Choosing the right pricing strategy is a key task for any business owner in today’s uncertain economic market.
The key is to be data-driven and agile. Read on to discover the different types of business pricing strategies and a ‘cheat sheet’ to help you find the right pricing strategy for your business.
What is a pricing strategy?
A pricing strategy is a method of finding the optimum pricing for your products or services, which can ultimately help your cash flow. The best strategies are built around:
- market conditions
- how competitors behave
- costs to produce or buy raw products
- profit margins
The most effective pricing strategy for your business depends on your business model.
Different types of pricing strategies
There are many types of pricing strategies. Here we list the main examples:
Competitive pricing – this is where you under-cut your competitors by charging less for a similar product. This doesn’t consider production costs, so be conscious of not eroding your margin.
Cost-plus pricing – this approach is based on taking the cost of producing your product, and adding a specific amount for profit.
Dynamic pricing – this describes an approach where you track demand and adjust your pricing based on its peaks and troughs.
Premium pricing – this strategy relates more to brand perception than the cost of producing goods. By charging more than other similar items, the consumer feels they are getting higher quality, or an exclusive solution.
Bundle pricing – this describes offering more than one product for a specific, often lower, price. A good example is a supermarket 'meal deal'.
Geographic pricing – this approach is helpful if you sell in different markets. You price your product differently in each region, depending on local competition, target market pricing levels, and transportation costs.
New product/penetration pricing – this strategy is used when you are pushing a new product or entering a new market. It requires careful consideration as you don’t want to price too far above your close competitors before establishing a strong initial foothold.
Penetration pricing – this approach helps to drive interest by pricing as low as possible (above the cost of making the item).
High-low pricing – this describes the approach where you attract customers through lower-cost items, and once reassured they are getting value, they’re open to buying your more expensive offerings.
Economy pricing – this approach involves tracking the cost of production and pricing in line with it, and is only advisable if you have tight control of production costs and cash flow.
Price skimming – this is a strategy where the price is set high at launch, then gradually lowered over time to expand the potential market.
Value pricing – this involves understanding customers' perceived value of a product and adjusting in line with that.
Loyalty-based pricing – customer loyalty is the ultimate business goal; offering (even small) premiums to customers who keep buying from you is cheaper than acquiring new customers.
Choosing pricing strategies using data
However experienced you are in business, choosing between different pricing strategies on gut instinct is too risky; you need solid information to guide your choices.
Existing client and sales data provide the ideal starting point. Make use of these existing records by cross-referencing them with stock rotations to analyse what has previously sold well and when. These datasets can also show you the impact of discounts or promotions on sales.
Free online calculators and templates help take the guesswork out of planning business pricing strategies. They provide formulas to calculate expenses and the retail mark-up that will land best with customers.
Example: How one business came up with the right pricing strategy
Wiltshire-based On-Group is one of Britain’s leading beauty and wellness manufacturers. It took the opportunity to rebrand the sports side of its business to target consumers instead of its original focus on B2B.
This move – based on employing some of the key pricing strategy examples we’ve been describing – paid off. “We decided to go full-steam ahead with our B2C rebrand and saw turnover increase nearly ten-fold,” confirms its owner, James Greenwell.
Using a discounted subscription model
On-Group’s key pricing strategy following the rebrand is a 20% subscription discount on its popular ‘U Perform’ line.
The discount is ongoing and applies to anyone who subscribes, but Greenwell stresses the eventual pricing strategy was calculated based on two data factors: competition information from similar brands, and detailed market analysis.
Competitor analysis is essential
Greenwell said software showing competitor marketing spend and where they are advertising played a critical role in that process.
“We analysed data against the percentage of turnover required for On-Group’s running costs so we could see the product’s price point in the market, but also clearly understand our margins,” he says.
“For example, this year our running costs were sitting too high as a percentage of turnover, at 42%. That meant we knew what our minimum required margin was and could consider the discounts we may give to trade, ambassadors and distributors, which helped us understand the required end price.”
Reducing churn and improving customer retention
The new subscription pricing strategy has helped with customer retention, allowing this fast-growing SME to secure a closer, more informed relationship with subscribers.
This data-based pricing strategy also helps On-Group plan for the future. “We can see that our churn rate is approximately 9-10%,” Greenwell adds. “This means that we lose one person for every 10 people we bring on, which helps us with our cash flow.”
Greenwell’s team can also see that the customer’s lifetime averages around 77 days; an improvement thanks to the subscription model.
On-Group's loyalty-pricing strategy, based on offers such as a free gift with purchase, discounts, product videos or birthday bonuses has also been key.
Predicting inventory needs
Greenwell has found the subscription model great for preserving cash flow. It helps the company defend itself from possible disruption by making it easier to predict when a product run is needed, meaning fewer unnecessary funds get tied up in unused stock.
It also allows clear predictions on growth and production timelines and On-Group’s leadership can predict almost to the day when a new stock delivery is required.
If you're still working out the finer points of your subscription model, why not use the American Express® Business Gold Card to invest in stock without disrupting your cash flow. It has a payment period of up to 54-days¹, allowing you the time to use data-led insights to refine your approach to pricing for success.
What's more, you can earn Membership Rewards® points² with every £1 you spend, which can be redeemed as statement credit – allowing you to free up further cash to reinvest in your business.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you’d prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
