Pricing Strategies: How To Set Prices For Your Products

Low or economy pricing is arguably the strategy that takes the principle of the demand curve most literally — that if you drop your prices, demand will increase. Ways to Price a Retail Product. Pricing involves a little bit of art, a little bit of science, and a whole lot of strategy — including balancing the prices across your entire product range to achieve your goals. The Role of MSRP. Here’s how the manufacturer’s suggested retail price (MSRP) is supposed to work. The manufacturer sets a. An effective pricing strategy is essential to help a business set an offer price which is in line with competition, and will maximize revenue and deliver a good profit. A business can pick from a variety of pricing strategies based upon a variety of different factors. A business can set a price.

How you price your product, service or workshop can have a massive impact on your sales. Unfortunately, it can also lead to a massive anxiety attack as well.

In this episode we lay out 8 pricing strategies you should know about.

More importantly, however, we share off the cuff, brutally honest ideas about how to price your offering.

Other topics include:

  • 7 pricing strategies for you to choose from
  • 3 methods to price your first product
  • When to use your gut and when not to
  • What kinds of things should be on your sales page to help customers feel comfortable with your price
  • 'Pre-selling' to test the price of digital products
  • Why we threw out our pricing strategy several months after we launched Fizzle

Whether it's your first time putting something up for sale, or you're an old pro, the tactics in this conversation are going to help you get confident about your pricing. Enjoy!

Let’s Talk About Pricing Strategy

Most entrepreneurs never think too much about their pricing strategy. They might take a peek at a similar product from a competitor, adjust the price by a couple dollars, and joila – the product is ready for sale.

But in the classic business world, pricing was an art form. Pricing gurus at major companies obsessed over finding the perfect price to maximize profit from a given product or service.

In other words, that Gillette razor is priced the way it is for a reason. Not because it makes the most sense for the consumer, but because it maximizes shareholder value.

So, keep in mind that a pricing conversation is really about how you will get the most value from the product or service you decide to sell. Thankfully, independent business owners don’t have shareholders, so we can also take into account things like doing what’s right for the customer.

Price Elasticity of Demand

While we’re not crazy about business school terms, we wouldn’t be doing our jobs if we skipped over price elasticity of demand in this conversation about pricing.

All you really need to know about price elasticity is this: if all else remains equal, demand for your product or service will decrease with an increase in price.

As an example, imagine this: you can sell 100 units of a $100 dollar product to your current audience. If you increase the price to $105, you are able to sell 95 units. Your costs are $20 per unit. Should you sell at $105 or $100?

Pricing Strategies: How To Set Prices For Your Products

The answer: $105. Why? Because you’ll earn $8,075 profit as compared to $8,000 at $100 per unit.

Great. That’s all the theory you need to know. When price increases, demand goes down. There is an optimal pricing level you can reach to make the most money from your thing. Capiche?

8 Pricing Strategies to Help You Price Your Digital or Physical Product, Service, or Workshop

Elasticity is great in theory, but it doesn’t tell us anything about where to start with your pricing strategy. Instead, let’s talk about some of the most common methods for pricing:

