The 7 most common pricing strategies for Maximum Profit

Finding the best pricing strategies for your products or services is a balancing act: too low and you won’t generate enough profit; too high and potential customers will look elsewhere for cheaper alternatives.   On the other hand, confident pricing can indicate value in your brand, alluding to a premium service or product.

Unfortunately, many businesses fail to put enough thought into pricing, treating it as an afterthought rather than a strategic lever of revenue and growth.

The good news is that taking the time to get your pricing right can act as a powerful growth driver.  If you optimise your pricing strategies so that more people are paying a higher amount, you’ll end up with significantly more revenue and profit than a business that treats pricing more passively. 

In this article,  we will look at the 7 most common pricing strategies, provide examples of each and highlight the pros and cons of pricing strategies.

Before we explore further, let’s learn a bit more about why finding an ideal price is important and how to do it.

Finding your ideal price

Dolansky, Associate Professor of Marketing, at Brock University, is quoted as saying “Pricing is one decision that shouldn’t be driven by accounting”.  At Palmers Accounting, and not because we’re accountants, we disagree with Dolansky’s perspective.  

Where Dolansky was speaking from a marketing stance, at Palmers Accounting, we know that numbers in business are the harsh reality of ‘make or break’; they should be a consideration in all aspects of your strategy. 

You absolutely must consider your pricing strategies from a perspective of accounting, in order to identify your scope for experimentation in your marketing.  Once you have done so, you can confidently explore pricing strategies that work best for both your customer and your business.

“Numbers in business are the harsh reality of make or break; they should be a consideration in all aspects of your strategy.”

Finding the right price range

Price floor

From an accounting perspective, create a cash flow/profit and loss report to assess your business metrics and determine the lowest amount you can charge for a product or service, while breaking even against your expenses.  You may also need to consider how many service tasks you can complete or products you can produce.  We can help you with this stage, if you would like to get in touch for a free consultation.

Price ceiling

From a marketing perspective, assess your ideal or target customer perceived limit of value for the product or service.  Technically, the sky is potentially the limit here, although market research will provide a workable metric to use.

Use pricing strategies within your ideal price range

Use pricing strategies to locate the pricing sweet spot where your business makes the most profit per product or service and where you find most customers finalising the sale.

What are pricing strategies?

While you may understand the idea of pricing strategies, what exactly is a pricing strategy?

If pricing is how much you charge for your product or service, your pricing strategies are how you determine what those prices will be. 

There are a range of pricing strategies to choose from for your business, but the 7 most common ones are:

Can you combine pricing strategies?

Companies can adopt numerous pricing models, and many may use more than one, depending on the circumstances. 

Let’s look at some of themost common pricing strategies and some examples.

What are the different types of pricing strategies

Cost-plus pricing strategy

Cost-plus pricing is a simple pricing strategy commonly used in manufacturing. This is a pricing strategy whereby you work out the production costs and add a fixed percentage markup in order to decide your selling price. The formula for calculating cost-plus pricing considers materials, labour, and overhead costs, multiplying this by the markup amount.

Cost-plus pricing works well for businesses where value and cost of production are closely related, but you need to have a laser view of what exactly these costs are, otherwise it’s very easy to get this horribly wrong.

Pros of the cost-plus pricing strategy

Simplicity is one of the key advantages of cost-plus pricing strategies and as accountants we recommend that all businesses go through this exercise, so they understand their cost base in detail BUT it’s only one factor.  

Cons of the cost-plus pricing strategy

The cost-plus pricing strategy doesn’t consider more subtle variables outside of the business. Don’t ignore other price strategies that consider external factors like perceived customer value and competitor pricing.

Competitive pricing strategy

Competitive pricing strategy is a price-setting that is based on your competitors’ prices. It’s typically used by businesses that sell the same or highly similar products in the same market for an extended period, as prices of these products or services often reach a level of equilibrium.  

A strong competitive pricing model is based on thorough market research. When you know the prices of your main competitors in your market and how those prices might meet customer expectations, you have a basis for determining the rates of the prices of your own products or services. Competitive pricing strategies can come in many forms, a business can choose to always be the cheapest of their competitors or always offer the average price of the highest and lowest priced competitors – they all count as competitive pricing strategies.

Pros of the competitive pricing strategy

Positions the business in a pricing niche and therefore targets a more specific customer within the market.  There is less competition on the extremes of the pricing spectrum.

Cons of the competitive pricing strategy

This strategy achieves less in creating brand awareness, aside from ‘premium’ or ‘bargain’.  Anything in the centre of the pricing spectrum is highly-competitive and may result in high fluctuation in response to competitor price changes.

Penetration pricing strategy

Penetration pricing is a competitive pricing strategy that entices customers to switch from competitors by offering a lower price for a product or service. It’s often used to gain market share and brand awareness quickly when a company launches a new offering into the market.

Penetration pricing is usually applied short-term, allowing companies to snap up new customers whilst hoping that they will be able to retain them when prices go up. It can lead to a boost in sales and market share, but equally, it can erode profit margins too or even start a pricing war.

Pros of the penetration pricing strategy

Initial customer base and profit margins are positive.

Cons of the penetration pricing strategy

When prices rise to a sustainable level, customer retention suffers and the product, service or brand can experience extremely negative feedback.  Profit margins decrease.

