From sole proprietorships to global conglomerates and every kind of company in between, oneof the hardest questions many businesses face is also one of the most basic: How much shouldwe charge for our products and services? Adhering to a disciplined pricing process —where goals are clarified and appropriate methods are selected — can help allayuncertainty and improve outcomes, which, in turn, leads to higher profits, larger marketshare and business longevity.
What Is the Pricing Process?
The pricing process is the series of steps a business takes to figure out how much to chargefor its products and/or services. The process is both an art and a science. In some cases,each individual product or SKU will have its own pricing process; in other cases, pricing isconsidered at the portfolio level, such as when separate products are bundled together atone price.
Key Takeaways
- Before making any pricing decisions, it’s important for the business to clarifyits objectives and know as much as possible about its customers and competitors.
- Setting a specific, primary pricing objective can help the business narrow down whichstrategy or strategies might work best.
- Pricing products and services is not a set-it-and-forget-it task. Businesses mustconstantly monitor their customers, competitors, market trends and the economy.
Pricing Process Explained
Pricing is one of the “4 Ps” of the marketing mix, the other three being theproduct to be sold, the places (sales channels) where the product will be sold, and thepromotion of the product to potential customers. The pricing process is a customizablemethod that companies use to determine how to price their goods and services, and it’sconsidered in the context of the other three factors.
For example, the quality of a product relative to its competitive offerings can helpdetermine whether a premium pricing strategy is sustainable, while the place it’s soldcan dictate whether a dynamic pricing strategy is even possible. Many pricing strategiesalso go hand in hand with promotional strategies. In fact, some pricing strategies, such ashigh-low pricing, specifically require integration with promotions to offer regulardiscounts. (More on these pricing strategies soon.)
Price Elasticity of Demand
Before diving into the pricing process, it’s essential to understand the implicationsof price changes — a concept known as the elasticity of demand.Price elasticity is a way of measuring how sensitive a product’s sales are to itsprice. Demand is said to be elastic when small changes in price produce big changes in thequantity purchased. Conversely, demand is considered inelastic when the quantity of aproduct sold remains about the same, regardless of its price.
Demand elasticities are measured using the aggregate demand curve for a product. If abusiness is one of hundreds making a functionally interchangeable product, its pricing poweris constrained by market conditions. However, if the product is well differentiated, to thepoint where the business can consider its loyal customers to represent a market of theirown, then the elasticity of demand concept comes into play, as the business debates thetrade-offs that come with raising or lowering prices.
For products with highly elastic demand, it’s possible that the business could makemore money by lowering the price, because the increase in sales would more than make up forlost margin per sale. But raising prices could be a better move for a product with highlyinelastic demand, because, in addition to making more money per sale, about the same numberof units will likely be sold.
The more differentiated the product, the more the business can tap into these concepts. Keepin mind, though, that short-term and long-term elasticities don’t necessarily align.For example, people who drive to work have a fairly inelastic short-term demand forgasoline. They might take fewer discretionary trips, but they’re still going to driveto and from work every day. But if prices are persistently and uncomfortably high, they maystart to carpool. And if those high prices are a concern at the time of their next vehiclepurchase, cars with better mileage, hybrid models or fully electric vehicles are likely tobecome more appealing.
Pricing Process Steps
Before a business can affix a price tag to any of its offerings, it must do its due diligenceto ensure that the price is right, for both its customers and its bottom line. The followingsix steps outline the pricing process, with greater details about steps 4-6 to come insubsequent sections.
Know Your Business
In the first step of the pricing process, the business digs deep to determine itsneeds and — equally important — its constraints. At what point is aprice too low, causing the business to lose money on each transaction? What are thebusiness’s fixed and variable costs, and how much would it need to sell to break even atdifferent price points? What is the maximum capacity of production beforethe business needs substantial investment in order to sell more?
