Pricing Strategies: The Complete Guide
Choose the Pricing Strategy That Works for You
Whether you’re starting from nothing or taking a closer look at your current pricing strategy and deciding you need a change, choosing the right pricing strategy can be a daunting task. After all, you want something that will help to meet your strategic goals, can scale and is effective. To make matters complicated there are so many strategies and combinations of strategies to choose from. And once you’ve chosen the right strategy, how do you implement and test it to make sure it’s helping to reach your objectives?
At Pricefx, we've helped 100s of companies for over 10 years optimize their chosen pricing strategy to maximize profits, operating margin, and gain efficiencies in their processes.
We explain the top pricing strategies, provide real-life examples for each along with pros and cons for using them, then show you how you can implement a pricing strategy, and highlight the key metrics you should use to track success.
Table of Contents
1 | 10 Types of Pricing Strategies
2 | Pricing Strategies for Different Industries
3 | Examples of Pricing Strategies
4 | How to Create A Great Pricing Strategy
5 | Tracking Your Pricing Strategy
6 | Optimize Strategy with Software
10 Pricing Strategies
With a plethora of pricing strategies to choose from, it's easy to get overwhelmed by the choices that are available. In this section, we highlight the top 10 most common pricing strategies along with the benefits and disadvantages so that you can choose the best one for your business.
Cost Plus Pricing Strategy
What is cost-plus pricing?
Cost-plus pricing (also called markup pricing) is a very simple pricing strategy for setting prices based on the costs of manufacturing and selling your product.
Let’s say you’re selling pro tennis racquets. You first calculate your cost per unit, then add a fixed percentage markup on top to determine a final selling price that ensures a profit.
In order to lock in the margin you’re hoping for, it’s important to have an accurate understanding of all business costs involved in the manufacturing and selling of your tennis racquets. You need to factor in everything from acquiring raw materials to getting the product into your customer’s hand, including raw materials, labor costs, and overheads, as well as marketing, selling, distribution and retail costs. Miss any costs off your list, and you could end up making a loss.
In most cases cost-plus pricing focuses entirely on internal factors and disregards external factors like consumer demand and competitor prices. However, some companies may take current market or economic conditions into account when setting their markup percentage. For instance, they might use a lower markup if demand is slow but place it higher at times when they feel they can command more.
Advantages and Disadvantages of Cost-Plus Pricing
Benefits of a Cost Plus Pricing Strategy
Drawbacks of a Cost Plus Pricing Strategy
Dynamic Pricing Strategy
What is a dynamic pricing strategy?
Dynamic pricing goes by many names such as real-time pricing. time-based-pricing, surge pricing, and demand pricing. It is, by definition, a pricing strategy where a company sets flexible and variable prices on its products and services depending on any number of standalone or competing factors such as demand, supply chain, competition, location, time frame, and other market conditions.
However, most importantly, dynamic pricing is contingent on market forces. A dynamic pricing strategy is not designed to work for every business nor in every industry.
Most famously, Amazon is one of the largest retailers to have adopted dynamic pricing and on many of their product lines, they update prices every 10 minutes. (We’ll look at Amazon's pricing strategy in detail later).
Other industries that have successfully implemented dynamic pricing include:
- Hotels
- Airlines
- Ticketed events
- Large eCommerce platforms
- General retail
- Energy
- Public transportation
- Ridesharing
Advantages and Disadvantages of a Dynamic Pricing Strategy
Pros of Dynamic Pricing
Cons of Dynamic Pricing
Value-Based Pricing Strategy
What is value-based pricing?
Value-based pricing is a customer-focused strategy that involves setting prices based not on your costs or competition, but on your customer’s perceived value of your offering—how much it is worth to them.
Of course, the amount a customer is willing to pay will be different for different types of customers. A customer who plays tennis every second month won’t be half as inclined to spend $320 on your fancy new tennis racket as the pro (who’ll want one in every color). The dabbler might spend $100, but $320 just isn’t worth the value he’ll get from it. Pricing for the dabbler means sacrificing potential profit from the pro, and pricing for the pro means losing the dabbler entirely.
Advantages and Disadvantages of a Value-Based Pricing Strategy
Pros of Value-based pricing
Cons of Value-based pricing
Penetration Pricing Strategy
What is penetration pricing?
The penetration pricing strategy is most often employed to attract a large volume of buyers by setting the prices of products or services at a lower price than competitors. The penetration pricing strategy is the opposite of the price skimming strategy. Instead of starting high and slowly lowering prices, you instead look to undercut your competitors on price in the beginning and gradually increase your prices.
While the pricing strategy can be extremely useful in increasing market share in the short term, it is worth keeping in mind that many new businesses who decide on a penetration pricing strategy experience can potentially experience an initial income drop that can be difficult to bounce back from.
Advantages and Disadvantages of Penetration Pricing Strategy
Pros of Penetration Pricing Strategy
Cons of Penetration Pricing Strategy
Competitive Pricing Strategy
What is a Competitive Pricing Strategy?
A competitive pricing strategy is also known across the pricing industry as competitive-based pricing or competitor-based pricing.
