How to use product pricing strategies to maximize revenue

Many entrepreneurs struggle to establish the best price for their product or service. The balancing act of making enough profit to sustain a business versus pricing yourself out of the market can be daunting.

This article will look at what pricing strategies are, what makes them effective, and how to choose the best option for boosting your business’s revenue.

Finding the ideal price requires a precise strategy for creating a healthy profit margin without sacrificing customers who may feel the product is worth less. Choosing the correct pricing strategy is key to balancing value and profit.

A pricing strategy is a method used to set prices for goods and services. Your product or service’s price should be brand-appropriate and take into consideration what the market will bear.

When setting prices, give special consideration to your revenue goals and marketing objectives. Research is essential. What do your competitors charge? What will your target customer pay? All these factors, along with market trends, customer demand, and your offering’s special attributes or value-added properties, go into determining the ideal price.

Pricing strategies vs. pricing models

Pricing strategies are sometimes confused with pricing models.

A pricing strategy is an internal approach used to determine the best price for products or services.

A pricing model is used to set the price and provides a structure for implementing the strategy.

They are different in scope, purpose, and application.

• Scope: pricing strategies are concerned with business goals, marketing objectives, and customer perceptions. Pricing models simply refer to the format you use for pricing.

• Purpose: pricing strategies take into consideration all the factors that help price and position products using information from customer psychology, marketing tactics and objectives, and alignment with business goals and objectives. Pricing models allow you to determine the best price point for your product or service.

• Application: pricing strategies are created within the company using research from data collected from customers, marketing goals, and costs. Pricing models are external and are presented to the customer.

An effective pricing strategy won’t just allow you to meet your business goals; it can also help you build trust with your customers. After all, your customer will judge your product and your business in terms of quality and value. Having a clear company goal is important when choosing which pricing strategy to use.

Convincing customers to purchase

There’s a sweet spot your customer looks for when making a purchase. If your price is too high, they may pass it over for a fairly-priced competitor. If the price is too low, they may think you have an inferior offering.

An effective pricing strategy is one that will convince your audience to purchase your product over others.

Representing value

Customers tend to associate lower prices with lower quality and higher prices with greater value. The ideal price will give the customer quality and will also meet their expectations in value.

Promoting customer confidence

Customers use a product’s pricing to prematurely assess its quality. As a result, pricing may determine your customer’s confidence in your offering.

Your pricing should reflect the same brand confidence that your customer identifies with. Ideal pricing can encourage customer loyalty and retention.

When pricing a product or service, it isn’t just about picking a random number and hoping for the best. It’s more about pricing your product as a win-win for both you and your target audience. You want to provide your customers with value while turning a profit at the same time.

Consider the following factors to adopt a fair yet profitable pricing strategy:

Cost of production

This cost of production doesn’t just include what it costs to produce the product. It includes all the costs that are involved with getting your product to market, including the following:

• The cost of goods sold (COGS) includes all the direct costs of producing your product, including materials, labor, shipping costs, packaging, and more.

• Indirect costs include marketing materials, loan repayments, indirect labor such as cleaning or accounting, utilities, and taxes.

• Additional costs include other specific costs attributable to this product or service, such as equipment costs and travel.

Competitor pricing

Competitor pricing is an important factor when choosing a pricing strategy because it helps determine the range of prices that your competitors are using, which may or may not reflect their success in the market.

For example, company ABC sells widgets for $25. They had some initial success, but customers quickly realized that company ABC’s low pricing reflects their quality, so they are not getting repeat sales.

Company XYZ sells a similar widget for $75. Their sales are very limited because of their high price point.

This example shows that your pricing should fall somewhere in the middle—as long as it allows you to be profitable.

Conduct a thorough analysis of the pricing strategies your competitors are using. Determine if you can price higher than them because of added value or if you want to undercut them.

Customer demand and willingness to pay

Determine historical demand and look at market trends. This will enable you to determine fluctuation and develop pricing strategies that foster customer loyalty while maximizing profits.

Understand the correlation between customer demand and price changes. If customer demand falls off sharply when a competitor takes a price increase, research the reasoning behind this. If your product has a more elastic demand (meaning customers are very price-sensitive), more competitive pricing may be needed.

Positioning in the market

The way you position yourself in the market directly correlates with pricing. Consider your brand’s reputation, the quality of your product or service, if you’re offering features or enhancements that are exclusive to your product, and if your product fills an unmet customer need.

