From sole proprietorships to global conglomerates and every kind of company in between, one of the hardest questions many businesses face is also one of the most basic: How much should we charge for our products and services? Adhering to a disciplined pricing process — where goals are clarified and appropriate methods are selected — can help allay uncertainty and improve outcomes, which, in turn, leads to higher profits, larger market share and business longevity.
What Is the Pricing Process?
The pricing process is the series of steps a business takes to figure out how much to charge for its products and/or services. The process is both an art and a science. In some cases, each individual product or SKU will have its own pricing process; in other cases, pricing is considered at the portfolio level, such as when separate products are bundled together at one price.
Key Takeaways
- Before making any pricing decisions, it’s important for the business to clarify its objectives and know as much as possible about its customers and competitors.
- Setting a specific, primary pricing objective can help the business narrow down which strategy or strategies might work best.
- Pricing products and services is not a set-it-and-forget-it task. Businesses must constantly monitor their customers, competitors, market trends and the economy.
Pricing Process Explained
Pricing is one of the “4 Ps” of the marketing mix, the other three being the product to be sold, the places (sales channels) where the product will be sold, and the promotion of the product to potential customers. The pricing process is a customizable method that companies use to determine how to price their goods and services, and it’s considered in the context of the other three factors.
For example, the quality of a product relative to its competitive offerings can help determine whether a premium pricing strategy is sustainable, while the place it’s sold can dictate whether a dynamic pricing strategy is even possible. Many pricing strategies also go hand in hand with promotional strategies. In fact, some pricing strategies, such as high-low pricing, specifically require integration with promotions to offer regular discounts. (More on these pricing strategies soon.)
Price Elasticity of Demand
Before diving into the pricing process, it’s essential to understand the implications of price changes — a concept known as the elasticity of demand. Price elasticity is a way of measuring how sensitive a product’s sales are to its price. Demand is said to be elastic when small changes in price produce big changes in the quantity purchased. Conversely, demand is considered inelastic when the quantity of a product sold remains about the same, regardless of its price.
Demand elasticities are measured using the aggregate demand curve for a product. If a business is one of hundreds making a functionally interchangeable product, its pricing power is constrained by market conditions. However, if the product is well differentiated, to the point where the business can consider its loyal customers to represent a market of their own, then the elasticity of demand concept comes into play, as the business debates the trade-offs that come with raising or lowering prices.
For products with highly elastic demand, it’s possible that the business could make more money by lowering the price, because the increase in sales would more than make up for lost margin per sale. But raising prices could be a better move for a product with highly inelastic demand, because, in addition to making more money per sale, about the same number of units will likely be sold.
The more differentiated the product, the more the business can tap into these concepts. Keep in mind, though, that short-term and long-term elasticities don’t necessarily align. For example, people who drive to work have a fairly inelastic short-term demand for gasoline. They might take fewer discretionary trips, but they’re still going to drive to and from work every day. But if prices are persistently and uncomfortably high, they may start to carpool. And if those high prices are a concern at the time of their next vehicle purchase, cars with better mileage, hybrid models or fully electric vehicles are likely to become more appealing.
Pricing Process Steps
Before a business can affix a price tag to any of its offerings, it must do its due diligence to ensure that the price is right, for both its customers and its bottom line. The following six steps outline the pricing process, with greater details about steps 4-6 to come in subsequent sections.
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Know Your Business
In the first step of the pricing process, the business digs deep to determine its needs and — equally important — its constraints. At what point is a price too low, causing the business to lose money on each transaction? What are the business’s fixed and variable costs, and how much would it need to sell to break even at different price points? What is the maximum capacity of production before the business needs substantial investment in order to sell more?
These answers and numbers are critical to selecting the right pricing strategy (step 5). A strategy that cuts prices while doubling sales in a year won’t do much good if it takes two years to build the capacity to meet that kind of demand. In the meantime, promotions that aim to expand market share could put the business at risk if the deals are too good and the business can’t afford to fulfill them. Keeping in tune with the current state of affairs, studying next-step options, and understanding the business’s costs and operations provide essential information for sound decision-making. Put another way, the business must understand its needs inside and out and use those details as the foundation on which it builds everything else.
