June 23, 2023
There are numerous studies that prove: pricing can impact not just the immediate desire to buy but more long-term aspects like customer loyalty, brand positioning, churn rate and many more. Hence, choosing the right pricing strategy or model is a life-and-death decision for any company’s management. Here’s a quick overview of the most common pricing models, their applicability for various industries, upsides and drawbacks.
When it comes to pricing products, businesses have different options to choose from. These options depend on the business's goals, target market, competition, the nature of the product, and obviously, the perceived value of the product. Pricing is not just a technical question of putting a certain price tag. Whenever you face a task of pricing, you have to think strategically and choose one of the following approaches.
The most widely used today pricing models include:
Pricing is not just a technical question of putting a certain price tag. There are numerous studies that prove: pricing can impact not just the immediate desire to buy but more long-term aspects like customer loyalty, brand positioning, churn rate and many more.
Now that we've established the different pricing models let's explore the various pricing strategies businesses might use.
It's a strategy based on an educated guess about what a customer is willing to pay for the product or service. It's about the emotional connection the customer has with the product, and businesses can use this to their advantage. According to Neil Patel, "value-based pricing is all about understanding what the customer wants and what they are willing to pay for it."
This strategy is unthinkable without building a strong brand around the product, the company, or the founder.
For example, Apple uses value-based pricing as they had spent years investing in the Apple brand associated now with quality and uniqueness. Tesla can price its cars higher than the market average, because Elon Musk is a controversial figure and has gained a wild popularity online. Think of any D2C brand launched by a celebrity — and you’ll get an idea. Remember that hilarious story when some sports celebrity girlfriend got away with selling her farts in a jar for hundreds and hundreds of dollars? This is a great example of value-based pricing strategy. Customers assigned ridiculously high value to the farts because they associated them with a well known football player.
Competition-based pricing strategy is about setting a price based on what the competition is charging for similar products. This pricing strategy is often used in highly competitive markets where businesses need to keep their selling price in line with the competition. According to Eric Siu, "competition-based pricing means you have to gain deep market understanding and have a 360-degree view."
Competition-based pricing is pretty straightforward. The tricky part is identifying the right competitor. That is, choose the products that are similar to yours not just in price and quality. But also the ones that are perceived as similar by consumers. This requires a lot of leg-work from your marketing team, numerous surveys and focus-groups.
Another challenging aspect is collecting market price data. If you’re selling a limited number of products or services it’s relatively easy to do that. But you can’t realistically ask your category managers to go and check out your competitors' prices daily if you have thousands of items in your catalog. Years ago retail companies started using web-scraping bots to automate this task. Today plenty of tech companies offer price monitoring and competitor price comparison services. The idea is to choose the right service provider (you can read more about it here How to choose price monitoring service).
Penetration pricing strategy involves setting a low price for a new product to gain market share quickly and get rid of possible competition. Real-life text-book example: Uber. When entering a new market Uber makes taxi rides prices ridiculously small. In several months other players lose price wars and leave the market. Consumers end up having no other choice but to use Uber. Then the company can take prices up.
It is obvious that this pricing strategy can be only used by really big players who have unlimited runaway, and can burn cash as long as they want until they kill all the competition. Also, it involves proprietary relationships with the product you sell. If the service or the product doesn’t really belong to you it might cause big troubles. Example: in February 2023 Twitter made API changes. 90% of Twitter-related products that were making money on scheduling tweets experienced huge churn. They were unable to offer the service, and customers left.
Price skimming strategy is rare. Businesses that use a price skimming strategy must be able to convince customers that their product is worth the higher price. They must also be able to maintain the higher price until the competition catches up. It presumes huge investments in staying ahead of everyone else, building an objectively better product.
The textbook example — Google search engine, For years it stayed ahead of everyone else. It allowed the company to price their advertisement-related services as high as they wanted. But again, 2022 changed everything. With Microsoft getting access to the ChatGPT technology, Bing became a very visible and real competition. Which will probably lead to changes in Google pricing strategies in the nearest future.
All these strategies can be implemented manually or in automated mode using smart repricing solutions. They eliminate human-factor-related erros and allow businesses leverage the benefits of technology at full scale.
Step-by-step guide on maintaining high profitability in retail.