Pricing a new product or service can be challenging.
If you don’t charge enough, it will be difficult to remain profitable and if you charge too much, you will struggle to make sales.
That’s why it’s so important to find the right balance where your price is high enough for you to have healthy profit margins but also low enough to be appealing to your dream customers.
Today we are going to share ten pricing strategies that can help you with that…
Economy pricing is a strategy where you offer the lowest price possible and hope that sales volume will be high enough to make up for low profit margins.
This strategy makes the most sense if you are selling a commodity product to price-sensitive customers.
Supermarket chains use it when they offer store-brand versions of staple groceries that compete with the name-brand versions on price alone.
Some companies even build their entire businesses around economy pricing. Walmart is a classic example of this approach.
Cost plus markup pricing is a strategy where you calculate the cost of producing a product or providing a service and then add a fixed markup percentage on top of it.
This approach is typically used to price custom products and services that adhere to the buyer’s specifications.
That includes various government contracts, services like home construction and interior design, products like tailor-made clothing, etc.
Competitive pricing is a strategy where you research how much your competitors are charging for similar products and services and then price your product or service lower to undercut them.
This approach works best for products and services that don’t differ much from one company to another and have already reached market equilibrium where their prices are relatively stable.
Offering lower prices than your competition while remaining profitable isn’t easy. You will need to find inefficiencies in your industry and capitalize on them in order to pull it off.
You can do that by analyzing how your competitors are running their businesses, including how they are handling manufacturing, storage, transportation, marketing, and sales.
It might be possible to reduce the costs by streamlining your workflow with software, hiring remote employees from low-cost-of-living countries, and using digital marketing to promote your business.
You probably won’t be able to maintain the advantage that you gained through competitive pricing forever because sooner or later, your rivals will catch onto it and begin implementing the same tactics to get their costs down.
Also, if you come up with something truly innovative, you can expect to see a bunch of copycats once the word gets out.
All that being said, competitive pricing can help you get your business off the ground, so it’s a strategy worth considering!
Market penetration pricing is a strategy where you price your product or service extremely low – maybe even selling it at a loss – in order to carve out a market share for yourself with the intention of increasing the price in the future.
This approach is typically used by companies that have a ton of money already, either in the form of their own war chests or in the form of capital provided by their investors.
VC-funded tech startups often use penetration pricing to accelerate growth. A classic example of this is Uber, which initially captured ride-hailing markets across the world by undercutting local taxi companies.
However, it can take a long time to achieve profitability this way. Uber was launched in 2010, but despite the popularity of its service, the company only turned a profit for the first time in 2023.
Another issue is that raising prices might prove to be more difficult than you expected. There’s no guarantee that customers will be willing to pay more for your product or service.
Several popular food delivery apps have successfully used penetration pricing to gain market share, but they are still operating at a loss.
For example, DoorDash, which was founded in 2013, has never generated a profit except for the second quarter of 2020 when demand surged due to the Covid-19 pandemic.
It remains to be seen whether this business model is viable. It may turn out that people are unwilling to pay for food delivery if the prices are high enough to make these services profitable.
Finally, penetration pricing tends to attract price-sensitive customers, which makes it difficult to establish a loyal customer base. Competitors who have more resources than you can steal your market share by charging even less.
Price skimming is a strategy where you set a high price for a new product and then gradually lower it over time. It’s the opposite of penetration pricing.
This approach is popular in the gaming industry. Studios typically set high launch prices but then lower them over time and also regularly put their games on sale with discounts as steep as 90%.
This strategy seems to work best for companies that already have loyal customer bases. It enables them to maximize profits from their biggest fans who want to get their latest products immediately.
However, if you attempt to use price skimming as a brand new business, it might backfire because you haven’t proven yourself in the eyes of your dream customers yet.
For example, gamers who are happy to pay $30+ for a game from a studio that they like probably won’t be willing to pay that much for a game from a studio that they have never heard of.
