I think one of the hardest decisions entrepreneurs has to make is how much to charge for their products and services. If you charge too little, you’ll strtuggle to cover expenses. If you start out charging too much, you might have a tough time acquiring customers. Choosing good pricing can be a tough balancing act which is why it’s important to understand different pricing strategies in marketing, so you can choose the appropriate pricing and get your business to thrive.
Good pricing strategy enables you to choose prices that maximize profit for your goods and services. When setting prices, there are so many things to consider. Things like:
- Production and distribution costs
- Competition and their offerings
- Positioning strategies and niche
- and, Target audience
Then, after all these factors are understood, the price should be like a puzzle piece that makes the whole business come together. Here are some pricing strategies in marketing products and services that businesses implement when choosing prices for their products and services:
Competitive pricing is where a business sets it prices based on what competitors are charging. According to Investopedia, competitive pricing is usually done when a product or service has reached an equilibrium, where the product or service has been on the market for a long time and there are many substitutes.
Rather than continually changing prices as competitors change prices, some companies offer a price match guarantee to remain competitive with pricing.
Examples of businesses using competitive pricing are:
Cost Plus Pricing
Cost plus pricing is a cost-based way to price products and services. Many people with videos and articles on “how to price products or services” favor the cost plus pricing strategy.
In cost plus pricing, you add the costs of production, marketing, and distribution of products and services, then add a markup for each unit.
According to Chron, cost plus pricing works especially well when all of the costs are not well known in advance such as with big renovation projects, with custom projects, or with products that have less competition. This San Antonio Contracting Company is a good example of how cost based pricing is marketed:
Keywords associated with companies using cost based pricing strategy are:
- Get a quote
- Complete the Needs Analysis
- or other terms that denote custom pricing associated with cost
Some examples of circumstances primarily based on cost based pricing are:
- Custom aircraft
- Movie Production
- Real Estate
- or Pay-Per-Click Advertising
Very similar to cost plus pricing is markup pricing. Markup pricing is where you calculate the cost of production, the expenses direct and indirect, and add a markup. What makes markup pricing different than cost plus pricing is you also take into consideration the market demand to decide the markup percentage or amount.
Although several businesses use markup pricing, Multi-level marketing companies are known for having high markups on their products to account for the high turnover and recruitment required in that business model.
For example, Young Living Essential Oils is a multi-level marketing company that sells essential oils. They’ve done a phenomenal job with pricing strategies in marketing to take the focus away from their markup by using terms made-up marketing terms like “therapeutic grade” or “proprietary distillation process”. Here’s a product of theirs:
36.97 for 15 ml of their “proprietary blend” of oils. Customers say this brand has an almost identical blend and potency:
It’s less than 1/3 of the price! Still, markup pricing seems to be working for Young Living because they started the company in 1993 and have always maintained a higher price in comparison to competitors partially because their primary distribution method is thru independent contractors who buy into a “business opportunity”.
Premium Pricing Strategy
A strategy that falls under markup pricing is premium pricing. Companies like Rolex, Bentley, Lamborghini, Luis Vuitton, or Coach use the premium pricing strategy to set their products and services apart. Rather than targeting high volume sales or the mainstream audience, most premium priced products target high-end consumers who value perceived status over price.
Premium pricing can be done successfully by:
Limiting customer quantity or Limited Production: If you say, “We’ll only serve 30 customers at a time”, you increase the perceived value of the product or service. Lamborghini uses this approach with each model they launch.
Luxury Products: Coach, Rolex, or Luis Vuitton appeal to the luxury audience by choosing choice real estate, making their displays elegant, and locating their stores within high income brackets.
No Substitutes: Companies that have a monopoly on products or services like the water company, cable company, cell phone companies, or even the government can charge premium prices when there’s no competition because the consumers are stuck.
Patents: When there are “proprietary” elements in a product or service that add value to a customer, premium pricing can be introduced.
Strong Barriers to Entry: Some industries have strong barriers to entry like the wine industry. Wine distributers are able to charge premium prices for wine because it is a luxury item and because it’s very difficult to get into.
Uniqueness: Apple uses their uniqueness and innovation as a unique selling proposition that explains their higher prices.
