Pricing Strategies 101: How to Choose the Right Pricing Strategy For Your Business

Small businesses play a big role in the economy. On the surface, it may seem like setting your small and medium sized business’s (SMBs) prices isn’t too complicated: price your products for a higher amount than it costs you to make or acquire it, then make a profit. 

But pricing is  more than just numbers. How you price your products and services can reflect on not only your SMB’s identity, but how you interact with your customers and competitors. 

Understanding and implementing an informed pricing strategy is imperative to continued business success. Keep reading to learn about pricing strategies and how they can help your business thrive.

What is a pricing strategy? 

A pricing strategy refers to all of the various methods SMBs can use when setting prices for their goods and services.

It may sound simple, but pricing strategies can pose a bit of a conundrum. 

If your business sets prices too high, then it’s possible you can miss out on additional sales. Set them too low and your business can miss out on valuable revenue. It’s a bit of a Goldie Locks and the Three Bears situation.

In a sea of multiple pricing strategies, how do you choose the strategy that, in Goldie Locks terms, is justtt right for your SMB? 

How many different pricing strategies are there and how do they work? 

Before you can decide which strategy is best for your SMB, it’s important to understand the different pricing strategies that are out there and how they work. Keep in mind that some may work better than others. 

Consider these five pricing strategies that SMB’s use to attract and keep customers.

1. Price Skimming

Price Skimming is designed to help SMBs maximize sales on new products or services. It involves setting prices high when a product is introduced, and then gradually lowering the price as more competitors enter the market.  

This strategy makes the most sense for your SMB when your business is still green or entering emerging markets. Not only does this strategy help your SMB recoup costs, it can also create an illusion of quality and exclusivity when first introducing your product to the market. 

2. Market Penetration

Market Penetration is essentially the opposite of price skimming. Instead of starting high and slowly lowering prices, your SMB offers lower prices in an attempt to draw customers away from competing businesses. Only once your SMB develops regular clientele do you then raise your prices.

This strategy is a bit aggressive, but works for SMBs that can take potential losses upfront. It’s also crucial to develop a loyal customer base. If your small business is comfortable with prioritizing marketing and other branding strategies,  this may be the strategy for you.

3. Premium Pricing

Premium pricing is a strategy that involves tactically pricing your product higher than your competition. An important part of this strategy is developing a product that is high quality and marketing it to high-income individuals. 

This strategy works best if your SMB focuses on luxury or lifestyle products or services that are in high demand. You should consider this strategy if you have a large competitive advantage and are confident that you can charge a higher price without being undercut by a product of similar quality. Cultivating a sense in the market that your product is a bit higher quality than your competitors is key. 

4. Value-based Pricing

Value-based pricing is done when a company bases its pricing on how much the customer believes the product is worth. This strategy mainly applies to markets where offerings or owning an item enhances a customer’s self image or facilitates unparalleled or prestigious life experiences. 

Does your SMB offer a unique product or service? Then this strategy works best for you! 

5. Promotional Pricing

Promotional pricing is a competitive pricing strategy that focuses on offering discounts on a product. Think vouchers, coupons, and buy one, get one campaigns. This approach can generate some buzz and excitement about a product or service, and incentivize shoppers to return to your SMB.

This strategy really works best when used in the short-term. It’s also best used for SMBs that have a lot of inventory to move and that can also sustain a spike in business.

Choosing the strategy that makes the most sense

Every strategy has its advantages and disadvantages. It’s important to choose a strategy that covers your costs and also includes a margin for profit for your SMB. 

At the end of the day, don’t be afraid to experiment with strategies to determine the best fit for your business. No matter which approach you take, pricing your inventory properly will help your SMB thrive.

Once you decide on a pricing strategy, make sure you’re using a payments processor that will help you get paid on time. GoSite Payments make it easy for your customer to pay you conveniently. You can accept payments online or via text message, all through one dashboard. Get started for free today!