Which of the following is a common business to business pricing tactics?

One of the biggest challenges you face as a small business owner is deciding how to price your product or service. With so many types of pricing strategies at your disposal, how do you decide which one is best for your business?

Choosing the appropriate pricing strategy can have a substantial impact on your business. Price it right, and you can boost your bottom line and capture new customers. Price it wrong, and you risk missing out on hard-earned sales or valuable revenue.

Let’s explore how to determine the best pricing strategy (or strategies) for your business. You’ll also learn why pricing strategies are essential and discover 12 common pricing strategies other small business owners use.

What are pricing strategies and why are they important?

Pricing strategies are the different approaches that businesses take to figure out what the cost of their goods and services should be. To choose the appropriate pricing strategy, companies consider factors like current product demand, cost of goods sold, consumer behavior, and market conditions.

There are different types of pricing strategies depending on the company’s goals. Some want to maximize profit margins while others want to gain market share and find new customers in their area. And then there are other businesses that simply want to get rid of old inventory.

12 types of pricing strategies

Different types of pricing strategies can help grow your business, earn more sales, and maximize profits. Here are some common pricing strategies to consider as part of your broader marketing strategy.

1. Penetration pricing

It’s difficult for a business to enter a new market and immediately capture market share, but penetration pricing can help. The penetration pricing strategy consists of setting a much lower price than competitors to earn initial sales. These low prices can draw in new customers and divert revenue from competitors.

This strategy is meant to jumpstart sales and won’t be effective for your long-term growth. You’ll likely take a monetary loss at first in exchange for higher sales volume and brand recognition. As you eventually raise prices to be more in line with the market, prepare for some customers to drop off as they continue to look for the cheapest option. You can combat customer churn up front with strategies that turn those new buyers into loyal customers.

Pro: Market penetration is much easier than entering with an average price, and you can quickly earn new customers.

Con: It’s not sustainable in the long run and should only be a short-term pricing strategy.

Example: A new cafe opens up in town and offers coffee that is 30% cheaper than any other cafe in the area. They also focus on excellent customer service and implement a loyalty program that offers every tenth coffee for free. When customer demand has built up, the cafe slowly starts increasing the coffee price to a more profitable level. This gives customers a chance to build a taste for the coffee and other products and enjoy the great service as they work towards their free tenth coffee. Many of them will keep coming back as the price rises.

2. Skimming pricing

Businesses that charge maximum prices for new products and gradually reduce the price over time follow a price skimming strategy. In this type of pricing strategy, prices drop as products end their life cycle and become less relevant. Businesses that sell high-tech or novelty products typically use price skimming.

Pro: You can maximize profits of new products and make up for production costs.

Con: Customers may become frustrated that they purchased at a higher price and watch as the price gradually declines.

Example: A home entertainment store starts selling the latest, most advanced television well above market price. Prices then gradually decrease over the year as newer products come to market.

3. High-low pricing

High-low pricing is similar to skimming, except the price drops at a different rate. With the high-low pricing method, the price of a product drops significantly all at once rather than at a gradual pace. Retail businesses that sell seasonal products typically use a high-low strategy, often using a promotion to clear stock they won’t be able to sell for much longer.

Pro: You can clear your inventory of out-of-date products by discounting them and putting them on clearance.

Con: Customers may wait for impending sales rather than purchasing at full price.

Example: A boutique clothing store sells women’s sundresses at a high price during the summer and then puts them on clearance once autumn arrives.

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4. Premium pricing

Premium pricing occurs when prices are set higher than the rest of the market to create perceived value, quality, or luxury. If your company has a positive brand perception and a loyal customer base, you can often charge a premium price for your high-quality, branded products. 

This type of pricing strategy works especially well if your target audience includes early adopters who like to be ahead of the pack. Companies that sell luxury, high-tech, or exclusive products—especially within the fashion or tech industry—often use a premium pricing strategy. 

Pro: Profit margins are higher since you can charge much more than your production costs.

Con: This type of pricing strategy only works if customers perceive your product as premium.

Example: A beauty salon builds up credibility within its market (such as via word of mouth or online reviews) and offers its services for 30% higher than its competitors.

5. Psychological pricing

Psychological pricing strategies play on the psychology of consumers by slightly altering price, product placement, or product packaging. Some psychological pricing techniques include offering a “buy two, get one half off” deal or setting the price to $9.99 rather than $10 (“well, it’s cheaper than $10, isn’t it?”). Some businesses also use artificial time constraints to speed customers into stores, such as one-day or limited-time sales.

Nearly any type of business can use this strategy, but retail and restaurant businesses most commonly employ this method as it creates the perception of getting a bargain.

Pro: You can sell more products by slightly tweaking your sales tactics without losing profits.

