What Is a Pricing Strategy and How to Develop Your Own: 6 Tips

Pricing is a crucial and highly demanded component of the marketing mix. Strategically, pricing is of vital importance because it is related to product positioning and helps set your product and business apart from others. Pricing also affects other strategic decisions like product features, distribution, and promotion.

A business should implement a well-planned pricing strategy in order to maximize profitability for each unit sold or from the market overall. Pricing strategies can be used to prevent new entrants into an existing market, to increase market share, influence consumer behavior, or to enter a new market.

piece of paper reading pricing

What Is a Pricing Strategy?

A pricing strategy is a firm’s decision about how to price a product, line of products, services, or even to set the standard for a market or industry. Price is the value that is put on products or services. A firm’s pricing strategy directly impacts the consumer’s decision on whether or not to buy a product.

In applying a pricing strategy, firms should consider goals and the consumers it wishes to target, as well as the inputs required to offer the product or service, and the current state of the economy where it provides its products and services. The firm must also consider its competition within the market and be attentive to its opponent’s actions in order to gain a comparative advantage.

Who Uses Pricing Strategies?

Pricing strategies in marketing are used by businesses who wish to determine the ideal price point at which it can maximize profits off of goods and services. While customers will not purchase goods that are priced too high, a business cannot succeed if it prices products too low. Pricing has a profound effect on the success of a business.

Any firm that wishes to optimize its market share, product placement, and impact consumer behavior will implement an effective pricing strategy. Price is the only element of the marketing mix that directly impacts revenue and that directly influences consumer decision-making about whether or not to buy a product. Therefore, it is extremely beneficial for a firm to do its research, apply cost analysis, and perform due diligence in deciding on and applying pricing strategies for its products and services.

How Can Pricing Strategies Help Your Business?

magnifying glass over a dollar sign

You should understand your market and price elasticity of demand. To ensure a competitive place in the market, a cost and price analysis for your products and services should be performed:

Product Positioning

Where are your products compared to similar products? Are you ahead of your competitors? Are they copying you, pricing lower, or maybe they are higher than you with a premium product? Is the market saturated with comparable products? Maybe your product is obsolete and threatened with being replaced.
Are you a market leader with the greatest share? If you are, you can focus on gaining economies of scale in production and distribution. If you would like to be a challenger, then your pricing strategy should reflect that.

Price Elasticity of Demand

Next, determine the demand for your product and the price elasticity of demand in the market you’re pursuing. If demand changes substantially with price changes, whether up or down, then demand is elastic. If demand does not change much when the prices change, then demand is inelastic and consumers will buy your products regardless.
Ordinarily, the higher the price, the lower the demand. The exception is for luxury items where a very high price signals a product of a higher quality.

Price Sensitivity

Consumers are not so sensitive to price growth if the product is unique or has a high value. On the other hand, consumers are more sensitive to price increases if there is a lower priced alternative or substitute product.

Competitive Pricing Strategy

By understanding your competitor’s pricing policy, you can develop a competitive strategy to respond to their pricing tactics.

6 Ways to Implement the Most Effective Pricing Strategy

pricing that makes sense for you

Penetration Pricing

When the price is set artificially low, a good or service can gain market share quickly. This is effective when launching a new product. Once the promotion period is over and the market share objective is met, prices are raised to a reasonable level in order to achieve profitability.

Economy Pricing

Consider dollar store prices and bargain box shops. Margins are wafer thin and overhead costs are kept extremely low. The idea behind economy pricing is to target the mass market and high market share with products everyone needs at rock bottom prices. Products must be priced at a level that is sustainable.

Skimming

Skimming means that a high price is charged for a good until competitors offer a comparable product. The idea is to earn max profits before the product or segment attracts competitors who will lower profits for everyone.

Premium Pricing

The highest price is used as a defining criterion for premium or luxury products such as designer handbags, sports cars, or hotel accommodations. Premium pricing strategies work in industries where a strong competitive advantage already exists.

Psychology Pricing

Psychology pricing is a technique that encourages consumers to respond on emotional levels instead of logical ones. It can include pulling on heart strings by encouraging them to donate to a charity, or it can be clever pricing tactics. For instance, pricing a gym membership for $99 instead of $100 has proven to attract more members. The mind tricks itself into believing there is a more significant difference than there is. The goal is to increase demand by creating an illusion of greater value to the consumer.

Bundle Pricing

With bundle pricing, businesses sell multiple products for a lower rate than if they were purchased separately. Bundling increases the value perception in the minds of consumers since they are essentially getting something for free. Keep in mind, however, that the profits earned on higher-value items must make up for the losses taken on the lower-value goods.

A business should develop an effective pricing strategy in order to optimize profits and maintain a solid position in its market. Pricing strategies can be used to change consumer behavior, prevent new entrants into an existing market, to increase market share, or to enter a new market.

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