Think back to the most recent item you purchased in a store or online. Did you ever pause to consider how and why that item was priced the way it was?
Far from an arbitrary decision, pricing involves strategies, calculations, research, and careful planning. Prices aren’t fixed, either. They change over time—sometimes from minute to minute.
Whether you sell products or services, having a pricing strategy in place to guide your sales is important. Here’s how it works.
Table of contents
- What is a pricing strategy?
- Common types of pricing strategies
- Pricing strategies in detail
- Pricing strategy examples from real companies
- How to start a pricing analysis and strategy
What is a pricing strategy?
A pricing strategy is the process through which a business decides what to charge for goods or services—and it’s an important part of any business plan. When your company has a pricing strategy in place, it:
- Becomes easier to remain competitive with other companies
- Helps you capture new clients and grow customer loyalty
- Maximizes profits now and in the future
For all of the above to work, though, you’ll need to find the right pricing strategy for your business. This guide will walk you through the most common types of pricing strategies and look at how several well-known companies price their goods and services.
Common types of pricing strategies
Many established businesses use one of the following common pricing strategies:
- Value-based pricing
- Cost-plus pricing
- Competitive pricing
- Price skimming
- Market penetration pricing
- Dynamic pricing
- Economy pricing
- Premium pricing
- Freemium pricing
- Bundle pricing
While you could try to develop your own pricing strategy, using one of the existing strategies above is typically a good idea—especially when first starting out. By doing so, you can look to other established businesses and reference materials (like this guide!) to help you implement your pricing strategies to best effect.
Pricing strategies in detail
The best pricing strategy for your company will depend on your business model, customer base, products or services, and personal preferences.
A value-based pricing strategy centers around the way your target audience perceives goods and services. The more valuable a consumer thinks a product or service is, the more willing they will be to purchase it.
For example, if a customer believes that a particular brand of milk provides them with value in the form of better quality, nutrition, or taste—and they feel they are paying a good price for that value—they are more likely to purchase the milk over competing brands’ products.
Effective marketing is a critical component of value-based pricing. The right marketing strategy can inspire a perception of value in potential customers due to lifestyle or status aspirations, promises of high customer service, guarantees of product quality, and more. Knowing and clearly communicating your value proposition is vital when launching a marketing campaign for products and services that use value-based pricing.
This type of pricing strategy is typically well-suited for use by B2C or B2B service providers, freelancers, and experts who teach a specific skill, including:
- Course creators
- Personal finance experts
- Business strategists
- Personal stylists
- Home organizers
You can also find value-based pricing at work across luxury goods industries, including brand-name clothing, handbags, and other perceived “status” symbols. In retail applications, there is often some overlap between value-based and premium pricing strategies.
Cost-plus pricing, or markup pricing, strategies involve taking the cost of production, adding an additional dollar value on top of that, and charging the total to customers.
For example, let’s say you’re planning to sell a product that costs $10 to produce. This means that you have to sell the product for more than $10 in order to make a profit.
- For a 20% profit margin, you’ll need to sell your product for $12
- For a 50% profit margin, you’ll need to price it at $15
A cost-plus pricing strategy also makes it fairly easy to generate a rough idea of what your profit will be based on sales volume. Here’s how we might set a sales goal for ourselves when selling items at a markup of 20%:
$10,000 profit goal / $2 profit per unit = 5,000 unit sales goal
Cost-plus pricing strategies are often used in B2C retail applications like grocery stores, big-box stores, and convenience stores. This approach typically doesn’t require a huge investment in marketing, either, beyond how you’d normally advertise your business.
A competitive pricing strategy involves looking at businesses selling similar products or services and setting prices comparably. This type of pricing strategy can be used for products or services in both B2B and B2C markets.
Companies typically implement a competitive pricing strategy in three ways:
- Set prices below competitors
- Set prices in line with competitors
- Set prices slightly above competitors
Marketing is very important when implementing a competitive pricing strategy.
- If you price your products or services below competitors, you may need to designate a product as a “loss leader.” This is a highly advertised, low-cost product that you ultimately lose a small amount of money on with every sale—but it enables you to capture new customers and convert them to higher-cost sales across the product line or on future sales.
- If you price your company in line with the competition, you’ll have to get creative with marketing in order to differentiate your products or services and convince consumers to choose your business first.
- If you price your products above competitors, you’ll need to take some inspiration from value-based pricing strategies and use your marketing efforts to justify the cost increase.
