Skip to content

Importance of a Pricing Strategy

Written by

Last editedApr 20222 min read

Too many companies set prices without having a proper strategy behind their decisions. This mistake can make a business’s offerings appear uncompetitive and position them poorly in the market. In order to maintain cash flow and grow a business, it’s essential to have a smart pricing strategy. This will solidify your position in the market, build trust with customers, and ensure you meet your business’s objectives.

In this post, we’ll define what’s meant by a pricing strategy and introduce some of the elements you’ll need to consider when you’re setting your prices.

What is a pricing strategy?

Pricing is defined as the amount of money you charge for your products or services. Your pricing represents the value you place on your brand products and customers. It’s the key element that can draw people towards, or away, from making a purchase. As such, it needs to be carefully calculated.

A pricing strategy involves the processes and methodologies that can be used to set prices for products and services. It is there to help you determine how much to charge for your items.

Benefits of a good pricing strategy

A clear pricing strategy has a number of clear benefits:

Symbolises value: Consumers tend to associate less expensive products with cheap, sometimes shoddy, production values. Products of a higher price tend to be associated with higher value.

Attract buyers: If a price is too high, the customer may not be able to afford it. The ideal price should be set at a level that attracts people to buy your product or service, compared with a competitor.

Give consumers confidence in your offerings: Prices that are too low may make customers less likely to trust that your goods are of the best quality.

How to create a pricing strategy

To help you calculate a price for your products, work out how much it costs to produce or deliver your products or services. Include your overhead costs and factor taxes into your calculation. Here are some key elements to include:

  • Manufacturing costs

  • Competition

  • Market conditions

  • Industry

  • Brands

  • Quality of your products or services

You should also take into consideration your objectives. Making a profit is an obvious objective, but not always the only one. You may want to price in order to:

  • Position yourself in the market: Whether you sell high-end products or want to attract budget buyers, price is an indicator of quality, so your prices need to reflect your brand.

  • Stay competitive: For many companies, being price competitive is enormously important, whether as a price leader or in response to a competitor’s pricing. Your pricing will impact competitors, so it’s important to anticipate how a competitor will react to your pricing and factor this in when you’re setting prices. If you use your competitors’ prices to guide yours, however, be careful you’re not devaluing your products and driving down your profits.

  • Increase demand: Prices can be used to help you increase demand for new or existing products and boost sales. If there’s high demand, it’s likely you can increase your prices.

It’s essential to keep your business objectives top of mind when you’re creating a pricing strategy to ensure they align with each other.

Pricing strategy example

‘Charge-per-hour’ is an example of cost-based pricing used by service-based businesses and independent contractors. This calculates the relevant costs of a business at an hourly rate. With this model it’s important to consider all the business costs, from taxes and wages to superannuation and holiday entitlements.

Whatever your objectives, your company cannot do without a robust pricing strategy, helping you price your products in line with market demand, position your products correctly, and – most importantly – ensure you make a profit.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.

Over 85,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

Sign upLearn More

Try a better way to collect payments, with GoCardless. It's free to get started.

Try a better way to collect payments

Learn moreSign up