Premium pricing

Premium pricing sets higher prices than the market average to cultivate a perception of value and quality in customers’ minds. This is a psychological pricing model for companies branding themselves as luxury or high-end; customers often equate higher cost with better quality.

Pros of the premium pricing strategy

A premium pricing strategy has several advantages for businesses, including higher margins and increased brand equity. 

Cons of the premium pricing strategy

This type of pricing model can bring much higher advertising and branding costs.

It is also a risky pricing strategy that relies on being able to maintain your brand superiority. Customers will not look favourably on brands that charge a premium price for a below-par product.

Dynamic pricing

As the name suggests, a dynamic pricing strategy is not fixed. It automatically adjusts prices based on numerous human and market-based factors. Dynamic pricing relies on complex data sets and advanced technology platforms to automatically generate the “optimum” real-time price.

Dynamic pricing hit the news last year when half the UK was trying to get hold of Oasis tickets but in truth, it’s been operating for years across the travel industry. The aviation industry is well known for its dynamic prices, which are calculated based on the number of seats remaining on a flight, the class of a seat, and the amount of time remaining before a flight departs. The fewer seats there are, the closer the departure date, the more expensive the ticket will be.

Pros of the dynamic pricing strategy

When demand is high or choice is limited, higher prices bring increased profit margins

Cons of the dynamic pricing strategy

Dynamic pricing can frustrate customers, especially in an industry where it is not typical.  The brand or service that exploits need or limited choice is not favoured, resulting in limited customer loyalty, if any.  

Price skimming strategy

Price skimming is typically employed when a new product or service enters a low-competitive market environment. A company will initially set the highest possible price the market will tolerate, allowing it to generate maximum revenue from early adopters with limited choices. As new players enter the market, they gradually lower prices over time to capture more price-sensitive customers and increase demand. 

Pros of the price skimming strategy

A price skimming strategy can be very effective for a short period while a new product or service enters the market. It allows the company to set a high perception of value and quality in consumers’ minds and quickly establish itself as the “original” and the best.

Cons of the skimming strategy

Like all pricing strategies, price skimming has limitations. There must be a population of customers willing and able to pay premium prices. They will only do so when no viable alternatives exist. Once the market becomes more competitive, brands must shift to more flexible pricing models.

Promotional pricing

Many companies temporarily reduce the price of products and services to attract more customers and drive short-term sales volume. This is known as promotional pricing. Promotional pricing is a psychological pricing model that gives customers the impression of scarcity and generates a sense of FOMO around missing out on a good deal.

Pros of promotional pricing

Promotional pricing effectively drives revenue and market share in the short term. This pricing strategy works best when customers are not staunchly loyal to a particular brand. It can persuade customers to switch from a competitor’s product to their own, hoping that those customers will stay after prices return to normal. 

Cons of promotional pricing

When overused, promotional pricing can damage profit margins, injure a brand’s reputation, and drag the average market value down.  If a brand is known for frequent promotional pricing, customers will often wait for the next ‘sale’, if a product or service has low necessity. 

Value-based pricing

When companies set a price for their products or services based on perceived value rather than the cost of producing them or their historical price, they are using a value-based pricing strategy. This pricing strategy works well in specific situations where there is an emotional and meaningful connection to the product or service and when there is a sense of scarcity.

Pros of value-based pricing

Value-based pricing strategies can be effective for some companies who have achieved a high level of branding after -for example- a trending marketing campaign.  This allows a product or service to remain highly profitable, relative to others in their industry.  The Prime drink is a good example of this.

Cons of value-based pricing

The value based pricing also comes with challenges. While other pricing strategies are relatively scientific, value-based pricing involves an element of guesswork. It can be challenging to determine what customers are willing to pay for a particular product or service. Gauging demand effectively is absolutely key to getting this right.

How does pricing strategy fit into your marketing strategy?

As we established at the beginning of this article, it’s imperative to find the price range that keeps your business breaking even or -preferably- profitable.  Once this is established, you can use various pricing strategies as marketing methods. 

It’s important, however, to do market research beforehand in order to understand how customers perceive your business as well as the value of your product or service. Don’t ask yourself how much should I charge for my services until you figure that out.

What market research will help to decide on pricing strategies?

Benefits

 Identify the benefits your service offers customers.

Demand

Determine the demand for your product/service.  It’s important to pull together some metrics on this in order to prioritise a product or service in your business and investments.

Costing

Identify the costs for producing, distributing, and selling your product/service.

Competition

Check your competitor’s pricing and assess how your product or service stacks up against this. If you charge more than your competition, show customers the value of the unique experience your company offers.

Market testing

It’s worth noting that pricing is a complex task and it’s not always easy to find the perfect price point. It’s important to test different pricing options and gather feedback from customers to make sure you are pricing your products or services correctly.

It’s essential to keep in mind that prices are not set in stone and can be adjusted as needed. It’s a good idea to regularly review your prices and make adjustments as necessary based on market conditions, competition, and other factors.

Final thoughts on choosing the right pricing strategies

The million-dollar question for business growth is:  What’s the best pricing strategy for my business?  

Well, as you can see from this article, there is no “one-size-fits-all”.  

The most effective pricing strategy for a business depends on many factors and business owners need to do their homework to determine the best pricing strategies to implement in a particular season or context.  

But, start with the basics and establish the pricing range you can experiment with your pricing strategies.

If you would like to discuss your business and the best pricing range to work within, get in touch with us for a FREE CONSULTATION.  We’d love to chat with you.