Pricing Strategy – How to get it right

The right pricing can be one of the most potent drivers of profitability for your business, yet studies have shown that, on average, businesses spend no more than six hours a year working on their pricing.

Pricing should be reviewed regularly, at least every quarter, through a rigid process of review, research, and testing.

What should you consider when setting your pricing?

Spending time on your pricing is always time well spent. When developing a pricing strategy, you must consider your broader business strategy.

Understand your costs

To implement the most profitable and sustainable pricing strategy, the most fundamental area you must understand is your costs. Both fixed and variable costs will be associated with your products or services. Without a comprehensive understanding of these costs, you will not have a baseline for setting prices that drive profit.

Analyse the competition

The perception of value among customers is heavily influenced by how an item is priced across various sellers/providers. Detailed market research is essential to help you understand how your process compares to the competition, whether you want to be a cost leader, a differentiator, or a niche player.

Understand your target audience

The success of a pricing strategy ultimately depends on one thing: will the customers be happy to pay for it? A complete understanding of your customer base’s attitudes toward cost and quality is required to set a pricing strategy that works. Do they value premium quality over low prices, or are they looking to spend as little as possible on the products?

Pricing Strategy types and how they compare

You should consider which competitive strategy applies to your business. There are three core competitive strategies:

Cost-based pricing strategy

The most straightforward pricing strategy for businesses is cost-based. It is based entirely on the total cost to the business of selling the goods or services, with your target margin added to it.

This strategy can benefit simple businesses, resellers, or businesses with many different products to price up. It is a simple, sum-based strategy that requires little research.

However, your pricing will be required to change frequently as costs go up and down in line with the supply cost. It may also not be the most profitable pricing strategy available for your business at a given time.

Value-based pricing strategy

As the name suggests, a value-based pricing strategy is predicated on delivering perceived value for money. This doesn’t mean being as cheap as possible; it means maintaining a positive customer perception of your brand and product and charging a price they feel is acceptable.

Some factors will raise the value of your product or service in your customer’s eyes. For a cyber security firm, these positive factors may be quality, visibility, peace of mind, certainty, and good communication. Other factors may reduce this value, such as uncertainty, variable/changing costs, credibility, or perceived risk associated with purchasing.

Value-based pricing takes time, effort and expertise to get right, but there are very few other downsides, providing the product is up to scratch.

Competitor-based pricing strategy

If you operate in a competitive market, you must ensure you are not priced out of customers. If your pricing is considerably higher than your competition, you may struggle to secure as many customers. At the same time, if your pricing is significantly lower, customers may perceive your product as inferior.

This pricing strategy is beneficial in highly competitive markets or when a business is relatively new. However, it may not be the most profitable and may cost differentiation.

Price skimming

Price skimming is a pricing strategy built around initially setting prices as high as possible before gradually lowering them. This can be especially effective for businesses offering unique, exciting or innovative new products for which people are willing to pay a premium price.

The early iterations of the iPhone are a good example – before smartphones were everywhere, the new technology was in high demand and, therefore, commanded a high price.

Penetration-based pricing strategy

A penetration-based pricing strategy works in the opposite way to price skimming. New products or services are launched at a price below its market value to “penetrate” the market and attract new customers. These prices are then raised gradually to align with a value-based strategy.

Dynamic pricing

A popular and sometimes controversial pricing strategy is dynamic pricing. This involves adjusting prices in real time based on supply, demand, and other market conditions. The approach allows businesses more opportunities to maximise revenue and respond quickly to changes in the market.

Perhaps the most famous example of dynamic pricing is the Uber taxi-fare system, which automatically raises prices when fewer drivers are available at busier times. Airlines may also dynamically change the cost of seats on a flight to take advantage of high demand or reduce empty seats on less busy flights.

Promotional pricing

Promotional pricing is a proven way to attract new customers who may not initially want to pay full price for a product or service they are unfamiliar with. It essentially means offering discounts for a limited time and is a popular strategy among broadband and multimedia providers and Software as a Service (SaaS) companies.

Recurring Revenue Models

Recurring revenue models make it easier to grow your business but offer additional benefits. These include longer customer relationships, which enables you to increase revenue streams by offering new products to existing customers. It also provides greater resilience to tough times and offers a better customer experience.

Many companies are moving to recurring revenue models, including membership organisations, SaaS products, physical product subscriptions, and service plans (such as insurance and utilities.)

The benefit of multiple revenue models

Multiple revenue models reduce risk by spreading revenue. It allows you to develop products which complement each other. It also makes innovating easier and leaves you open to more significant opportunities.

Apple is an excellent example of a multiple revenue model, with iPhone, iPad, Mac, Macbook, Apple Watch and many more products or accessories bringing in revenue. This dramatically reduces the risk if they only sell computers.