17+ Pricing Strategies: The Ultimate Guide

According to a McKinsey study, The Hidden Power of Pricing, on average, a 1% price increase translates into an 8.7% increase in operating profits, assuming no loss of volume.

Nevertheless, the same study finds that up to 30% of the thousands of pricing decisions companies make every year fail to deliver the best price.

These statistics make you think twice about your pricing decisions.

So, to help you in making that important decision, we’ve prepared a comprehensive list of the most common pricing strategies nowadays, followed by examples. 

What’s more, you’ll find valuable insights from marketing experts we talked to and learn:

• Tips for better pricing your products, and
• Benefits the right pricing strategy may bring.  

Now, let’s dive in!

What are pricing strategies?

In essence, pricing strategies are different approaches to how to set the right prices for your offerings to accomplish specific business objectives while taking into account the ongoing market situation.

According to the CEO of a marketing outsourcing agency, BBSA, Anna Stella, there are many things to consider when creating your pricing strategy:

Another expert we contacted, Nicolas Garfinkel, Founder of Mindful Conversion, a digital marketing agency, believes that finding the right price is quite a balancing act: 

14 Common pricing strategies with examples

Now, it’s time to move on to specific pricing strategies.

We’ll focus on the most common strategies followed by examples, including:

• Cost-plus pricing,
• Competitive pricing,
• Value-based pricing,
• Skim pricing,
• Penetration pricing,
• High-low pricing,
• Dynamic pricing,
• Bundle pricing,
• Geographic pricing,
• Behavioral pricing,
• Premium pricing,
• Economy pricing,
• Hourly pricing, and
• Project-based pricing.

Let’s dive in!

Strategy #1: Cost-plus pricing

Cost-plus pricing (also known as cost-based or markup pricing) is one of the most widely used pricing strategies nowadays and is considered a traditional method. 

Namely, with cost-plus pricing, you simply add a fixed percentage to the total production costs.

It’s a highly popular method used for industrial goods and products that generally have a market price. 

One of our contributors, Aleksandra Sarovic, Product Marketing Manager for the Plaky project management tool at CAKE.com, explains cost-based pricing in simple terms:

Though it’s rather simple to determine, cost-based pricing turns out to be slightly contradictory, as it neglects variable costs that change with the production volume.

Namely, if there’s a lower number of products manufactured, production costs are higher, which would, according to the cost-plus theory, lead to higher total prices.

In reality, you’d end up with overpriced products in weak markets or underpriced products in solid markets. 

Nevertheless, cost-based pricing should be well understood as costs represent the fundamentals of any price decision.

Strategy #2: Competitive pricing

Competitive or competition-based pricing is a strategy for determining the price of your offering based on competitors’ prices. 

As explained by Aleksandra Sarovic, competitive pricing may also be referred to as neutral pricing, as the companies can “set prices based on current market trends and competitor pricing, to avoid positioning the product as either a premium or low-cost option.”

According to Price Management: Strategy, Analysis, Decision, Implementation by Hermann Simon and Martin Fassnacht, there are 3 crucial steps to take when analyzing your competition:

• Identifying the relevant competitors,
• Analyzing the current competitors’ prices, and
• Anticipating competitors’ potential future price behavior.

Competitive pricing becomes even more prevalent in online environments and e-commerce, especially in those companies that rely on algorithmic pricing systems for setting prices. 

Some well-known examples of companies that use a competition-based pricing strategy include constant rivalries between:

• Amazon and Walmart, as well as
• Uber and Lyft.  

Strategy #3: Value-based pricing

Value-based pricing, sometimes referred to as perceived-value pricing, is a strategy that puts customers first, with prices reflecting the customer’s perceived value of a product.

With value-based pricing, the target price isn’t guided by costs or competition. 

Instead, the price reflects the customers’ willingness to pay. 

This means that the idea of a price is incorporated into the product’s design and development process from the very beginning, and then the product is ‘built into’ that price later on.

According to The Strategy and Tactics of Pricing by Thomas T. Nagle and Georg Müller, the customer’s willingness to pay is shaped by 2 types of values:

• Monetary value — the customer’s total cost savings resulting from purchasing a product, and 
• Psychological value — various intangible ways in which a product creates innate satisfaction for the customer.

Another contributor, Phil Portman, Founder and CEO of Textdrip, an SMS marketing automation software company, gives us an example of how this strategy worked out for them:

Another well-known example of a value-based pricing strategy is the Rolex watch.

Though Rolex doesn’t bring any tangible monetary benefits to its wearers, it does bring certain psychological benefits to its owners, such as the unique feeling of beauty and prestige.

