The 7 Most Common Pricing Strategies That Drive Profits 

---

Pricing does more than cover costs — it influences revenue, marketing strategies, customer relationships, and long-term growth. It’s crucial to the company’s profitability and longevity, so a solid marketing and pricing strategy is essential for making informed decisions.

What Is a Pricing Strategy?

A pricing strategy is the approach a company uses to determine how much it wants to charge for its products or services. The price is the amount of money a business asks in exchange for its offerings. A pricing strategy is the method the company uses to decide on that amount.

A good strategy is more than the amount necessary to break even — it also considers market conditions, customer preferences, and business goals to maximize revenue while still appealing to customers. Research shows that a long-term pricing advantage contributes 15%-25% of a business’s profits.

7 Popular Pricing Strategies

Every business is unique — each one involves different costs, resources, and financial goals, which is why pricing strategies can also differ. Effective pricing can make profits more consistent and accurate. Here are seven of the most popular approaches to setting prices that companies can consider:

1. Cost-Plus Pricing

Cost-plus pricing, sometimes called markup pricing, is the simplest way to price products or services. As the name suggests, it takes the total production cost and adds a fixed profit percentage. Its simplicity can work well for companies offering a wide range of services or products since it doesn’t involve many external factors, such as competitor pricing or customer demand.

Take a company that sells graphic T-shirts, for example. In this example, one t-shirt costs $10 to produce, including raw materials, design, printing, and other overhead costs. If the company wants a 50% profit margin, the final product would cost $15 once it hits the stores.

2. Competitive Pricing

Competition-based or competitive pricing looks to a company’s competitors when setting prices. The approach is to strategically set a number that can win over customers over a competitor selling similar products. A company can match its competitor’s price point or sell above or below it.

There are three approaches to competitive pricing:

• Cooperative: This approach matches the competitor’s prices to the dollar, making quality and preference the only distinguishing factors. Most gas stations are a good example of this pricing method.
• Aggressive: A company using this strategy strives to create distance between its pricing and its competitors, usually by keeping its prices low. If a competitor increases its prices, the company will not budge. If a competitor lowers prices, the business will set its price even lower. This approach can be risky, especially if the profit margins aren’t enough to sustain costs.
• Dismissive: A dismissive strategy involves a company setting the price and not following the competition’s lead. It usually creates distance by pricing above the competition, positioning itself as a premium option. This approach usually works for businesses offering high-end or luxury products and services.

3. Price Skimming 

Price skimming involves a company setting higher prices when entering the market. When used in the right industry, such as tech or software, this approach can attract niche fans or early adopters. As time passes, this market becomes saturated, leading to a drop in sales. The company then pivots and gradually lowers prices to attract a broader audience.

This strategy takes advantage of a product or service’s initial hype while eventually capturing more price-sensitive customers. The resulting lower prices can also pressure newer brands joining the market.

4. Penetration Pricing

While price skimming strategies start with expensive offerings, penetration pricing does the opposite. Penetration pricing enters the market with prices significantly lower than its competitors. This low introductory price can be very attractive to the regular consumer, making it an effective strategy for rapidly gaining market share in a competitive industry.

However, once the business has established itself, it must raise prices to remain profitable. Establishing trust is crucial to ensure customers stay loyal after the price increase.

5. Value-Based Pricing

Value-based pricing bases its prices on the perceived value of the product or service. How much are customers willing to pay for it? The value lies in customer perception, making strategic branding and marketing crucial for this strategy.

This pricing model works best on unique offerings, such as art or luxury products, where value can be more subjective than that of generic items. Luxury brands like Hermes and Gucci are excellent examples. Their prices go beyond covering production costs and instead signal value through prestige and taste.

6. Economy Pricing

Economy pricing involves setting low prices. With this pricing model, companies generate revenue by selling more items. It relies on consistent, high-volume sales through new and returning customers. 

This strategy makes the most sense for grocery stores and shops selling essential commodities with low production costs. It’s relatively easy to implement and allows companies to establish a reliable foundation by attracting price-sensitive customers.

7. Dynamic Pricing

A dynamic pricing strategy constantly changes prices depending on selected factors, such as inventory levels, time, or demand. Uber’s surge pricing model is a popular example of dynamic pricing. Prices increase during rush hour, special events, or bad weather. 

Dynamic pricing works best for eCommerce businesses, where it’s easier to implement and automate algorithmic changes. Brick-and-mortar stores might struggle with this approach since it can be difficult to change prices frequently in person.

Best Practices for Choosing the Best Pricing Strategy

Setting the right prices requires analyzing internal and external factors affecting costs and audience reception. While each business is different, following best practices can help leaders choose the best strategies for their industry and target audience.

Define Business Goals

Pricing should contribute to the company’s overall goals, which guide all decisions and strategies. For example, a new subscription business wanting to establish itself in the market might want to adopt a penetration pricing strategy. On the other hand, a well-known artisanal jewelry brand seeking to differentiate itself can do well with value-based pricing.

Understanding Costs

Even if a business doesn’t primarily use the cost-plus strategy, production expenses will still factor into the final price. Businesses exist to earn a profit, and knowing the costs of producing or acquiring something is essential to calculate revenue accurately.

If a business retails an existing product, it’s much simpler to compute costs — usually, calculating the price per unit and overhead expenses will suffice. However, calculating the cost of manufactured goods covers more factors, such as raw materials, production time, packaging, and research and development.

Researching Competitors

Understanding competitor pricing and strategies is crucial for long-term success. This practice helps brands make informed decisions to retain customers better. Competitor research is fundamental in saturated markets, as it can help companies increase revenue by differentiating their unique value.

Understanding the Target Market

A brand’s target market is another crucial consideration when pricing. More than deciding on a profit margin, businesses must know how much their audience is willing to pay for their offerings. Some market segments might be price-conscious, while others are willing to pay more depending on a product or service’s perceived value.

Aside from improving pricing, understanding one’s target customers also improves sales and marketing strategies. More customers expect personalized experiences from brands and could get frustrated when they can’t find them.

Pricing for a Solid Bottom Line

No universal approach guarantees success, but understanding common strategies provides a solid foundation for companies to refine their practices. By using established frameworks and considering multiple factors, brands can use pricing as a driver for profitable and sustainable growth.