Demand based pricing is where you’d analyze the periods where your product or services has the highest and lowest demand and change your prices accordingly. For example, companies know there’s a big hype surrounding “Black Friday”. Shoppers have a high demand to shop on this day.
Most companies shoot for volume during Black Friday and lower their prices. Alternatively, if you know your a seasonal company, you might lower prices in the off season to encourage off season buying.
Factors Influencing Price
As you can see there’s many strategies you can take to approach price, but you have to consider all of the factors unique to your situation before choosing the correct approach for you. It would be a big mistake to choose a strategy like premium pricing when you don’t have much marketing budget or time.
It would also be a mistake to choose a penetration marketing strategy when you don’t have the money to lose in the initial phases before the sales volume ramps up. Pricing is a delicate balance and here’s a few situational factors to keep in mind:
Resources and Pricing
I somewhat hinted to budget as a factor previously when I said “it would be a mistake to attempt a premium pricing strategy without money”. Your resources are going to play a big role in your pricing strategy.
If you need to be conservative because you don’t have money to lose, you’d probably want to stick to a cost plus pricing strategy. However, if there are other resources you could have that could give you more flexibility in choosing a pricing strategy like:
- Reputation – If you have an established reputation with enough people, then it’ll be easier to choose a different pricing strategy that enables you to acquire either premium prices or higher sales volumes.
- Uniqueness – In some instances, people would be willing to pay premium prices without the business being well established. For example, people will pay unestablished photographers in tourist areas or people will pay unestablished retailers for cold drinks in hot climates.
- Intellectual Property – Proprietary processes, unique products, or legally exclusive agreements all inflate value and open the flexibility you have with pricing.
- or Competition – Some recreation companies know you’ll be staying for hours to enjoy festivities, and they make rules like “you can’t bring food”. Immediately, they’ve removed competition. They know you have to pay the prices they have when you get hungry or thirsty. As a result, they don’t need to market their food much. Instead, they might market their admission or festivities.
Reputation and Price
If you have lots of reviews or established credibility, you’re able to have more flexibility with price. Take a look at how Tripadvisor uses reviews to distinguish which trips you should consider:
Business Phase and Price
Typically, business phase is connected to market penetration and reputation. In the startup phase, you have a less established reputation and in the mature phase.
You can choose different pricing strategies in marketing for the startup phase and change it later after you’re more established. For example, if you start up with a tight budget, you could do demand based pricing or markup pricing, then once the lead generation system is set up well, you can switch to competitive pricing or premium pricing.
Pricing strategies can change and it’s probably important to change them to test and ensure your company is getting the best profits it can.
Intellectual Property and Pricing
Similarly, with the growth of your company, you can invest more in creating proprietary processes, proprietary products, and more intellectual property to be used as a competitive advantage. Adding intellectual property can give flexibility in the pricing.
Hopefully, as your reputation becomes stronger, your brand will grow a higher demand, however, even if the demand is not specific to your brand, market demand definitely influences prices. The law of supply and demand is one of the oldest economic principles to factor into price.
According to the law…
If the demand for your product or service is high, you can raise your prices. If the demand for the product or service is low, you should lower your prices.
Competition helps to keep a more balanced playing field for the consumer. When there’s no competition, consumers can get stuck paying premium prices without reason, but when there’s competition, there’s usually a challenge in value and price. If your competition is well established within your target audience, it might be difficult to break into the market without factoring price.
Cost of Goods Sold
You never want to forget how much your goods cost you when pricing products and services. If the good are costing you more to make than the sale price, you’d be setting yourself up for failure.
Netflix is one of the top movie companies but they have competition. Competitors like Pureflix have chosen to compete for a portion of their market by appealing to the “Christian” audience or “Homeschool” audiences.
Your branding strategy and how narrow you choose to hone in on one niche could influence your pricing. You might be able to charge higher because consumers would percieve your expertise to have higher relevance than a company with a more broad approach.
A Playlist on Pricing Strategies in Marketing
Final Words on Pricing Strategies in Marketing Your Products and Services
The goal of this article was to show different pricing strategies you can use when pricing your products and services. If you have questions or concerns about this, don’t hesitate to leave them in the comments section. I’d love to help you out!
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Now, it’s Your Turn…
Do you have products or services in the market? What pricing strategy did you use? Do you think you’ll continue using this pricing strategy going forward? Why or why not?