23 Pricing Strategies: Find out how to calculate selling price of a product

August 12, 2020

Pricing strategies featured image

Marketing Consultant, Nigel Temple, explains how to price a product in a way aligned to your brand.

Are you selling your products at the right price? Are you maximizing your profitability, via your pricing? Do you have a pricing strategy?

Pricing a product requires careful thought, research, and a willingness to learn. There are numerous pricing strategies available for your products. Think about the psychological factors. What does the price say about your brand and your product?

From a marketing perspective, pricing is one of the four Ps: Product, Price, Place, and Promotion.

Pricing is, to a large extent, a brand positioning exercise. Low, average, or high prices are messages in their own right.

The Holy Trinity of product pricing strategies

Competition pricing (or Market based pricing)

An analysis of the way in which your competitors price their products, leads to a pricing decision. This may be lower, the same or higher than the competition, depending on how you want to differentiate and position your product. In broad terms, elasticity of demand means that lower prices should lead to higher sales volumes; however, you will have to sell more product, which will, in turn, increase your costs.

Cost-based pricing

If costs are changing frequently, you can calculate production, distribution and marketing costs. Then choose a markup each time that a quotation is produced or a price has to be set for a product. This may be worthwhile if you sell an expensive product.

Cost-plus pricing

This is a pricing strategy whereby you work out the production costs and add a fixed percentage markup in order to discover the selling price. For example, if a product costs £100 to manufacture and the markup is 25% then the selling price will be £125. Often used by manufacturing companies.

Other product pricing strategies:

BOGOF: Buy One Get One Free. This pricing strategy is much loved by supermarkets all over the world. It is a variant of Bundled pricing. Everyone likes to get something for free and BOGOF can be used by most organisations including B2B enterprises.

Bundle pricing: Two or more products are bundled together and sold at a single price. “If you buy this, I will throw in that.”

Deadline pricing: “If you buy by the end of the month it will be £X; after that, it will be £Y.”

Dynamic pricing: Enterprises set flexible prices based on market demand.

Decoy pricing: Offer at least 3 products – 2 of which have a similar or equal price. The 2 products with the similar prices are the most expensive. One of these is less attractive than the other one. Customers compare the options with similar prices. Sales of the more attractive high-priced item go up.

Freemium pricing: This is not just a pricing option, it is a business model in its own right. The idea is to promote a free version of a product, i.e. a smaller version or one with fewer features. The objective is to convert a proportion of the users into paying customers, who then receive the full product. Examples being MailChimp plugins and Spotify music streaming.

Geographic pricing: Different prices are offered to customers depending on where they live or happen to be. (Petrol prices!)

High-low pricing: Products are priced higher than competitors. However, promotions offer lower prices on some products, in order to gain new customers (think mortgage rates).

Loss leader pricing: A pricing strategy which attracts new customers and increases market share. The product or service is sold at or below production cost, or the cost of buying it in.

Options pricing: An extensive range of optional features are offered to a basic product. Beloved by the car manufacturing industry (…“the engine is an added extra.”)

Pay what you want pricing: The customer is allowed to pay whatever they feel is reasonable for the product or service. A ‘floor’ price may be set, or it may not be. This pricing strategy has been tried within the music industry. It can attract considerable publicity.

Payment options. Pay by cash or card? Lease the product or purchase it outright?

Penetration pricing: The enterprise chooses low pricing in order to boost sales and market share. If sufficient market share is attained, they may choose to increase prices. However, penetration pricing can start a price war.

Premium pricing: A high price is set in order to reflect brand exclusivity and product quality. Think Rolls Royce and Rolex watches. Interestingly, it is not just the physical product that attracts buyers (think buying experience, service and all sorts of additional touches).

Price skimming: An enterprise starts with a high price and then gradually lowers the price, in order to increase market share. The result is that profits are ‘skimmed’ from the market, over time. Usually employed when there is a clear picture of the product’s life cycle (i.e. within the software industry).

Product line pricing: Each product line (or product category) is given its own pricing. For example, budget, standard and premium product ranges.

Psychological pricing (AKA Optical pricing): For example, selling a product at £4.97 or £4.99 rather than £5.00. A small change in price can make a significant difference in turnover.

Self liquidating pricing (SLP): The objective here is to recover your costs and gain publicity and market share.

Value-based pricing: Often used by high end software companies, the idea is to pitch the price around the products’ value to the customer, in terms of benefits received.

Yield management pricing: Variable pricing is used by airlines and hotels where they have to sell the seat in the plane / the hotel room on any given day or that opportunity has gone forever. The challenge is that two airline travellers can be sitting next to each other on a flight and discover that they have paid different prices. How would this make you feel, if you had paid the higher price? (This is known as price discrimination, by the way).

Conclusion

Keep an eye on your competitors’ pricing. Work on NPD (New Product Development). Test different pricing strategies and analyse the results. Remember that strong brands can charge higher prices. 

More must-read stories from Enterprise League:

Create your company page. Discover companies to work with. Get business deals.

Related Articles

Share This
Start expanding your business now. Join for Free.