Because your competitors may also be using a competitive pricing strategy, it’s not uncommon to find that competitively priced companies:
- Adjust prices up and down over time to keep pace with competitors
- Offer periodic discounts for customer retention and lead generation
- Provide price-matching guarantees to meet competitors’ lower advertised prices
- Enter into price wars, in which competing companies try to out-price each other and draw a larger share of customers
You can find competitive pricing in play at a variety of B2B and B2C companies, including:
- Home repair service providers
- Internet service providers
- Telecom companies
- Gas stations
- Large chain retail stores
- Grocery stores
The price skimming strategy involves charging a high price to your first customers, and gradually lowering the price from there. While this may seem counterintuitive, planning and aligning with market demand offers opportunities for higher revenue generation.
When price skimming, you’ll enter a low-competition market by targeting a very specific group of customers—and emphasizing the product’s or service’s value. (This requires a high initial investment in marketing and promotion.)
As new competitors begin to enter your market, you can lower the price of a product and begin to capture a bigger share of customers. By this time, your brand awareness will have ideally grown as well thanks to marketing and word-of-mouth advertising.
While it’s possible that your first customers will be upset by later price increases, ideally, you’ll have already cemented early adopters as loyal believers in your brand’s value.
Market penetration pricing
A market penetration pricing strategy is the reverse of price skimming. When you implement market penetration, you enter a market at a low price point and begin to raise prices over time. This might look like:
- Advertising new client rates and incentives
- Promoting buy-one-get-one (BOGO) offers for new customers
- Offering to buy out new customers’ service contracts with competitors
By entering a market at a lower price than anyone else, you can lure customers away from competitors and capture a large market share. This strategy works well in competitive markets, and you’ll need to engage in heavy marketing efforts to build brand awareness.
Once your brand is established, you may migrate from a market penetration strategy to a competition-based strategy.
You can find market penetration pricing at work in both B2B- and B2C-focused companies like:
- Telecom service providers
- Internet service providers
- Bulk retailers
- Fuel and energy providers
Dynamic pricing is a strategy that requires companies to continually adjust prices based on a variety of market conditions and other factors:
- Consumer demand
- Buyer behavior
- Other algorithmic data
If you’ve ever tried to book a ride using a ridesharing app, you may have noticed that you’ll see different prices for the same journey depending on the time of day. This is an example of dynamic pricing in action—the ridesharing companies tweak pricing based on demand. (It’s often called “surge pricing” in this situation.)
You can also find dynamic pricing at work in these B2B and B2C industries:
- Automotive sales
- Digital advertising
Economy pricing strategies work in two ways:
- Selling cheaply priced products
- Up-charging for features and services considered standard by competitors.
B2C retail stores often use the economy pricing model to boost profit margins. For example, if you go into a large chain retail store, you can often find brand-name personal care product lines on the shelf next to store-brand products that appear very similar.
It costs retailers less to produce and market these store-brand items than it does to buy and promote brand name items, so stores can sell generic items for less money and still make a higher profit.
Airlines also use economy pricing, but in a different way. Large international airlines often offer several amenities with the price of every ticket, such as “free” carry-on bags or checked luggage.
Economy airlines, on the other hand, offer tickets for much less money upfront—but passengers have to pay to bring a carry-on, check a bag, and get other services that would be included in the cost of a more expensive airline ticket.
As you can see in the example above, the cheaper airline does not include any baggage or in-flight power outlet like the more premium option. However, the budget flight does offer slightly more legroom and lower carbon emissions. Travelers will need to compare the costs of adding baggage and other amenities onto their budget ticket to see which one is ultimately the best choice for their trips, preferences, and wallets.
Marketing plays a notable, but not major, role in economy pricing strategies. An economy retailer may need to advertise to get customers in the door; however, they don’t need to heavily promote each and every economy product. Customers will see the products in the store when they arrive to purchase a brand-name item. Economy airlines will often promote their low fares—but leave additional charges in the fine print.
You can find economy pricing at work in these companies:
- Large discount retailers
- Budget hotel chains
- Pay-as-you-go telecom operators
- No-frills airlines
A premium pricing strategy is the inverse of an economy approach. Rather than pricing products as cheaply as possible, you bump up the price to instill a sense of luxury and prestige.
As with some value-based pricing strategies, a premium pricing strategy requires a considerable investment into branding and marketing. You’ll need to convince your ideal customers that your product has more value and instills more status than those offered by competitors.
Premium pricing strategies often work best when entering a market with few competitors. Ideally, you’ll want to target a very specific audience segment that already purchases premium products or services—so market research is a must.
By entering and positioning yourself as a premium player in a market early, you can set the standard. This makes it harder for competitors to enter the same market and lure away your customers later.
