Companies that struggle to price their products effectively must adequately balance pricing strategies to maximize their portfolio and achieve long-term success.
The challenges, however, don’t stop at pricing. Without a proper pricing strategy, businesses can suffer revenue losses, as pricing is a crucial pillar in the marketing mix that significantly influences whether sales targets are met.
This guide will inform you about different common pricing strategies, who they’re suitable for and how to select the right pricing strategy for your product.
Pricing strategies, price determination and pricing policy
Product pricing is critical in successfully competing against rivals, entering the market or launching a new product. As a core element of sales strategy, pricing significantly impacts the long-term success of companies and brands.
Pricing is based on strategic considerations and the figures from your trade calculation, which estimates all the costs associated with producing and distributing a product or service. With a complete overview of all costs and sales opportunities, you can determine the best way to keep your company economically viable and competitive and achieve your profit, revenue and sales goals.
Pricing policy also significantly affects the long-term positioning of the brand and has far-reaching effects on how your customers perceive and categorize it. In this context, you need to develop your pricing strategy, which includes all long-term decisions about shaping prices and how they should evolve depending on variable factors.
Actively determining your pricing policy
The biggest mistake you can make is not following an active pricing strategy.
This happens more often than it seems. Many companies have little room for strategic pricing in highly defined and competitive markets with high price pressure and low margins.
A typical phenomenon for SMEs is being “stuck in the middle”, where it seems impossible to move pricing downward or upward. You should avoid this situation by actively using price alongside other strategic instruments.
Key questions you should ask yourself:
Do you want to take over price leadership in the long term as a market leader and set the framework for competition?
Do you want to create market entry barriers for subsequent competitors?
How should you react to new competition, changing market trends and technological innovations with your pricing?
These are just a few pain points to consider when you choose a pricing strategy. As you can see, you shouldn’t only set it once. Keep it continuously in view and check its relevance.
Key drivers of your strategic pricing strategy
Numerous factors from different business areas determine pricing: product development, marketing, sales, procurement and human resources influence pricing policy.
An effective pricing strategy is typically part of a comprehensive marketing and sales strategy, so the information you need for this step should already be fully available. You just need to gather and arrange it into a meaningful overall picture.
We have compiled the most important factors for you in a clear overview.
Market factors
These provide the broadest framework for your pricing strategy and include:
Market saturation
Market share and achievable sales volume
Trends and economic conditions
Size of sales potential
Price elasticity
Sales expectation is crucial as it determines your expected scale effects.
Competitive factors
Competition is crucial for determining your pricing strategy. Consider the following points:
Your position relative to the competition
Strengths and unique selling propositions (USPs) of competitors
Dynamics in the competition
Switching costs for customers
Positioning factors
Your positioning also influences the pricing strategy. This includes:
Market position
Quality policy
Brand image
Decide which position you want to occupy based on your customers’ perceptions and remain consistent.
Target group factors
Your target group also significantly influences the advantages of the pricing strategy. Particularly interesting values include:
Purchasing power
Wishes and expectations of the target group
Network effects
Product factors
Your products and offers must also be considered as factors in the decision. Important aspects include:
Scale effects based on production volume
Phase in the product lifecycle
Gather all these influencing factors to form a complete picture, then weigh individual information and factors. Based on this, you can define your pricing strategy.
Your options: comparing pricing strategies
You can now choose from several proven pricing models and strategies tailored to your specific situation and goals. You can set dynamic price sequences or fixed price strategies, positioning yourself above, below or at the market equilibrium price. At this point, the quantity demanded by consumers matches the quantity supplied by producers, resulting in a stable price.
Skimming strategy or penetration strategy
The skimming strategy starts with a high initial price that decreases over time. This allows you to address each buyer segment sequentially, maximizing revenue.
Initially, you benefit from the strong purchase intent of the most loyal customers, who are willing to pay higher prices. Later, you can target customers who are less willing to pay by offering lower prices.