These answers and numbers are critical to selecting the right pricing strategy (step5). A strategy that cuts prices while doubling sales in a year won’t do muchgood if it takes two years to build the capacity to meet that kind of demand. In themeantime, promotions that aim to expand market share could put the business at riskif the deals are too good and the business can’t afford to fulfill them.Keeping in tune with the current state of affairs, studying next-step options, andunderstanding the business’s costs and operations provide essentialinformation for sound decision-making. Put another way, the business must understandits needs inside and out and use those details as the foundation on which it buildseverything else.
Assess the Target Market’s Demands
Once the business has assessed its own needs, it’s time to learn everything itcan about its current and potential customers. What do they think about thebusiness’s product or service? What problem does that product/service solvefor them? How many noncustomers share that same problem? What do those people doabout the problem? How eager or hesitant are the business’s target customersto find a better solution or try something new? What’s most important to them,and where does price fall on their priority lists? How big is the total market? Whatcould grow or shrink that number?
The answers to these questions are central to picking the right pricing strategieslater on. For example, the business couldn’t charge a premium over itscompetition if its customers think its offering is a good, but lower-qualityalternative to the bigger names in the same industry. The business also needs torecognize whether it’s fighting with competitors over existing customers or ina race to tap newmarkets and customer segments. Each involves different mindsets andstrategies that will inform many marketing decisions, including price.
Evaluate Competitor Pricing
Now, it’s time for the business to evaluate its competitors and other next-bestalternatives. For example, a startup ride-sharing service should, of course, seewhat Uber and Lyft charge, but also review taxi, bus and car rental prices.Underpricing a close competitor can be a huge advantage. (Imagine cutting margins by20% but doubling sales, which would more than make up for any loss.) On the otherhand, charging a little more than the competition could signal that the product issuperior.
Regardless of the strategy, monitoring the competition is essential. If the businessis out of sync with like businesses, it could also wind up doing serious damage toits reputation, on top of the more immediate loss of short-term sales.
Choose a Pricing Objective
Before establishing a pricing strategy, the business must be clear about what thestrategy needs to accomplish and ensure that teams are aligned. Is the objective tomaximize profits? Market share? Is it looking to build the brand or just get throughsome tough times? The objective will ultimately drive the strategy.
Select a Pricing Strategy
…or a mix of strategies. The goal is to make sure the chosen strategy isappropriatefor the product, will be well received by customers, can be executed by staff, andwill lead to progress toward the main pricing objective.
Determine Your Prices
Strategy in hand, prices can now be set. The information gathered about the businesscan inform realistic prices and sales forecasts. Customer information can be used tomake sure the prices will be attractive to them. Competitive information candetermine prices in terms of market positioning. Pricing decisions are the bigculmination of a long process of research and analysis, but remember, it’salso somewhat forgiving: If the business misses the right price by a little bit, itcan usually change it promptly. Much can be learned along the way, and the bestcompanies incorporate that kind of new information quickly.
6 Types of Pricing Objectives
A key step in the pricing process is determining the primary pricing objective. This willsteer the business’s strategy and price-setting going forward. These examples coverthe most common focuses of companies going through the pricing process.
Profit-Oriented
Nonprofit companies aside, financial gain is one of the primary — if not thedefault— objectives among businesses. It entails devising a pricing strategythat, at least for some businesses, builds in a decent profit margin,which is often defined by the business’s industry.
An important consideration is whether the business is after short-term or long-termprofit. Companies going into short-term profit maximization mode will often makeshortsighted decisions that generate a lot of money up front but could erodecustomer loyalty and invite competition. Be clear about your time horizons and riskswhen looking for profit-maximizing pricing strategies.
Survival-Oriented
Sometimes a company’s main objective is simply to stay in business. Thesecompanies aren’t trying to expand or squeeze extra margin out of theircustomers. Rather, they are facing tough times — whether due to a disruptionin their business model, a major event (such as a pandemic) or a short-termemergency, such as a sudden problem with cash flow — and are fighting tosurvive. Any of these reasons, and plenty more, could necessitate an immediatepricing strategy pivot. Survival mode is going to look a little different dependingon the threat, but it’s important for businesses to align their pricingstrategy with their most immediate and urgent needs, while also working to ensure amore successful future.