This pricing method is used by companies producing high-end B2C goods, such as:
- Flagship smartphones
- Luxury vehicles
- Gourmet foods
The freemium pricing strategy inverts the premium model. Instead of offering your product—often software or a service—at a higher price point, you use a free offer or free tier to draw in customers.
This strategy requires heavy upfront marketing efforts in order to generate word-of-mouth and convince competitors’ customers to try your offerings instead.
Companies that use a freemium approach to pricing generate profit through:
- Micro-transactions and one-time purchases
- Upselling free customers on paid products or service plans
The freemium pricing strategy works best for apps and software as a service (SaaS) businesses, and can be found across B2B and B2C industries. You might encounter freemium pricing in:
- Smartphone games
- Software tools
- Music streaming services
Bundle pricing, or the product-bundle pricing strategy, is an option for companies that sell multiple related products or services. Bundling provides a discount over ordering items separately, and it can be a way for companies to differentiate themselves from competitors.
Many companies that engage in bundle pricing use one of the following strategies:
- Pure bundling: These are prepared bundles of two or more products. Customers can only buy bundled items as part of a bundle—the products aren’t available individually. Bundles can include several comparable products, or a leading item paired with an accessory or a less-popular piece of inventory you’d like to clear out.
- Mixed bundling: A mixed, or custom, bundle is made of various products that the customer selects. Businesses might guide their customers to select from specific product categories, but the actual product choice is ultimately up to the buyer.
Some businesses actively market bundles, especially when they’d like to lure customers away from a competitor through discounts and offers. Others, like Amazon, don’t actively market bundles—the option to bundle for a discount simply appears on a product page or at checkout.
Bundling is typically seen in B2C applications, but may apply to some B2B industries as well. You can often find these kinds of businesses offering bundles:
- Telecom providers
- Insurance providers
- Software companies
- Online stores
Pricing strategy examples from real companies
You can see many of these popular pricing strategies in use at top companies including:
Let’s take a closer look at the strategies each company uses.
Google uses a freemium pricing strategy across its core suite of software products, which includes apps like Gmail, Google Drive, and Google Docs. Personal users gain access to all of Google’s apps for free, as well as 15 GB of storage space for all types of files. At this point, Google uses two methods to convert many of its free users to paid customers:
- They use up all of their free file storage space and need to purchase more. Google offers additional space for a fee—as little as $2 per month for 100 GB.
- Users realize that they rely on Google for many of their day-to-day actions and decide to buy a Google Pixel phone, Nest thermostat, or smart speaker to access their data in new and convenient ways.
The company also offers a paid, enterprise-grade version of their entire software suite for business use.
Apple has traditionally used a premium pricing strategy to market its products, particularly the iPhone.
The company spends upward of $60 million a year in digital advertising costs to cement its products in consumers’ minds. This positioning originally focused on the iPhone as a status product.
Today, as more phone companies make premium “flagship” models, Apple focuses heavily on the iPhone’s durability, quality components, and privacy features.
Apple also engages in price skimming. In 2016, nine years after the first iPhone’s release, the company announced the lower-cost iPhone SE that used an older body style and components, giving customers the option of obtaining a “premium” product at a lower price point.
Today, the entire lineup includes the iPhone SE, the standard iPhone, and the Pro iPhone, which contains the most premium features.
As an international retailer with over 10,000 stores in 24 countries, Walmart engages heavily in economy and cost-plus pricing strategies to generate profits.
While the company sells thousands of brand-name products, Walmart also produces its own economy product lines under names including:
- Great Value
These products are priced to have a competitive advantage, and it works. Walmart’s Great Value products generated more than $27 billion in global revenue during 2020.
Costco implements a unique mix of economy and value-based pricing strategies.
First, by only buying and selling goods in bulk quantities, the warehouse retailer is able to sell items at a lower cost and higher profit margin. Second, Costco produces its own Kirkland brand that appears on everything from table salt to swimwear.
The final piece in Costco’s successful pricing strategy comes from its membership model. Consumers can only shop at Costco if they become a member—this starts at $60 a year in the United States—which brings exclusivity to the experience.
Members also get access to a variety of additional perks like insurance, travel benefits, optical services, and excellent customer service. Combined, this creates word-of-mouth advertising and a perception of value that goes beyond cost savings.
Nike uses premium and price skimming strategies. By releasing products at a high price point, in limited quantities, the athletic apparel retailer can specifically target known, loyal customers, such as sneaker fans who frequently buy Air Jordan shoes.
This exclusivity drives up the perceived value of Nike gear, which brings more customers into Nike stores to buy the product once its price is lower.
