man in store checking price of item
There are several options when it comes to developing a pricing strategy. Choosing the right one is essential to your business's success. — Getty Images/VLG

Setting your business’s prices may seem simple: List your product for higher than it costs you to manufacture or acquire it, and you’ll make a profit.

But your prices are more than just numbers. The way you price your products or services can be a reflection on your business’s identity, how you view and treat your competitors and how you value your customers. That’s why it’s important to have a carefully planned pricing strategy.

What to consider when setting your pricing strategy

Setting your product or service’s prices shouldn’t be a haphazard decision focused entirely on profit. It should be a calculated, informed choice where your business identity, brand and financial stability are considered.

As with any business decision, determining your pricing strategy starts with assessing your own business’s needs and goals. This involves some commercial soul searching – what do you want your business to contribute to the economy and world? This could mean embracing traditional retail strategy, establishing a service business mindset or emphasizing personal customer relationships in your offering.

Once you have your goals and needs defined, do some research on the market you’re entering. Determine three to five main competitors in the industry by conducting online research or scouting out local businesses. No matter what pricing strategy you adopt, what your competitors are doing will impact your business’s success and future decisions. Understanding your competitors’ strategies can also help you differentiate your business from other businesses in the market. In an economy where there are thousands of small businesses providing the same products and services, an effective pricing strategy can help you stand out.

A good final stage in your research is speaking with potential customers to get a feel for how they value your brand, product or service. This can give you valuable insight into how to set your pricing. This kind of research can range from casual conversations with friends and family to formal surveys of potential buyers.

While you may have already done some of this legwork when developing your business plan, it’s good to have as much insight and information as possible before you decide what pricing strategy to adopt.

Pricing strategies to attract customers to your business

There are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy. Consider these five common strategies that many new businesses use to attract customers.

1. Price skimming

Skimming involves setting high prices when a product is introduced and then gradually lowering the price as more competitors enter the market. This type of pricing is ideal for businesses that are entering emerging markets. It gives companies the opportunity to capitalize on early adopters and then undercut future competitors as they join an already-developed market. A successful skimming strategy hinges largely on the market you’re looking to enter.

2. Market penetration pricing

Pricing for market penetration is essentially the opposite of price skimming. Instead of starting high and slowly lowering prices, you take over a market by undercutting your competitors. Once you develop a reliable customer base, you raise prices. Many factors go into deciding on this strategy, like your business’s ability to potentially take losses up front to establish a strong footing in a market. It’s also crucial to develop a loyal customer base, which can require other marketing and branding strategies.

There are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy.

3. Premium pricing

Premium pricing is for business that create high quality products and market them to high-income individuals. The key with this pricing strategy is developing a product that is high quality and that customers will consider to be high value. You’ll likely need to develop a “luxury” or “lifestyle” branding strategy to appeal to the right type of consumer.

4. Economy pricing

An economy pricing strategy involves targeting customers looking to save as much money as possible on whatever good or service they’re purchasing. Big box stores, like Walmart and Costco, are prime examples of economy pricing models. Like premium pricing, adopting an economy pricing model depends on your overhead costs and the overall value of your product.

5. Bundle pricing

When companies pair several products together and sell them for less money than each would be individually, it’s known as bundle pricing. Bundle pricing is a good way to move a lot of inventory quickly. A successful bundle pricing strategy involves profits on low value items outweighing losses on high value items included in a bundle.

Which pricing strategy is right for you?

Determining your needs up front can make it clear which strategies are ideal for your business. If you’ve already launched your business, you can experiment with these strategies until you determine what works best for your business. You can also vary strategy between products depending on the market for each good or service.

Regardless of which tactic you choose, pricing your inventory properly is essential for continued business success. You may have the best product in the world, an excellent team and a beautiful storefront, but if you can’t price your products effectively, your sales will ultimately struggle.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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Published April 03, 2019