Sales-Oriented
Usually, a sales goal is to “increase sales,” but a sales-orientedpricing strategy can also seek to change a company’s sales pattern in othermeaningful ways. For example, when a company launches a new sales channel —perhaps selling through a new partner, introducing a mobile app or opening a newstore — it may initially want to funnel more business through the new option,as a way to test the waters regarding a potential future direction for the business,even if it means sacrificing some profit in the short run.
Whatever the reason, a pricing objective that targets sales will aim to generate moresales, either in general or of specific types (within a new target market, through aparticular channel, in a particular geography, etc.). The details of the intendedpush will help determine an appropriate pricing strategy to steer customers in thedesired direction.
Market Share–Oriented
Choosing market share as an objective is similar to selecting sales but with a morestraightforward end in sight: Companies with this goal want to capture a largerpercentage of the market’s customers. This isn’t alwayscompatible with profit-maximizing, as the most successful way to attract newcustomers is often to offer great promotions and deals that lure them in. But plentyof businesses see market share as the best path to success and longevity: Being thedominant, more recognizable and beloved brand can be turned into profit later on.
Image-Oriented
Some companies use their pricing strategies to help cement a particular image. Forexample, makers of luxury goods typically choose to keep their prices high and wouldrather have inventory go unsold than sold at a discount, out of fear that doing sowould erode the long-term image of their brand. By the same token, some companies doeverything they can to keep the prices of certain items low, wanting to be known ascustomer-friendly and reliable. Sometimes companies will even use pricing as part ofa gimmick or theme, like selling items for $17.76 on the Fourth of July to reinforcethe holiday’s theme.
Status Quo–Oriented
Don’t. Rock. The. Boat. This is excellent advice for businesses thatdon’t know what they’re doing when they start out running a pricingprocess, and there’s no urgent need for immediate change. Staying the courseis just fine in advance of thoughtful deliberation and preparation for theopportunity being right. Change for the sake of change can confuse or annoycustomers.
However, status quo pricing doesn’t mean that a business should never changeits prices. The status quo can also be thought of in relation to where the businesswants to position itself in terms of the competition. If the business wants to keepits prices 3% lower than its competitors’ at all times, if competitorsincrease their prices, then the business will need to do so, too, to maintain the 3%gap.
17 Types of Pricing Strategies
With objectives and consumer and competitive information in hand, a business is ready toselect a specific pricing strategy. The following list includes some of the most common anduseful pricing strategies (alone or in combination) found in the business world today.
Competition-Based Pricing
Competition-based pricing is a strategy in which a company sets its prices based onits competitors’ prices. This strategy is often used in markets wherecompetitors offer similar products or services and where price is a majorconsideration for customers.
Setting prices based on competitors’ pricing typically means matching orslightly beating them. If companies sell functionally identical products that areinterchangeable in the eyes of customers, then they’ll probably wind upconverging on almost identical, if not identical, prices. Think about how gasstations adjust their prices together. While certain differentiating factors, suchas a convenient location, may matter, gas is gas, and a station selling wildlyoverpriced gasoline will soon see cars passing it by.
If products are not interchangeable, competition-based pricing might mean making sureprices aren’t too out of sync, while still maintaining a gap. If a premiumseller in a market is lowering its prices, a low-cost provider in the same marketwill have to stay below it to retain its customers. Likewise, the high-end sellermay still be able to command a revenue premium with its better products — butonly to a point, lest the gap become too wide between its competitors’ pricesand its own.
Cost-Plus Pricing
With cost-plus pricing, a company adds a markup to the cost of providing a good orservice to determine final pricing. The markup can be a percentage (most common), afixed amount or both. Cost-plus pricing requires a comprehensive understanding of aproduct’s or service’s costs; if the business is missing a key component— for example, hours spent by employees to prepare the product — itcould wind up losing money on every transaction. Implemented well, cost-plus pricingoffers a simple way to ensure that transactions are profitable and prices reflectcosts.
