Skip to content

4 Common Pricing Strategies, Which Works Best For Your Business?

4 Common Pricing Strategies, Which Works Best For Your Business?

 How you price your products or services is what will make or break your business. So setting up the right pricing strategy is crucial for you to move forward. A pricing strategy refers to the method businesses use to price their products or services. Almost all companies, large or small, base the price of their products and services on production, labour and advertising expenses and then add on a percentage so they can make a profit.

You can adopt several pricing strategies, including penetration pricing, price skimming, discount pricing, product life cycle pricing, and even competitive pricing. We take you through each one and share which of these would work best for your business.

1. Penetration Pricing Strategy

You can use this pricing strategy when you start your business, and you choose to set a low price for your product or service to build a client base. Penetration Pricing works very well for startups trying to offer the best prices, especially for service-based industries such as internet software distributors who may have to give offers time and again consistently. However, even medium to established businesses can use this strategy to gain market share. For example, a music app offering one month free for a subscription-based service or a bank offering a free checking account for six months.

2. Price Skimming Strategy

This pricing strategy works when you’ve invested a lot of money in your business, and you’d like to recover your money as soon as possible. An excellent example of a business that can use this strategy includes event companies. When you have a lot of stock that needs to be purchased, you may have to set your prices higher to recover the expenditures you used in advertising buying stock. 

Price skimming is a strategy that businesses with solid brands commonly use to maximize profits by initially charging the highest possible price for an innovative new product and then gradually discounting the cost over time.

Price skimming is a routine practice in the technology industry where product lifespans are limited, and upgrade cycles are short. 

3. Competitive-Based Pricing Strategy

Whenever you introduce a new product, either two things happen. Sales may boom immediately, or an inadequate response may follow. Every product has a life cycle that must go through the following stages: 

  1. Introduction

  2. Growth

  3. Maturity and decline stages. 

For this pricing strategy, you choose how to price your product based on whether or not people are willing to buy it at the price you’ve set during the growth stage. Note for best results; your product needs to be of high quality and better than your competitors. 

If you’re in an industry with even one or two direct competitors, you can implement a reasonable competitor based pricing strategy. If you have a reasonably solid grasp of your product’s quality, target audience, and production cost, this method will most likely set you up for success.

4. Discount Pricing

You can use temporary discount pricing to increase sales at a given time. Businesses use discount pricing to sell low-priced products in high volumes. With this strategy, it is essential to decrease costs and stay competitive. There are three main types of discount pricing; 

  1. Promotional Discounts: Promotional discounts are short-term and used to drive sales.

  2. Seasonal Discounts: You could use this method on slow-moving products, and you’d like to get rid of the stock by offering seasonal price reductions. The seasonal price reductions should make sense to your current and potential clients. This is a great strategy, especially when trying to hit sales targets.

  3. Quantity Discounts: Offer quantity discounts to customers who purchase in bulk and rewards customer loyalty. 

Are you looking for a financial advisor who can help you accelerate the growth of your business? We can help you achieve your financial goals while making accurate predictions. We also provide businesses with a complete fractional accounting team for the price of a full-time bookkeeper. Get in touch with us for a free consultation on how we can assist you with accounting services.