  1. Cost-plus Pricing – Cost-plus pricing is an effective way to build a profit margin directly into the price of your product or service. It’s just what it sounds like: you calculate the cost to deliver a product or service (cost) and then add a 10% margin, for example (plus). Cost-plus is straightforward for the entrepreneur, but doesn’t take into account the mindset of the customer. You may also leave money on the table by focusing on cost.
  2. Competitive Pricing – Competitive pricing focuses neither on costs or customers. Instead, competitive pricing is all about the existing market for your product or service. In competitive pricing, your job is to research the pricing strategies of many competitors to establish a pricing range. The range should have a high end and a low end, and the price of your product or service should fall somewhere between those bookends so that it is competitive.
  3. Luxury Pricing – Luxury pricing is a classic strategy used by brands like Louis Vuitton, Mercedes, and Rolex. The price has more to do with the aspirations and image of the person making the purchase than anything else. By buying a product or service at a luxury price, we are buying our way into a club. That club is a representation of how we want others to see us in the world.
  4. Rate-based Pricing – Also known as hourly pricing. Freelancers, consultants, and coaches most commonly use rate-based pricing for their services. The downside is that you have to trade time for money. The upside is that you’re guaranteed to get paid for every hour of work. Clients are sometimes hesitant about hourly pricing because they fear the incentive is to work more hours to make more money as opposed to being efficient.
  5. Project-based Pricing – Project-based pricing is a flat fee arrangement agreed to at the outset of a project. The entrepreneur may make an estimate of how many hours she thinks the project will take and then price accordingly. Or, she may combine this strategy with some of the upcoming pricing strategies to charge more. The incentive is to finish the work quickly and with high quality. For this to work well, the scope of work should be well defined up front.
  6. Value-based Pricing – Value-based pricing takes into account two key questions: 1) Can they pay?; 2) Will they pay? They are the customers, which makes value-based pricing a customer-centered approach to pricing. The determinant factor in this pricing strategy is how much your customers are willing to pay, rather than how much a product or service costs to produce or deliver. There is huge upside for the entrepreneur when value-based pricing is used well.
  7. Tiered Pricing – A tiered pricing strategy gives consumers the option of choosing between different versions of the same product or service. For example, imagine considering a single gear bike for $299, a three-gear bike for $399, and a seven-gear bike for $499. A tiered pricing strategy turns a yes or no decision into an either or decision for the potential customer. It also provides a price anchor (as a consumer, I can convince myself I am being frugal by spending $299 on the single gear bike as compared to $499 on the seven-gear).
  8. Pay What You Want Pricing – Also known as a donation-based pricing strategy, pay what you want pricing allows the customer to make the decision on how much the product or service is worth to her. Pay what you want allows you to test market demand without knowing the price elasticity for your thing. When combined with a “suggested price,” a pay what you want pricing strategy can sometimes lead to more profit than a set price.

As you read through the eight pricing strategies, you might have noticed something… These pricing strategies are not mutually exclusive. And, in fact, they are not.

Many of the pricing strategies can be used together to create the best outcome for your business and your customers.

Pricing Strategies for Digital Products, Physical Products, Services, and Live Events

Now that you have an arsenal of pricing options available to you, let’s get into the specifics of how to apply them.

Digital Products

For digital products, pricing strategies range widely. From $.99 books on Amazon to $2,000 courses, digital products truly run the gamut. Your price should be a reflection of your industry, your customers, and the value provided through your product or service.

Pricing strategies to consider: Competitive Pricing, Value-based Pricing, Tiered Pricing, Pay-What-You-Want Pricing

Physical Products

Unlike digital products, there are hard costs (other than time and energy) to producing a physicial good. While services like drop shipping, print-on-demand, and 3D printing are helping drive costs down, the physical product world is still very unique. It’s important to keep in mind unit economics when it comes to pricing physical products: if you lose money selling one product, you’ll lose more money with every successive sale.

Pricing strategies to consider: Cost-Plus Pricing, Competitive Pricing, Luxury Pricing, Value-based Pricing, and Tiered Pricing

Services

Pricing services can be challenging, as so much of the value comes from your personal ability to deliver. Customers like to see things like testimonials, portfolios, and case studies of your work before they’re even willing to consider hiring you. While price is important, make sure you don’t disqualify yourself by keeping necessary information from your customers. Additionally, “productizing” your services can be a great way to help customers understand exactly what you can do for them.

Pricing strategies to consider: Rate-Based Pricing, Project-Based Pricing, Value-Based Pricing, and Tiered Pricing

Live Events

Like services, workshops and live events are highly dependent on the speakers or workshop leaders to deliver value. The experience of the attendee can vary greatly from session to session. Setting clear expectations up front helps frame the value of the event so that a potential attendee is ready to consider the price you’ve set for the ticket.

Pricing strategies to consider: Competitive Pricing, Value-Based Pricing, Tiered Pricing, and Pay-What-You-Want Pricing

Pricing Strategy Matters, But a Great Product or Service Matters More

Hopefully this gives you a great overview of the pricing strategies available to you, and the ways you can use them to help price different kinds of products and services.

But if you take one thing away from this podcast episode and article, let it be this: no matter how well you price your product or service, nothing can make up for the importance of having a truly great product or service.