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Assess the Target Market’s Demands
Once the business has assessed its own needs, it’s time to learn everything it can about its current and potential customers. What do they think about the business’s product or service? What problem does that product/service solve for them? How many noncustomers share that same problem? What do those people do about the problem? How eager or hesitant are the business’s target customers to find a better solution or try something new? What’s most important to them, and where does price fall on their priority lists? How big is the total market? What could grow or shrink that number?
The answers to these questions are central to picking the right pricing strategies later on. For example, the business couldn’t charge a premium over its competition if its customers think its offering is a good, but lower-quality alternative to the bigger names in the same industry. The business also needs to recognize whether it’s fighting with competitors over existing customers or in a race to tap new markets and customer segments. Each involves different mindsets and strategies that will inform many marketing decisions, including price.
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Evaluate Competitor Pricing
Now, it’s time for the business to evaluate its competitors and other next-best alternatives. For example, a startup ride-sharing service should, of course, see what Uber and Lyft charge, but also review taxi, bus and car rental prices. Underpricing a close competitor can be a huge advantage. (Imagine cutting margins by 20% but doubling sales, which would more than make up for any loss.) On the other hand, charging a little more than the competition could signal that the product is superior.
Regardless of the strategy, monitoring the competition is essential. If the business is out of sync with like businesses, it could also wind up doing serious damage to its reputation, on top of the more immediate loss of short-term sales.
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Choose a Pricing Objective
Before establishing a pricing strategy, the business must be clear about what the strategy needs to accomplish and ensure that teams are aligned. Is the objective to maximize profits? Market share? Is it looking to build the brand or just get through some tough times? The objective will ultimately drive the strategy.
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Select a Pricing Strategy
…or a mix of strategies. The goal is to make sure the chosen strategy is appropriate for the product, will be well received by customers, can be executed by staff, and will lead to progress toward the main pricing objective.
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Determine Your Prices
Strategy in hand, prices can now be set. The information gathered about the business can inform realistic prices and sales forecasts. Customer information can be used to make sure the prices will be attractive to them. Competitive information can determine prices in terms of market positioning. Pricing decisions are the big culmination of a long process of research and analysis, but remember, it’s also somewhat forgiving: If the business misses the right price by a little bit, it can usually change it promptly. Much can be learned along the way, and the best companies incorporate that kind of new information quickly.
6 Types of Pricing Objectives
A key step in the pricing process is determining the primary pricing objective. This will steer the business’s strategy and price-setting going forward. These examples cover the most common focuses of companies going through the pricing process.
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Profit-Oriented
Nonprofit companies aside, financial gain is one of the primary — if not the default— objectives among businesses. It entails devising a pricing strategy that, at least for some businesses, builds in a decent profit margin, which is often defined by the business’s industry.
An important consideration is whether the business is after short-term or long-term profit. Companies going into short-term profit maximization mode will often make shortsighted decisions that generate a lot of money up front but could erode customer loyalty and invite competition. Be clear about your time horizons and risks when looking for profit-maximizing pricing strategies.
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Survival-Oriented
Sometimes a company’s main objective is simply to stay in business. These companies aren’t trying to expand or squeeze extra margin out of their customers. Rather, they are facing tough times — whether due to a disruption in their business model, a major event (such as a pandemic) or a short-term emergency, such as a sudden problem with cash flow — and are fighting to survive. Any of these reasons, and plenty more, could necessitate an immediate pricing strategy pivot. Survival mode is going to look a little different depending on the threat, but it’s important for businesses to align their pricing strategy with their most immediate and urgent needs, while also working to ensure a more successful future.
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Sales-Oriented
Usually, a sales goal is to “increase sales,” but a sales-oriented pricing strategy can also seek to change a company’s sales pattern in other meaningful ways. For example, when a company launches a new sales channel — perhaps selling through a new partner, introducing a mobile app or opening a new store — it may initially want to funnel more business through the new option, as a way to test the waters regarding a potential future direction for the business, even if it means sacrificing some profit in the short run.
Whatever the reason, a pricing objective that targets sales will aim to generate more sales, either in general or of specific types (within a new target market, through a particular channel, in a particular geography, etc.). The details of the intended push will help determine an appropriate pricing strategy to steer customers in the desired direction.
