Choosing the right pricing strategy is not simply about deciding how much to charge. It is about choosing a pricing approach that supports your business goals, reflects the value you provide, covers your costs and helps you make sustainable profit.

The right strategy will depend on your customers, your market, your competitors and what you are trying to achieve. A premium business will usually price differently from a low-cost provider. A new business trying to build market share may price differently from an established business with a strong reputation.

In this episode, we look at six pricing strategies you can use for products and services, together with the numbers and business decisions that should sit behind them.

About this episode

There is no single pricing strategy that works for every business.

Your pricing needs to support the proposition you put in front of your customers. If you position yourself as a high-quality business but charge bargain prices, the message can become confused. Likewise, if your business competes mainly on price, your costs and operating model need to support that position.

Pricing also needs to help the business make profit over the long term.

That is why we should not choose a pricing technique simply because another business uses it.

Don’t price to please, price to match your performance, experience, and worth.

What should influence your pricing strategy?

Before choosing a particular pricing method, there are several things we need to understand.

Your business objectives

Start with purpose.

What are you trying to achieve?

You may want to build market share, increase profit, position the business as premium, reach a wider audience or make your product more accessible.

Different objectives can lead to different pricing choices.

Your price should reinforce your business and marketing goals rather than contradict them.

Your costs

You need a good understanding of what it costs to produce and deliver what you sell.

That applies whether you manufacture products, sell digital products, run training, provide consultancy or deliver another service.

As a result, if you do not understand your cost base, it becomes very difficult to judge whether the price you choose is actually making money.

If you need to work out a service rate first, our guide to How to Calculate Pricing Rates for Your Services takes you through costs, profit and realistic capacity.

Your target profit

Think about how much profit you want the product, service or business to generate.

Adding a percentage to every item may sound sensible. However, the bigger question is whether the resulting profit is enough to support the business, pay you properly and make the effort worthwhile.

Profitability is ultimately what keeps the business sustainable.

For a wider foundation, see What Is Profit? Gross Profit and Net Profit Explained.

Your competitors

Competition gives us useful information.

That does not mean simply finding a similar business and copying its prices.

Your real competition may come from businesses solving the same customer problem in a different way.

A restaurant may compete with other experiences for the customer’s money. A financial planning service may compete with coaches as well as accountants.

Research what alternatives customers have and what those alternatives cost.

Customer value and the market

We also need to understand what customers value and what they are willing to pay.

Think about the environment you are selling into. Is the market crowded? Are you operating in a specialist niche? Is your proposition genuinely different?

These questions help us decide which pricing strategies are realistic.

Six pricing strategies to consider

1. Premium pricing

Premium pricing means setting your price above competing offers because the product or service is positioned as higher quality, more distinctive or more valuable.

Customers often use price as one signal of quality.

However, the price has to be supported by substance.

If you charge a premium price, the customer needs to experience a premium proposition. Quality, service, reputation, branding and delivery all need to support the price.

Charging more without delivering more can damage trust and reputation very quickly.

2. Market penetration and loss-leader pricing

Market penetration pricing deliberately sets a price lower than competing alternatives to attract customers and encourage them to switch.

In some situations, a business may even price an item below cost. This is often called a loss leader.

The logic is that the initial product brings the customer into the business, giving you an opportunity to sell other profitable products or services later.

However, there is a significant risk.

If customers only buy the low-priced offer and there is no effective cross-sell or upsell, the business can simply end up making losses.

It can also become difficult to raise prices once customers become accustomed to the lower level.

3. Economy pricing

Economy pricing is built around keeping the product and the cost of providing it as lean as possible.

The customer receives what they need without unnecessary extras, and the business charges a low price while still covering costs and making profit.

Low-cost airlines and supermarket own-brand products are familiar examples of the principle.

In practice, successful economy pricing is not simply about being cheap.

The businesses that make it work usually have tight cost control, efficient processes and good visibility of their numbers.

If your costs are badly controlled, a low-price strategy can quickly become a low-profit strategy.

4. Price skimming

Price skimming can work where a business launches something distinctive into a market with relatively little competition.

Initially, the price is set high while the product is new and the business has an advantage.

As competitors enter the market and alternatives become available, that position may become harder to maintain.

