Understanding pricing strategies

When you offer a product or service, finding the correct price can be the trickiest step of all. You need to settle for a price that makes financial sense, but you don’t want to alienate customers by going too high. And, unless it’s your intention, you don’t want to look like a budget option by going too low. Here’s how to land on the perfect price for your brand.

Pricing strategy definition

A simple definition of pricing strategy is relatively self-explanatory: a strategy for determining pricing. There are several types of pricing strategies you can use, each of which may give you a very different answer. Whatever pricing strategies you go with, make sure you consider all the important factors for your business, including your profit margins, your customer personas, and your competitors.

Types of pricing strategies

When it comes to pricing strategies, business owners can decide what they want their prices to reflect. For example, a low price can reflect that you are a value brand, or it can suggest that you are a new company offering a time-limited introductory offer. A high price, naturally, means customers will expect more for their money. Here are the most common pricing strategies to consider:

Keystone pricing

Keystone pricing is when you simply take the wholesale cost you paid for your product and double it. As it’s so simple, keystone pricing is as likely to work as it is to completely miss the mark, but if your priority is your profit margin, it might be an easy go-to strategy.

Cost plus pricing

Similar to keystone pricing, in that it doesn’t take into consideration any external factors, cut plus pricing is when you take the cost of producing a product and add on what is needed in order to achieve your profit margin goals. For example, if a shirt costs £4 to make and you want a 50% profit margin, you would sell at £8. Again, this pricing strategy only looks at your business’s goals in isolation – it doesn’t consider customers or demand.

Pricing at premium

This is a pricing strategy that sees you deliberately place your product or service in the higher price bracket. This implies that your offering is of premium quality. Through branding, product features, or décor, you will need to create a perception of value that supports a larger price tag.

Economy pricing

This is the pricing strategy business finance teams can use if they are offering a “no frills” product. By saving money on marketing, packaging, and production (e.g., no premium ingredients or parts), these savings can be passed onto the customer. This can be a useful strategy if you are already well established and want to introduce a new line of value items, but it can also be one of the risker pricing strategies if you’re still a small operation.

Penetration pricing strategy

Penetration pricing strategy is used when a brand wants to move into a new market. A penetration pricing strategy requires you to set your prices deliberately lower than the competitors already operating in the industry in order to try and grab the attention of their customers. After the brand has entered the market, they can look to increase their prices.

Psychology pricing

This pricing strategy is when brands think emotionally rather than logically. For example a price of £400 might be the best choice financially, but a customer is more likely to be drawn to £399. Psychology pricing is the reason so many prices end with 99p rather than the next highest pound. You can apply psychology pricing to other pricing strategies to make your price seem more appealing.

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.