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Market Share–Oriented
Choosing market share as an objective is similar to selecting sales but with a more straightforward end in sight: Companies with this goal want to capture a larger percentage of the market’s customers. This isn’t always compatible with profit-maximizing, as the most successful way to attract new customers is often to offer great promotions and deals that lure them in. But plenty of businesses see market share as the best path to success and longevity: Being the dominant, more recognizable and beloved brand can be turned into profit later on.
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Image-Oriented
Some companies use their pricing strategies to help cement a particular image. For example, makers of luxury goods typically choose to keep their prices high and would rather have inventory go unsold than sold at a discount, out of fear that doing so would erode the long-term image of their brand. By the same token, some companies do everything they can to keep the prices of certain items low, wanting to be known as customer-friendly and reliable. Sometimes companies will even use pricing as part of a gimmick or theme, like selling items for $17.76 on the Fourth of July to reinforce the holiday’s theme.
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Status Quo–Oriented
Don’t. Rock. The. Boat. This is excellent advice for businesses that don’t know what they’re doing when they start out running a pricing process, and there’s no urgent need for immediate change. Staying the course is just fine in advance of thoughtful deliberation and preparation for the opportunity being right. Change for the sake of change can confuse or annoy customers.
However, status quo pricing doesn’t mean that a business should never change its prices. The status quo can also be thought of in relation to where the business wants to position itself in terms of the competition. If the business wants to keep its prices 3% lower than its competitors’ at all times, if competitors increase their prices, then the business will need to do so, too, to maintain the 3% gap.
17 Types of Pricing Strategies
With objectives and consumer and competitive information in hand, a business is ready to select a specific pricing strategy. The following list includes some of the most common and useful pricing strategies (alone or in combination) found in the business world today.
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Competition-Based Pricing
Competition-based pricing is a strategy in which a company sets its prices based on its competitors’ prices. This strategy is often used in markets where competitors offer similar products or services and where price is a major consideration for customers.
Setting prices based on competitors’ pricing typically means matching or slightly beating them. If companies sell functionally identical products that are interchangeable in the eyes of customers, then they’ll probably wind up converging on almost identical, if not identical, prices. Think about how gas stations adjust their prices together. While certain differentiating factors, such as a convenient location, may matter, gas is gas, and a station selling wildly overpriced gasoline will soon see cars passing it by.
If products are not interchangeable, competition-based pricing might mean making sure prices aren’t too out of sync, while still maintaining a gap. If a premium seller in a market is lowering its prices, a low-cost provider in the same market will have to stay below it to retain its customers. Likewise, the high-end seller may still be able to command a revenue premium with its better products — but only to a point, lest the gap become too wide between its competitors’ prices and its own.
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Cost-Plus Pricing
With cost-plus pricing, a company adds a markup to the cost of providing a good or service to determine final pricing. The markup can be a percentage (most common), a fixed amount or both. Cost-plus pricing requires a comprehensive understanding of a product’s or service’s costs; if the business is missing a key component — for example, hours spent by employees to prepare the product — it could wind up losing money on every transaction. Implemented well, cost-plus pricing offers a simple way to ensure that transactions are profitable and prices reflect costs.
Cost-plus pricing requires frequent monitoring of the relevant costs, as well as what competitors are doing. Cost-plus pricing can quickly turn into competition-based pricing if competitors are competing over who can trim their costs and/or markups the most.
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Dynamic Pricing
Dynamic pricing is a strategy in which a company sets prices based on real-time market conditions. Dynamic pricing means that the price of a product or service can change frequently, depending on such factors as current inventory levels, how quickly inventory is selling, competitors’ prices, customer behavior and even current events.
Dynamic pricing offers several advantages, including the ability to respond quickly and to maximize profits. Once in place, dynamic pricing can be handled by, or with the assistance of, automation technologies, taking a lot of work out of human hands. It also prevents companies from getting left behind when competitors are moving quickly, as well as enabling them to respond to internal needs — such as clearing out slow-moving inventory — before they become bigger problems.
However, not every customer segment is going to respond well to dynamic pricing, especially when more predictable alternatives are available. Dynamic pricing also requires monitoring. For example, without human oversight, a hotel could wind up selling out at very low prices on busy nights, when dates for a nearby event are announced. It’s also important to implement safeguards, in case an algorithm accidentally gouges customers to the point of reputational harm, or it exploits a tragedy, causing the business to be seen as predatory.