Nike also engages in effective marketing, depicting some of the world’s top athletes wearing Nike apparel. The message is that Nike products inspire great performance—if you want to succeed like the pros, choose Nike gear.
Starbucks uses a premium pricing strategy that positions coffee beverages as luxury treats.
Three factors that contribute to this “premium” image include:
- Store-specific lingo, such as calling 12-ounce (355-milliliter) beverages “tall” instead of “small”
- Seasonal offerings, like pumpkin spice lattes, that create high demand during a limited window of time
- Customizable menu items that enable customers to order a completely unique drink if they so choose
The strategy pays off. While it is certainly possible to go into a Starbucks and order a cup of black coffee, customized cold beverages drove 75% of the chain’s $8.2 billion revenue in the second quarter of 2022.
Amazon uses a variety of pricing strategies, including:
- Competitive: Amazon prices can be 14% cheaper than other large retailers in many categories including electronics, toys, and video games.
- Dynamic: Amazon prices change depending on a variety of demographic and demand factors.
- Economy: The company’s Amazon Basics line of products are low-cost, high-revenue alternatives to brand-name items.
- Bundling: Customers purchasing an Amazon-branded electronics product, such as a Kindle, can opt to purchase official accessories at a discount.
The company also uses attractively priced Kindle devices to bring new customers into the Amazon ecosystem. The company anticipates these users will continue purchasing e-books and other digital content that may have a higher profit margin than the Kindle device itself.
How to start a pricing analysis and strategy
Whether your company is just starting out or you’re seeking to revitalize stagnating profits with a new pricing strategy, here’s how to get started.
1. Research your target market
First, you’ll need to research your target market. By gathering information about your ideal audience, you can establish which products or services your potential customers are likely to buy. This can help you increase sales and revenue.
When researching your target market, you’ll need to consider:
- Psychographic data
- Typical behaviors
Considering what groups may be part of your secondary market can also be useful. For example, if you sell high-end children’s toys, your primary market may be parents. Your secondary market may be grandparents.
2. Conduct competitor price research
Next, look at the primary competitors in your market. How are they pricing and positioning their similar products or services?
If your market is rich with competition, you’ll want to decide where your product should fall in terms of price. This will, in turn, impact the type (and amount) of marketing that you need to do to differentiate your brand.
3. Review macroeconomic trends
After establishing your target market and considering what products or services they may want to purchase, you’ll also need to review macroeconomic trends that may impact both production and sales. Ask yourself the following:
- Will I be able to price my products at an attractive price point given the cost of sourcing and production?
- Are sourcing and production costs projected to fluctuate considerably in the next year?
- Is unemployment increasing? Are companies reducing expenses? Will this impact who I can sell my product or service to?
- What kinds of businesses and products are companies or consumers expected to invest in over the next year? How do I align with this?
If you realize that macroeconomic trends point toward factors that will impact your pricing or your customers’ buying power, you’ll need to factor this into your pricing and revenue calculations.
4. Identify the cost of your product or service
Taking all of the above factors into consideration, estimate how much producing one unit of your product will cost. If you’re selling a service, consider how much you’ll need to invest in order to successfully deliver that service to a customer.
Whether you use the cost-plus pricing model or not, it’s important to know what producing a product or delivering a service costs you. You’ll need to set your customer price above this number so that you don’t lose money.
5. Identify revenue per customer
Once you identify how much producing a product or delivering a service will cost, consider the amount of revenue you’d like each sale to generate.
Next, look at your target market research from step one. Do your potential customers tend to purchase similar products and services multiple times? Is your industry full of repeat customers or one-time buyers? By estimating the average lifetime value of your target customer, you can begin to determine where your price point needs to start and how much revenue one buyer will generate.
6. Test the impact of increasing or lowering pricing
Finally, look at the price point you established in step five. Is this supported by your market? Is it in line with competitors’ pricing, or do you have the research and data to justify a more premium price point?
Consider the impact of a higher or lower price point on your bottom line. Do you have any flexibility to adjust prices without losing profits, or will you need to continue to keep prices constant?
Developing your pricing strategy
If creating a pricing strategy yourself feels overwhelming, seeking some help may be a good idea. This way, you can go into new markets feeling confident that your products will generate reliable revenue for your business—it won’t be a constant guessing game as to how much you’ll make.
By collaborating with a skilled pricing strategy consultant on Upwork, you can get help analyzing markets, evaluating different pricing strategies, and setting ideal price points for your products or services. Start working—and pricing—more effectively by posting a job on Upwork today.
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