Con: Some customers may perceive it as being tricky or salesy, which could potentially tarnish your reputation or lead to missed sales.

Example: A restaurant sets a gourmet hamburger’s price at $12.95 to lure customers into purchasing at a perceived lower price compared to $13.

6. Bundle pricing

Bundle pricing is a type of promotional pricing where two or more similar products or services are sold together for one price. Bundling is an effective way to upsell additional products to customers or add value to their purchases. Restaurants, beauty salons, and retail stores are among the many businesses that apply this type of pricing strategy.

Pro: Customers discover new products they weren’t initially planning to buy and may end up purchasing them again.

Con: Products that are sold within a bundle will be bought less often individually since consumers are saving money on a bundled purchase.

Example: A taco cantina sells tacos, tortilla chips, and salsa individually but offers a discounted price if customers buy an entire meal with all of these items.

7. Competitive pricing

The competitive pricing strategy sets the price of your products or services at the current market rate. Your pricing is determined by all other products in your industry, which helps you stay competitive if your business is in a saturated industry. You can also decide to price your products above or below the market rate, as long as it’s still within the range of prices set by all competitors in your industry. 

With the advent of e-commerce, it‘s now easy to compare prices before purchasing—and 96% of consumers do. This gives you an opportunity to win over customers with a price slightly below the market average.

Pro: You can maintain market share in a competitive market and attract customers who are interested in paying slightly less than your competitors’ rates.

Con: You need to diligently watch average market prices to maintain a competitive advantage for price-conscious consumers.

Example:  A landscaping company compares its prices to local competitors. It then sets the price for its most popular service, a lawn maintenance package, below the market average to attract price-sensitive customers.

8. Cost-plus pricing

Cost-plus pricing involves taking the amount it cost you to make the product and increasing that amount by a set percentage to determine the final price. You can work backwards to determine your markup percentage by first figuring out how much you want to profit from each product sold.

Pro: Profits are more predictable since you’re setting your markup price to a fixed percentage.

Con: Since this type of pricing strategy doesn’t account for external factors, like your competitors’ pricing, or market demand, you may miss out on sales if you set your markup percentage too high.

Example: A pizza shop adds up the cost of its ingredients and labor, then sets the pizza price to receive a 20% profit margin.

9. Dynamic pricing

Dynamic pricing matches the current market demand for a product. Also known as demand pricing, this pricing strategy most often occurs when the product at hand fluctuates on a daily or even hourly basis. Industries like hotels, airlines, and event venues set different prices daily and apply this strategy to maximize profits.

Pro: You can increase overall revenues by raising prices when demand is on the rise.

Con: Dynamic pricing requires complex algorithms that small businesses may not have the ability to manage.

Example: A boutique hotel raises its room rates for one weekend because there is a popular summer festival in town.

10. Economy pricing

Economy pricing consistently undercuts competitors with the goal of making a profit through high sales volumes. This type of pricing strategy usually goes hand-in-hand with low production costs. It works well in the commodity goods sector and is used by companies like Walmart and Costco.

Pro: You‘re likely to sell a large volume of products.

Con: You won’t be making much on each item, so you’ll need to sell more goods than usual. Also, if you don‘t manage your pricing carefully, you might create the perception of a low-value product or business.

Example: A superstore sells a generic brand of tea for 10% less than its local grocery store competitors.

11. Freemium pricing

Freemium pricing offers a basic product or service for free, then encourages customers to upgrade to the paid, premium version to access more features or choices. Potential customers get a taste of what the product or service can do for them and gain insight into your company. This is a popular strategy for software businesses and membership-based organizations.

Pro: You‘re building trust and educating potential customers about your product. You also get their contact details so you can stay in touch through email marketing.

Con: You don’t make money from every customer immediately and many users may choose not to upgrade.

Example: A software company offers basic virus protection for free with the option to upgrade to several other tiers of progressively higher levels of online security.

12. Loss-leader pricing

Loss-leader pricing brings customers to your store to buy a highly discounted product (the loss leader). While they’re there, they might buy other full-price items they didn’t plan on—which should more than make up for the loss of the original product.

Pro: This type of pricing strategy attracts customers who might not otherwise visit your store and exposes them to your full range of products.

Con: Some customers will only buy the loss leader product (and possibly many of them), so you need to watch your profit and stock levels closely.

Example: A supermarket offers bread at a very low price on Fridays, attracting people who might then do all their shopping for the week.

Choose a pricing strategy that matches your goals

There are many types of pricing strategies, and it’s critical to find the right fit for your business. To begin, determine your business goals. Then select the pricing method that will help you meet those objectives—whether it’s maximizing profits, obtaining market share, clearing inventory, or a combination of these. Once you have your pricing strategy, you can focus on how to grow your business further.

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The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.

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