Pricing strategy

Definition

Pricing strategy is a fundamental component of a business’s overall marketing and financial strategy.

What is a pricing strategy?

A pricing strategy involves the method and approach a company uses to set the prices of its products or services. A well-considered pricing strategy is essential for achieving profitability, remaining competitive, and maximising the value offered to customers. 

One of the primary goals of a pricing strategy is to maximise profit margins, ensuring that the revenue generated exceeds the costs of production and operation. Some businesses go for lower initial prices to quickly gain market share and establish a foothold in a competitive industry.

Setting prices that offer perceived value can help build customer loyalty and retention, leading to long-term profitability.

Common pricing strategies:

1. Cost-plus pricing: This involves setting prices by adding a markup to the cost of production, ensuring that costs are covered and a profit margin is achieved.
2. Market-oriented pricing (value-based pricing): Prices are determined based on the perceived value of the product or service in the eyes of the customer.
3. Competitive pricing: Prices are set based on what competitors are charging for similar products or services.
4. Penetration pricing: Initially setting prices lower than competitors to gain market share rapidly. 
5. Skimming pricing: Setting high initial prices for unique or innovative products, then gradually lowering prices as competition increases.
6. Dynamic pricing: Prices are adjusted in real-time based on market demand, competitor pricing, or other relevant factors. 
7. Bundle pricing: Offering products or services together at a combined price, often at a discount compared to purchasing each item separately.
8. Psychological pricing: Utilising pricing points that appeal to consumer psychology, such as setting prices at $9.99 instead of $10 to create a perception of a better deal.

High prices can be associated with quality, luxury, and exclusivity. This can contribute to building a strong brand image, while offering competitive prices while maintaining quality and value helps establish a reputation for affordability and value for money.

Example of a pricing strategy

Let’s consider a clothing retailer, Fashion Trends, which wants to introduce a new line of premium-quality t-shirts. To determine its pricing strategy, Fashion Trends conducts market research to understand customer preferences and competitor pricing.

After analysing the data, Fashion Trends decides to implement a value-based pricing strategy. They set the price of their premium t-shirts at $30, positioning them as high-quality, trendy fashion items that offer superior value compared to competitors’ products.

By implementing a value-based pricing strategy, Fashion Trends aims to attract fashion-conscious customers who are willing to pay a premium for quality and style, while also maximising profitability for the company.