Pricing strategies for small business


27th May, 2021

6 pricing strategies in marketing to consider for your small business

Pricing is a major factor when customers make purchasing decisions. That’s why it’s important for small business owners to consider different pricing strategies.

The price you choose is how you translate the value of your product or service into cash.

And the pricing strategies outlined in this article will help you tap into your market, meet your overhead, and boost your bottom line.

But, getting the pricing right isn’t just a matter of picking the first strategy you see.

Different pricing strategies may apply depending on what business stage you’re in. To help you make the right choice, below I’ve listed six pricing strategies in marketing to consider for your small business.

1. Price skimming

Best for: Businesses introducing brand new products or services

Price skimming is a popular pricing method for new businesses. The strategy involves setting the price of the product or service considerably higher than its actual value.

Since this is a brand new product that customers aren’t familiar with, they have no idea how to evaluate it properly.

But, once competitors enter the picture, the market catches up with that product or service and the price will then come down to its real market value.

This strategy ensures that profit margins, in the beginning, are significantly higher in order to get back R&D and marketing costs.

Example of price skimming: Apple

Apple is a popular example of a brand that uses price skimming as an effective and profitable pricing strategy.

Apple price skimming strategy
Apple works hard to ensure their new products are sold for top-dollar prices. Source Cnet..

Their iPhone sales are always priced a lot higher when the phones first come out.

For instance, a phone might cost $649 when it comes out, and then a few months later, users could find it for just $210. The interesting thing about this is that by the time the price drops, many people have already signed up for a loan from their phone provider to pay installments for the phone.

How you can use price skimming in your own business:

If you are a small to medium business owner in the retail business with a new product to offer, this would be a great strategy to help you maximize your profits and revenue before competitors catch up.

2. Penetration pricing

Best for: New businesses that want to gain market share quickly

This pricing strategy is different from price skimming in that the price is set very low as a way to quickly gain market share.

The idea behind this is that by the time the company raises the price, the customer is so used to the product or service that they are willing to continue using it at its full price.

Example of penetration pricing: HostGator

Web hosting services are among the most common examples of this concept at work.

HostGator pricing
As a subscription hosting service, businesses like HostGator are able to make the most of X as a pricing strategy.

When you sign up for their hosting services, the price is dramatically reduced, but when you renew after a year, you pay the real price, as in the image above.

This is a great strategy for them.

It means that the people who are serious about building a business online will be willing to continue the service uninterrupted at the new price.

How you can use penetration pricing in your own business:

If you create online courses to sell in your business, This is just one example, but the strategy works for all types of businesses across all industries.

3. Competitive pricing

Best for: All types of small to medium businesses

Competitive pricing is a general pricing strategy that any business can use to sell its products or services in a competitive and profitable way.

Regardless of any other pricing strategy that you might employ, competitive pricing will allow you to compete with other businesses with a similar cost structure and lower your customer churn.

For this to work, first you need to make a survey of the way your competitors price their products and then calculate the mean or average.

With that information in hand, you can then decide whether to stay at the same level OR if you can go below their base prices.

Of course, you must take into account your own costs so as to avoid underpricing your products.

Example of competitive pricing: McDonald’s and Burger King

Franchises like McDonald’s and Burger King have similar value menus, which offers a great example of competitive (and profitable) pricing in the fast-food industry.

How you can use competitive pricing in your own business:

There are many ways you can use this pricing strategy in your own business.

It works particularly well if you have a product whose price has reached a level of equilibrium, and it can be a great way for you to easily pull customers from your competitors.

For instance, a software company may run informational webinars to bring in potential customers and might offer a low price guarantee to customers as a way to ensure confidence and peace of mind that customers are getting the absolute best value.

4. Charm pricing

Best for: Supermarkets and retailers that sell everyday products

Charm pricing is a type of psychological pricing that has to do with using the price of a product or service to influence the customer’s perception of quality, savings, fair value, etc.

This strategy is commonly used by supermarkets and retailers where prices normally end in “99”, or “9”.

This has been shown to induce customers to purchase more based on the way human brains work.

Specifically, customers see $10.00 and $9.99 as two very different prices.

To their subconscious minds, $9.99 is $9, which is way cheaper than $10.00.

Example of psychological pricing: Costco

5. Prestige pricing

Best for: Businesses that sell luxury products and services

This is yet another type of psychological pricing used by businesses. It’s also known as premium pricing or image pricing.

Although charm pricing is among the most commonly used pricing strategies, it isn’t effective for ALL types of products and services.

For instance, luxury goods can be better sold with the exact opposite strategy.

Prestige pricing is more effective for such products, with prices raised to rounded numbers.

So, $49 becomes $50, $99 becomes $100, and so on.

According to studies, round numbers work to encourage customers to make purchase decisions based on feelings rather than calculated opinions.

That’s why this strategy is ideal for businesses that sell higher-priced goods.

Example of prestige pricing: Nike

Nike premium pricing model
As a premium brand, Nike is able to pitch products at the highest price points.

This brand is a perfect example of how companies can use prestige pricing effectively. For a company like Nike, low prices would actually hurt their sales.

How you can use prestige pricing in your own business:

You can use this pricing strategy in your own business, in any industry, as long as you can justify a higher price point.

Say, for instance, your company sold a premium Japanese knife set on the market at $320.

The price is a lot higher than what most people have in mind when considering a product of that nature.

But, you can leverage this pricing strategy to target those people at the top of the market who are willing to pay for the very best product available out there.

This is a great strategy for you to use if you market your products or services to people who focus more on quality, value, prestige, etc. than on price.

Important Note: This type of pricing strategy is best for strong brands that offer products at premium prices

6. Loss-leader pricing

Best for: Businesses in a super-competitive niche

Loss-leader pricing is a promotional pricing strategy that is based on sacrificing one product or service in order to make a sale on another.

This is used a lot in retail as a way to get traffic away from rivals.

You’ll typically see this strategy in action where an e-commerce business offers up a product below market value as a way to incentivize customers to proceed to purchase another, more popular item.

Example of loss-leader pricing: Focus Magazine

Magazines are a great example of this strategy at play. They offer the first few copies free when you get a subscription for six months or more.

Focus magazine
Focus Magazine, like many subscription publications, uses a loss-leader strategy to draw in new customers.

How you can use loss-leader pricing in your own business:

You can use this strategy if you want to lure customers away from your competitors. For example, if you have a retail arbitrage business it would be one of the best ways to get customers to buy from you instead of other people.

More pricing strategies for small businesses

This article contains six of the most commonly used and pricing marketing strategies. There are tons more pricing strategies for you to choose from. It’s beyond the scope of this article to go through all of them, but here’s a quick list some of of the different pricing strategies in marketing to consider for your small business.

  • Dynamic pricing (Uber has focused exclusively on this model)
  • Versioning pricing
  • Freemium pricing
  • Value-based pricing
  • Captive product pricing
  • Customer Perceived Value (CPV)
  • Cost-plus pricing
  • BOGOF (Buy One Get One Free)
  • Close-out pricing
  • Membership (loyalty) pricing
  • Bundle pricing

READ: Pricing psychology tips that really work

Maintain a clear view of the market

This article has outlined some of the most effective pricing strategies in the different categories (general, promotional, and psychological pricing strategies), but the important thing to take away from it all is that you understand your market; including how customers value your products or services as well as the competitive landscape.

And, you must know your product or service well enough — including its associated costs — so you can pick the best pricing strategy for your small business.

Need data-led insights to inform your pricing strategy? Combine accounting and inventory management tools for a best practice approach with MYOB.