Pricing Strategy 101: What is Pricing Strategy and why should you look into it?

Leaving no money on the table

Did you know that pricing is the most underrated marketing tool in terms of profitability? It plays a key role in determining the success or failure of a product or service in the market. More and more companies invest in marketing and saving programs rather than investing in developing those price competencies. Interested in why you should investigate pricing strategy? Then this article is a must read.

What is pricing strategy exactly?

Pricing strategy refers to the approach a company takes to determine the price of its products or services. It is a key component of a company’s marketing plan and can have a significant impact on a company’s revenue, profitability, and overall success. Pricing strategy takes into consideration various factors such as the prices of competitors, the target market and their willingness to pay, the cost of production, and the desired product positioning in the market. You can find 3 examples of pricing strategies below.  A well-designed pricing strategy can help a company increase its profits, attract and retain customers, and achieve its marketing and business goals.

Why is pricing important in your marketing strategy?

1. Influences consumer perception: The price of a product or service can greatly influence how consumers perceive its value and quality. A well-designed pricing strategy can help position a product or service as premium or high value, leading to increased customer loyalty and brand recognition.

2. Competitor analysis: A company’s pricing strategy must consider the prices of its competitors. If a company’s prices are too high compared to its competitors, it may lose market share. On the other hand, if the prices are too low, the company may not be able to cover its costs and make a profit. ( CFR cost-up pricing & competitive pricing strategy) Understanding the pricing strategies of your competitors can provide you with a competitive advantage. You can use it to differentiate and attract customers who are looking for specific value propositions.

3. Revenue and profitability: Pricing strategy can have a significant impact on a company’s revenue and profitability. A well-designed pricing strategy that takes into consideration the cost of production and the target market’s willingness to pay can help increase revenue and maximize profits, while a poorly designed pricing strategy can lead to lower profits and decreased revenue. Successful implementation of a strategy can gain you a 10-30% result improvement.

4. Product positioning: Pricing strategy can be used to position a product in the market. A marketer can use different pricing strategies such as premium pricing, psychological pricing etc. to position the product in a way that appeals to the target market. For example, a company may use premium pricing to position a product as a luxury item or use promotional pricing to attract customers to a new product.

5. Customer segmentation: Different customer segments may be willing to pay different prices for a product or service. A company’s pricing strategy should take into account the different segments and their willingness to pay, in order to optimize revenue and profits.

In conclusion, pricing strategy is an important marketing tool that plays a key role in determining the success or failure of a product or service. It influences consumer perception, takes into account competitor analysis, and helps maximize revenue and profitability. A well-designed pricing strategy can help a company achieve its marketing and business goals.

How to get started?

Where do you start? Well, to set you on your way we provided you with some possible steps you could take as a marketeer. We also threw in some questions to ask yourself along the way to make sure to give you an idea of what you could be in for. It’s a nice checkbox list to help you reflect on your pricing strategy choices.

An example of three big strategies

There are several strategies within pricing strategy, and it depends on your company and services which one will prove to be the right fit. Ideally, you master all 3 of them to arrive at the Value-based pricing one. But first, let’s dive into 3 big possible strategies.

1. Cost-up pricing

With cost-up pricing, your starting point is – no surprise- your costs. What are all the costs you make and what do they sum up to? When you have a clear view of your total costs you can decide on what margin you want to settle on and build your price up like this. Of course, within reasonable boundaries and in line with your brand strategy. It is an easy-to-apply strategy in situations where the unit product is specific. It also helps in covering your costs in a predictable manner. However, it takes not into account market conditions and doesn’t really show value.

2. Competition-based pricing

A more advanced pricing strategy is called competition-based pricing. It’s pricing based on what the market and your direct competitors are doing. Think about retailers who have the lowest price strategy like Colruyt. Or the all too well-known image of 5 or 6 different gas stations lined up right after each other with mostly price being their only tool to make a difference out there. Compared to cost-up pricing your pricing range and playing field are determined not only by your costs and margin but also by what your competitors do.

3. Value-based pricing

In order to be able to do value-based pricing, you will still need to know your costs like in the cost-up pricing strategy. It will enable you to define your bottom line to start working from. If you can add to the cost-up pricing good research, you can really define your pricing strategy. Think for example: What is the willingness to pay, via a maxdiff or conjoint analysis). What do people value the most in my product or service and can I arrange specific features into a specific valued order? This way you can split up your product and/or service into prioritized features, according to what your customers value least or the most. It gives an idea of what the customer is willing to pay per feature and in the end, it can allow you to make different packages in your offer.

All of this will help you optimize your margins, which is the ultimate goal. A big advantage of this proven strategy is that it can give you a higher success rate in acquisition because you can create an increase in professionality within your organization on how to truly sell value instead of products or certain features.

To be able to work on value-based pricing you will need to master the other techniques too. The cost-up pricing, the competition-based pricing combined with your value-based pricing insights, in order to create the biggest chance of success in terms of pricing. Next to pricing techniques, keep in mind you need to link your reasons ‘why’ you have a certain price your general strategy for the biggest chance of success in terms of pricing and to increase your profitability.

As you can tell, there are a lot of questions and angles to consider when talking about pricing strategies. Don’t worry if it might come across as overwhelming, we are always happy to go through these questions together or just grab a coffee and talk pricing.