Strategy #4: Skim pricing 

Skim pricing (or skimming) is setting a high initial price and then lowering it over time in successive steps. 

As explained in The Strategy and Tactics of Pricing, the skimming strategy “is designed to capture superior margins, even at the expense of large sales volume.”

In other words, skimming allows for achieving maximum profits in the shortest time period. 

According to the above-mentioned Price Management book, Apple successfully carried out the skimming strategy with several of its products. For example, they applied it to the launch of the original Apple iPhone, which was initially set to $599 and then cut to $399 3 months later.

Despite high prices, the lines of customers in front of Apple stores were quite long on the launch day, and there was an additional boost in demand after the price cut.

Strategy #5: Penetration pricing

Penetration strategy is setting a very low launch price to attract a large base of customers.

However, as explained in Price Management, there is no general rule for how the price changes over time after the launch.

Here’s a classic example of a penetration strategy: 

Namely, Toyota launched its new premium brand Lexus in the US with an initial price of $35,000. It turned out a success, as it helped Toyota build foundations for the long-term success that followed. 

Over the next 6 years, the price of Lexus rose by a total of 48%. 

In this case, the low initial price helped the new and then unknown brand enter the market and build a reputation. 

However, in some other cases — as explained in The Strategy and Tactics of Pricing — using the penetration pricing strategy may actually undermine a brand’s long-term appeal. 

One such example was when Lacoste allowed its shirts to be discounted by lower-priced mass merchants. This caused the high-end retailers to refuse to carry the product any longer and made Lacoste’s traditional customers shift to more exclusive brands. 

After that, Lacoste had to employ other strategies to restore its prestigious status, such as signing endorsements with famous tennis stars.

All in all, a low price may not be the best solution in all cases, which is why it should be carefully thought through first.

Strategy #6: High-low pricing

The high-low pricing strategy (or hi-lo pricing) is typical for low-price companies, such as the following:

• Food and grocery — ALDI, LIDL,
• Electronics — Best Buy, Dell, 
• Clothing — Forever 21, Primark, H&M, or
• Furniture — IKEA.

Hi-lo pricing means offering temporary low prices on a recurring basis, following a pulsation pattern of high and low prices alternating in a more or less regular rhythm. 

In other words, retail companies alternately offer discounts and price promotions via advertising flyers or circulars for a given week or period.

However, as highlighted in Price Management, a low price on its own won’t lead to success unless the company also manages to keep its costs low.

Strategy #7: Dynamic pricing

You’ve probably noticed that airlines usually charge more for last-minute bookings or that hotel prices vary depending on the day of the week or season.

This pricing strategy is called dynamic pricing, and it is defined in the Price Management book as a strategy that “takes advantage of the ability to change prices quickly by adjusting prices to the prevailing supply and demand situation.” 

As The Strategy and Tactics of Pricing explains, companies may use various rules-based algorithms to adjust prices according to various criteria, such as:

• Market, 
• Customer, and 
• Product category.

Such algorithms allow companies to automate mass price updates that reflect real-time changes in market conditions.

Dynamic pricing is also commonly referred to as time-based pricing as prices may often fluctuate based on the time factor, e.g.:

• Time of the day — e.g. electricity, fitness studios,  
• Day of the week — e.g. movie tickets, transportation tickets, or 
• Season of the year — e.g. air travel, tourism. 

For example, as stated in Price Management, Amazon openly admits to changing prices based on demand to maximize profit.

A specific form of dynamic pricing is the so-called peak pricing or surge pricing. 

It refers to raising prices for “perishable” offerings during peak times (e.g. a ride ticket in an amusement park).

A well-known example of this strategy is Uber’s surge pricing. 

Namely, Uber employs a surge pricing algorithm when there’s a large spike in demand — e.g. on New Year’s Eve or after a sold-out concert ends — to balance supply and demand.

Strategy #8: Bundle pricing

In price bundling, companies offer several products as a package or bundle at one total price.

The total price of a bundle is usually lower than the sum of individual item prices.

According to Price Management, there are several reasons for implementing a bundle pricing strategy, including.:

• Selling a mix of products both in high and low demand,
• Disguising individual prices, 
• Hiding a price increase, or
• Achieving the psychological effect of receiving more for less money, thus increasing sales.

An example of price bundling could be internet or mobile contracts that include access to streaming services such as Netflix.

Strategy #9: Geographic pricing 

It often happens that certain products are significantly cheaper in one country than in a neighboring one, or in one region compared to another.