Risk: During the high-price phase, competitors may already begin to capture a portion of your target audience with lower-priced alternative offers.
Penetration strategy
The second price sequencing strategy starts with a low initial price. This approach can help you undercut existing competition or create market entry barriers by reducing the profitability of the products through your price leadership.
Once your offer is firmly established and competition has been thwarted, you can raise the price level to achieve economical prices.
Risk: Your brand might suffer as it could be associated with low quality due to the initial low prices. Additionally, fierce price wars could lead to destructive competition.
Fixed price strategy
Fixed price strategies vary depending on where you position yourself relative to the equilibrium price.
Premium. A premium strategy achieves high prices at a lower sales volume. It is based on differentiation and distinction from the competition through higher quality, superior benefits and strong USPs. Brand management is also crucial here. You achieve a willingness to pay higher prices not just through product features but also through a better customer experience.
Low price. A low-price strategy increases sales volume through lower prices. Profitability, despite low margins, is achieved through high volumes. This strategy works only expansively. You use synergies and globalization effects in the largest possible sales markets to optimize cost structures. Brand strength plays a minor role in this strategy.
Mid-segment. Many companies, especially in the SME sector, try to position their offerings near the equilibrium price, achieving a medium margin at a medium sales volume. However, this strategy is unstable as the equilibrium price does not remain constant over time.
Risk: Fluctuations in the market equilibrium price can quickly erode profit margins. Companies may need to adjust their prices frequently or risk being undercut by competitors with lower-priced offerings.
Luxury pricing strategy
The luxury pricing strategy is exceptional because the dynamics can run counter to classic market laws: higher prices can lead to more sales.
This occurs when a higher price becomes a benefit because it conveys prestige and status, for example, when the target audience possesses very high financial resources.
Risk: This strategy is only possible for very selected markets, such as the art market or luxury watches.
Price competition strategy
Price competition adjusts to the market leader’s fixed price strategy. Here, you can operate as a price follower or an aggressive price fighter, undercutting the benchmark price of the price leader to capture market share.
Risk: Mutual undercutting can significantly deteriorate a previously profitable market if many competitors participate.
Price differentiation options
Price differentiation: Price differentiation is a variation of the fixed-price strategy in which variable prices are set for different situations.
Geographical differentiation: You define prices for different regions. Typical examples include different prices for books and press products in different states of the USA.
Personal differentiation: Members of certain groups pay different prices. Examples include discounts for students or rates for disability insurance, which can be prohibitively expensive for professions like pilots or mountain guides.
Seasonal differentiation: Products cost more when they’re in high demand. For example, travel and hotel rooms are much more expensive during the peak season than off-peak.
Sales-related differentiation: Customers pay according to the amount purchased. The typical volume discount plays a key role, especially in B2B sales. By offering lower prices for larger orders, companies can pass on the cost savings directly to their customers, resulting in a win-win scenario for all parties involved.
Risk: Companies must ensure that the cost savings from larger orders outweigh the price reductions offered.
Target cost strategy
This strategy works similarly to price differentiation. However, here you determine what cost each customer is willing to pay and try to achieve the maximum from each individual.
As a result, different customers often pay completely different prices for the same product, depending on their needs, willingness to pay and negotiating skills. For example, some coaches use this tactic to sell costly consulting programs.
Risk: Customers can perceive pricing as unfair or discriminatory, potentially harming long-term customer relationships and brand reputation.
Final thoughts: Pricing policy is an essential part of the marketing strategy
Proper pricing is crucial to a business’s success and competitiveness. However, you must consider several factors: the market, competition, your target group, the strengths of your products and offers and your positioning.
With this information, you can select from various strategies. Strategic brand management is not just a complement to your pricing strategy but an integral component. A strong brand can elevate the perceived value of your products or services, increasing profitability by allowing for premium pricing.
The synergy between pricing and branding is crucial to achieve long-term success in any market.