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Freemium Pricing
“Freemium” pricing is a portmanteau of “free” and “premium,” and that’s exactly what this pricing strategy is: a free version plus a premium version presented to the customer at the same time. Anyone can sign up for the free version, but a premium version that’s better in some way is also available. The idea is that a percentage of customers will love or have high enough needs for the product or service that they’ll upgrade to the paid premium version.
Freemium models are common with software. The paid version could unlock additional and more sophisticated features, eliminate unwanted features (such as ads) or allow for heavier usage, such as increased file storage space.
For freemium pricing to work, the following has to be true:
- The freebies have to be inexpensive, since they’ll be subsidized by a smaller group of paying customers. When talking about a few gigs of storage space, that’s easy enough, but any hands-on services that require regular human interaction could send labor costs spiraling out of control.
- The free version has to be an excellent experience for customers. After all, the free version is a form of marketing for the paid version. If the free experience is subpar, customers will be less likely to upgrade.
- The paid version has to offer meaningful upgrades that are both valuable and easy to communicate to target customers.
Freemium pricing requires more advanced thought and commitment than most other types of pricing, in that the business has to split its offering into at least two versions. That’s a bigger lift for most companies than just changing the price tag on existing items and seeing what happens.
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High-Low Pricing
Most common in retail, high-low pricing is a pricing strategy in which a company sets a high price for a product or service and then offers fairly frequent discounts, sales or other promotions. High-low pricing allows the company to attract both price-sensitive customers through frequent bargains and less price-sensitive customers who are willing to pay full price, rather than wait for sales or search clearance racks.
Sometimes, companies use high-low pricing to offer quasi-dynamic pricing without changing the sticker price. Other times, it’s a form of price discrimination: letting more price-sensitive customers monetize their flexibility and patience, while more affluent customers don’t have to wait for a sale. In some cases, it’s a form of psychological marketing that operates on the idea that customers will be more likely to buy if they feel like they’re getting a great deal. (More on this strategy soon.)
The risk of high-low pricing? Sometimes a company can cannibalize its own business, if it makes it too easy to get a low price, because the discounted price loses its allure.
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Hourly Pricing
As its name implies, hourly pricing means a company charges its customers based on the number of hours that employees and subcontractors work for that customer. This pricing model is often used for services that are specialized or labor-intensive — such as consulting, legal services and cleaning — marked up to cover overhead and other expenses. It works especially well for projects where the goals and/or obstacles aren’t well known at the outset.
It’s important to remember that agreeing on hourly pricing and a certain rate is not the same as agreeing on a total price. Transparent documentation and communication are helpful here, so that all parties feel charged and paid appropriately.
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Skimming Pricing
Skimming pricing is a pricing strategy designed for introducing new products into a market. With skimming pricing, companies charge a high price for a new product or service, then lower the price over time as more competitors enter the market and/or as demand for the product or service decreases.
The idea behind skimming is that when a new product comes out, some people will value it very highly. Therefore, sellers start the initial price high for the most enthusiastic (and most willing to pay) customers. Later on, the price can be lowered to capture the portion of the market that didn’t want the product right away.
A major risk of skimming pricing is that a competitor or substitute could enter the market before the business captures enough of it, and its initial high-priced sales don’t make up for the volume lost by not lowering prices faster.
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Penetration Pricing
Penetration pricing is the flip side of skimming pricing. Here, a company sets its initial price very low for a new product and service, then raises it over time. Low initial prices can help companies capture new customers quickly, allowing them to build market share (and hopefully loyalty) ahead of competitors poised to enter the market. Penetration pricing also gives customers a chance to try the new product or service with less risk; future price increases will reflect increased confidence in the new offering as it becomes a trusted brand. The goal of penetration pricing is to give up some short-run profits at the outset in exchange for faster growth and/or a more defensible position later on, when the business is faced with more competition.
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Premium Pricing
Premium pricing is exactly what it sounds like: setting prices higher than a business otherwise would or, more commonly, higher than the competition’s prices. Companies that do this profitably — making more from the markup than they lose in sales to price-sensitive consumers — are said to be able to command a revenue premium.
Premium pricing is a solid strategy for businesses whose customers are willing to pay more for higher quality products. Sometimes, “higher quality” isn’t about durability or features but, rather, perception. If a brand is well known and consumers get some kind of psychological or social benefit from being seen as a customer, such as with sports cars or designer handbags, that alone can sustain a revenue premium over less well-known competitors’ products of otherwise identical quality.