This means businesses using price skimming need to watch the market and keep developing what comes next.

It tends to fit businesses with innovation, differentiation or a strong early advantage.

5. Psychological pricing

Pricing is not purely mathematical. Psychology also affects how customers interpret a price.

For example, a business might price something at £99.99 instead of £100.

The financial difference is tiny, but the number can feel different to the customer.

The same principle can be applied to hourly rates, daily rates and other offers.

Psychological pricing is about how the price is perceived, not just the number itself.

6. Bundle pricing

Bundle pricing combines several products or services into one overall package.

The customer may pay less for the bundle than they would if every element were purchased separately.

For example, a business might separately offer tax support, financial planning, accounting systems and regular meetings, then create a package that combines several of those services.

For bundle pricing to work, you need to understand the cost and profitability of the individual elements.

Do not simply chase a bigger sales figure.

The bundle still needs to make financial sense.

Which pricing strategy is right for your business?

In practice, the answer may be more than one.

You do not have to use the same pricing strategy across everything you sell.

One product might use premium pricing. Another might be used to attract new customers. Services may be bundled together, while a new product may use one strategy at launch and another as the market changes.

One size does not fit all.

Come back to the basic questions:

What are we trying to achieve?
Do we understand our costs?
What profit do we need to make?
What are competitors and alternatives charging?
What does the customer value?
What is happening in the market?

Then choose the pricing technique that supports those answers.

Another useful pricing approach is target costing, where we start with the market price and required profit, then work backwards to the cost the business can afford.

Do not set prices blindly

Research matters.

For example, talk to customers, use surveys, test landing pages and look at competitor offers to understand what customers are comparing you with.

Do not rely entirely on assumptions.

If the price is too low, bringing it back up later can be difficult. If the price is too high, you may lose customers and opportunities.

Pricing should therefore remain flexible.

Markets change. Demand changes. Competitors change. Your costs and proposition may change too.

Your pricing strategy should be reviewed as the business develops.

FAQs

What is a pricing strategy?

A pricing strategy is the approach a business uses to decide how its products or services will be priced. The choice should reflect costs, profit goals, customers, competitors, positioning and wider business objectives.

Which pricing strategy is best?

There is no single best strategy. The right approach depends on what you are selling, what you are trying to achieve, your costs, your customers and the market you operate in.

Can a business use more than one pricing strategy?

Yes. Different products, services and customer groups may need different pricing approaches. Your strategy may also change as the market and business develop.

Is premium pricing just charging more?

No. A higher price needs to be supported by a strong proposition, quality, service and customer value. Otherwise, the premium can be difficult to justify.

Is economy pricing the same as selling cheaply?

Not quite. Economy pricing relies on low costs and efficient operations as well as a low selling price. The business still needs to make profit.

What should I check before changing my prices?

Review your costs, target profit, competitors, customer feedback, demand and the purpose behind the pricing change. Avoid changing prices based on guesswork alone.

Episode Timecodes

00:28 – Why pricing should reflect performance, experience and worth
00:53 – Introducing six pricing strategies
02:07 – Why pricing must support your business goals
03:39 – Costs, target profit, competitors and customer value
06:11 – Premium pricing
07:19 – Market penetration and loss-leader pricing
08:24 – Economy pricing
09:51 – Price skimming
10:38 – Psychological pricing
12:24 – Bundle pricing
13:30 – Choosing the right mix of pricing strategies
14:21 – Customer research, flexibility and avoiding guesswork

Related episodes

Key takeaway

Choosing a pricing strategy is not a formula.

Your objectives matter. So do your numbers, your customers, your competitors and the market you operate in.

Premium pricing, penetration pricing, economy pricing, price skimming, psychological pricing and bundle pricing can all work in the right circumstances.

The important thing is to understand why you are choosing a particular approach and whether the numbers support it.

Start by knowing your costs and understanding the profit you need. Then research your customers and competitors, and be prepared to adapt as the market changes.

Plan it, Do it, Profit.

Further Support

If you want to explore the numbers behind your pricing decisions, use our free online business calculators to test different costs, profit and pricing scenarios.

If you need help understanding your pricing, costs, profit or wider business numbers, you can contact us for an initial chat.

You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Pricing Strategy: 6 Ways to Price Products and Services