Why pricing is important?
Coming up with pricing strategies for your product/service is the most dynamic aspect of your startup business. As Warren Buffet stated, customers, will always decide on what value they get after paying the price. If they are satisfied with the price, then the pricing strategy works fine.
In the book Blue Ocean Strategy, W. Chan Kim said –
“The strategic price you set for your offering must only attract buyers in large numbers but also help you to retain them.”
Pricing in a nutshell
Basically, your pricing strategy depends on the market your product/service belongs to. If the market is perfectly competitive, you can’t decide the price. Only demand & supply will decide. If your offering is part of a monopoly market or follows the blue ocean strategy where no one is there to compete with you, the price can be decided based on the perceived value.
We’ve created a video below that shows the key pricing strategies you can use for your business. The video will give you a great overview on pricing your products.
The key components of price are costs (fixed and variable), profits, the value created for the customer, and competitor prices. The most important kinds of pricing are cost-plus pricing where you add margins to the cost to arrive at a selling price.
Then there’s value-based pricing where you price the product as a percentage of the value the customer gets from the product/service.
Finally, there’s the competitor-based pricing where you price your product based on how your competitors have priced and positioned their products.
Below the video, we have added a comprehensive list of pricing strategies that are commonly used by businesses & startups.
Pricing strategies vs tactics
When it comes to running a business, there is a lot that goes into pricing strategy. After all, the prices you charge for your products and services will have a direct impact on your ability to generate revenue and profit. However, it’s important to understand the difference between pricing strategy and tactics.
Pricing strategy is the overarching approach that you take to setting prices for your products and services. This includes factors such as your overall pricing objectives, target market, and competitive landscape. Pricing tactics, on the other hand, are the specific actions you take to implement your pricing strategy. This can involve things like discounts, bundling, and segmentation.
So, which is more important? Ultimately, it’s important to have a sound pricing strategy in place before you start working on tactics. This will give you a clear direction to follow and ensure that your tactics are aligned with your overall goals. However, Tactics can also be important in their own right and can help you to fine-tune your prices and stay ahead of the competition.
Here, the price is determined by demand and supply. Your price will be close to the price of your competitors in order to have a sustainable business. Competition-based pricing works in markets that are mature and there is very little product differentiation. Examples are the pricing of Coke and Pepsi. Both these brands follow each others’ pricing and branding strategies.
In cost-plus pricing, the profit percentage is decided and added to the cost of goods sold (COGS) to get the product’s price. For many products, cost-plus pricing works well because it helps businesses to plan better. Also, the purpose of doing business is to make profits. If you don’t add margins to your cost, you will not be able to run a sustainable business.
This is most commonly used for commodities. The goal of dynamic pricing is to allow a company that sells goods or services to adjust prices on the fly in response to market demands. Depending on the time, willingness to pay, and market demand, the price is changes. Surge pricing (Uber), demand pricing, and time-based pricing are some examples of dynamic pricing.
Freemium pricing is mostly used by software companies and startups selling digital products where a basic free product/s is offered to the customer for free. The customer has the option to buy priced products that offer more benefits and features. For example, for mobile games, you can install and play the game for free but need to pay for upgrades.
Also known as discount pricing strategy, in this kind of pricing one product is launched at a high price. After some time, the product is offered at a high discount. In retail products, this kind of pricing is popular where the fashion changes in a set time, so an old lot of products are sold at a high discount.
Hourly pricing works in service-related businesses where the price is charged on a man-hour basis. Consultants and freelancers use hourly pricing. If you want to hire a freelancer on platforms like Upwork, many freelancers offer their services priced on hourly-based pricing.
In this pricing strategy, the product is launched at a premium price initially, and prices are then reduced after some time. Innovative technology products are priced this way. E.g. when iPhone 8 was launched, the prices of the iPhone 7 and 6 were reduced severally.
This is the opposite of skimming pricing. In this pricing type, the product is launched at a low price compared to the competitor’s price to attract new customers. However, this type of pricing only works for a short period. When low prices become the source of attraction for buyers, a price war begins where competitors start cutting down their prices as well.
Premium prices are usually charged by companies who have built a good brand name or are selling products in the luxury segment. These companies prefer to differentiate themselves from competitors’ products and cater to customers who are willing to pay a higher price for better quality goods. For example, high-end fashion brands like Gucci and Prada charge premium prices for their luxury products, and dedicated customers are willing to pay for craftsmanship, brand image and differentiate themselves from the crowd.
Here, the price is charged on a project basis. This kind of price is also charged by consultants, contractors, and freelancers. For example, if you want to build a website for your business and talk to a freelance coder. He/she will charge you a fixed sum of money to build the website for you.
In Value-Based pricing, the price is a percentage of the value the product brings to the customer. A lot of B2B products are priced in this way. For example, if you have cloud software that can help businesses generate leads, and you estimate that your software can help the client generate US$ 10,000 per month, you can charge the customer a price of $1,000 per month (10x value to the customer).
In Bundle-pricing, products are bundled together and offered at a price less than the price of the individual items if bought separately. This kind of pricing is offered by fast-food chains like Mcdonald’s and KFC. It costs less to buy a meal than to buy a burger, fries, and drink separately. Bundle pricing helps businesses generate a higher-order value per customer and overall revenues.
Psychological pricing involves playing with the customer’s mind. For example, pricing a product at $9.99 instead of $10 is a type of psychological pricing and makes the customer think that the price is more attractive. Another example is when you offer 2 different prices for 2 similar products. We have covered psychological pricing in detail in one of our earlier blog posts here.
From the name you can guess that in this type of pricing, the price may vary as per the geographic location. Sometimes prices can vary between different retailers in different neighborhoods. Geographic pricing is done for various reasons including demand-supply, the purchasing power of customers, logistics costs, etc.
In this post, various pricing strategies were discussed. You can check out web-story of this post here.
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