Pricing strategies for small businesses

Trying to work out what the best pricing strategy is for your small business? If so, keep on reading as I’ll be sharing what a pricing strategy is, some examples of the different types of pricing strategies you could use and some advice to help you choose the right pricing strategy for your small business.

 

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WHAT IS A PRICING STRATEGY?

A pricing strategy is a method companies use to set the prices for their product or services. A pricing strategy will take into consideration your business model, business objectives, target market and costs.

 

 

THE DIFFERENT TYPES OF PRICING STRATEGIES

Now that you understand what a pricing strategy is, I’ll share with you some of the most common pricing strategies used in business.

  

Cost-Plus Pricing

Cost-plus pricing is calculated by working out your costs and then adding a markup. This is an easy pricing strategy for most people to calculate and will ensure that your business is making a profit. However, the downside to this pricing strategy is that the price is calculated totally based on the business’ needs. The price is set without considering what that price is in relation to competitors, and most importantly whether your target market is willing to pay that much. This pricing model is often used with products, but can also be applied to services (and is used by lots of agencies).

 

Competition-Based Pricing Strategy

A competition-based pricing strategy, also called strategic pricing, is creating by reviewing the pricing of your competitors and then setting your prices in the same region. By setting your prices at a similar pricing to your competitors the aim is to ensure that you are being competitive in pricing from a consumer perspective. If your competition have set their prices correctly then hopefully this will mean your prices are set in accordance to what you target market is willing to pay. However, there is an issue of you setting prices without ensuring that the pricing allows the business to maximum profit.

 

Dynamic Pricing Strategy

A dynamic pricing strategy is focused on the demand for a product or service. Instead of a fixed price the pricing is flexible and will increase when there is high demand (or low supply) and decrease when there is low demand (or high supply). This pricing model is often seen in the travel and hotel industry. As you get closer to the date there will be less availability of seats or hotel beds and as a result, the price will increase. This pricing strategy requires closer monitoring than other pricing strategies.

Freemium Pricing Strategy

As you might have guessed freemium is a combination of the words “free” and “premium”. A freemium pricing strategy is where a company offers a basic version of its product for free and then the buyer has to upgrade in order to access more features. The freemium pricing model is often seen in software companies, Saas, and apps. For example, Convertkit, Hubspot, and Grammarly.

 

Penetration Pricing Strategy 

A penetration pricing strategy takes into consideration competitor pricing, but unlike competition-based pricing, the final price is deliberately set in order to undercut the competition. The aim of a penetration pricing strategy is to be cheaper than everyone else in the market and therefore quickly gain traction and hopefully grow market share. The major issue with penetration pricing is it doesn’t take into consideration how much your product/service costs you. Also, normally it will be difficult for most businesses to sustain this pricing strategy for a long-time. Depending on the business it can be difficult to increase your prices and if you do manage to raise your prices you may see customers and clients quickly moving to the other cheapest option out there.

 

Hourly Pricing Strategy

This is a pricing strategy used in the services industry where you are charged by the hour. This is pricing strategy can be combined with other pricing strategies, for example, you might use a cost-plus pricing strategy to work out your hourly rate.

 

Project-Based Pricing Strategy

Project-based pricing is another pricing strategy used in the service industries. Rather than using an hourly pricing strategy you may choose to use a project-based pricing strategy. This strategy is often preferable to customers/clients than an hourly pricing strategy because they know are paying one fee for something specific to be delivered. If you decide to use this pricing strategy in your business then you’ll need to ensure that you are able to accurately predict the number of hours a project will take to ensure the project fee leaves you with a profit.

 

Premium Pricing Strategy

A premium pricing strategy is where you purposefully will set your prices at a premium rate. By setting your prices at an inflated rate the idea is you’ll give the impression of a higher quality product or service. This pricing strategy is often used in conjunction with premium branding.

 

Bundle Pricing Strategy

A bundle pricing strategy is where multiple products or services are sold together for one combined price. This pricing strategy is useful if you have something to add in to the bundle that has a higher perceived value than the cost. For example, in a product-based business, you may have some stock that is end of line and that you are happy to bundle up before you discontinue it altogether.

 

Psychological Pricing Strategy

Have you ever wondered why products are priced at £199.99 instead of £200? This is an example of psychological pricing. This is where prices are set based on how they are perceived. In most cases rather than being a round number like £200 they will be priced just below with either a 9, 7 or 5.

 

 

HOW TO CHOOSE THE RIGHT PRICING STRATEGY FOR YOUR BUSINESS

As you can tell there are a number of different pricing strategies you could use in your business, so I’m sure you are thinking “How do I choose the right pricing strategy for my business?”

Unfortunately without speaking to you, I can’t give you a definitive answer to the best pricing strategy for your business, but here are some things to consider.

 

• LONG TERM BUSINESS OBJECTIVES

Your pricing strategy should be supporting your overall business objectives. If you have a business model that relies on you gaining a large percentage of the market share in your industry then you may decide to follow a penetration pricing strategy even though you’ll may make a loss in the short term.

 

• COMPETITION

Even if you don’t decide to follow a competition-based pricing strategy I would still suggest you are aware of what your competition is charging. If you decide to follow a pricing strategy that results in your prices being drastically higher than the competition then you may have to consider how you can justify the price difference through value.

 

• BRAND POSITIONING

If you have a premium brand that it makes sense to follow a premium pricing strategy, but what if you don’t have a premium brand. In that case whatever pricing strategy you decide to follow you should look at your final prices and assess whether you think that the prices sit well given your brand positioning.

 

• TARGET MARKET

There is no point in setting a price that no one is willing to pay. Whatever strategy you use to set your prices you’ll then need to review the prices and ask yourself whether your target market is able, and willing, to pay that price.

 

• POTENTIAL MARKET SIZE

How many products or services can you expect to be able to sell? Companies that operate using a freemium model are usually apps or software that can be used by millions of people. This means that if only a small percentage of people upgrade to the paid version that can still be hundreds of thousands of users.

 

• COSTS

Last but definitely not least, you need to consider your costs. Ultimately your pricing strategy should help you to maximise your profit. In order to properly calculate the profit you’ll need to know your costs.

 

 

There you have it. You should now know about the different pricing strategies for small businesses.

 

If after reading all of this your head is spinning and you still don’t know what to don’t worry. Pricing is complex and there are a lot of factors to consider. However, you don’t have to do it alone. Whether you are launching a new service or want to adjust your current prices to maximise your revenue I’m here to help.

Find out how you can work with me here