What that means is that a competitive pricing strategy is a pricing method that involves setting the prices of your business’s products in relation to the prices of your competitors.
It is a type of pricing strategy that is in direct comparison to other pricing strategies like cost-plus pricing or value-based, where prices are determined by analyzing other factors like consumer demand or the cost of production. A competitive pricing strategy focuses entirely on publicly available information about your competitor’s prices, not customer value.
Advantages and Disadvantages of a Competitive Pricing Strategy
Pros of a Competitive Pricing Strategy
Cons of a Competitive Pricing Strategy
High Low Pricing Strategy
What is a High-Low Pricing Strategy?
A high-low pricing strategy is a widely used pricing strategy (usually in the retail industry) that allows businesses to charge more for initially introduced products and then later, sell them at a much lower price during promotional campaigns before raising prices again. These usually include seasonal deals, clearance sales, and markdowns. The primary goal of the campaign is to increase the revenue of your business. Whilst it does involve a decrease in prices on products through sales promotions, it also includes re-increasing the price after the promotional period has finished.
Therefore, the goal and psychology behind high low pricing is to lure customers to visit retail stores (both bricks-and-mortar and online stores) with discounts, which might also lead them to buy other higher-priced products as a bi-product.
What’s more, when buying at the lower discounted sale price, customers can sometimes develop a ‘taste’ for the usually higher priced products and as a result, continue to purchase the item at its regular higher price.
The high low pricing strategy is different from everyday low pricing strategy, which consistently uses low prices.
Advantages and Disadvantages of a High-Low Pricing Strategy
Pros of a High-Low Pricing Strategy
Cons of a High-Low Pricing Strategy
Price Skimming Pricing Strategy
What is price skimming?
Price skimming pricing strategy is defined as the situation where businesses mark up the initial (usually introductory) price of the product to a much higher rate and slowly decrease it as time goes on.
To break that down into everyday terms, the business charges the highest price when your new product/s is/are first launched and is new and novel in the marketplace, and then reduces the price over time.
Price skimming is often used by businesses (particularly electronics or technology manufacturers like Apple, Samsung, LG, Sony, Lenovo etc.) when they meet some or all of the following circumstances;
- The business is a well-established brand and has a wide user base
- The product or service is revolutionary or new to the marketplace
- A high number of potential customers exist for the product
- No competitors exist for your innovative product
Price skimming suits certain industries more than the others. For example, price skimming price strategy is a favorite for tech companies, although those in the fashion industry are also big fans of the concept given its seasonality.
Advantages and Disadvantages of a Price Skimming Pricing Strategy
Pros of a Price Skimming Pricing Strategy
Cons of a Price Skimming Strategy
Discount Pricing Strategy
What is a discount pricing strategy?
A discount pricing strategy differs slightly from an everyday low pricing strategy, which is famously used in the Walmart Pricing Strategy.
Discount pricing is a type of pricing strategy where you mark down the prices of your products.
The ultimate goal of a discount pricing strategy can be to increase customer traffic, or clear old any outdated inventory from your shelves, or simply increase sales volume.
Most businesses will also use alternate pricing strategies, so they are not required to depend on discount pricing for extended periods of time.
Advantages and Disadvantages of a Discount Pricing Strategy
Pros of a Discount Pricing Strategy
Cons of a Discount Strategy
Everyday Low Pricing (EDLP) Strategy
What is an everyday low pricing strategy?
EDLP is a pricing strategy in which companies promise customers that their prices will always be consistently low. And when we mean ALWAYS LOW, without intermittent sales, one-off discounts or timed promotions. In other words, the low-priced goods will remain low-priced over a long timeframe and sometimes even remain at their original low price as production costs rise.
Everyday low pricing is a pricing strategy where retailers and brands assure consumers that their prices will be consistently low over the long term, as opposed to using sporadic discounts or promotions to attract short-term buyers.
There are several factors that a business must make before deciding if Everyday Low Pricing is the right pricing strategy for them. However, to understand precisely what EDLP is and how it works, it helps to compare it against some other similar pricing strategies.
Advantages and Disadvantages of Everyday Low Pricing Strategy
Pros of an EDLP Strategy
Cons of an EDLP Strategy
Economy Pricing Strategy
What is Economy Pricing?
An economy pricing strategy sets prices at the bare minimum to make a small profit, but the idea is to make the bare minimum as many times possible by selling as much volume of your products as possible. You need to lower your prices and earn a very minimal profit margin per product sold. But in a perfect world, your overall profit will not be decreased due to high sales volume.
Because of the relation to sales volume, economy pricing is also sometimes referred to as volume-based pricing.
In other words, the principle behind economy pricing is straightforward– an economy pricing strategy involves selling a high volume of goods at a low price.
The purpose of the strategy is to ensure a healthy cash flow and reliable income stream by appealing to large numbers of customers to make a purchase based upon your product’s affordability.
Economy pricing usually only works sustainably over the long term when your business has lower overheads and costs than your competitors. That low-cost base allows you to sell at discount prices to gain a high market share.