Cost-plus pricing requires frequent monitoring of the relevant costs, as well as whatcompetitors are doing. Cost-plus pricing can quickly turn into competition-basedpricing if competitors are competing over who can trim their costs and/or markupsthe most.
Dynamic Pricing
Dynamic pricing is a strategy in which a company sets prices based on real-timemarket conditions. Dynamic pricing means that the price of a product or service canchange frequently, depending on such factors as current inventory levels, howquickly inventory is selling, competitors’ prices, customer behavior and evencurrent events.
Dynamic pricing offers several advantages, including the ability to respond quicklyand to maximize profits. Once in place, dynamic pricing can be handled by, or withthe assistance of, automation technologies, taking a lot of work out of human hands.It also prevents companies from getting left behind when competitors are movingquickly, as well as enabling them to respond to internal needs — such asclearing out slow-moving inventory — before they become bigger problems.
However, not every customer segment is going to respond well to dynamic pricing,especially when more predictable alternatives are available. Dynamic pricing alsorequires monitoring. For example, without human oversight, a hotel could wind upselling out at very low prices on busy nights, when dates for a nearby event areannounced. It’s also important to implement safeguards, in case an algorithmaccidentally gouges customers to the point of reputational harm, or it exploits atragedy, causing the business to be seen as predatory.
Freemium Pricing
“Freemium” pricing is a portmanteau of “free” and“premium,” and that’s exactly what this pricing strategy is: afree version plus a premium version presented to the customer at the same time.Anyone can sign up for the free version, but a premium version that’s betterin some way is also available. The idea is that a percentage of customers will loveor have high enough needs for the product or service that they’ll upgrade tothe paid premium version.
Freemium models are common with software. The paid version could unlock additionaland more sophisticated features, eliminate unwanted features (such as ads) or allowfor heavier usage, such as increased file storage space.
For freemium pricing to work, the following has to be true:
- The freebies have to be inexpensive, since they’ll be subsidized by asmaller group of paying customers. When talking about a few gigs of storagespace, that’s easy enough, but any hands-on services that require regularhuman interaction could send labor costs spiraling out of control.
- The free version has to be an excellent experience for customers. After all, thefree version is a form of marketing for the paid version. If the free experienceis subpar, customers will be less likely to upgrade.
- The paid version has to offer meaningful upgrades that are both valuable andeasy to communicate to target customers.
Freemium pricing requires more advanced thought and commitment than most other typesof pricing, in that the business has to split its offering into at least twoversions. That’s a bigger lift for most companies than just changing the pricetag on existing items and seeing what happens.
High-Low Pricing
Most common in retail, high-low pricing is a pricing strategy in which a company setsa high price for a product or service and then offers fairly frequent discounts,sales or other promotions. High-low pricing allows the company to attract bothprice-sensitive customers through frequent bargains and less price-sensitivecustomers who are willing to pay full price, rather than wait for sales or searchclearance racks.
Sometimes, companies use high-low pricing to offer quasi-dynamic pricing withoutchanging the sticker price. Other times, it’s a form of price discrimination:letting more price-sensitive customers monetize their flexibility and patience,while more affluent customers don’t have to wait for a sale. In some cases,it’s a form of psychological marketing that operates on the idea thatcustomers will be more likely to buy if they feel like they’re getting a greatdeal. (More on this strategy soon.)
The risk of high-low pricing? Sometimes a company can cannibalize its own business,if it makes it too easy to get a low price, because the discounted price loses itsallure.
Hourly Pricing
As its name implies, hourly pricing means a company charges its customers based onthe number of hours that employees and subcontractors work for that customer. Thispricing model is often used for services that are specialized or labor-intensive— such as consulting, legal services and cleaning — marked up to coveroverhead and other expenses. It works especially well for projects where the goalsand/or obstacles aren’t well known at the outset.
