How do you choose the best pricing strategy model for your product or service?

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Pricing is one of the most important decisions you have to make as a business owner. It affects your profitability, your competitiveness, and your customer perception. But how do you choose the best pricing strategy model for your product or service? There are many factors to consider, such as your costs, your value proposition, your target market, your competitors, and your goals. In this article, we will explore some of the most common pricing strategy models and how to apply them to your business.

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1 Cost-based pricing

Cost-based pricing is the simplest and most straightforward pricing strategy model. It involves adding a markup to your total costs of production or delivery, such as materials, labor, overhead, and taxes. The markup can be a percentage or a fixed amount, depending on your desired profit margin. Cost-based pricing ensures that you cover your expenses and make a profit, but it does not take into account the value that your customers perceive or the prices that your competitors charge. Therefore, it may not be the most optimal or competitive pricing strategy model for your product or service.

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Mohammad Waheeb

Be inspiring and startup your business. We’re here for serving water cups to American people
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cost based pricing is a pricing strategy in which a company adds a markup to the price of a product over the cost of production and manufacturing. The strategy often involves adding a fixed percentage added on top of production costs for one unit.

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2 Value-based pricing

Value-based pricing is the opposite of cost-based pricing. It involves setting your price based on the value that your customers perceive or are willing to pay for your product or service, rather than your costs. Value-based pricing requires that you understand your customers' needs, preferences, and pain points, and how your product or service solves them. It also requires that you communicate and demonstrate your value proposition effectively, through branding, marketing, and customer service. Value-based pricing allows you to charge a premium price and increase your profitability, but it also requires more research, analysis, and testing to determine the optimal price point.

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3 Competition-based pricing

Competition-based pricing is a pricing strategy model that involves setting your price based on the prices that your competitors charge for similar products or services. It can be a useful way to benchmark your price and position yourself in the market, especially if you operate in a highly competitive or saturated industry. Competition-based pricing can be either higher, lower, or equal to your competitors' prices, depending on your differentiation, quality, and reputation. However, competition-based pricing does not take into account your costs or your value proposition, and it may not reflect the true demand or willingness to pay of your customers.

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4 Penetration pricing

Penetration pricing is a pricing strategy model that involves setting your price lower than your competitors' prices, or lower than the market average, in order to attract more customers and gain market share. It can be an effective way to introduce a new product or service, or to enter a new market, by creating awareness, interest, and loyalty among potential customers. Penetration pricing can also help you achieve economies of scale, reduce unit costs, and create network effects. However, penetration pricing also means that you sacrifice profitability in the short term, and it may be difficult to raise your price later without losing customers or facing backlash.

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5 Skimming pricing

Skimming pricing is the opposite of penetration pricing. It involves setting your price higher than your competitors' prices, or higher than the market average, in order to maximize your profit margin and capture the most willing and able customers. It can be an effective way to launch a new or innovative product or service, or to target a niche or premium segment of the market, by creating a perception of exclusivity, quality, and value. Skimming pricing can also help you recover your research and development costs, and deter new entrants or imitators. However, skimming pricing also means that you limit your market size and volume, and it may invite competition or price erosion over time.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Anita Subramaniam

Ford Certified Sales Consultant
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Pricing can also be based on how we can cover the costs and make profits without charging the consumer! Alternative pricing strategy is used where we cover the costs to the consumer and make profits through promotions of businesses (sponsors/advertisers) on billboards, magazines, social media, etc. For example a consumer does not pay anything for using Facebook or Twitter. Some publishers sell magazines, newspapers or periodicals at subsidised rates. Here alternative pricing strategy is used. There is parallel consumption of the product wherein one category of users (businesses advertising their products or services) pay for the usage of space while the other category of users (consumers) use the same platform for free.

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How do you choose the best pricing strategy model for your product or service?

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1 Cost-based pricing

2 Value-based pricing

3 Competition-based pricing

4 Penetration pricing

5 Skimming pricing

6 Here’s what else to consider

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