What are some examples of pricing strategies?
There are plenty of pricing strategies to choose from, and in some cases, you may decide a combination of pricing strategies is best. The strategy Pragmatic advocates for whenever possible is value-based pricing. Here, we outline eight pricing strategies to illustrate their uses and differences.
Value-based pricing is when you charge what the market is willing to pay for your product. It’s the ultimate win-win scenario, in which you get the revenue you require and the customer feels as though your product is worth what they are going to pay for it. This makes for a reciprocal long-term relationship, whereby both parties are satisfied. How can you be sure you’ll get the revenue you require? Because you’re going to consider price from the very beginning in your business plan.
Price segmentation is when you charge customers differently for the same or similar products based on their ability or willingness to pay. For example, software companies that price student products lower than nearly identical professional products are using price segmentation. They do so because they know when someone trains on their software, they’re more likely to use it in their career.
Dynamic pricing is similar in concept to price segmentation except that instead of charging different prices for different customers, your prices change over time with environmental factors or demand. Movie theaters have long used dynamic pricing by charging more for evening showtimes than matinees. Gas stations also use dynamic pricing—when oil prices go up, they raise gas prices, often the same day.
Portfolio pricing is when you consider your entire product portfolio when establishing prices. You may price some products lower than you otherwise would if they stood alone but are willing to take a hit because it makes the rest of your portfolio more attractive and the product seem more valuable to customers. This is the loss-leader concept. Fast-food dollar menus are an example of portfolio pricing at work. McDonald’s is happy to charge at or even less than their cost for a hamburger because they know most of their customers will also buy fries and a drink, too, and those products have great margins. Printers are another example. Companies might charge less for the hardware knowing they’re going to make up for it in the revenue they make in ink.
Price skimming. Popular with technology device companies including, Apple, price skimming is when you initially charge a high price for a product and then lower it over time. With this strategy, you’re charging early adopters more for the privilege of having a product before anyone else. Then you capture more of the market when you lower your price.
Cost-plus pricing is the old-school (and largely outdated) method of determining your product’s price, in which you calculate the cost to make your product and then mark it up a certain percentage or margin.
Penetration pricing is the “torrent of nickels” concept. It involves pricing products very low, usually not far above cost, to attract many buyers. The idea is that while you don’t make much on any individual sale, you will make a lot if you can capture a large portion of the market. Think Amazon and Walmart here.
Competitive pricing is when you base your prices off the prices of your competition and match or undercut them. Of course, you’ll want to research the competitive landscape and consider your competition’s prices, but basing your prices entirely off of another company’s prices is almost always a bad idea. First of all, how do you know your competitors priced their products well? And the competitive pricing model often leads to pricing wars, which are bad for everyone involved.