It’s important to remember that agreeing on hourly pricing and a certain rateis not the same as agreeing on a total price. Transparent documentation andcommunication are helpful here, so that all parties feel charged and paidappropriately.
Skimming Pricing
Skimming pricing is a pricing strategy designed for introducing new products into amarket. With skimming pricing, companies charge a high price for a new product orservice, then lower the price over time as more competitors enter the market and/oras demand for the product or service decreases.
The idea behind skimming is that when a new product comes out, some people will valueit very highly. Therefore, sellers start the initial price high for the mostenthusiastic (and most willing to pay) customers. Later on, the price can be loweredto capture the portion of the market that didn’t want the product right away.
A major risk of skimming pricing is that a competitor or substitute could enter themarket before the business captures enough of it, and its initial high-priced salesdon’t make up for the volume lost by not lowering prices faster.
Penetration Pricing
Penetration pricing is the flip side of skimming pricing. Here, a company sets itsinitial price very low for a new product and service, then raises it over time. Lowinitial prices can help companies capture new customers quickly, allowing them tobuild market share (and hopefully loyalty) ahead of competitors poised to enter themarket. Penetration pricing also gives customers a chance to try the new product orservice with less risk; future price increases will reflect increased confidence inthe new offering as it becomes a trusted brand. The goal of penetration pricing isto give up some short-run profits at the outset in exchange for faster growth and/ora more defensible position later on, when the business is faced with morecompetition.
Premium Pricing
Premium pricing is exactly what it sounds like: setting prices higher than a businessotherwise would or, more commonly, higher than the competition’s prices.Companies that do this profitably — making more from the markup than they losein sales to price-sensitive consumers — are said to be able to command arevenue premium.
Premium pricing is a solid strategy for businesses whose customers are willing to paymore for higher quality products. Sometimes, “higher quality”isn’t about durability or features but, rather, perception. If a brand is wellknown and consumers get some kind of psychological or social benefit from being seenas a customer, such as with sports cars or designer handbags, that alone can sustaina revenue premium over less well-known competitors’ products of otherwiseidentical quality.
Product or service reliability is another justification for premium pricing.Airlines, for example, have been able to maintain revenue premiums just by being ontime more often than their competition, even if they have an identical in-flightproduct and a worse loyalty program. It’s also the reason a big-nameconsultancy might get hired over a less-expensive alternative that could do just asgood a job.
Project-Based Pricing
Project-based pricing is a strategy in which companies charge for the end result of acompleted project, regardless of how many hours it takes to complete. This workswell when the end result is known, can be described in detail, and the company has agood idea of what it will take to complete. Project-based pricing is common inconstruction (“build me X”), marketing (designing and executing an adcampaign, for example) and artistic commissions.
Sometimes, more complicated contracts will be a hybrid of project-based and hourlypricing, when, for example, some items are included in the project price — orincluded up until a well-defined point — but others are not.
Value-Based Pricing
With a value-based pricing strategy, a company sets prices based on the perceivedvalue of its products or services in the eyes of the customer. In other words, theprice is based on what customers are willing to pay, rather than on the cost ofproduction/delivery or the market price.
Value-based pricing can be explicit. Hedge funds, for example, often go with a“2 and 20” pricing structure, where investors are charged 2% of theirassets under management as a flat fee, but then 20% of the gains the hedge fundearns go to the investment management company, representing a 4:1 split of theprofits. One advantage of this kind of built-in value-based pricing is thatincentives are aligned — the hedge fund makes more money when its customersmake more money.
Companies also use this kind of pricing structure to tackle large societal problems.For example, homeowners may know that installing solar panels will save them money,but the up-front costs are substantial. A company might say, “We’ll payfor all or most of the panels and installation, and you pay us back when you payyour electric bill — some or all of the savings will go to us for apredetermined period.” The customer winds up paying the company in proportionto how much value the company was able to add to the home’s energy efficiency,and, at the end of the relationship, the home is now greener and cheaper to operate.
