How to Approach Pricing Strategy in Your Business
Out of all the areas to increase cashflow or profit, pricing strategy might be the most complicated.
Striking the right balance between creating value for clients or customers and the proper margin for your business to succeed is an art form.
In this post, we’ll dive into the keys to creating the right strategy and how to set your business up for success.
Why is Pricing Strategy Important?
Producing or choosing your pricing strategy depends on:
What consumers are willing to pay
Revenue goals
Competitors
Changes in the marketplace
Production/distribution costs
Input costs
Economic trends
Specificity of the product or service
You can prioritize your profit margins by developing a pricing strategy that will essentially create more revenue and value for your business.
What is a Good Starting Point?
Before you choose a strategy, you need to think about your business as a whole. What are you seeking internally and externally from your business? Are you listening to consumers? What is the value of your business?
It’s important to answer these questions and think about your business goals. Choosing a pricing strategy means:
Paying attention to the current marketplace
Understanding your target audience
Knowing your potential competitors
Determining your goals
You’re ready to choose a pricing strategy once you completely understand the direction of your business.
Common Approaches to Pricing
Some examples of pricing strategies include:
Value Pricing: Value pricing matters on what your customers are willing to pay for your product. By listening to your customers’ opinions on pricing, you can price your product at a reasonable value to both you and your customers. Your product could have negative feedback if you charge more or less for your product rather than listening to your customers.
Price Skimming: Price skimming involves lowering your once high-priced products.
Technology companies use this pricing approach. As a company releases a new smartphone, other companies will eventually catch wind of the popular product and compete with their own.
Freemium Pricing: When companies let individuals use their platforms for free but limit certain features, they use the freemium pricing strategy. With freemium pricing, individuals pay more for the service if they want to use the special premium features.
Many streaming companies like Hulu, Amazon, Netflix, and other services use this strategy. Spotify allows users to listen to commercial-free and unskippable music for free for seven days. After seven days, users lose parts of their Spotify freedom and have to pay a fee or plan to have a more enjoyable listening experience.
Premium Pricing: Premium pricing works if you offer a unique service or product that no one else has in the marketplace. Your company will appear more desirable if you offer a product or service that no one else has entirely replicated. Consumers will choose your products time and time again because you have high popularity or you are the only provider of what they want.
Tesla is an example of this strategy. Tesla produces high-tech vehicles that not many companies offer, making their products more valuable and unique.
Dynamic Pricing: Dynamic pricing means changing prices depending on consumers’ demands. For example, Halloween-themed products are popular and essential during the September-October months. Consumers expect to see and purchase Halloween-themed products in stores during these months. After Halloween, the products are not as popular anymore, and the prices are low since they are not in high demand.
Dynamic pricing is not only used for seasonal products. It’s also a strategy used in booking hotel rooms, the airline industry, securing seats at venues, etc.
More strategies include competitive-based pricing, psychological pricing, penetration pricing, economy-based pricing, and other pricing approaches.
Creating Tiers for your Pricing
Tiered pricing includes producing various options that range from low-to-high prices for your consumers. You might want to choose tiered pricing for your product or service based on its several benefits:
Consumers have the opportunity to choose differently priced options that better suit them and their current income
You offer more for your consumers than your competitors do
You will receive more revenue
An example of tiered pricing is Apple and its Macbook products. Consumers have options to choose from when purchasing Macbooks. All Macbooks have different advantages or more than the others, and consumers will ultimately pick the best Macbook that will satisfy them.
Tiered pricing could open the door for more versatility, revenue, and customer satisfaction in your business.
Tracking your Pricing Data and Listening to Feedback
You never know if your pricing is the best fit for your business until you’ve analyzed the data. When analyzing how your pricing is performing, you’ll want to:
Listen to feedback
What does your target customer base think of how you’ve priced your product or service? Conducting a survey or using other forms to reach out to your customers could help you understand their experiences and how much they would pay.
Review your prices’ journey
How have your prices stood out in the marketplace? Have you seen a trend in your prices? If your prices are not trending well in the marketplace, review and make some adjustments.
Pay attention to your competitors
Are your competitors’ sales lower, the same, or higher ever since you’ve chosen a new pricing strategy? Depending on how your competitors are performing, you’ll either want to make adjustments or continue with your set strategy.
Other factors go into reviewing your prices, but you always have the opportunity to adjust your pricing strategy if it needs more work.
Working with a partner like Teitelbaum & Co. CPA, you’ll get a regular review of your reporting and know if there is a need for adjustment in your pricing model.