Lately, many businesses have faced challenges due to the high inflation rate resulting in costs of goods and services increasing at an average rate of 2.3% annually over the last decade. As sellers and business owners, it’s important to choose the right pricing strategies to ensure that your business remains profitable. To make the right choice, it is mandatory to understand the different pricing strategies available, and the pros and the cons of each. Market demand , competitors' prices , and production costs are the factors you need to consider while developing a pricing strategy. Keeping in mind how these factors can influence your pricing strategy will help you maintain profitability and growth in the face of inflation. In this article, we will walk you through the definition of pricing strategies, the pros, and cons, and how you can choose among the 5 most common pricing strategies that will help you stay ahead of your competitors.
What is a Pricing Strategy?
Pricing strategy or price setting is one of the most important parts of the marketing process and it requires deep market research. In this matter, the right price can generate more sales while the wrong price can make potential customers purchase in other stores. On the other hand, a pricing strategy is a method used by large or small companies to price their products or services based on production costs, advertising expenses, and many other factors like competitors' actions and the financial capacity of the consumer.
The 5 Pricing Strategies You Should Know
In this short guide, we will approach these 5 major and most common pricing strategies:
- Dynamic Pricing
- Cost-Based Pricing
- Value-Based Pricing
- Competition-Based Pricing
- Penetration Pricing
1. Dynamic Pricing
Dynamic pricing is a pricing method where you adjust your prices based on real time market conditions such as demand and respect your profit margin by using a price intelligence software. Pros 👍
- You can compare your prices with the ones of your competitors and adjust your products' prices.
- Respect your profit margins and still offer attractive prices.
- You can evaluate your prices and detect if changes are mandatory to your pricing strategy.
The Cons 👎
- In the worst case of low-profit margin you have to lower your product prices until you are competitive enough, while you are defining the minimum margin of your products.
2. Cost-based Pricing
Cost-based pricing is a pricing technique based on manufacturing costs, however, a profit level must be applied in order to define the product price. Many companies use this technique to find a price range between the floor price which is the minimum price and the ceiling price which represents the maximum price. The Pros 👍
- Methods to determine price are simple.
- During price setting, unexpected situations are taken into account.
- Pricing guarantees total profits for the business.
The Cons 👎
- Ignore how customer demand affects the price.
- Competition is not included in the price setting
- Price setting cannot be exclusively based on costs.
3. Value-based Pricing
Value-based pricing is a pricing strategy that involves setting prices based on customers' perception of the products or services and the benefits it provides to consumers. It is about finding the price that your customers are willing to pay. The Pros 👍
- The price set supports the product image and builds customer loyalty and trust.
- The value added helps increase product sales by charging more for products perceived to have a high value.
The Cons 👎
- Methods of calculations may ignore product costs.
- It might forget about existing competitors and focus only on customers’ perceptions.
- It requires great selling techniques.
4. Competition-based Pricing
Competition-based pricing strategy is based on what prices the competition is setting and this strategy is used mostly by businesses selling similar products. Unlike services that can vary from business to business, the features of a product, however, need to remain similar in highly competitive markets. In this case, a competitor price monitoring software will allow you to remain competitive since you can have an overview of your rivals’ product prices all the time and adjust your prices accordingly. The Pros 👍
- You have the chance to monitor present and new competitors in the Market.
- Develop a global perspective in order to make more efficient price decisions.
- Setting the correct price based on market conditions aids in order to stay competitive
The Cons 👎
- You may lose profits if the price elasticity is not respected.
- The pressure of external competitors' price points.
- The complexity to position your business as a premium option.
5. Penetration-based Pricing
Penetration pricing strategy is when a company attempts to grow in a market through the delivery of existing products in existing markets and involves low prices to attract customers and gain a high market share. The Pros 👍
- You can develop a strong brand equity.
- Increase market share and attract customers.
- Low product prices can secure market integration.
The Cons 👎
- You can gain a high market share and attract new opportunities, but it can be difficult to raise prices without losing customers.
- If you want your products to be known as and linked to a premium brand, providing products at low prices can make your consumers think you're producing cheap products.
Conclusion: The Top 5 Pricing Strategies
Choosing the right pricing strategy is mandatory for your business in order to remain profitable in inflationary times. Above we mentioned the 5 common pricing strategies , each strategy mentioned has its own advantages and disadvantages, and it’s important for businesses to choose the best pricing strategy that fits their products and market conditions. The ultimate strategy to succeed in your business goals is to target the right audience and understand the value that may come with it, and how you can provide your customers the best value. Keep in mind that finding the right pricing strategy means adapting to your industry, as well as your company's unique objectives in order to have clear expectations on how much customers are willing to pay and invest for your products.
Find the Right Pricing Strategy!
Pricing Strategies FAQ