When finding the ideal price, you’ll need to choose a pricing strategy that fits your company’s circumstances.

These seven pricing strategies can help you better understand how to set the prices that are right for your company and your customers.

Value-based pricing

Value-based pricing is a type of pricing structure that is based on what your customer believes a product or service is worth.

It can work well for companies pricing highly valuable products such as art or fashion. For example, customers often believe that some high-end items with positive brand equity are worth more because of brand recognition and historical premium quality.

Consider brands like Rolls Royce, Hermès, and Cartier. On the reverse side, it can be challenging for commodity or stock products to command high prices. The customer’s perceived value is what drives the pricing, and it can be influenced by other factors such as economics, social circumstances, or cultural beliefs.

Cost-plus pricing

One of the easiest, most straightforward pricing strategies is cost-plus pricing—a simple calculation that takes the cost of the product or service and adds a markup to determine the price.

For example, a hat costs $5.00 in materials, $5.00 in labor, $3.00 in transportation costs, and $4.00 in overhead and indirect expenses. Let’s say the industry standard is a 25% profit. You would simply add the costs together ($17) and multiply it by 1.25, giving you a retail price of $21.25.

This pricing strategy is simple and works well for some physical items. However, it doesn’t take into consideration price changes of raw materials, other changing market conditions, or what the customer perceives the item is worth. It’s also not well-suited for some items that aren’t affected by product manufacturing, such as software.

Penetration pricing

If you are introducing a new product to an already established market or you are a new company with little to no brand recognition, then you may initially employ penetration pricing as a strategy to get a foothold in the market.

This strategy intentionally sets low prices with the goal of capturing more market share.

It may work initially, but it’s not sustainable in the long run. For penetration pricing to be successful, you must obtain a decent amount of sales and get customers loyal enough to continue to purchase when the price increases in the future.

Dynamic pricing

Dynamic pricing is the strategy of changing your prices to match the current demand for your product or service. It’s also known as surge pricing, demand pricing, or time-based pricing.

This strategy is used in many industries, including airlines, hotels, rideshare, and entertainment, to offer lower pricing in times of lower demand and higher pricing in times of higher demand.

An example might be airline fares that are higher over the holidays or rideshare services that are more expensive on weekends. If you want to book a hotel room in Phoenix in January, it would be substantially more expensive than the same room in July.

Bundle pricing

Bundle pricing is a strategy where multiple items are grouped or bundled at a combined price that is more favorable than if the items were bought separately.

For example, an insurance company may bundle several policies at a less expensive rate or offer discounts if multiple policies are purchased. Retail items are another example. They may be packaged together and sold at a better price than if the items were purchased separately. Think of holiday gift packs such as food, health and beauty items, or packaged socks or underwear.

This is a good strategy if your company is promoting a new product or service or trying to increase sales volume. However, bundling should be closely monitored to ensure that the bundled sales equate to individual sales, or profits could suffer.

Price skimming

Price skimming is when a business charges the highest initial price on an item that the market will allow. They then lower it as competition and saturation increase.

Consider how the latest cell phone product is priced. Initially, the cost is very high. But, as other companies release cell phones with similar technology, the cost will continually drop. Another good example is drugs in the pharmaceutical sector. A new drug is introduced at a very high price, but that price will drop as more and more generics are offered or other alternatives are manufactured.

Price skimming can initially lead to high profits. It works best for products that are in high demand but have little market competition.

Competitive pricing

Competitive pricing is a strategy that sets prices based on your competition.

Companies just starting out may use competitive pricing to get a foothold in a competitive market. When they price their product or service slightly below their competitors, it can enable them to attract and retain customers. If, however, you are a smaller company, you may not be able to have a low cost of goods sold, so your profit margins may be low.

When using a competitive pricing strategy, be sure to investigate your target audience and their buying habits. If their choices are not price-driven, a competitive pricing strategy may not be effective.

Absolutely! In fact, you can often improve your results if you combine multiple pricing strategies.

To do this successfully, you must know your customers, what they are willing to pay for a product, and how that can differ between products or services. This means using the right strategy for the right customer for the product they are buying.

Use multiple strategies to best reflect your customer, the market conditions, and, of course, the lifecycle of your product or service. When done correctly, your company can experience better profit margins, customer satisfaction, and overall success.

There are several things to consider when choosing a pricing strategy for your product or service. For it to be successful, you’ll need to ensure it aligns with your company’s brand and philosophy. What you’re offering is another key consideration alongside market saturation, who your customer is, and their buying habits.

