes? If not, be sure to adjust pricing to match her expectations (so long as it falls within the WTP price range).
Another technique to understand optimal pricing is to conduct surveys, focus groups, or other ways to gather customer feedback. You can ask them questions related to how much they're willing to pay, what factors influence their purchasing decisions, their perceived value of your product, and more. This can not only improve your pricing strategy but show your customers that you value their thoughts.
Nail your value proposition
Gordon Ramsay could cook the most perfect beef Wellington in history, but if he's serving it to a lunchroom full of first graders, they're going to want chicken nuggets instead. The takeaway is that you need to appeal to your audience, and you can do that by developing an expert value proposition.
In all marketing materials, highlight your unique benefits, features, and why your product is perfect for your customers and their budgets. Maybe your running shoes are the most comfortable on the market—transforming that middle-class California woman's after-work run from a workout to a relaxing meditation session. Once you catch your customers' eye, your pricing strategy will be that much more effective.
Experiment with different models
Don't be afraid to experiment with different pricing models to find what works best for your business. For example, you might start with a cost-plus pricing model and then pivot to a value-based model. Or, you may decide to experiment with limited-time promotions and sales or delve into tiered pricing. By testing different approaches, you can gain useful insights into what resonates with your audience.
And be sure to track your progress:
sales metrics, like revenue, churn rate, customer lifetime value, will tell you what's working with your customers and will help measure what's most effective over time.Sell more with automation
Businesses need to nail their pricing strategy to win more business and drive revenue. But it's not as simple as throwing a dart and hoping it sticks—you need to be methodical to ensure you resonate with your customers. Once you perfect that approach, you can supercharge it with Zapier.
With Zapier, you can
build automated workflows that save your team time and let you focus on the work that matters. Create asupercharged sales pipeline to perfect your sales approach and optimize the buying process, or connect allyour favorite tools so you can efficiently monitor the effectiveness of your pricing structure. Whatever workflow you have in mind, Zapier can make it happen while you sleep.Pricing strategy FAQ
What are the major pricing strategies?
Successful businesses may use several different pricing strategies, but some of the most popular include:
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Value-based pricing
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Cost-plus pricing
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Economy pricing
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Premium pricing
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Freemium pricing
If you skipped this entire article just to get to the FAQs, scroll up for 11 more.
How do you set your product pricing?
You should set your product pricing based on factors like how much it costs to make your product, what your competitors are charging, your brand positioning, your customer profile, and any economic or marketplace trends. You also want to align your pricing strategy with your goals to help your business grow and achieve profitability.
What makes a pricing strategy successful?
There are too many factors to name for successful pricing strategies, but two of the most important are understanding your customers and revenue goals. If you're in tune with your customers' expectations and their perceived value of your product, you're more likely to develop an effective pricing method.
Keeping your revenue goals in mind can also help guide you on what you should be charging. If your customer expectations and revenue goals aren't aligned, you'll want to assess the discrepancy—maybe that means engaging in different product marketing or cutting production costs.
Related reading:
- The best eCommerce website building platforms for online stores
- Optimizing your small business product mix
- The best CRMs for small businesses
- The best project management software for small businesses
This article was originally published in December 2020 by Norm Mclaughlin and has also had contributions from Ben Lyso. It was most recently updated in July 2024.