Charging different prices for the same offerings based on geographic location is called geographic or regional pricing.

As explained in Price Management, the following factors may bring about regional price differentiation:

• Purchasing power, 
• Buying behavior, 
• Costs,
• Competition, and 
• Sales channels.

Regional pricing may be applied in many markets, including: 

• Fuel,
• Food and groceries,
• Alcohol and cigarettes, and 
• Various kinds of services.

Strategy #10: Behavioral pricing

However random customers’ buying decisions may seem at first, the truth is, there are certain patterns behind all of those decisions. 

Behavioral pricing focuses on understanding customer’s behavior patterns concerning prices and using them for maximizing business profits.

Here are just some of the pricing effects that may impact purchasing decisions:

• Charm pricing (also known as psychological pricing) — setting prices that end in 9, 99, or 95, e.g. $2.99 instead of $3.00, as people tend to remember the first digit on the left,
• Good-better-best pricing — when less aware of a product’s features and values, customers tend to pick a middle-price option (e.g. most customers opt for the medium price range of wine in restaurants, while they rarely purchase the least expensive and most expensive ones),
• Price anchoring — when customers aren’t sure about their price judgment, they search for a reference point, i.e. the anchor, which may influence their willingness to pay (before displaying the price, you can expose customers to a certain high number first, e.g. “Join 2,378 happy customers for 39$”), and
• Decoy pricing — adding a “decoy” option that is similar to the product you’re selling but slightly worse, and you’ll probably make the product you really want to sell sound more appealing.

Strategy #11: Premium pricing 

Premium pricing (sometimes referred to as prestige or luxury pricing) is setting your prices high to reflect the high value of your offerings.

Aleksandra Sarovic shares what premium pricing refers to in the SaaS industry specifically:

Strategy #12: Economy pricing

As opposed to premium pricing, companies sometimes employ the so-called economy pricing strategy to appeal to more cost-driven customers.

Here’s how Aleksandra explains economy pricing:

Strategy #13: Hourly pricing

As its name suggests, hourly pricing implies setting the price based on the time spent working on a particular task.  

Here are the examples of some services usually billed per hour:

• Design, 
• Coaching, 
• Consulting,
• Writing, and
• Translation.

As you can see, hourly pricing is typically used in service industries where there are no costs other than your time and effort.

Strategy #14: Project-based pricing

Project-based pricing is pricing a project at a fixed rate. 

It’s great if you know precisely how much time and project resources you’ll need for the project in advance. 

In case there’s no clear project scope defined in advance with the client, you may risk initially setting a lower price for your project than is actually later required by the project, which may lead to additional unplanned costs.

Here are some examples of projects well-suited for project-based pricing:

• Developing a website,
• Illustrating a children’s book, 
• Producing a video for a commercial,
• Composing a short music track for a video, or
• Creating a social media content calendar.

Using a project management tool can be of great help in determining the price of specific projects, as it gives a clear overview of all the specific tasks within a project.

Here’s an example of a social media calendar template made in the Plaky project management tool:

As you can see in the example above, the Plaky project management tool may help you outline your content plan for different social media channels over several months and then share it with your client.

Using Plaky, for example, you won’t risk any misunderstandings or unplanned tasks that lead to additional expenses coming up later in the project.  

On the contrary — both the tasks and the price will remain transparent from the initial project phase till the final closure phase.

3 Innovative pricing strategies

Apart from the traditional pricing strategies, we’re witnessing the emergence of new product pricing strategies as we speak.

We’ll take a closer look at the following innovative pricing strategies, as described by Price Management:

• Flat rate,
• Freemium, and
• Interactive pricing.

Keep reading!

Strategy #15: Flat rate pricing

As Price Management explains, a flat rate implies customers pay a fixed price per occasion or time period and can then use the goods or services for as much as they want. 

For example, customers who buy a menu at McDonald’s receive a cup that they can refill with soft drinks for as long as they remain in the restaurant.

Here are some common examples of flat rates nowadays:

• Monthly bus or train passes and tickets,
• Cable television and Internet access, and
• Restaurants with an “all-you-can-eat” slogan.

There are several reasons for customers preferring flat rates, including:

• They avoid fluctuations in monthly bills, and
• They find the feeling of unlimited usage more enjoyable.

Companies shouldn’t face any risks to profit as long as there’s some kind of natural or artificial limit to consumption/usage.

Strategy #16: Freemium pricing 

The freemium pricing strategy is the combination of the words “free” and “premium”. 

Freemium allows customers to use the basic version of a product/service without having to pay for it. 

