The Five Most Common Types of Pricing Strategies

From Amazon to Apple, Ford to Sketchers, most brands use a mix of these pricing strategies across their range of products or services.

1?? Cost-plus Pricing Strategy?The cost-plus approach involves calculating the cost of making the product or delivering the service and then adding a profit margin.

Pros and Cons of Cost-plus Pricing

• Pros:?This strategy is simple and makes it easy to forecast operating costs, revenue, and profits. It’s particularly valuable for brands with material costs and inventory, as it helps manage orders, sales, and other operating costs efficiently.
• Cons:?Accurately accounting for every input material can be time-consuming. Inaccurate inventory can lead to accounting errors, lost profits, or wasteful spending. Additionally, cost-plus pricing doesn’t consider a consumer’s willingness to pay that price.

2?? Competitive Pricing Strategy?Competitive pricing focuses on analyzing the market and setting prices based on competitors. However, it’s not always about undercutting the competition.

Subtypes of Competitive Pricing:

• Co-operative Pricing:?Matching your competitor’s price to maintain similar market prices and profit margins.
• Aggressive Pricing:?Beating a key competitor’s price no matter what, which can increase market share but may result in operating at a loss on some products.
• Dismissive Pricing:?Ignoring the competition and pricing based on your own value criteria, often used by luxury brands or market leaders like Apple.

Pros and Cons of Competitive Pricing

• Pros:?This strategy is outward-focused, considering competition and consumer behavior.
• Cons:?It largely ignores internal costs and profit protection, making it most suitable for markets with similar products.

3?? Price-skimming Strategy?Price skimming involves setting high prices initially when introducing an innovative product, then gradually lowering them as competition increases.

Pros and Cons of Price Skimming

• Pros:?High profits early on.
• Cons:?The strategy is short-lived as prices must eventually drop, making it a temporary solution.

4?? Penetration Pricing Strategy?Setting a low price point to enter a new market or introduce a new product. This strategy is particularly useful for subscription-based businesses and hardware.

Pros and Cons of Penetration Pricing

• Pros:?Effective for entering new markets and building a loyal customer base.
• Cons:?It’s risky, with no guarantee of customer loyalty, and often requires significant capital, leading to rapid cash burn.

5?? Value-based Pricing Strategy?This method balances internal and external price considerations, blending components of other strategies. It involves evaluating competitors’ products, identifying differentiating features, and assigning financial values to these features.

Pros and Cons of Value-based Pricing

• Pros:?It’s nuanced and considers both the brand’s costs and the value offered to customers.
• Cons:?Communicating the added value can be challenging, especially if switching brands involves additional costs for consumers.

Which Pricing Strategy Works Best for Your Product or Service?

There’s no rule that says you must choose just one pricing strategy. It’s often best to use a mix of methods across product and service lines to diversify revenue streams and position new areas for growth.

For example, a company might use penetration pricing to grow its new advertising display network, competitive pricing on its retail sales platform, and price skimming to capitalize on its cloud-based networking investments. This diversified approach is similar to Amazon’s strategy.

You Can’t Put a Price on Great Marketing

No matter how you set prices, it’s marketing that drives sales. Oneupweb’s marketing strategists design effective multichannel marketing campaigns to put your product in front of the right audience and meet your goals. Whether it’s a new product launch or revitalizing an established service offering, our integrated team provides creative solutions to even the toughest marketing challenges.

Let’s get started! Contact our team or call (231) 922-9977 to get the ball rolling.