Your customers will tell you whether you have a great product. Make sure you listen.

If you want to learn more about pricing strategies, be sure to check out the show notes below!

Show Notes:

PPP & STIMULUS GUIDE FOR SMALL BUSINESS OWNERS:WATCH & READ!

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An effective pricing strategy is essential for continued sales success. Here's how to determine the right tactic for your business.

Setting your business’s prices may seem simple: List your product for higher than it costs you to manufacture or acquire it, and you’ll make a profit.

But your prices are more than just numbers. The way you price your products or services can be a reflection on your business’s identity, how you view and treat your competitors and how you value your customers. That’s why it’s important to have a carefully planned pricing strategy.

What to consider when setting your pricing strategy

Setting your product or service’s prices shouldn’t be a haphazard decision focused entirely on profit. It should be a calculated, informed choice where your business identity, brand and financial stability are considered.

As with any business decision, determining your pricing strategy starts with assessing your own business’s needs and goals. This involves some commercial soul searching – what do you want your business to contribute to the economy and world? This could mean embracing traditional retail strategy, establishing a service business mindset or emphasizing personal customer relationships in your offering.

Once you have your goals and needs defined, do some research on the market you’re entering. Determine three to five main competitors in the industry by conducting online research or scouting out local businesses. No matter what pricing strategy you adopt, what your competitors are doing will impact your business’s success and future decisions. Understanding your competitors’ strategies can also help you differentiate your business from other businesses in the market. In an economy where there are thousands of small businesses providing the same products and services, an effective pricing strategy can help you stand out.

A good final stage in your research is speaking with potential customers to get a feel for how they value your brand, product or service. This can give you valuable insight into how to set your pricing. This kind of research can range from casual conversations with friends and family to formal surveys of potential buyers.

While you may have already done some of this legwork when developing your business plan, it’s good to have as much insight and information as possible before you decide what pricing strategy to adopt.

Pricing strategies to attract customers to your business

There are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy. Consider these five common strategies that many new businesses use to attract customers.

1. Price skimming

Skimming involves setting high prices when a product is introduced and then gradually lowering the price as more competitors enter the market. This type of pricing is ideal for businesses that are entering emerging markets. It gives companies the opportunity to capitalize on early adopters and then undercut future competitors as they join an already-developed market. A successful skimming strategy hinges largely on the market you’re looking to enter.

2. Market penetration pricing

Pricing for market penetration is essentially the opposite of price skimming. Instead of starting high and slowly lowering prices, you take over a market by undercutting your competitors. Once you develop a reliable customer base, you raise prices. Many factors go into deciding on this strategy, like your business’s ability to potentially take losses up front to establish a strong footing in a market. It’s also crucial to develop a loyal customer base, which can require other marketing and branding strategies.

There are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy.

3. Premium pricing

Premium pricing is for business that create high quality products and market them to high-income individuals. The key with this pricing strategy is developing a product that is high quality and that customers will consider to be high value. You’ll likely need to develop a “luxury” or “lifestyle” branding strategy to appeal to the right type of consumer.

Pricing Strategies: How To Set Prices For Your Products Sold

4. Economy pricing

An economy pricing strategy involves targeting customers looking to save as much money as possible on whatever good or service they’re purchasing. Big box stores, like Walmart and Costco, are prime examples of economy pricing models. Like premium pricing, adopting an economy pricing model depends on your overhead costs and the overall value of your product.

5. Bundle pricing

When companies pair several products together and sell them for less money than each would be individually, it’s known as bundle pricing. Bundle pricing is a good way to move a lot of inventory quickly. A successful bundle pricing strategy involves profits on low value items outweighing losses on high value items included in a bundle.

Which pricing strategy is right for you?

Determining your needs up front can make it clear which strategies are ideal for your business. If you’ve already launched your business, you can experiment with these strategies until you determine what works best for your business. You can also vary strategy between products depending on the market for each good or service.

Regardless of which tactic you choose, pricing your inventory properly is essential for continued business success. You may have the best product in the world, an excellent team and a beautiful storefront, but if you can’t price your products effectively, your sales will ultimately struggle.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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