Advantages and Disadvantages of Economy Strategy
Pros of an Economy Pricing Strategy
Cons of an Economy Pricing Strategy
Pricing Strategies for Different Industries
Pricing Strategies in the Manufacturing Industry
Global manufacturing companies are arguably facing a more challenging set of conditions than in other era in their collective histories. The prices of raw materials—including zinc, lithium, iron, copper, steel, lumber, and plastics—are on unprecedented rises, while investment in plant capacity is struggling to keep pace with the demand of growing global markets. Simultaneously, distribution and shipping costs have accelerated in recent times, meaning that manufacturers cannot simply shift production abroad where labor costs are less as a money-saving method. In that light, we are going to examine manufacturing pricing strategies in-depth in this article.
In determining your manufacturing company’s best-selling price, think of the price as made from five key components.
The five elements in your price to create your 5-layered manufacturing pricing cake are:
- Your Customers: Your customers’ ‘willingness to pay’ is a crucial factor in determining the ideal price to sell your products.
- Direct costs – Direct costs are the cost of the material and labor costs required to make your products. You have these costs for new products only when you manufacture them.
- Other Manufacturing overheads – depreciation of machinery, factory repairs, janitorial services etc. Continue even when you are not making your products.
- Non-manufacturing overheads – selling, marketing, salaries, administration etc. are ongoing even if your production plant takes a break or ceases to operate.
- Profit Margin – Profit margin is the percentage of sales that a manufacturing business retains after all expenses have been deducted.
Considering the above components in price setting in the manufacturing industry, the overwhelmingly popular strategy used in the industry is the cost-plus pricing strategy, although value-based pricing is increasingly becoming attractive to manufacturers.
Popular pricing strategies used in the manufacturing industry include:
- Competitive Pricing Strategy – A competitive pricing strategy is a pricing method that involves setting the prices of your businesses’ products in relation to the prices of your competitors.
- Cost-Plus Pricing Strategy – Cost-plus pricing is sometimes also referred to as markup pricing and is a favorite in the manufacturing industry. It’s a pricing strategy whereby a fixed percentage or fixed amount is added on top of the production of a single unit. The resulting number is the selling price of your product.
- “Equipment As a Service” Pricing – A hot and trending pricing strategy in the manufacturing industry is Equipment as a Service (EaaS). What this means is that traditional manufacturing industries are now introducing pricing models for services (liters of clean water cleaned by your water filters, cost per flying hour on your jet engines etc.). In other words, even in manufacturing, pricing beginning is turn towards ‘pay-per-use’ models. This is in direct comparison to traditional cost-plus product pricing models in order to generate more value from your manufactured products.
- Supersession Pricing – Supersession Pricing is a form of pricing whereby your once-premium priced products are replaced by a new model (and therefore sold at a higher price and literally ‘supersede’ older products) to become the new premium-priced product due to seasonality, fashion, or better functionality. The older products may decrease in price, although it is not always the case. The auto spare parts industry is a prime example of one using supersession pricing. Due to engineering changes in new car models, old spare parts can become obsolete and need to be replaced by new, upgraded and frequently, higher-priced versions.
- Value-based Pricing – Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of a product or service —also known as customers’ willingness to pay—to determine the price it will charge. Because it revolves around customers’ priorities, it’s occasionally called customer-focused pricing but that tends to over-simplify and underestimate the value of your products value to you as a manufacturing business.
Pricing Strategies in the Retail Industry
Over the last few years, a myriad of reasons have popped up increasing the rate of change of what we used to call ‘normal’ in the retail industry. Whether it is due to CoVID-19, rampant inflation, increasing fuel and distribution costs or an increasing drift to online shopping, shifting consumer buying patterns means it is now more important than ever to consider your retail industry pricing strategies.
It is critical to acknowledge that no single perfect pricing strategy exists for any company. Changes in the market conditions and competition require flexibility and adaptability.
What’s more, being flexible and able to pivot and switch between pricing strategies is becoming just as important as the pricing strategy itself. As shifting market forces are moving faster than ever before, you may need to use different strategies on different lines of your products. Going back to our sporting goods retailer example, you might use a competitive pricing strategy on your Adidas shoes (as competitors in your market all have the same models for sale) but you may choose a value-based pricing strategy on the exclusive Nike shoe models that you have imported from Europe. After all, as Warren Buffet once famously said; “Price is what you pay. Value is what you get.”
A prosperous retailer is usually prepared to adjust their pricing strategy over time in pursuit of competitive advantage and profitability.
The most common pricing strategies employed in the retail industry include;
- Competitive Pricing Strategy – A competitive pricing strategy is a pricing method that involves setting the prices of your businesses’ products in relation to the prices of your competitors.
- Discount Pricing Strategy – Discount pricing is a strategy where you mark down the prices of your products with the goal of increasing customer traffic, clearing old and outdated inventory from your shelves, or simply increasing sales volume.
- Everyday Low Pricing Strategy – Or ELDP (as it is commonly referred to) is a pricing strategy in which companies promise their customers consistently low prices on their products each and every day without having to wait for sales events.
