Pricing strategies are techniques used to set the price of a service or product so that it generates profit for the business. With them, it is possible to have more accurate information about consumers and demand, increasing the chances that the defined price is correct.
With this in mind, we have gathered the 7 main most used and efficient methods. Check out:
- Competitive pricing;
- Added cost price;
- Value-based pricing;
- Penetration price;
- Psychology-based pricing.
What are pricing strategies?
As stated, pricing strategies are methods, mostly driven by data and research that can be used to define the price of a service or product more accurately.
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Despite the simple definition, to have a good pricing strategy it is necessary to consider several factors, such as the objectives of the stakeholders, the strategies of competitors, and the positioning of the brand.
Therefore, it is a task that requires a lot of research and analysis in order to find the best tactic for your demand and your target audience. A well-thought-out pricing strategy is capable of directly influencing sales success.
See Top 7 Pricing Strategies
1. Competitive pricing
Competition-based pricing is a very simple and practical method for setting the price of a product or service. Its realization is done through the analysis of competitors’ prices and the establishment of a price a little lower or a little higher than theirs.
Despite being practical and, in a way, with low risks, this strategy is very superficial and can mean the loss of good opportunities or even financial risk for the business.
While keeping an eye on competitors’ prices is really a good attitude to stick with and do analysis, ideally, this strategy is just one part of the entire process. Joining this method with others that make it possible to acquire more complex information can result in a more accurate and effective strategy.
Freemium is the union of the words “free” and “premium” in English. This pricing strategy is widely used today by large companies that sell by subscription in many industries – and can be found in everyday products like Netflix, Spottily, Amazon Prime and many others.
The idea of this strategy is to offer the product for free, with limitations or for a certain period, with the intention that the consumer sees its value and subscribes to the premium version in the future.
The freemium strategy has proven to be very effective and has already brought results considered incredible for some organizations. This is the case with Slack, which had a 30% conversion rate from the free to the paid version.
The skimming pricing strategy is conducted as follows: the company launches a product at a high price, but it goes down over time according to demand and value to customers.
This is a strategy widely used by technology and electronics companies, as the products are launched with high prices due to the innovations they bring. However, the price is reduced as they become obsolete in the face of competitors or new technologies.
Therefore, this strategy may work better for a really very innovative product or for well-known brands. This is because there will be a market for the highest price due to quality or loyal consumers.
It’s a tactic that can bring big profits in a short period of time, but it can also cause discontent among some consumers that they’ve paid more than others.
4. Cost price plus
The added cost pricing strategy, also known as Markup, is the most classic and simple way to define the price of a product. Basically, you count the total cost for production and add the percentage of profit you want to earn on each unit.
For example, let’s say you make watches and the total cost of each is $100, and the target profit margin is 25%. Therefore, the final price of each watch would be R$125.00.
This strategy may work better for physical products because it makes production costs clearer. Another point that is recommended is to associate this method with others to have a deeper and more accurate study.
5. Value-based pricing
The value-based pricing strategy is entirely consumer-centric. This is because it defines the pricing of the service or product according to the value added to the target audience and the purchasing power of these people.
So this is a method that can be more effective for products that are innovative or far ahead of competitors. After all, it will solve a pain that no other product can.
This method requires well-defined personas and ongoing studies related to them, demand, and the market. But if done well, it can maximize profits and build a loyal customer base.
6. Penetration price
The penetration pricing strategy is to launch a product or service at a price well below competitors, or at deep discounts, to gain market share.
It is a method widely used by new brands that are looking for space or consolidated companies that are entering new markets.
A good example that occurred recently in Brazil is that of Amazon. It started sales only with books and at huge discounts, and over time it increased its variety of products and decreased its discounts.
This is a tactic that can result in damage at first. However, this is offset by gaining market share, enabling the profit to be recovered when the regular price is established.
7. Psychology-based pricing
Psychology is used extensively in pricing strategies. That’s because studies show that spending money can bring a sense of loss. So, the purpose of using this tactic is that the purchase conveys exactly the opposite feelings, such as pleasure and satisfaction.
A good example of a method with psychological intent is the strategy of decreasing 1 cent from the price and using the digit 9. This tactic gives the impression that the expense is lower because it makes the consumer associate the “broken” number with a lower price.