Bundle Pricing
Bundle pricing (sometimes just called “bundling”) is a pricing strategythat allows a company to sell several products or services together as a unit— such as with television packages. The thought is that customers will value asubset of items within the bundle as being worth as much as or more than the price,which would be higher if all the items were sold separately.
Think of a simple cable package with two channels: Channel 1 and Channel 2. Onecustomer thinks Channel 1 is worth $80 per month and Channel 2 $10 per month.Another customer thinks the opposite is true. If these customers purchase only theirmost highly valued channels, the most the cable company will make is $160. But ifthe company bundles the channels and sells them as a package for $89, then it wouldmake $178.
Bundle pricing is a natural fit for physical products where customization isdifficult. It may be a way to provide curation services — gift baskets, forexample, are a form of bundled pricing. Bundling is also increasingly common inservice industries beyond telecom. For example, event-hosting venues often havebundled meal and entertainment packages from which to choose, while travel providersare increasingly bundling a variety of experiences, such as lodging, food andtransportation.
Be aware that although bundling can add value for both business and consumers alike,it can also annoy customers who resent having to pay for things they don’twant. But the biggest danger is that bundling may be illegal if it forces customersto use a secondary product or service they might otherwise get from another company,if it comes as a condition of purchasing a primary product.
Psychological Pricing
Psychologicalpricing is a broad term covering pricing strategies that leverage what isknown about human psychology to influence consumers’ purchasing decisions.Psychological pricing techniques can be used alone or in conjunction with otherstrategies.
The most common technique is called “price ending,” which tries to make aprice seem smaller by setting it just below a rounder, larger number — forexample, an item is priced at $3.99 or $3.95 instead of $4. The extra penny ornickel doesn’t matter very much, compared to the benefits of the price feelinglower to consumers. It’s especially impactful when the left-most digit changesas a result of the tiny markdown. In other words, $19.99 is better than $20. Thisworks with whole-dollar prices, too, like a $29 restaurant menu item that mightotherwise cost $30. It’s also used for items that are among the most expensiveand time-consuming purchases buyers may make in their entire lives, such as for realestate.
Another psychological strategy is the “loss leader” — a productpriced so aggressively the seller loses money on it, but it’s designed to grabthe attention of customers, get them through the physical or digital door, and builda brand.
Geographic Pricing
Geographic pricing is a straightforward technique that many companies use as theyexpand. As its name implies, geographic pricing means charging different prices indifferent geographic locations. While sometimes it’s a clever way to make moremoney, more often than not it is used out of necessity: Different localities havedifferent taxes to pay and regulations to follow, faraway locations have highertransportation costs, international borders may require dealing with customs andtariffs, rents on similarly sized storefronts can be wildly different depending onlocation and the same is true of labor costs. What’s more, customers arelikely to have vastly different needs and incomes.
Even companies that pride themselves on consistent low pricing across geographies,such as fast-food restaurants, still find the need to charge different prices indifferent countries. In fact, The Economist created the Big MacIndex(opens in a new tab) to track thecost of a McDonald’s Big Mac across borders and currencies, and learn aboutpurchasing power and cost of living in different areas of the world.
Subscription Pricing
Subscription pricing centers on the business providing access to its product orservice on an ongoing basis in return for recurring revenue, often monthly.Newspaper and magazine publishers have long abided by this pricing model. But it hasalso become increasingly popular among software vendors, which charge customers amonthly or annual fee for access to their applications via the internet. Thesoftware company typically earns more in total revenue, and customers appreciate nothaving to buy new software when an updated version comes out, as updates areincluded in their subscriptions. And if customers’ needs change, they also getthe benefit of being able to cancel at a low cost.