This strategy aims to eventually convert non-paying customers into paying customers by switching to the premium version.

Here are 2 basic freemium success factors: 

• Have an appealing basic offer that will attract many users, and 
• Have a premium version price acceptable enough to actually convert free users into customers.

Speaking of the SaaS industry, Aleksandra Sarovic shares another important benefit of a freemium strategy:

Spotify is a good example of a freemium pricing strategy, with the app offering a basic service for free. 

However, to enjoy the app without constant interruptions by ads, Spotify users are in this way encouraged to upgrade to a premium version.

Strategy #17: Interactive pricing 

With interactive pricing models, the price is determined through an interaction between the customer and the seller.

Price Management lists several interactive pricing models, including the following:

• Pay-what-you-want — the customer pays what they want, while the seller can’t turn down the offer,
• Name-your-own-price — the customer offers a price and the seller decides whether or not to accept it, and
• Rebate systems — a seller returns a part of a customer’s purchase price, e.g. cash-back, if the customer buys a certain amount of product or spends a certain amount of money.

9 Tips for better pricing your products

We are aware that choosing the right strategy is not an easy task.

So, to help you on the journey towards a perfect pricing strategy for your business, we’ve prepared a couple of useful tips to give you a head start, including:

• Think carefully about your customers’ needs,
• Be well familiar with the competition,
• Identify customers’ purchase motivators,
• Position your offering properly,
• Perform price sensitivity testing,
• Be ready to adjust your pricing strategy,
• Keep in mind that pricing strategies vary across industries,
• Define good price metrics, and
• Make sure your prices are easy to understand.

Now, we’ll provide more details on each tip.

Tip #1: Think carefully about your customers’ needs 

Our contributor, Aleksandra Sarovic, advises taking time to truly understand customers’ needs when setting prices:

Tip #2: Be well familiar with the competition

“Keep your friends close, but your enemies closer” — an old saying says. 

And, it’s exactly what you should bear in mind when setting prices for your offerings.

Knowing your customers is crucial, but knowing your competitors is equally important, or as Aleksandra explains:

Tip #3: Identify customers’ purchase motivators 

Determining your offering’s price first requires determining what drives customers to pay for it in the first place i.e. customers’ purchase motivators.

To identify purchase motivators, you can ask yourself the following question: 

• How is my product different?

As Rafi Mohammed explains in his book The 1% Windfall: How Successful Companies Use Price to Profit and Grow, you can consider the following product differentiation factors:

• Brand — refers to a promise of satisfaction and quality customers get,
• Quality — refers to a higher degree of excellence you’re offering, 
• Attributes — refers to the physical characteristics of your offering,
• Service — refers to any non-physical features of your offering,
• Ease of purchase — refers to how convenient it is to buy your offering, and
• Style — refers to the “distinctive artistic expression” of your offering.

Tip #4: Position your offering properly

Depending on the price positioning strategy they’re going for, companies may choose lower or higher prices as compared to their competitors, and ultimately take one of the 5 typical price positions:

• Luxury,
• Premium, 
• Medium,
• Low, and 
• Ultra-low.

As Jason Vaught, Director of Content and Marketing at SmashBrand, a branding and packaging design agency, highlights, determining the optimal price position is essential and can come with many risks:

In addition, price positioning is especially important in a new product launch. 

Take a look at the following example as found in Price Management: 

In 2014, Amazon introduced the “Fire” smartphone, which was priced at $200. 

This price reflected a medium-price positioning between basic Android phones and the more expensive iPhones. 

However, nobody would buy the “Fire” at that price, which prompted Amazon to cut the price to just $1. 

This radical move couldn’t save the “Fire” either.  

The price position of “Fire” was wrongly determined from the very beginning, which condemned Amazon’s smartphone to failure.

Tip #5: Perform price sensitivity testing

To measure price sensitivity i.e. how price-sensitive the customers are, you can use the concept of price elasticity of demand.

As explained in Essentials of Marketing Management, price elasticity of demand implies the following:

• If customers are willing to pay almost any price for the product, the demand is considered inelastic, and
• If customers are willing to pay only within a narrow range of prices, the demand is considered very elastic.

For inelastic demand, you can raise prices as much as you want without significantly affecting demand. 

Conversely, elastic demand means that customers are price sensitive and won’t buy your product if prices rise too much.

Jason Vaught advises companies to determine the value of their offerings through price sensitivity testing: 

Tip #6: Be ready to adjust your pricing strategy

Keep in mind that your pricing strategy shouldn’t be set in stone — success often depends on adaptability. 