Chemical Industry Pricing Strategies
Over the past few years, the chemical industry has been hit by a seemingly never-ending barrage of challenges and changes that have forced companies to adapt and pivot to survive. No sooner had plants reopened after pandemic-enforced shutdowns and restrictions on movement been lifted, than demand was spiking amidst raw material shortages, supply-chain bottlenecks, and shipping delays. Not to mention the eye-watering cost increases across the board, with raw material prices increasing 44% across commodity classes, mostly in chemicals.
As business strategies are set, the task at hand turns to developing a strategic pricing plan to enable the achievement of overall business goals. Chemical pricing strategies should be used to achieve margin targets that support earnings goals will be a priority. Some factors to consider on the strategy and resulting tactics:
- Commodity products versus specialty products: Most businesses have a balance. Each end of the spectrum implies different strategies and approaches. Most commodity product areas require high focus on underlying costs and frequent price changes to enable nimble actions to achieve margin goals. In the specialty area, recognition of differential value is critical, with pricing reflecting those differences. Rapid price adjustments are infrequent here, but significant changes in underlying costs (particularly logistics) can drive surcharges or more frequent price actions.
- Seeing the end in mind: With goals and forecasts in hand, what price movements will be expected during the course of the year, and at what times and for what products and services? Don’t leave this to chance – have a plan for price adjustment for the full year ahead to be proactive to meet earnings expectations. Pricing remains the highest lever available to support earnings goals.
- Expecting the unexpected: The last 18 months have taught us that our plans must be flexible and adaptable. Review progress on pricing and margin performance frequently and be prepared to make course corrections to the initial plan to stay on target for margin and earnings goals. Nothing is certain!
- Leveraging data and technology: It’s a lot easier to stay on top of current and projected performance when historical and forecast data on pricing and sales are leveraged through analytics as well as AI/ML based pricing software. Companies with these capabilities will be more nimble on price adjustments, more effective in empowering sales personnel with accurate pricing targets and guardrails, and more successful in achieving margin and earnings goals.
Therefore, your pricing strategy will become less like guesswork and more of a science. Setting earnings targets based on supply, demand, the ability to source raw materials and projection on prices to protect margins will be your pathway to a successful pricing strategy. However, ideally, those numbers will be specific to your business and not reacting to the price movements of others.
What is most important to the potential 2022 success of your chemical company’s pricing strategy is that you have one and communicated clearly to all relevant stakeholders in the organization.
Become more focused, flexible, proactive, and agile in your pricing reactions.
Remember, pricing is not a ‘set and forget.’ Setting data-driven and innovative pricing strategies to increase profit will require constant attention and updating as the rate of change and uncertainty is not expected to stagnate in the year ahead.
Pricing Strategies in the Airline Industry
As an airline trying to improve yields in the ultra-competitive Airline Industry, you face unique challenges that other industries don’t need to be concerned about. Your business is currently facing more disruptions than other industries as you continue to be affected by COVID-19, pilot shortages, and the rising cost of fuel. In times like these, an airline’s pricing strategy is critical to ongoing success.
Why Pricing is Different for Airlines
Airlines are unique in their approach to pricing due to;
- Fare Price Constraints – Subject to legacy IT constraints, airlines are limited to offering twenty-six fares per itinerary. Within these fares an airline will have various cabins (First Class, Business, Economy, etc.) advance purchase options (30-day, 7-day, etc) and itinerary dependencies (one-way, round-trip, connecting).
- Customers – Generally, airline customers fall into two categories, leisure and business. While the leisure traveler is cost-conscious, the business traveler is convenience-focused. For the network carrier, the leisure traveler helps cover costs while the business traveler is critical for profitability. Leisure travelers are the lifeblood of the ULCC.
- Loyalty Programs – For many carriers, the airline loyalty program is more valuable than the carrier itself. To generate cash during COVID, carriers collateralized loyalty programs. Most network carriers are members of one of the three airline alliances (Sky Team, Star Alliance and OneWorld). Each allows for members’ points sharing. Savvy airlines are now pricing loyalty awards and redemptions based on the load factor of the flight. Depending upon the award or redemption value, a seat can be sold or redeemed for a points-premium or discount compared to the same seat sold for cash.
- Ancillaries – Because they are ultra-competitive with their fares, the majority of the ULCC’s revenue and profit come from the sale of bags, assisted check-in, additional legroom, etc. Conversely, the network carrier, dependent upon the business traveler for profitability, will include amenities in their private fare.
However, there may be different pricing strategies that airlines use to reach that end profit goal including;
- Lowest Fare Strategy – Ryanair is noteworthy for their low fares. They have distinguished themselves as the lowest price provider in the markets they compete in. Their strategy requires the lowest cost of operations and a relentless determination to keep operating costs at the lowest levels. The business design is based on maximizing the load factor of the flight and then when combined with the upcharges for check-in, bags, beverages, etc., results in a profitable flight.
- Competitive Pricing Strategy – In markets where no single carrier is dominant, a competitive pricing strategy (a pricing method that involves setting the fares in relation to the fares of competitors) is often used. In some cases, a carrier may choose to match another network carrier, while when competing with an ULCC they may choose to add percentage uplift to a ULCC’s fares.
