pricing strategy

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The pricing strategy guide: Choosing pricing strategies that grow (not sink) your business

Choosing the pricing strategy for your business requires research, calculation, and a good amount of thought. Simply guessing may put you out of business. Here's what you need to know.

Too many businesses set their pricing without putting much thought into it. This is a mistake causing them to leave money on the table from the beginning. The good news is that taking the time to get your product pricing right can act as a powerful growth lever. If you optimize your pricing strategy so that more people are paying a higher amount, you'll end up with significantly more revenue than a business who treats pricing more passively. This sounds obvious, but it's rare for businesses to put much effort into finding the best pricing strategy.

This guide will cover everything you need to know about setting a pricing strategy that works for your business.

Check out this introduction video:

Definition of pricing

Pricing is defined as the amount of money that you charge for your products, but understanding it requires much more than that simple definition. Baked into your pricing are indicators to your potential customers about how much you value your brand, product, and customers. It's one of the first things that can push a customer towards, or away from, buying your product. As such, it should be calculated with certainty.

What are pricing strategies?

Pricing strategies refer to the processes and methodologies businesses use to set prices for their products and services. If pricing is how much you charge for your products, then product pricing strategy is how you determine what that amount should be. There are different pricing strategies to choose from but some of the more common ones include:

Pricing is an underutilized growth lever

Many companies focus on acquisition to grow their business, but studies have shown that small variations in pricing can raise or lower revenue by 20-50%. Despite that, even among Fortune 500 companies, fewer than 5% have functions dedicated to setting the best price possible. There's a missed opportunity in the business world to see immediate growth for relatively little effort.

Because most businesses spend less than 10 hours per year thinking about pricing, there's a lot of untapped growth potential in optimizing what you charge. In fact, choosing the best pricing method is a more powerful growth lever than customer acquisition. In some cases, it can be up to 7.5 times more powerful than acquisition.

The importance of nailing your pricing strategy

Having an effective pricing strategy helps solidify your position by building trust with your customers, as well as meeting your business goals. Let's compare and contrast the messaging that a strong pricing strategy sends in relation to a weaker one.

A winning pricing strategy:

A weak pricing strategy:

Top 7 pricing strategies

Let's now take a closer look at the seven most common pricing strategies:

1. Value-based pricing

Set prices according to what consumers think your product is worth.

2. Competitive pricing

Set prices based on what the competition is charging.

3. Price skimming

Set prices as high as the market will allow and lower them over time.

4. Cost-plus pricing

Add a percentage to the product production cost.

5. Penetration pricing

Offer much lower prices than the competition in highly competitive markets.

6. Economy pricing

Price a product cheaper than the competition to drive volume.

7. Dynamic pricing

Change prices based on the current demand for the item.

Three real-world pricing strategy examples

1. Streaming services

These companies have adopted competitive pricing based on market observations.

2. Salesforce

Initial higher pricing followed by gradual lowering, exemplifying price skimming.

3. Dollar Shave Club

An aggressive economy pricing that led to significant visibility and acquisition.

How to create a winning pricing strategy

  1. Determine your value metric
  2. Identify your customer profiles and segments
  3. Conduct user research + experimentation

Step 1: Determine your value metric

Value metrics are what you charge for based on customers’ perceptions of worth. Examples include per seat or per transaction.

Step 2: Determine your customer profiles and segments

These profiles should be specific to target market segments to ensure effective pricing.

Step 3: User research + experimentation

Continually test and refine pricing approaches based on customer feedback and market responses.

Bonus: 10 rapid-fire pricing strategy tips rooted in data⚡

1. Localize your pricing

2. Freemium is an acquisition model

3. Value propositions matter

4. Don't discount over 20%

5. For upgrades to annual discounts, avoid percentages

6. Ending in 9s or 0s depends on price point

7. Experiment with your pricing quarterly

8. Case studies boost willingness to pay

9. Design impacts willingness to pay

10. Integrations enhance retention and value perception

Pricing strategies for different industries

For SaaS and subscription businesses, value-based pricing is strongly recommended. Enjoy deeper insights into each strategy through related links available above.

Pricing strategies FAQs

Which pricing strategy is best?

It depends on your business model, although value-based pricing is often most effective for SaaS and subscription services.

How do you determine the selling prices of a product?

Identify a suitable pricing strategy that aligns with your business and product nature.

What is the simplest pricing strategy?

Cost-plus pricing, which involves calculating production costs plus a mark-up.

What is a pricing curve?

A graph illustrating the number of people willing to pay a specific price for a product.

What are the 4 major pricing strategies?

Value-based, competition-based, cost-plus, and dynamic pricing.