Product or service reliability is another justification for premium pricing. Airlines, for example, have been able to maintain revenue premiums just by being on time more often than their competition, even if they have an identical in-flight product and a worse loyalty program. It’s also the reason a big-name consultancy might get hired over a less-expensive alternative that could do just as good a job.
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Project-Based Pricing
Project-based pricing is a strategy in which companies charge for the end result of a completed project, regardless of how many hours it takes to complete. This works well when the end result is known, can be described in detail, and the company has a good idea of what it will take to complete. Project-based pricing is common in construction (“build me X”), marketing (designing and executing an ad campaign, for example) and artistic commissions.
Sometimes, more complicated contracts will be a hybrid of project-based and hourly pricing, when, for example, some items are included in the project price — or included up until a well-defined point — but others are not.
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Value-Based Pricing
With a value-based pricing strategy, a company sets prices based on the perceived value of its products or services in the eyes of the customer. In other words, the price is based on what customers are willing to pay, rather than on the cost of production/delivery or the market price.
Value-based pricing can be explicit. Hedge funds, for example, often go with a “2 and 20” pricing structure, where investors are charged 2% of their assets under management as a flat fee, but then 20% of the gains the hedge fund earns go to the investment management company, representing a 4:1 split of the profits. One advantage of this kind of built-in value-based pricing is that incentives are aligned — the hedge fund makes more money when its customers make more money.
Companies also use this kind of pricing structure to tackle large societal problems. For example, homeowners may know that installing solar panels will save them money, but the up-front costs are substantial. A company might say, “We’ll pay for all or most of the panels and installation, and you pay us back when you pay your electric bill — some or all of the savings will go to us for a predetermined period.” The customer winds up paying the company in proportion to how much value the company was able to add to the home’s energy efficiency, and, at the end of the relationship, the home is now greener and cheaper to operate.
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Bundle Pricing
Bundle pricing (sometimes just called “bundling”) is a pricing strategy that allows a company to sell several products or services together as a unit — such as with television packages. The thought is that customers will value a subset of items within the bundle as being worth as much as or more than the price, which would be higher if all the items were sold separately.
Think of a simple cable package with two channels: Channel 1 and Channel 2. One customer thinks Channel 1 is worth $80 per month and Channel 2 $10 per month. Another customer thinks the opposite is true. If these customers purchase only their most highly valued channels, the most the cable company will make is $160. But if the company bundles the channels and sells them as a package for $89, then it would make $178.
Bundle pricing is a natural fit for physical products where customization is difficult. It may be a way to provide curation services — gift baskets, for example, are a form of bundled pricing. Bundling is also increasingly common in service industries beyond telecom. For example, event-hosting venues often have bundled meal and entertainment packages from which to choose, while travel providers are increasingly bundling a variety of experiences, such as lodging, food and transportation.
Be aware that although bundling can add value for both business and consumers alike, it can also annoy customers who resent having to pay for things they don’t want. But the biggest danger is that bundling may be illegal if it forces customers to use a secondary product or service they might otherwise get from another company, if it comes as a condition of purchasing a primary product.
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Psychological Pricing
Psychological pricing is a broad term covering pricing strategies that leverage what is known about human psychology to influence consumers’ purchasing decisions. Psychological pricing techniques can be used alone or in conjunction with other strategies.
The most common technique is called “price ending,” which tries to make a price seem smaller by setting it just below a rounder, larger number — for example, an item is priced at $3.99 or $3.95 instead of $4. The extra penny or nickel doesn’t matter very much, compared to the benefits of the price feeling lower to consumers. It’s especially impactful when the left-most digit changes as a result of the tiny markdown. In other words, $19.99 is better than $20. This works with whole-dollar prices, too, like a $29 restaurant menu item that might otherwise cost $30. It’s also used for items that are among the most expensive and time-consuming purchases buyers may make in their entire lives, such as for real estate.
Another psychological strategy is the “loss leader” — a product priced so aggressively the seller loses money on it, but it’s designed to grab the attention of customers, get them through the physical or digital door, and build a brand.
