A successful product pricing strategy involves much more than simply naming a price for each product you sell. Your product pricing strategy can be what makes or breaks your business, so it’s important to think beyond what you think your product is worth or how much money you can get away with selling it for. High product prices could either result in big profit margins or low sales. Low product prices could boost sales and grow your business or cause you to leave money on the table by eating away at your margins. Because so much is at stake, it’s important to carefully consider your product pricing strategy and all of the factors you’ll use to determine it.
Types of Product Pricing Strategies
To determine the type of product pricing strategy that’ll work for your brand, take into account details about your industry, the quality of the product, your marketing strategy, production costs (including shipping and fulfillment), customer personas, market status, competitors, and any other information that pertains to your business, product, costs, or customers.
Take a look at the list below for pricing strategies that could help you sell your product or service. Keep in mind that pricing your products is not a set it and forget it process. There’s a good chance that you’ll end up changing your prices somewhere along the way, and that’s perfectly okay. Your product pricing strategy may even include a plan to discount or raise your price. If you leave enough room for trial and error, you will eventually land on the ideal product price for your business.
1. Cost-based Pricing Strategies
Cost-based pricing strategies are the easiest and most straightforward pricing strategies you can use. All it takes is a little bit of math based on the cost of producing your product or service, and you have your prices. However, some brands might find that cost-based pricing means that they don’t take full advantage of the value of their product and end up pricing too low. Cost-based pricing strategies don’t account for the market value of products either. Nevertheless, some businesses find success using one of the cost-based pricing strategies below.
Cost-plus pricing involves a process of setting the price of each product according to your business’ desired profit margin. All you need to do to execute this pricing strategy is take the cost of production, and add to it so that with each sale, you’re making enough money to cover your costs, plus a certain percentage of those costs. Cost-plus pricing strategies can be effective for businesses such as those in manufacturing or retail.
Rather than using your desired profit margin to determine a cost-based price, brands that use a mark-up pricing strategy increase the price of products based on a fixed percentage of the cost of each product. This pricing strategy is common with retailers who purchase products wholesale and markup the products in their stores. So, for example, if a retailer purchases a particular item from a wholesaler at the price of $10 per item and marks up the price by 50% to sell in their stores, then customers would pay $15 to purchase that item.
2. Value-based Pricing Strategies
Value-based pricing strategies rely on the customer-perceived value of your product rather than the cost it takes to produce it. This makes value-based pricing strategies especially useful for industries where production costs are low, like SaaS or fast food. While these pricing strategies may require more work than cost-based pricing strategies, they could help you avoid pricing your product or service too high or too low.
What better way is there to determine the value of your product than asking the people who want to purchase it? To utilize a value-based pricing strategy, you first have to survey your customers and find the customer-perceived value of your product or service. Once you determine your product’s customer-perceived value, you can price with confidence that buyers will be willing to pay for it.
Product Mix Pricing
If you have several different products or different tiers of service to sell, your value-based pricing strategy will need to take product mix pricing into account. Make sure to segment your customers into different buyer personas so you can get a better idea of what kind of person would pay for specific product features. Even if you offer a line of similar products or services, the prices will vary because customers belonging to different personas will have a different median customer-perceived value of your offerings.
3. Market-based Pricing Strategy
Market-based pricing strategies, of course, are based on the market value of your product or service. To use a market-based pricing strategy, you’ll need to assess your product to determine the features that add to product quality and will allow you to raise the price of the product. A low-quality product will have a lower market value and lower price compared to similar products of a higher quality.
Competitor-Based Pricing Strategy
If you’re introducing a new product to a market, you may want to consider competitor-based pricing. Keeping in mind the market value of the product, you can also look at the prices competitors are selling for, and which features differentiate your product from theirs. Then, you can determine if you need to price your product slightly higher or lower based on your findings.
Discount Pricing Strategy
Discount pricing strategy comes into play when the market value of a product decreases. When sales are down, brands want customers to buy from their business over the competition, so they decrease the price of their products in order to increase sales. Keep in mind, if you use discount pricing, your profit margin will also decrease, so make sure you’re able to take the hit. Price skimming is also a type of discount pricing — read on to learn more about skimming and the other strategies in the pricing strategy matrix.