- Penetration Pricing Strategy – Penetration pricing is a pricing strategy that is used by new entrants to a market to gain a significant market share quickly by setting an introductory low fare to entice customers to fly their airline.
- Value-Based Pricing – Value-based pricing is a strategy of setting prices primarily based on a traveler’s perceived value of a product or service —also known as customers’ willingness to pay—to determine the price it will charge. Utilizing shopping data, this is possible to determine.
Pricing Strategies in the Distribution Industry
As a business trying to make it in the ultra-competitive Distribution Industry, you face some unique challenges that other industries don’t need to be concerned about. Your business is currently facing more disruptions than any other industry as you are the critical lynchpin in the heavily disturbed supply chain between manufacturers on the one hand, and retailers on the other. What’s more your transportation overheads are currently priced through the roof, and labor (if you can get it) costs are rising steadily too. No wonder considering or even re-examining your distribution industry pricing strategy will be critical to your ongoing success.
Aim to make logical and scientific data-informed pricing decisions. That is the clear gateway to discovering the precise price optimization points for your distribution business to eliminate margin leakage and maximize your company’s profits.
However, there may be different pricing strategies that you could seek to employ to reach that end profit goal including;
- Competitive Pricing Strategy – A competitive pricing strategy (a pricing method that involves setting the prices of your products in relation to the prices of your competitors) is often referred to as a ‘Manufacturer-Aligned Pricing Strategy’ within the distribution sectors. Distributors will often all sell the same product from the same manufacturer using the same manufacturer’s recommended price (often known as the Manufacturer List Price).
- Cost-Plus Pricing Strategy – Cost-plus pricing is sometimes also referred to as ‘markup pricing’ Cost-plus is a pricing strategy whereby a fixed percentage or fixed amount is added on top of the manufacturing and distribution costs of a single unit, resulting in the selling price of your specific product/s.
- Economy Pricing Strategy – An economy pricing strategy sets your prices as low as possible to make a small profit on each item. The concept is based on selling as many units as possible of your product/s as possible. Being based on volume selling, this type of pricing strategy is also commonly referred to as ‘volume-based’ pricing strategy.
- Penetration Pricing Strategy – Penetration pricing is a pricing strategy that is used by new companies to gain a significant market share quickly by setting an introductory low price to entice customers to buy their products. Established companies also use the strategy when launching new products to build market share.
- Value-based Pricing – Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of a product or service —also known as customers’ willingness to pay—to determine the price it will charge. Because it revolves around customers’ priorities, it’s occasionally called customer-focused pricing. However, a great value-based pricing strategy should consider the value you place on your products as a distributor.
Pricing Strategies in the Food & Beverage Industry
Food and beverage manufacturers have watched in horror over the last 2 years while your input prices have skyrocketed and placed pressure on already constrained margins. What’s more, it is not exclusively food and beverage ingredient prices that are swollen to record levels. Record fuel prices and labor shortages are also an enormous part of the margin compression puzzle. Roll in other factors into the pricing equation like meat prices undergoing rapid rises as the cost for grain to feed animals climbs, and beverage makers are facing a jump in packaging expenses for plastics and aluminum. In this uncertain climate, re-examining your food industry pricing strategy will be critical to your ongoing business success.
Your company’s specific food and beverage pricing strategy should be unique to your food and beverage business and should reflect your company’s preferences, strengths, and weaknesses, and with that, naturally consider the overall objectives that your business is trying to achieve. 9 times out 10 that will be about maximizing profit but remember there are other business outcomes you might need to consider in the short term.
Even if your short-term business objective is more about raising production volume, you’ll still need to be analyzing and tracking the visibility of all the cost components to ensure you are still making as much profit as possible along the way.
There are a range of different food and beverage pricing strategies that you can consider reach your desired business outcome;
- Dynamic Pricing Strategy – Dynamic Pricing goes by many names such as real-time pricing, time-based-pricing, surge-pricing, and demand pricing. It is, by definition, a pricing strategy where a company sets flexible and variable prices on its food and beverage products depending on any number of standalone or competing factors such as demand, supply chain, competition, location, time frame, and other market conditions.
- Discount Pricing Strategy – Discount pricing (or sometimes referred to as ‘Trade Promotion’ within the food and beverage industry) is a type of pricing strategy where you mark down the prices of your products. The goal of a discount pricing strategy in food and beverage can be to win new contracts or as bargaining chip in contract negotiation, clear ageing food and beverage items from your warehouse shelves, or simply increase sales volume. Most businesses will also use alternate pricing strategies, so they are not required to depend on discount pricing for extended periods.
- Competitive Pricing Strategy – A competitive pricing strategy (a pricing method that involves setting the prices of your products in relation to the prices of your competitors) is often used in the food and beverage sector to win new deals and contracts.
- Cost-Plus Pricing Strategy – Cost-plus pricing is sometimes also referred to as ‘markup pricing’ Cost-plus is a pricing strategy whereby a fixed percentage or fixed amount is added on top of the production costs of a single food and beverage item, resulting in the selling price of your specific product/s.
- Economy Pricing Strategy – The objective of an economy pricing strategy is to set your prices as low as possible, whilst still being able to make a small profit on each item.
