Pricing strategies for businesses

Knowing where to start with a pricing strategy can be overwhelming, especially when starting up your own business or trying to optimise your current pricing. To give you a hand, our experts at Dojo have put together a guide on the key points you need to know about competitive pricing strategies for your business.

In this guide we’ll cover:

• What is a pricing strategy?
• Pricing strategy definition
• Why is a pricing strategy important?
• How do I choose the right pricing strategy for my small business?
• Types of pricing strategy and pricing strategy examples

What is a pricing strategy?

Pricing strategies are crucial for any business. Simply put, a pricing strategy is just the framework used to determine the prices for your products or services. Pricing is really important to get right as correct pricing can be vital to a business’s success. Getting it right can be hard and sometimes you’ll need to trial different strategies. In a nutshell, you’ll need to make sure you’re offering a price that is competitive within your market whilst also providing value for the customer and simultaneously turn over a profit to keep your business in business.

Pricing strategy definition

The definition of a pricing strategy is a method or process used to determine the best prices for a product or service. There are a variety of different pricing strategies that you can use depending on your business but before you decide on a strategy you should calculate the point that your business can break even. This is so you understand how much profit you’ll need to make to pay your overheads and will have a big impact on how you choose to price your goods or services

It’s worth noting, a pricing strategy also often uses factors such as customer and competitor analysis, to help a business decide the prices they should have.

Why is a pricing strategy important?

Every business needs to make a sustainable profit and implementing the correct pricing strategies is a vital part of this. An effective pricing strategy will benefit your business financially, build customer loyalty and in time can support the growth and expansion of your product or service.

How do I choose the right pricing strategy for my small business?

To determine the best pricing strategy for your business you need to consider your total costs. Factors such as; rent (if your business requires a physical location), product costs, staff wages, manufacturing costs, distribution costs, alongside many other elements that could be specific or unique to your business or industry like licences, need to be considered when it comes to pricing.

Types of pricing strategy and pricing strategy examples

• Value-based pricing - this is a market-driven pricing strategy that uses the customer’s perceived value of a product or service.
• Cost-plus pricing - this strategy to determine pricing adds expected/objective profit to the price of your item. How much profit do you want to make on each sale?
• Competitive pricing - this marketing strategy uses the prices of your competitors to determine yours.
• Price skimming/premium pricing - this is when you purposely mark up your price with the intention to lower it down the line.
• Dynamic pricing - a flexible pricing strategy that changes value depending on demand.
• Penetration pricing - setting a low price during launch to penetrate the market and then upping your costs later.
• Economy pricing - this is when you have lower prices due to lower production costs, usually having minimal profit margins but a greater volume of buyers.
• Bundle pricing - usually a secondary pricing strategy used alongside another, this is when you group products or services together under one price rather than individually.
• Captive-product pricing/by-product pricing - if you have a product that requires secondary products for it to function eg. a printer and printer ink, this strategy is used when a typical one-time purchase is supplemented by frequent additional purchases.
• Psychological pricing - this works in a number of ways by utilising the belief that certain prices influence customer behaviour, for example, ‘buy one get one free’ or having the price at £9.99 rather than £10.

Competitive marketing pricing strategy

If you are entering a well-established sector or business that already has a large number of competitors then a competitive pricing strategy may be your best option.

As mentioned above this is a marketing pricing strategy that requires analysing your competitor's prices to decide yours. There are then multiple ways you can utilise this information, for example, you can choose to price similarly to your competitors or you could price yourself much lower to gain a competitive advantage.

The three types of competitive pricing are:

• Low pricing - pricing yourself lower than your competitors to draw in cost-conscious customers
• Match pricing - having the same prices as your competitors and focusing on your marketing strategies and USP to stand out from the crowd
• High pricing - this is when you price your products and services higher than your competitors, often utilised in luxury business models particularly if what you are offering is of better quality, for example.

For an example of how pricing fits into setting up a business, take a look at our coffee shop guide.