8 Types of Strategic Pricing for Products and Services

By Indeed Editorial Team

Published January 3, 2022

Companies use different pricing strategies to attract customers, increase brand awareness, and establish a market value for their products and services. Knowing which method to use is a critical element to running a profitable business. Learning about strategic pricing can help you better determine the best practices for a business. In this article, we discuss the definition of strategic pricing and identify eight types of pricing strategies companies commonly use for their products and services.

What is strategic pricing?

Strategic pricing is a method of pricing a product or service based on its value to the consumer or another competitive approach. A company can choose a specific pricing strategy based on its objectives. For example, a company may want to increase its profitability, encourage brand awareness, or maximize sales during peak seasons. Each strategy has benefits and disadvantages, and an organization benefits from analyzing the best method to remain competitive and profitable.

Related: Strategic Position for Your Marketing Plan (With Tips)

Types of strategic pricing

There are many types of pricing strategies, including:

1. Competitive pricing strategy

A company may use a competitive pricing strategy that directs the price of a product or service concerning its competition. Organizations use this method most often for pricing similar products, as services can offer too many variables to be relevant. Companies use competitive pricing strategies once a product or service has been on the market for a considerable time and achieves equilibrium. First, an organization looks at its direct competitors' current market cost and pricing strategies. It then uses the other company's price as a standard.

Competitive pricing may use pricing less than, higher than, or equal to other companies depending on the purpose. Higher competitive pricing helps increase the perceived value of the product or service. A lower price helps appeal to customers primarily concerned with finding the lowest price. Pricing similar to other companies can help with increasing brand awareness. A company can use a competitive pricing strategy to achieve several results based on its desired intentions. For example, a company that manufactures kitchen accessories intentionally sets its prices lower than the competition to target customers looking for low-cost options.

Related: What Is a Competitive Price? Understanding Pricing Strategy

2. Cost-plus pricing strategy

A company can choose to use a cost-plus pricing strategy that focuses on the cost of production. Also known as a markup strategy, the company can dictate a predetermined level of profit based on a markup percentage. A cost-plus pricing strategy is effective for products because it's easy to calculate production costs consistently. In this strategy, a company identifies the costs required to manufacture an item and selects a rate of profitability to sell the product to the customer. For example, a business produces a shirt for $10, applies a 100% markup, and sells it for $20.

Companies rarely use this strategy if they have a high level of fixed expenses or fixed costs that increase as they manufacture more products. This strategy focuses inward instead of comparing to other market competitors or how the marketplace views the price of the product or service. For example, consider an artisan business that manufactures handmade custom leather handbags. They price their products at a 200% markup to cover off all costs of production, overhead, and a small profit. For example, if they produce a handbag for $20, they sell it to the customer for $60.

Related: How to Calculate Variable Cost With Examples

3. Dynamic pricing strategy

A company can use a dynamic pricing strategy to set flexible pricing for its products or services. Instead of using a fixed price or specific markup, the organization changes its pricing based on market factors to maximize profitability, increase brand awareness, or encourage sales. Also known as surge pricing, time-based pricing, or demand pricing, a company's pricing flexibility uses algorithms that consider supply and demand, competition prices, and peak periods to analyze the best price for its products or services. Several industries use this pricing strategy, including tourism, transportation, entertainment, and utilities such as electricity and heating.

For example, imagine a holiday resort may raise its prices over peak travel seasons, such as the winter and summer holiday periods, to maximize on last-minute tourism and increase profitability. This strategy rewards savvy travellers who book in advance to enjoy a lower price visit.

4. Freemium pricing strategy

A freemium pricing strategy combines the words "free" and "premium" to create a business model based on a free product that the customer upgrades to receive a premium service. Often used in digital services or software, a freemium strategy offers a basic product or service on a trial basis or with limited options. The customer can pay to unlock more advanced features or full use of the item. This strategy is advantageous as it allows a company to receive many initial users of its product or service, permitting the consumer to try an item before purchasing the full version.

It's critical for the company to ensure the upgrade or premium version provides value to the customer that the free version doesn't. For example, they may offer more storage space, access to custom reports, or 24-hour customer support. The success of this strategy is the conversion of free users into paying customers. For example, a software company launches a new smartphone app and offers a basic version with minimal functions for free. They encourage a customer to purchase the full version of the app for $29.99 to receive full functionality, customer support, and free upgrades for the product's life.

5. High-low pricing strategy

Another pricing strategy a company can use is high-low pricing. High-low pricing allows a company to charge premium prices initially on its products or services. As the demand for the product decreases or the item's appeal lessens, the company then dramatically reduces the cost. Retail brands or seasonal product companies use this strategy to gain maximum exposure and sales during peak periods and reduce inventory by offering discounts and clearance sales.

For example, a retail clothing line manufactures seasonal outerwear, such as jackets and coats. They charge a premium price for their products during the autumn and winter, as the demand is high. Then, during the spring, the company offers considerable discounts on winter jackets to reduce inventory and make room for next season's items.

6. Penetration pricing strategy

A company can use a penetration pricing strategy to enter a new market or launch a new product. The method requires the company to offer its product or service at a low or discounted rate to entice new customers to try the item and penetrate the marketplace. The opening price depends on how many competitors there are with a similar product and how they price their item. Once the company enters the marketplace with success, it can raise its prices and move to another pricing strategy based on its organizational objectives.

Many marketing professionals use this strategy to show the value of their product during a launch. As a result, this increases the company's customer base, and the focus then becomes keeping the customer after they've increased the price. For example, a software company is entering the market with a new accounting program. They offer a free trial for their software subscription plan. After the trial, a customer can stay with the new accounting program at a price that's half their competitors for three months.

Related: What Is a Market Segment? Definition, Benefits, and Steps

7. Price skimming pricing strategy

A company uses a price skimming pricing strategy to target customers already interested in its products or services to maximize profits in the short term. Organizations that use this strategy focus on brand reputation, high-quality products, or value-oriented marketing. The company sets its prices high in the beginning life cycle of the product to take advantage of high profitability. Then, it gradually reduces its prices over time to attract a broader range of customers. The potential downside is fewer sales initially but is offset by a high profit margin.

Another disadvantage is the potential for competitors to offer a similar product or service at a lower price, attracting customers. A company that uses a price skimming strategy wants to maintain high quality and value to its customers to keep their interest. For example, a vehicle manufacturer launches a newly designed luxury car with unique and innovative features that no other competitors offer. During the first year of sales, the vehicle manufacturer charges a premium price with all features and options. A year later, the company releases a similar model with fewer features for a lower price point.

8. Promotional pricing strategy

Companies can use promotional pricing to attract customers, increase brand awareness, and encourage sales during a limited time or special event. Some strategies within promotional pricing include onetime discounts, limited-time offers, or sales events. Other examples include loyalty rewards programs, flash sales, gift with purchase events, buy one get one free deals, or seasonal sales. In addition, a company typically uses promotional pricing strategies with other long-term pricing methods to fulfil its objectives in the marketplace.

For example, an independent coffee shop offers a loyalty program by providing member-only rewards, sales discounts, and exclusive events. This helps increase their customer's perceived value of what the cafe offers and encourages repeat business, sharing testimonials with family and friends, and improved brand awareness.

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