Pricing Strategies Examples
Pepsi vs Coca Cola – The Most Famous Competitive Pricing Strategy
Arguably the famous head-to-head between two companies employing competitive pricing strategy is Pepsi vs Coca-Cola.
There are differences between the two companies (in particular, Pepsi is more diversified in terms of having a lot more offerings in their product line other than drinks). However, the two companies go directly head-to-head with their Cola drinks products.
While at any given point in time the two companies can vary in price, looking in general over the last decade or more, Pepsi is slightly cheaper than Coca Cola over the long term.
Recently, how it has worked is that Pepsi sets prices low and Coca-Cola has been the price follower. It is a classic case of competitive pricing and value branding.
That is reflected in the two companies’ most recent full year results with Pepsi generating more income in 2021, while Coca-Cola is the more valuable brand name (Number 7 worldwide in 2021 compared to Pepsi’s number 36).
Walmart Pricing Strategy: An Everyday Low Pricing Example
Perhaps most famous of all the business that choose to use EDLP strategy is the monster North American-based retailer, Walmart.
Walmart offers storewide lowest prices to customers throughout all seasons of the year across more than 10 000 bricks-and-mortar stores worldwide (plus its online retail arm). Using an EDLP strategy, Walmart’s customers are empowered to trust the retailer, purchase more (and more often) and achieve high consumer satisfaction levels.
It’s worthwhile to note that high customer satisfaction and increased sales and profits tend to go hand-in-hand. The EDLP strategy creates a win-win situation for the Walmart company and its customers while consistently maintaining a strong brand reputation.
With its EDLP strategy, Walmart regularly beats out competitors across the industry. Even if the company does not usually boast a premium product selection, the everyday low pricing strategy keeps on attracting customers, leading to higher revenues and frustration in their competitors.
Singapore Airlines Pricing Strategy Example: An Economy Pricing Case Study
Well-known among long-haul travelers to Asia, Australia and New Zealand, Singapore Airlines has long held a top position among premium-branded airlines. However, to compete with low-cost air carriers that have significantly influenced consumer behavior for cheap price bargains among leisure travelers and increasingly among business travelers, Singapore Airlines also jumped on the economy pricing strategy bandwagon too.
As part of their overall brand portfolio strategy, in the last 10 years, Singapore Airlines launched their own two carriers for regional and medium to long-haul routes to compete on price. Silk Air flies under the Singapore Airlines banner and is a regional, medium-service carrier serving the Asian region around Singapore.
Also in the Singapore Airlines stable is Scoot, its medium to long-haul, low-cost airline launched in 2012, and merged with the other low-cost carrier Tiger Airways in 2017.
Rather than cannibalize each other, all three airlines under the Singapore Airlines operate separate routes and feed traffic between them and share many connecting passengers.
By minimizing its costs to serve with its two cheaper alternatives, Singapore Airlines is taking advantage of not only the premium traveler market but also the high volume/low-cost section of travelers: a classic use of an economy pricing strategy.
The aim of the strategy is to avoid dilution of the core premium brand, Singapore Airlines, and make sure all three brands are well-positioned for their distinct market segments.
If this use of economy pricing strategy seems familiar, frequent flyers may be aware of a similar business model between Virgin Atlantic and Virgin America in the USA (until it was absorbed into Alsaka Airlines in 2019), Lufthansa and Eurowings in Europe, or even Qantas and Jetstar throughout Australia, New Zealand, and Asia.
As part of their overall brand portfolio strategy, in the last 10 years, Singapore Airlines launched their own two carriers for regional and medium to long-haul routes to compete on price. Silk Air flies under the Singapore Airlines banner and is a regional, medium-service carrier serving the Asian region around Singapore.
Amazon Pricing Strategy – A Famous Dynamic Pricing Strategy Example
Amazon is the world’s largest e-commerce business with its 2020 sales in the United States alone amounting to almost $386 billion. And Amazon didn’t arrive at the imposing sales figure by good luck or accident – it is dynamic pricing strategy in action.
Amazon’s pricing strategy revolves around offering the most competitive prices to shoppers. Which means that the prices are not constant and can change even multiple times a day. That’s why dynamic pricing is often also referred to as ‘repricing.’ The low prices on offer at Amazon ensure brand loyalty and retention and make it profitable for sellers using the Amazon platform to sell their products and build a customer base.
Amazon’s dynamic price change factors can be divided between variables which refer to market and customer behaviors;
- Demand volume – Amazon’s price changes are based on expected market demand for products. Additionally, Amazon factors in whether the demand is seasonal or predictable, and why the user will make their purchase: need, peer pressure, fashion etc.
- Stock volume – As always if demand is outstripping supply, the higher the product. On Amazon, if stock units are already low, and continued demand is anticipated, prices will likely increase.
- Product visits: Repetition and Frequency – Using cookies to track users, the Amazon sales platform knows how many times a shopper may have viewed the same product, the time of day they viewed it and if they browse related products at the same time. Based on that data a price is generated for the potential buyer and additional products may be offered to increase the average value of each transaction.
