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Setting Your Pricing Strategy: Four Examples

When you set a pricing strategy, you should first consider what your objective is relative to the market. Are you using this product to break into a new market or segment? Are you first to market? Are you trying to grab market share from a competitor? Is this a novel product or service that has no competition? These are just a few of the considerations that go into a pricing strategy.

Pricing is one of the most difficult areas of marketing for business leaders to master. Creating a pricing strategy is critical is you want to avoid a cash-flow quagmire – or worse. Four common strategies of smaller businesses are cost-plus, value-based pricing, skimming, and penetration pricing strategies.

Cost-plus is what it sounds like. You figure out your (total) cost based upon your desired margin. This is  a simple pricing strategy, and that’s why most smaller businesses use it.  However it has a major drawback: it doesn’t consider the customer or demand for your product or service. As a result in periods of high demand you could be losing out on profit.

Value-based pricing relies on the perceived or estimated value from the customer’s perspective. Companies using value-based pricing can gain an advantage over its competitors in a couple of ways:

  • The price is a better fit with the customer’s perspective.
  • The pricing brings more profit, allowing you to grow your business faster.

Value-based pricing works very well for many businesses, but only if you are clearly differentiated and have a high perceived value. If it doesn’t work, changing the price with this method means finding a way to better match the customer’s expectations, not just lowering the price.

Skimming is when you set your price high, and lower it as competition in the market increases. This is a strategy that works primarily for offerings that are unique and have no alternative offerings or competition. It’s sometimes called “early adopter” pricing for that reason. As more people move into the market for that product or service, your price will decline. The major risk is that a copycat could enter the market at a lower price before you have achieved the growth or market share you targeted.

Penetration pricing involves using a very low margin to shut your competitors out of the market or enter a highly competitive market and attract market share. Penetration pricing works best when you expect to be able to capitalize on volume sales before you need to start raising your price. One of the longer-term risks to this method is that customers may expect the lower price to continue, even after your goals for penetrating the market have been met.

When you choose a pricing strategy, you need to know what the competition in the market is, and the relative strengths of your offering within that market. You also need to know what type of pricing strategy your target market is going to be most responsive to.

When possible, you should assess the potential sales under several different pricing models before you choose one. Make sure you understand your target market as well as you possibly can. Then choose the pricing strategy that will appeal to your market best while ensuring the net revenue generated is sufficient to support your planned growth and product development goals.

Have a question about pricing strategy or which model is best for you? Schedule a discussion with me.