4. Pricing Strategy Matrix
The pricing strategy matrix is made up of four basic pricing strategies: economy pricing, penetration pricing, price skimming, and premium pricing. Each of these pricing strategies makes up a quadrant of the matrix, representing different options for pricing a new product. Using quality on the horizontal axis and price on the vertical axis, the pricing strategy matrix illustrates the relation between these different strategies.
When a product is of low quality and low price, economy pricing is applicable. When a product is low quality but has a high price, price skimming is being used. Products of high quality and high pricing represent premium pricing, and those of low price and high quality are priced for market penetration.
You can see how these pricing strategies are related to each other in the image above. Let’s break down how each pricing strategy on the matrix could work for your business, with examples of brands that use them in real life.
If you are selling a bare-bones product without any frills or special features, and you want a lot of sales quickly, economy pricing is the strategy for you. Using a low price for a low-quality product means that buyers will get what they pay for in terms of quality, but your brand will be able to keep production costs low and still achieve a high profit margin, even at a low price.
A common example of economy pricing is generic products at a grocery or drugstore. Buyers know that if they purchase a drugstore-brand toothbrush, for example, they won’t receive any features like electronic brushing or super soft bristles, but rather, they are getting a decent product at a low price.
Penetration pricing is pricing your product lower than its market value to attempt to “penetrate” the market. It’s a useful strategy for brands with new products that customers aren’t yet aware of. Because the price is low (and sometimes even free), buyers will be more inclined to try your product, however, you will not make as much of a profit from each sale because the production costs of a quality product will be higher. Brands that use penetration pricing must eventually raise the price of their product to stay competitive in the market, but they run the risk of losing customers as they raise their prices. People may also think your product is a gimmick, or “too good to be true” and avoid purchasing it all together. So, brands must choose a price low enough to penetrate the market, but not so low that customers lose faith.
Penetration pricing could be a useful model for a subscription service like, for example, Myro deodorant. The brand offers new customers who subscribe to deodorant refills a low price and free shipping when they purchase a starter kit. Customers have the opportunity to try the product at a lower price and decide if they want to pay more for subscription refills after.
Price skimming is the polar opposite of penetration pricing. It involves setting a high initial price for a low-quality product, and eventually “skimming” the price down to a lower rate. This is a good product pricing strategy to use if your product is already in high demand because you have an opportunity to sell a lower quality product at a high price initially. Then, when sales slow down, you can start to reduce the price to hopefully continue selling at a reasonable rate. Brands that use price skimming run the risk of alienating customers who cannot afford the product at a high price point. Customers who buy the product at a high price also might have a negative opinion of a brand once the price drops and they realize they could have paid less had they waited.
Price skimming is a product pricing method often employed by technology brands. Customers who want to be the first to access a new product’s features will purchase a product as soon as it is released on the market. After a while, the brand can lower the price of the product as it releases newer products with more features, to be sold at higher prices. For example, when Apple first introduced the Apple Watch Series 3 in 2017, it was priced at $399. In 2021, you can purchase it from the Apple website for just $199, however, you might be more inclined to buy a newer model at a higher price instead.
Finally, the premium pricing strategy is used when brands with high-quality products set high prices for them. While this strategy makes sense when you consider the higher production cost of quality products, it also has a psychological effect on customers. If you use premium pricing, there is a chance that people will start to associate your brand with a high-quality, luxurious product. However, this plan can backfire if you don’t make enough sales and end up having to lower your price, and therefore your profit margin.
Premium pricing works the best with already well-established luxury and designer brands. For example, Christian Louboutin shoes can be priced at a whopping $795 because of their iconic look and the association buyers have with the brand. Those who purchase shoes at this price know they are getting a high-quality product for their money, but they are also paying for the designer brand association. After all, if you spend this much on a pair of shoes, you’re paying for a product you can show off.
You should now have a good idea of the wide variety of product pricing strategies you could use for your brand. Consider which type of pricing strategy could work with your product and industry. Estimate where you fall on the pricing strategy matrix. Now, all that’s left to do is decide on a strategy, set your prices, and start selling. Hopefully, you’ll turn a profit right away. If not, go back to the drawing board and find a new product pricing strategy that works better for your business.