Business 101: Clever Pricing Strategies for Your Product or Service

Business 101: Clever Pricing Strategies for Your Product or Service

Starting a business is a challenging endeavor in many aspects. As soon as you are done with the product or service design and branding, the question of pricing pops up.

Do not take it lightly. The best approach is to research the options, evaluate opportunities, and determine what works best for your business. In this guide, you’ll find all the basics of pricing strategies.

Pricing Fundamentals

A pricing strategy is a method one uses to figure out what to charge for a product or service. If you aim too low, you miss on revenue, and if you aim too high, you might miss on sales. There is no ultimate answer to this as every company and product is unique. But there are well-known and proven methods that the majority of businesses use.

A particular strategy depends on the type of product, business goals, and target audience. For instance, if your customers are mostly students, you need to prepare the best offer that suits their needs. In the majority of cases, students look for the best ratio of quality to price.

One might think that students will always aim for the lowest charge, but it is not always the case. For example, when students buy an essay paper online on PaperWriter, they base their choice on the quality of service. Their main objective is to get expert help with academic writing. The value proposition overcomes the rates. As a result, students choose this provider to get instant help from an experienced academic writer as it solves their problems.

To create the best strategy for your product, you need to evaluate all the options.

Price Elasticity

Another important factor new entrepreneurs need to know about is the concept of elasticity. It describes how much the price might affect demand. There are inelastic (people will buy it no matter what you are charging) and elastic products (changes in pricing affect the sales).

Examples of inelastic things are gas, cigarettes, or sometimes medications. Those who need them will still make a purchase even if the rates are high. Elastic ones are concert tickets or streaming services. If they go up, users might reconsider a purchase.

Sure, it is amazing if your product is inelastic. But for the majority of companies, it is not achievable.

Common Pricing Strategies

There are several general policies on defining how to charge for services. Here are the most widely-used ones.

Competition-Based

In this case, entrepreneurs base the prices on the market and competition. A competition sets a specific benchmark, and you can go a bit lower or a bit higher. The demand and production costs are not taken into consideration. It works best when you also offer something unique, like exclusive customer service.

Cost-Plus Strategy

This one is pretty straightforward. You take the cost of production and add a flat fee that will form your profit. The fee depends on how much you want to make from a thing. It can be 15%, 25%, or more. It works perfectly for offline sales of physical objects, like apparel.

Dynamic

In this case, businesses change the amount they charge based on the market overview and overall demand. Take the tourism industry for an example. Hotels cost more in the high season and less in other months. This comes from the demand for their services that fluctuates depending on the seasons.

Freemium

This method is quite popular in digital products and software. You can create an app that is free for basic features. But you can earn money by offering advanced functionality to a premium subscription. It is also convenient for customers to try things out before committing to purchase.

High-Low Model

Here you start with a high price and lower it when the demand goes down or when it loses momentum. It is commonly used in retail, for instance, in fast fashion. When the season is about to end, the prices for the previous collection significantly drop.

Skimming

Companies start with the highest charge possible and gradually lower it down. The difference with the previous one is in the step-by-step changes instead of rapid drop.

This strategy is used for tech that comes out of age fast (smartphones, games, players, etc.).

Penetration

On the opposite side is the penetration method. A company starts with a low price to attract customers. With time, it goes up, as well as the demand and public interest. Overall, it is a short-time fix rather than a long-term strategy. It can be used for one release.

Premium Method

Entrepreneurs also call it luxury pricing. In this case, the company positions its offer as a premium experience for a particular lifestyle. So, the amount you ask for is based on perceived prestige and not on the actual cost of production. It is pretty common among high fashion brands.

Hourly Rates/Project-Based

These apply to the provision of services. If you offer consulting, tutoring, cleaning, or writing, you can charge a flat fee for each hour of labor. Or you can also charge a flat fee for a complete project, which is often used in software development, for example.

Psychological Tips

Another factor to consider is the psychology of consumer behavior. Have a look at several research-based tricks that work for increasing sales.

  • Similar products with slightly different prices do better than those with the same one.
  • Anchoring – place a $10 T-shirt next to a $200 hoodie, and people will be more inclined to buy it because of a perceived deal.
  • Addvalue by bundling things.
  • Reframe the payment method – it is easier to commit to a $9 monthly subscription than to $108 per year (although it is the same amount of money).
  • Free shipping works charms, even if it is actually included in the product cost.
  • Number 9 drives more sales for some reason. So, putting 39 is more effective than 35.

Also, presentation matters. For example, customers prefer to buy something for “1560” rather than “1,560”.

Bottom Line

Ultimately, the strategy you settle for depends on many factors, from the actual offer to business goals. Look into the target audience, market trends, and competitors to see what might be an effective model for your company.

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