It’s also worth noting that in the gaming industry, customers expect price skimming and aren’t offended by it. Some even capitalize on it by waiting for the prices to drop and picking up the games they want on sale.
However, if you attempt to use this pricing strategy in an industry where it’s uncommon, you might end up alienating your customers. People who paid the high launch price might feel cheated once they see it drop later.
That’s why it’s best to reserve price skimming for industries where it’s already the norm!
Bundle pricing is a strategy where you bundle several products together.
This approach can enable you to charge more than you could by selling those products separately as long as the bundle offers convenience.
For example, in countries where ginger-lemon-honey tea is a popular hot beverage, grocery stores bundle the ingredients together and sell ginger-lemon-honey tea kits.
Customers could buy the ingredients separately at those same grocery stores at a lower total cost but they prefer to just grab a ready-made kit instead, even if that means paying more.
Ultimately, bundle pricing is about combining several products to provide a solution to a specific problem that the customer has. See if you can bundle your new product with something else to create a complete offer.
Performance-based pricing is a strategy where you charge not for the service itself but for the results that it delivers.
This approach can make it much easier for you to sell your service but it only works when the results can be easily measured.
For example, it’s easy to track conversion rates across sales funnels, which is why some professional funnel builders charge a fixed percentage of the funnel profit. If there’s no profit, they don’t get paid.
Meanwhile, ad agencies sometimes use the cost plus performance pricing strategy where the client covers the ad spend and the agency gets paid a percentage of the profit from the ads.
Keep in mind that if you use performance-based pricing, providing that service is going to be less like regular freelancing or agency work and more like a partnership with your clients.
That’s why you need to do your due diligence before you accept new clients. You should only work with established businesses that are selling proven products. Otherwise, performance pricing may be too risky!
Value-based pricing is a strategy where you price your product or service based on its perceived value.
Factors that determine that perceived value include your brand, your industry, your target audience, your social proof, your marketing, your sales copy, the quality of your product or service, and of course its price.
Optimizing these factors can help you increase the perceived value of your product or service and enable you to charge more for it.
Premium pricing is a strategy where you position your product or service as high-end and charge more than your competitors.
People tend to view price as a proxy for determining value so this approach can help you increase the perceived value of your product or service.
However, you need to make sure that your branding, marketing, and sales copy are consistent with this pricing strategy if you want it to work.
Apple is a great example of premium pricing: the company is able to charge several times more for its products than its competitors who are selling similar products.
Of course, this strategy only makes sense if your dream customers can afford what you are selling. This means that you will need to target an affluent demographic if you want to charge premium prices.
Promotional pricing is a strategy where you sell your product or service at a discount for a limited period of time.
Businesses often use this approach for product launches with 24-hour, 48-hour, and 72-hour launch sales.
It’s also common to hold sales on Black Friday, Cyber Monday, and various seasonal holidays.
Finally, some companies are running sales so frequently that the only purpose of having “regular prices” appears to be increasing the perceived value of their products so that the “discount” prices would feel like a bargain in comparison.
On the one hand, promotional pricing can help you increase sales volume, but on the other hand, it teaches your customers to wait for the next sale instead of buying your product or service at full price.
Also, using promotional pricing is probably a bad idea if your primary strategy is premium pricing. Keep in mind that holding sales can cheapen your brand in the eyes of your dream customers!
You can have the best product or service in the world but guess what?
If you can’t convey its value to your dream customers, you will lose out to competitors with inferior products or services but better copy. Sad but true.
That’s why if you are serious about building a business, you need to learn copywriting.
In fact, we would argue that it’s the single most important entrepreneurial skill.
Our friend Jim Edwards wrote a best-selling book “Copywriting Secrets” for busy entrepreneurs just like you.
In this book, he covers everything you need to know in order to start writing copy that CONVERTS.
“Copywriting Secrets” is available on Amazon where it has over 1,800 global ratings and a 4.7-star overall rating.
But you can also get it directly from Jim for free.
All he asks is that you cover the shipping!
So what are you waiting for? 🧐
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