- Day and time of purchase – The purchase of certain products increases on certain days of the week or even particular times of the day, just like airline seats or hotel rooms. (For example – Airbnb users – have you noticed you regularly receive the latest offers on Sunday mornings?) Usually, these are the times when the user has more relaxation time to browse, compare, and decide. Amazon usually implements defined price changes at these times.
The secrets behind the algorithms that drive Amazon’s dynamic pricing strategy are closely guarded. Suffice to say that it is pricing software that makes its repricing possible and provides the data-driven insights for this task, as with many other competitive price analyses.
Your company might not be as big as Amazon, but the same rules apply if you are looking to use dynamic pricing and reprice your products to win business. Without data and pricing software to empower it, the kind of proactive repricing that is used in true dynamic pricing is not feasible.
Volkswagen Pricing Strategy Example Real: A Value-Based Pricing Case Study
Let’s look at a multi-brand company like Volkswagen. They have multiple brands such as Škoda, VW and Audi. However, even if the production cost of each of these brands were to be similar, the final price ranges for each is very different.
Škoda’s range of cars, for example, would be one of the more affordable, VW in the middle and Audi is by far the most expensive. It is the “brand” surcharge and not the price difference across comparable models that account for the price changes.
The same can be said for travel. What’s it worth to you to arrive at your destination at a closer airport and convenient time in a comfortable seat with extra leg room? Well, the difference is based on the value you place on location and comfort. If getting to your destination is the most important factor, then the perceived value of a Business of First-Class seat would matter less.
Netflix Pricing Strategy – Penetration Pricing in Action
In contrast, a penetration pricing strategy means you offer a low price to attract many customers. Of all examples, the Netflix Pricing Strategy is the most well-known of penetration pricing examples. Netflix made classic use of the strategy, by rapidly penetrating the streaming market with low subscription costs and building up a loyal customer base. The high volume of Netflix subscription uptake compensated for the thin subscription margins. By winning many customers early in the battle for subscription streaming uptakes, Netflix found themselves better positioned to maximize customer lifetime value from future sales and upsells, and gradually increased subscription prices over time.
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What’s more, Netflix also operates a type of ‘packaging penetration’ to break their streaming service into the consciousness of new users and customers. What that means is that Netflix is often bundled into plans for free or discounted rates with internet providers, phone plans, or even in combination with other streaming services.
The most important part of this type of ‘packaging penetration’ to increase customers’ brand awareness is to either directly or indirectly communicate that the free or discounted offer is temporary and will increase in the future. This kind of communication and overall transparency is critical to establishing customer trust and using the penetration strategy again for more of your products and services.
Back to The Top of This Section Back to Table of ContentsHow to Create an Amazing Pricing Strategy
8 Factors to Consider as You Plan Your Pricing Strategy
Make Pricing a Priority in Your Organization
The first step to pinpointing your ideal pricing strategy is to establish your pricing objectives and make them a top priority across your organization. The strategy you choose can make or break your business, so, you require buy-in from your management team to regularly emphasize the importance of pricing for the entire organization. Broaden the internal scope of your pricing strategy across your entire business.Set Measurable Benchmarks with a Clear Goal in Mind
A fruitful pricing strategy implementation will require quantifiable goals that lead to an overall explicit target.
Identify your main pricing pain points and prioritize them in a hierarchical wish-list.
To assist your business to achieve this outcome, taking a differentiated perspective on pricing and identifying which pricing topics impact your organization’s bottom line will be key.
A price waterfall method which clarifies the steps to take for price optimization is a great scientific and methodical pathway to help you achieve your goals.
Select a Pricing Manager or Executive (Sponsor) to Drive Change
The final say on pricing strategy should live at the executive team level and those managers will drive the culture change and bring the pricing strategy to fruition across the entire company. This is the only way to ensure a successful roll-out, with all key stakeholders included as part of the discussion.
Some organizations will keep the CEO involved as part of the pricing strategy implementation process, as they can perform the role of the ‘tiebreaker’ in many of the company-wide decisions being made across departments, and drive pricing excellence.
Clearly Define Responsibilities & Embed Tech
To have a successful pricing strategy, you will need to give your pricing team the right tools to do the work. Your pricing team should be skilled in the use of data analysis (e.g., sales and transaction, customer, and product data) to develop the right fact base for your strategy.
Finding patterns and objective insights to support decision-making is vital and supplying your team with quality pricing software is a critical part of the puzzle. This type of transparent technology reinforces consistency in your pricing and allows for your pricing logic to be clearly defendable and explainable by your sales team when they are communicating with prospects.
Train Your Staff on the Strategy
Involving your sales at an early stage of your pricing strategy implementation project, training them, and clearly illustrating the benefits of your new strategy is important. To be able to explain your pricing to the customers, your sales team will need to comprehend and ‘buy into’ your pricing strategy to be able to explain it effectively and enthusiastically to your customers.
Define Pricing KPIs and Track Results
For most businesses, tracking defined pricing Key Performance Indicators (KPIs) is now easier than ever before. Choose KPIs that make the most sense to your company’s business model, not based on what your competitors are doing. Although it may depend on the type of objective to be measured, the development of innovative technology now allows automatic tracking with less risk, while freeing up human analysis time for the portion that still needs it.