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Geographic Pricing
Geographic pricing is a straightforward technique that many companies use as they expand. As its name implies, geographic pricing means charging different prices in different geographic locations. While sometimes it’s a clever way to make more money, more often than not it is used out of necessity: Different localities have different taxes to pay and regulations to follow, faraway locations have higher transportation costs, international borders may require dealing with customs and tariffs, rents on similarly sized storefronts can be wildly different depending on location and the same is true of labor costs. What’s more, customers are likely to have vastly different needs and incomes.
Even companies that pride themselves on consistent low pricing across geographies, such as fast-food restaurants, still find the need to charge different prices in different countries. In fact, The Economist created the Big Mac Index(opens in a new tab) to track the cost of a McDonald’s Big Mac across borders and currencies, and learn about purchasing power and cost of living in different areas of the world.
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Subscription Pricing
Subscription pricing centers on the business providing access to its product or service on an ongoing basis in return for recurring revenue, often monthly. Newspaper and magazine publishers have long abided by this pricing model. But it has also become increasingly popular among software vendors, which charge customers a monthly or annual fee for access to their applications via the internet. The software company typically earns more in total revenue, and customers appreciate not having to buy new software when an updated version comes out, as updates are included in their subscriptions. And if customers’ needs change, they also get the benefit of being able to cancel at a low cost.
Subscription pricing pairs well with some of the other pricing strategies on this list. For example, freemium pricing is common with subscriptions, and all the thinking behind choosing between penetration or skimming pricing can easily apply to subscriptions as well. Sub-strategies within subscription pricing, such as tiered pricing, are also worthy of consideration.
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Captive Pricing
Captive pricing is a strategy that involves a core product alongside “accessory” products that are often required to realize the full value of the core product — for example, a printer purchase also requires the purchase of ink cartridges. With captive pricing, the core product (the printer) is often priced very reasonably, with most of the profit margin built into the accessory products (the ink).
Accessory products don’t have to interact directly with the core product or even be sold by the same company. Captive pricing is the reason food is so expensive at sporting events and concerts in large arenas: There’s a captive audience that has no good alternatives.
In either case, once the core product is in use, the costs to switch are high — another reason customers become “captive.” Unsurprisingly, customers tend to dislike this approach, so businesses should consider the impact on their brands and customer acquisition costs before committing to it.
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Free Trials/Samples
Free trials are similar to freemium pricing in that the idea is to let prospective customers sample products and services for free before they decide whether to buy them, but with one exception: The free trial ends. The reasoning is that it’s much easier to sell something when the customer has had personal experience with it. This can take the form of giving away single-ounce servings of a snack or beverage that the business is trying to sell, offering access to its website for a predetermined length of time before access is revoked or a credit card is charged, or giving out free months or more of membership, in hopes that customers will grow to depend on the product or service and not want to give it up.
The size and/or duration of the free-sample offering will likely involve some optimization to determine how to get the most paying customers for the least investment. One way companies are increasingly looking to improve returns on free trials is by marketing those trials to a select group of customers, rather than to the general public, in hopes that they’ll get better conversion rates.
How to Determine the Best Pricing Strategy
The best pricing strategy is typically guided by an individual business’s situation. Some strategies will be easy to rule in or out — for example, geographic pricing is all but mandatory for a global B2B services company, whereas it wouldn’t make sense for a single-location restaurant. Likewise, some of these strategies target newly introduced products, whereas others are appropriate for established products.
The business’s pricing power is also an important factor. If the business is the only provider of a product or service, with no competitors or close substitutes, it has a monopoly, so the only limits on its pricing power are legal and political ones. If the business sells a completely fungible product, it probably has little choice but to charge the market price for what’s essentially a commodity product.
Additional considerations: How competitive is the market? The more competitive it is, the less the business can deviate from prevailing prices, so competition-based pricing becomes more important. How differentiated is the product? If it’s unlike anything else on the market, the business may be able to break from competitors and decide its own markup in cost-plus pricing. How customized and complicated are the orders? Hourly or project-based pricing could fit the bill, perhaps in conjunction with value-based pricing. (Keep in mind that mixing these strategies is often desirable.)
It’s also a good idea for businesses to examine their competitors’ prices and pricing strategies to see whether they’re bundling, using dynamic pricing, varying their prices based on geographies and so on. Finally, businesses should also be open to a bit of experimentation to see what pricing works best for them and their customers.
Pricing Process Examples
Pricing is anything but static. Let’s consider the journey of MCR T-Designs, a hypothetical T-shirt company, from startup to established player, and how its pricing strategy transforms along the way.
