Introducing 4 models of pricing strategies for businesses. Pricing products and services can be difficult. If you set prices too high, you will lose sales. If you take them too low, you won’t get valuable revenue. Note that pricing should not be sacrificed to other issues. Dozens of pricing models and strategies can help you better understand how to set the right price for your audience and revenue goals. Therefore, we will examine these issues in the following text.
What does pricing strategy mean?
A pricing strategy is a model or method used to determine the best price for a product or service. This will help you set prices with maximum benefit and stakeholder value, taking into account consumer and market demand.
Before we talk about pricing strategies, let’s review an important pricing concept that applies regardless of the strategies you use.
Price elasticity of demand
The price elasticity of demand is used to determine how price affects consumer demand. If consumers continue to buy a product despite an increase in price (such as cigarettes and fuel), that product is considered inelastic. On the other hand, elastic products suffer from price fluctuations (such as television and movie tickets). You can calculate price elasticity using this formula:
% change in quantity รท change in price = price elasticity of demand
The concept of price elasticity helps you understand whether your product or service is sensitive to price fluctuations. Ideally, your product should be non-stretchy; Therefore, if the price fluctuates, the demand remains constant.
Now, let’s explain some common pricing strategies. When doing this, it is important to note that these are not necessarily independent strategies. Many of them can be combined when pricing services and products.
Types of pricing strategies
1- Pricing strategy based on competition
Competitive pricing is also known as competitive pricing or competitive pricing. This pricing strategy focuses on the prevailing market rate (or going rate) for a company’s product or service. Of course, it does not consider the cost of the product or consumer demand. Instead, a competition-based pricing strategy uses competitors’ prices as benchmarks. Businesses competing in a highly saturated space may choose this strategy. Because the slight price difference may be the deciding factor for customers.
With competitive pricing, you can price your products slightly lower, the same, or slightly higher than your competitors. For example, if you sell marketing automation software and your competitors’ prices range from $99.99 per month to $99.39 per month, choose your product price between these two numbers. Whatever price you choose, competitive pricing is one way to stay ahead of the competition and keep your pricing dynamic.
Pricing strategy based on competition in marketing
Consumers are primarily looking for the best value, which is not always the same as the lowest price. Competitive pricing of your products and services in the market can put your brand in a better position to meet customer needs. Competitive pricing works especially well when your business offers something the competition doesn’t. such as exceptional customer service, a generous return policy, or access to exclusive loyalty benefits.
2- Cost plus pricing strategy
A cost-plus pricing strategy focuses solely on the cost of producing your product or service, or the cost of goods sold (COGS). Also known as markup pricing. Because businesses that use this strategy “mark” their products based on how much they want to make a profit.
To apply cost-plus pricing, add a fixed percentage to the cost of manufacturing your product. For example, let’s say you sell shoes. These shoes cost $25 to make and you want to make $25 per sale. You set a price of $50, which is 100% marked up.
Cost-plus pricing is commonly used by retailers that sell physical products. This strategy is not suitable for service-oriented or SaaS companies. Because their products are usually worth much more than their production cost.
Cost plus pricing strategy in marketing
If your competitor is looking to attract customers instead of increasing profits, it won’t help you attract new customers. Before implementing this strategy, complete a price analysis that includes looking at the performance of your closest competitor to make sure this strategy will help you achieve your goals.
3- Dynamic pricing strategy
Dynamic pricing is also known as a model for incremental pricing, demand pricing, or time-based pricing. This method is a flexible pricing strategy where prices will vary based on market and customer demand.
Hotels, airlines, event venues, and service companies use dynamic pricing using algorithms that take into account competitors’ prices, demand, and other factors. These algorithms allow companies to adjust prices with time and what a customer is willing to pay at the exact moment they are ready to buy.
Dynamic pricing strategy in marketing
Dynamic pricing can help you maintain your marketing plans. Your team can schedule ads in advance and configure the pricing algorithm you use to trigger ad prices at the right time. You can even A/B test dynamic pricing in real-time to maximize your profits.
4- Freemium pricing strategy
The name of this model is a combination of the words “Free” and “Premium”. A freemium pricing strategy is used when companies offer a basic version of their product in hopes that users will eventually pay for an upgrade or access to more features. As opposed to an additional fee, freemium is a pricing strategy commonly used by SaaS and other software companies. They choose this strategy because free trials and limited memberships reveal the full functionality of the software. It also builds trust with potential customers before they buy.
Conclusion
Pricing strategies incorporate many factors of your business, such as revenue goals, marketing goals, target audience, brand positioning, and product features. They are also influenced by external factors such as consumer demand, competitors’ prices, and general market and economic trends. In the following text, we tried to make it easy to understand this important by explaining 4 models of these strategies.
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