Subscription pricing pairs well with some of the other pricing strategies on thislist. For example, freemium pricing is common with subscriptions, and all thethinking behind choosing between penetration or skimming pricing can easily apply tosubscriptions as well. Sub-strategies withinsubscription pricing, such as tiered pricing, are also worthy ofconsideration.
Captive Pricing
Captive pricing is a strategy that involves a core product alongside“accessory” products that are often required to realize the full valueof the core product — for example, a printer purchase also requires thepurchase of ink cartridges. With captive pricing, the core product (the printer) isoften priced very reasonably, with most of the profit margin built into theaccessory products (the ink).
Accessory products don’t have to interact directly with the core product oreven be sold by the same company. Captive pricing is the reason food is so expensiveat sporting events and concerts in large arenas: There’s a captive audiencethat has no good alternatives.
In either case, once the core product is in use, the costs to switch are high —another reason customers become “captive.” Unsurprisingly, customerstend to dislike this approach, so businesses should consider the impact on theirbrands and customer acquisition costs before committing to it.
Free Trials/Samples
Free trials are similar to freemium pricing in that the idea is to let prospectivecustomers sample products and services for free before they decide whether to buythem, but with one exception: The free trial ends. The reasoning is that it’smuch easier to sell something when the customer has had personal experience with it.This can take the form of giving away single-ounce servings of a snack or beveragethat the business is trying to sell, offering access to its website for apredetermined length of time before access is revoked or a credit card is charged,or giving out free months or more of membership, in hopes that customers will growto depend on the product or service and not want to give it up.
The size and/or duration of the free-sample offering will likely involve someoptimization to determine how to get the most paying customers for the leastinvestment. One way companies are increasingly looking to improve returns on freetrials is by marketing those trials to a select group of customers, rather than tothe general public, in hopes that they’ll get better conversion rates.
How to Determine the Best Pricing Strategy
The best pricing strategy is typically guided by an individual business’s situation.Some strategies will be easy to rule in or out — for example, geographic pricing isall but mandatory for a global B2B services company, whereas it wouldn’t make sensefor a single-location restaurant. Likewise, some of these strategies target newly introducedproducts, whereas others are appropriate for established products.
The business’s pricing power is also an important factor. If the business is the onlyprovider of a product or service, with no competitors or close substitutes, it has amonopoly, so the only limits on its pricing power are legal and political ones. If thebusiness sells a completely fungible product, it probably has little choice but to chargethe market price for what’s essentially a commodity product.
Additional considerations: How competitive is the market? The more competitive it is, theless the business can deviate from prevailing prices, so competition-based pricing becomesmore important. How differentiated is the product? If it’s unlike anything else on themarket, the business may be able to break from competitors and decide its own markup incost-plus pricing. How customized and complicated are the orders? Hourly or project-basedpricing could fit the bill, perhaps in conjunction with value-based pricing. (Keep in mindthat mixing these strategies is often desirable.)
It’s also a good idea for businesses to examine their competitors’ prices andpricing strategies to see whether they’re bundling, using dynamic pricing, varyingtheir prices based on geographies and so on. Finally, businesses should also be open to abit of experimentation to see what pricing works best for them and their customers.
Pricing Process Examples
Pricing is anything but static. Let’s consider the journey of MCR T-Designs, ahypothetical T-shirt company, from startup to established player, and how its pricingstrategy transforms along the way.
Example 1: MCR emerges as an immediately popular company that sells T-shirts withclever phrases at popular vacation destinations. As a new entrant to the market, the ownersknow that their unique style and sense of humor are going to be easy to copy, so they adopta penetration pricing strategy to support their objective of growing market share byundercutting competitors and trying to build a brand while, at the same time, generating asmany sales as possible to get the business rolling.
Example 2: Curse you, Mother Nature. A hurricane closes some of MCR’s bestlocations during the peak of this year’s vacation season. The company had purchased alot of inventory in anticipation of sales that never came, and now bills are coming duewithout income coming in. As a result, MCR’s focus changes from growing market shareto surviving, which calls for the complementary strategy of selling off inventory at reducedprices and investing more in online sales and social media — whatever it takes —to make up the sales gap.