Example 1: MCR emerges as an immediately popular company that sells T-shirts with clever phrases at popular vacation destinations. As a new entrant to the market, the owners know that their unique style and sense of humor are going to be easy to copy, so they adopt a penetration pricing strategy to support their objective of growing market share by undercutting competitors and trying to build a brand while, at the same time, generating as many sales as possible to get the business rolling.
Example 2: Curse you, Mother Nature. A hurricane closes some of MCR’s best locations during the peak of this year’s vacation season. The company had purchased a lot of inventory in anticipation of sales that never came, and now bills are coming due without income coming in. As a result, MCR’s focus changes from growing market share to surviving, which calls for the complementary strategy of selling off inventory at reduced prices and investing more in online sales and social media — whatever it takes — to make up the sales gap.
Example 3: MCR weathers the storm and emerges more stable than before. Going forward, the owners want more consistent pricing and profits, so they reorient their key objective to seeking profit. They decide the best way to achieve this is with a cost-plus model, ensuring that every sale generates a healthy profit without prices ever getting too far away from their costs. This allows them to remain competitive in a market where many customers are not brand-conscious. They keep a close eye on competitors’ prices, however, and will adjust their margins if their prices ever get too high relative to their closest competition.
Industry-Based Pricing Processes
Some industries are natural fits for a specific pricing process. Occasionally, a company will try to disrupt a pricing model and gain market share from consumers who don’t like the status quo. For example, until the advent of streaming services, bundling was the only way for cable and satellite TV providers to reliably make a profit, so every provider in the industry used it (with few exceptions for premium-channel add-ons).
But, for the most part, pricing strategies around which an industry’s big players have unanimously converged are the standard for a reason. The travel industry, for example, has found dynamic pricing indispensable to being able to account for the wild fluctuations in demand — sometimes daily — for the services provided.
The Price Is Right With NetSuite
Growing businesses often find it hard to keep pace with their increasing diversity of customers and the numbers surrounding their expanding operations, while large businesses operate at a scale where no human can retain all the relevant information in their head. This is where good software comes in — and the best for making pricing decisions is a suite, such as NetSuite ERP, which manages real-time data from all parts of the business in a single, unified database. Such comprehensive visibility and access to easily digestible summaries and analyses turn what could be a pricing guessing game into a science. In addition, NetSuite ERP’s modular design means that the system can easily expand (and scale) as the business’s requirements increase. And, because the solution was designed specifically for the cloud, business users have anytime, anywhere access to their applications through a simple internet connection.
A thoughtful, replicable and well-informed pricing process is essential for companies looking to implement an integrated marketing strategy for their products or services. Reliably setting effective prices that make customers happy, and turn a profit, requires a business to know itself, its customers and its competition, in addition to aligning its pricing strategy with clearly defined goals. A business whose pricing processes can handle that will have a much easier time figuring out how much to charge and how to position its brand in the marketplace.
Optimize Your Pricing With NetSuite
Pricing Process FAQs
What is a pricing analysis?
Pricing analysis is a process of evaluating the prices of your products or services to determine if they are competitive and profitable. This can be a complex process, as it involves considering a variety of factors, such as the cost of production, the cost of distribution, the cost of marketing, the level of demand, the prices of your competitors, and your company’s long- and short-term goals.
How important is pricing?
Pricing is extremely important and often determines whether a company succeeds or fails. The process, however, is more forgiving than some other make-or-break factors, as many pricing strategies can be attempted, learned from and abandoned, especially in the early days of a company or product.
How does the pricing process play into marketing?
Pricing is one of the “4 Ps of marketing,” also referred to as the “marketing mix.” The four critical elements of that mix are product, price, place and promotion — in other words, what you sell, how much you sell it for, where you sell it and how you interact with potential customers about it.
What are the six steps in the pricing process?
Generally speaking, there are six steps in pricing a product or service. First, a business must assess its own needs. The next two steps involve looking externally at what its target market wants and what competitors are charging. Then, the business is ready to choose a pricing objective, select a pricing strategy and, finally, set a price.
What are the 4 types of pricing methods?
Businesses have many types of pricing methods available to them. Strategies include, but are not limited to, cost-plus pricing, high-low pricing, skim pricing and psychological pricing.
