Common Pricing Strategies

 

Common Pricing Strategies

By Connor Williams

The price of a product or service can be one of the most important decisions a business will have to make. The price will either attract your customers or scare them away, but this depends on the value of your product/service.

In this blog post, I will be explaining 3 of the most common pricing strategies that business’s use to this day.

1) Cost-based Pricing

This strategy is where a company will set the price based on how much it costed them to produce, promote, and distribute their product/service.

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This can be a good way to keep your profit margin consistent and reliable but this will only be achieved if a company can successfully convince their target consumers that their product/service is as valuable as the price. From this point, it is easier to further develop a definitive price for the product/service.

2) Value-based Pricing

This strategy is essentially the inverted version of cost-based pricing. A company sets the price based on their target consumers' perception of the value of the product/service.

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This can be a good way to cater towards a consumers' wants or needs and have a fair price in the eyes of the consumer as well as this. 

However, finding this sweet-spot for the price can be a challenge for a company. For instance, if a company sets its price below their consumers' maximum willingness to pay for the product/service, then the demand could be a lot higher than expected which of course is a good thing at first glance, but the negative is the company is not obtaining all of the potential profits.

3) Market-penetration Pricing

This strategy is when a company deliberately sets the price of their product/service lower than the average price of that markets products/services.

This is mainly used to attract a large amount of buyers, obtaining a large market share when starting out in a competitive market. After a company has established themselves into their target market, they may rise the prices of their product/service.

This strategy is conditional however. You would use this strategy if you are confident that your low prices will deter other companies from joining in on the markets margins. The market also needs to be a price sensitive one, so that your low prices will actually attract lots of buyers. Lastly, the cost of production and distribution of your product/service will need to decrease as the volume in sales increases in order for a company to see the full potential profits.

 

References:

Bragg, S. (2022) Cost-based pricing definition, AccountingTools. AccountingTools. Available at: https://www.accountingtools.com/articles/cost-based-pricing (Accessed: February 24, 2023). 

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Bosankic, L. (2017) A basic guide on cost and value-based pricing, Medium. Medium. Available at: https://medium.com/@leo_pold_b/a-basic-guide-on-cost-and-value-based-pricing-66e8d5dad22f (Accessed: February 24, 2023).