Example 3: MCR weathers the storm and emerges more stable than before. Goingforward, the owners want more consistent pricing and profits, so they reorient their keyobjective to seeking profit. They decide the best way to achieve this is with a cost-plusmodel, ensuring that every sale generates a healthy profit without prices ever getting toofar away from their costs. This allows them to remain competitive in a market where manycustomers are not brand-conscious. They keep a close eye on competitors’ prices,however, and will adjust their margins if their prices ever get too high relative to theirclosest competition.
Industry-Based Pricing Processes
Some industries are natural fits for a specific pricing process. Occasionally, a company willtry to disrupt a pricing model and gain market share from consumers who don’t like thestatus quo. For example, until the advent of streaming services, bundling was the only wayfor cable and satellite TV providers to reliably make a profit, so every provider in theindustry used it (with few exceptions for premium-channel add-ons).
But, for the most part, pricing strategies around which an industry’s big players haveunanimously converged are the standard for a reason. The travel industry, for example, hasfound dynamic pricing indispensable to being able to account for the wild fluctuations indemand — sometimes daily — for the services provided.
The Price Is Right With NetSuite
Growing businesses often find it hard to keep pace with their increasing diversity ofcustomers and the numbers surrounding their expanding operations, while large businessesoperate at a scale where no human can retain all the relevant information in their head.This is where good software comes in — and the best for making pricing decisions is asuite, such as NetSuite ERP, which manages real-time data from all parts ofthe business in a single, unified database. Such comprehensive visibility and access toeasily digestible summaries and analyses turn what could be a pricing guessing game into ascience. In addition, NetSuite ERP’s modular design means that the system can easilyexpand (and scale) as the business’s requirements increase. And, because the solutionwas designed specifically for the cloud, business users have anytime, anywhere access totheir applications through a simple internet connection.
A thoughtful, replicable and well-informed pricing process is essential for companies lookingto implement an integrated marketing strategy for their products or services. Reliablysetting effective prices that make customers happy, and turn a profit, requires a businessto know itself, its customers and its competition, in addition to aligning its pricingstrategy with clearly defined goals. A business whose pricing processes can handle that willhave a much easier time figuring out how much to charge and how to position its brand in themarketplace.
Optimize Your Pricing With NetSuite
You need one system with all of your product data,including item attributes, profitability, and recent performance, to set prices thatstrike the right balance between sales volume and profit margins. Discover howNetSuite ERP can make these complex decisions easier and help boost your bottomline.
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Pricing Process FAQs
What is a pricing analysis?
Pricing analysis is a process of evaluating the prices of your products or services todetermine if they are competitive and profitable. This can be a complex process, as itinvolves considering a variety of factors, such as the cost of production, the cost ofdistribution, the cost of marketing, the level of demand, the prices of your competitors,and your company’s long- and short-term goals.
How important is pricing?
Pricing is extremely important and often determines whether a company succeeds or fails. Theprocess, however, is more forgiving than some other make-or-break factors, as many pricingstrategies can be attempted, learned from and abandoned, especially in the early days of acompany or product.
How does the pricing process play into marketing?
Pricing is one of the “4 Ps of marketing,” also referred to as the“marketing mix.” The four critical elements of that mix are product, price,place and promotion — in other words, what you sell, how much you sell it for, whereyou sell it and how you interact with potential customers about it.
What are the six steps in the pricing process?
Generally speaking, there are six steps in pricing a product or service. First, a businessmust assess its own needs. The next two steps involve looking externally at what its targetmarket wants and what competitors are charging. Then, the business is ready to choose apricing objective, select a pricing strategy and, finally, set a price.
What are the 4 types of pricing methods?
Businesses have many types of pricing methods available to them. Strategies include, but arenot limited to, cost-plus pricing, high-low pricing, skim pricing and psychological pricing.