Start with these steps to choose the best pricing strategy for your offering:

1. Know your costs

To figure out your product pricing strategy, you must be aware of all the costs involved with bringing your product to market. This can be especially tricky if you manufacture a product, so be sure to include the cost of goods sold, production time, packaging, shipping, loan payments, and promotional materials.

If you are a retailer, you know the product’s wholesale price, but be sure to include any other charges you incur before the product arrives in your customer’s hands.

2. Know your customer

Your customer’s demographics are an important consideration when determining your pricing strategy. Here are some of the things you’ll need to consider:

• The demographics of your target audience: where they live, their income, their age range, and more.

• What are they willing to pay for your product?

• What are their pain points?

• What makes them a loyal customer?

3. Know your pricing potential

Choose a pricing strategy that will benefit your product and business. Your pricing potential is variable and can depend on several factors, such as:

• Cost

• Inventory

• Fluctuations in demand

• Geographic market and demographic data

• Brand or product awareness

• Competition in the marketplace

4. Know your competition

Don’t just look at who your competitors are, but research why they are successful. Determine how your product or service is better than theirs. For example, it could be that your product is of a higher quality, has enhancements, is less expensive, and is local.

To beat your competition in the marketplace and lure customers, you must either offer a better quality or a better price. Crucially, you need to determine how to retain those customers once they purchase.

5. Know your ultimate business goals

In an ideal world, you would produce your widget, take it to market, offer it at a highly profitable price, and retain all the customers who purchased it. But in the real world, you know you have to work hard to get your product into the hands of the customer. A big part of that is your pricing strategy.

To determine your strategy and strike a balance between your goals and customer value, you must first define your business objectives and take steps in that direction when choosing a pricing strategy.

Is your goal to produce high-end, luxury products? Or are your products made to appeal to those who want something affordable? Do you want to increase profitability, improve cash flow, or make your brand a recognizable name?

Many beginner entrepreneurs don’t think too much about pricing strategies. The reason? Some are probably just thinking, “If we build it, they will come.” Unfortunately, that doesn’t happen in real life.

Most successful companies have pricing strategies that work for them, propelling them to top performance in their category. Apple, Walmart, and Amazon are some of the companies that have been most successful.

Apple’s premium pricing strategy

Apple is one of the prime success stories in the US. From humble origins in a garage, it now owns the market share of high-tech electronic devices.

Apple can use their high-quality, innovative products to boost their brand positioning using a premium price skimming strategy. Because of their branding and their continually evolving technology, they can set their prices relatively high when compared to their competition.

Apple can use influencers and market trends to launch new models with different features and price points to reach a broader audience.

After the launch of new products, they offer trade-ins, discounts, and group deals that also work to grow market share and retain customers.

Once a product hits the marketplace, Apple benefits from economies of scale, lowering costs thanks to additional efficiency and better purchasing power. They then gradually lower the price until the next new product release is introduced.

Walmart’s low-cost pricing strategy

Walmart is famous for introducing its everyday low prices. It has made a long-term investment in being a low-cost leader and staying true to its business goals.

This pricing strategy is where a retailer maintains a low price on products instead of sales and discounts to attract customers. It’s an approach that appeals to budget-conscious, busy shoppers who don’t have the time to compare prices between competitors or shop sales.

Walmart combines competitor pricing with other models to keep prices low. Because of the company’s vast scale, they can cut operating expenses through efficiencies, purchase in bulk, and optimize bargaining power to get the best deals from suppliers.

Walmart has spent time getting to know its customer base, assessing its competition, and keeping a close eye on profit margins. With lower costs, they can be a leader in their category, appealing to loyal, satisfied customers.

Amazon’s dynamic pricing strategy

What started as an online bookseller is now a global phenomenon. Amazon has achieved much of its success by offering its customers the lowest price possible. Unlike Walmart, however, Amazon uses a dynamic pricing strategy that uses a sophisticated algorithm to monitor and change prices according to market demand and competition. The buyer gets a great price without compromising value.

Amazon also employs other tactics to keep shoppers coming back for more, including personalized suggestions. They also offer the Prime loyalty program, which, for a flat rate, gives customers additional benefits in other purchase categories. These include free shipping, unlimited music and video streaming, special deals, and discounts. Crucially, besides giving value to customers, Amazon’s Prime membership generates a significant amount of revenue.