And the more flexible you are with your pricing strategy, the better.  

One of our contributors, Will Yang, Head of Growth and Customer Success at Instrumentl, an online grant management platform, explains: 

Tip #7: Keep in mind that pricing strategies vary across industries

As Will Yang states, it’s also important to truly understand the industry you’re in: 

Furthermore, pricing strategies are often industry-specific, according to Price Management. 

This means that pricing issues, strategies, and tactics differ from one industry to another.

Here are a couple of examples of pricing strategies typically used in specific industries:

• Retail — e.g. cost-based pricing,
• E-commerce — e.g. dynamic pricing,
• Marketing — e.g. project-based pricing,
• B2B — e.g. value-based pricing, and
• SaaS — e.g. freemium pricing.

Tip #8: Define good price metrics

To be able to price your offering in the right way, it’s good to carefully think about your price metrics. 

As defined in the previously-mentioned book The Strategy and Tactics of Pricing, price metrics are “the units to which the price is applied”. 

In addition, price metrics define what exactly the customer receives per unit of price paid. 

For example, the common categories of price metrics include the following: 

• Per unit, 
• Per use, 
• Per time spent consuming, 
• Per person who consumes, and
• Per amount of benefit received.

To further clarify, software companies may choose a “per seat” price metric to price their software. 

The per seat metric results in customers paying more when they have more users accessing the software, which is more profitable for the seller than a fixed price.

Each time a company discovers a better metric than that of its competitors, it may gain a certain business advantage.

Tip #9: Make sure your prices are easy to understand

As our contributor, Anna Stella, explains — the pricing strategy you opt for shouldn’t be too complex for your customers to understand:

Why is choosing the right pricing strategy important?

Price is one of the “4 Ps” of a marketing mix which makes it an essential part of any strategic marketing plan. 

That’s why companies must pay special attention to choosing the right pricing strategy.  

In addition, as we’ve already mentioned at the beginning of this article, the right pricing strategy may significantly benefit companies in terms of profit.

But, is profit the only benefit a good pricing strategy may bring to a company?

The short answer is — no.

Namely, by choosing the right pricing strategy, you’ll likely enjoy many benefits beyond the most obvious one.

Here are just some of the ways the right price strategy may help your business:

• It helps in market positioning,
• It helps establish and maintain customer loyalty,
• It improves the brand image,
• It helps in customer segmentation, and
• It drives profit.

Let’s look into these benefits in more detail.

Benefit #1: It helps in market positioning

Our contributor, Aleksandra Sarovic, highlights that the right pricing strategy isn’t crucial purely for the sake of profit but for positioning as well, and this especially applies to the SaaS industry:

Another contributor of ours, Will Yang, points out that pricing can also bring benefits to companies entering the market:

Benefit #2: It helps establish and maintain customer loyalty

Aleksandra Sarovic highlights the importance of pricing as a means of nurturing a loyal customers base:

Aleksandra elaborates further:

Jason Vaught also points out the great impact pricing has on building customer trust:

Benefit #3: It improves brand image

Our contributor, Phil Portman, believes that the right pricing strategy may positively impact brand image: 

Benefit #4: It helps in customer segmentation 

Phil also points out that pricing may facilitate customer segmentation: 

Benefit #5: It drives profit

Last but not least — the right pricing strategy should bring profit to your business.

According to Price Management, several studies have shown that the right pricing strategy is crucial as:

• Taking the wrong pricing steps can quickly destroy a company’s market value, and
• Smart pricing can enhance a company’s market capitalization.

In addition, as explained in the same book, price plays a central role as a profit driver, impacting both: 

• Short-term gains and 
• Shareholder value.

Given the vital role pricing plays in determining whether you’ll have a profitable business or not, it is important to pay special attention to choosing the right strategy.

Conclusion: Pricing is not just about numbers, it’s about positive customer experience

In this article, we’ve learned about the most common pricing strategies and why opting for the right one is an essential decision for every company.

However, since every business is unique, not all pricing strategies will work the same way for each of them.

Fortunately, you can always shift from one pricing strategy to another and experiment with different approaches.

Our advice is to be well-acquainted with all the available options, and in addition to that, conduct thorough research while letting your customers guide all your decisions.

In the end, it’s the customer experience that really matters, or as Aleksandra puts it:

Deciding on the right pricing strategy for your product is a complex process that requires many factors to be taken into account. With a free, yet functional PM tool like Plaky, you can keep all the relevant information in one place and therefore have a clear understanding of your pricing options. Sign up for Plaky’s free account today and start managing your pricing strategies with ease.