4 Pricing Strategies In Marketing: What’s Your Worth?
Explore 4 pricing strategies to correctly price your product or service and influence everything from perceived value, market positioning and profitability.
In the worlds of marketing and business, pricing is an indispensable lever that can make or break your success.
This is not so much about right and wrong as doing what works.
This comprehensive guide explores the nuances of pricing strategies, empowering you to unlock your true worth.
Understanding Your Market
Before setting prices, it stands to reason that you need to intimately understand your target audience‘s willingness to pay.
Conduct market research by:
- Surveying potential customers about their pricing expectations and budgets
- Analysing customer discussions in online forums and social media
- Testing different price points using affordable A/B test campaigns
Competitive analysis is also vital.
Assess what competitors are charging for similar offerings, and identify opportunities to differentiate through unique pricing models or added value.
4 Pricing Strategies
Cost-Based Pricing: Covering Your Bases
Cost-based pricing is the foundational strategy of factoring in all associated expenses to determine your minimum viable price.
Start by calculating:
- Variable costs
Expenses directly tied to each unit produced (materials, labour, etc.) - Fixed costs
Overhead expenses not linked to output (rent, insurance, etc.)
Account for economies of scale if ramping up production volumes.
The higher the quantity, the more your fixed costs can be distributed, enabling lower per-unit pricing.
Determine your desired profit margin, then use this formula:
Minimum price = Total costs per item + Profit margin percent
Value-Based Pricing: Customer Perception is Key
While cost-based pricing ensures you cover baseline expenses, value-based pricing enables you to truly capitalise on the perceived worth customers assign to your offering.
Research what tangible and intangible value your customers seek through techniques like:
- Interviews exploring desired outcomes and problem motivations
- Surveys quantifying how much they’d pay for specific benefits
- Analysis of positive and negative reviews, highlighting value perceptions
Use your findings to price your offerings based on the end benefit and ROI you provide versus simply the cost of production.
Competitive Pricing Strategy: Staying in the Game
In crowded markets, strategic competitive pricing can provide an edge.
Start by assessing the pricing possibilities:
- Market leaders’ “premium pricing” for prestige offerings
- Competitors leveraging “economy pricing” to undercut the market
- Promotion-driven models using frequent discounts and deals
Determine where your pricing should position you.
Going too premium could price you out, but rock-bottom prices may be perceived as low-quality.
One savvy approach is premium discount pricing: setting your regular price high to convey quality, then offering selective deals to remain competitive.
Psychological Pricing: Influencing Purchasing Decisions
Psychological pricing taps into the subconscious factors impacting buying behaviour.
Some prevalent techniques include:
- Charm pricing (e.g. $99 instead of $100) for a perception of a bargain
- Pricing endings in 9s or 5s to automatically seem more affordable
- Decoy pricing uses an extreme option to make others look more reasonable
While psychological pricing should not be a core strategy, smart use of these tactics alongside other pricing models can nudge customers towards a purchase.
Putting It All Together: Developing Your Pricing Plan
The most effective pricing strategies often combine multiple models based on your unique business context.
- For new product launches, start with cost-plus pricing to ensure profitability
- As you gain market share, incorporate value-based pricing for premium segments
- In hyper-competitive spaces, use psychological and competitive strategies to stay relevant
Set progressive short- and long-term pricing goals, accounting for:
- Changes in expenses over time
- Introduction of product/service line extensions
- Dynamic market fluctuations that require price adjustments.
FAQs
How frequently should I re-evaluate my pricing?
Monitor your pricing strategy’s performance on an ongoing basis and re-evaluate formally 1-2 times per year to adjust to market dynamics.
What if competitors drastically undercut my pricing?
Avoid knee-jerk price slashing. Research if they can sustain lower pricing long-term. Focus on amplifying the distinct value justifying your premium price point.
How can I prevent customer sticker shock when raising prices?
Provide ample advance notice, preferably 60–90 days. Outline the enhanced value and benefits driving the increase, and consider grandfathering current customers initially.
Summary
Pricing is an art based on science requiring diligent market research, calculated cost assessments, and strategic market positioning.
Develop pricing plans based on the fundamental strategies of cost-plus, value-based, competitive, and psychological pricing.
With the insights gained from this guide, you can implement effective pricing strategies and ensure your business reaps the rewards you deserve for the remarkable value you create.
But maintain agility to refine and evolve your approach as your business scales and environments shift.
Most importantly, understand the immense value you provide customers and confidently price yourself accordingly.
😉
Richard
Useful Pricing Resources
Books:
- “Priceless” by William Poundstone
- “Monetizing Innovation” by Madhavan Ramanujam and Georg Tacke
Online Courses:
- Pricing Strategy Course on Udemy
- Pricing Strategy Certification on edX