Thanks to data analytics, it is now possible to process vast amounts of data regarding sales, prices, users, trends, processes, etc., which you can then cross-reference as you see fit to find relationships between specific areas or segments. Tracking the KPI results and providing internal visibility is key to providing your sales team with the confidence to challenge your customers on price.
Communicate Results Internally
Implementing a new strategy of any kind can be time consuming and open to different interpretation by different sectors or departments of your organization. Pricing and a pricing strategy is more complex than most strategy implementations, so we suggest taking the time to communicate progress across your entire business after you go live.
However, consider the level of transparency that each department needs to know. For example, your sales team don’t need to know the cost price of your products. If they do know, they may be tempted to sell too close to the cost price to get the sale. On the other hand, give them a minimum to maximum sale price corridor to play with. Your minimum sale price could already provide you with a significant profit margin.
Start Small but Aim Big
While you will want a pricing strategy for the long term, don’t underestimate the importance of beginning with a small victory to help win people over and align your business objectives.
Starting with a quick win is often one of the best places to start with a pricing strategy.
Choose something that can quickly or immediately address one or more key pricing pain points. Many businesses have holes in their pricing strategy just begging to be repaired—such as profit margin leaks, missed upsell opportunities or underpriced products.
How to Track the Success of Your Pricing Strategy
Top Pricing KPIs to Measure Success
To kick-off, we have identified when it comes to pricing that there are two types of KPIs – those that everyone follows – let’s call those ‘KPI Candidates’ for the sake of this article – and ‘Pure Pricing KPIs’ – that are discovered and drilled into to produce deeper insights and go after your company’s unique set of business objectives and enable a pathway to value through good pricing governance.
KPI Candidates
Here below is a non-exhaustive list of ‘KPI Candidates’ and what are simply called ‘pricing metrics’ or ‘KPIs’ in some pricing circles (the list is an endless one that depends on your company’s business goals and the industry your organization operates in) that you may choose to measure.
- Gross Profit Margin – Gross Profit Margin is almost every company’s go-to-KPI. It calculates how much money is left from the revenue after removing the cost of goods sold and expresses it as a percentage of revenue. This shows how profitable your products are.
- Total Revenue – Total revenue tells you exactly how much money your business generates before expenses. In other words, it’s the total amount of income your company brings in from selling your products/services.
- Won Opportunities to lost Opportunities Ratio – It can be calculated by dividing the number of opportunities your business has won by the number of opportunities your company has lost.
- Number of Deals – Total number of new deals that your company has welcomed over the last period.
- Average Deal Size – The total revenue achieved in a set period (e.g., a month, a quarter, a year) divided by the number of closed-won opportunities during that same period.
- Number of Accounts – How many accounts (customers) your business has on its books.
- Number of Products/Services – How many products or services your business offers to its clients.
- Number of Accounts per Salesperson – How many accounts each of your salespeople services.
- Sales Per Person – Sales per person relates the revenues of a business to its headcount. It is often tracked as it addresses the process efficiency of your business, rather than the Salespersons’ efficiency.
- Accounts with a positive or negative margin – Number of accounts that either made (positive margin) or lost (negative margin) your company money.
- Products with a positive or negative margin – Your products that either made (positive margin) or lost (negative margin) your company money.
- Number of Transactions with a positive or negative margin – Your deals that either made (positive margin) or lost (negative margin) your company money.
- And many, many more besides
That’s Great – But What Are the New KPIs I Can See Here?
Only when using pricing software and the resulting price waterfall can we see the three variables we refer to as ‘Pure KPIs’:
- List realization is about decreasing price leakage, increasing your ‘pocket price’ (after all discounts have been applied to your products) and hence keeping a higher proportion of the list price that flows directly to your company’s profit. List realization can come in the form of a higher list price, fewer discounts, additional charges or a decrease in services.
- Leakage – Unfortunately, in many B2B and B2C sales scenarios, a business is unable to get the customer to pay the full list price. Due to sales pressures, competitive offerings and other macro-economic factors, the prices are marked down. Different incentives applied to the list price are referred to as leakage, or price leakage and sometimes they do not work as planned and discounting can backfire, which is why it is critical for Leakage to be measured as a KPI.
- Discipline – Relying on good pricing governance, your pricing team can track both the good outliers (those customers you have been paying above your asking price) and the bad outliers (those clients you have been paying below your asking price). With pricing software, you are now able to identify both ends of the value spectrum. By setting up new approvals and workflows in your pricing software means you can now do as much as possible to reduce those bad outliers in your customer and sales transactions and leave less money on the table when closing deals to become a more profitable organization.
Implementing Your Pricing Strategy for Maximum Results
Now that you know everything you could want to know about the different pricing strategies available to you, you should have a better idea of which strategies or combinations are best for your business goals.
You might have noticed that some strategies don’t require a complex system to put in place, especially if you’re at the beginning of your pricing journey. However, to get the most out of most pricing strategies, especially if you sell multiple products across several regions, you’ll need two things;
- a strategy partner to help you install the strategy in a way that scales
- pricing software to help maximize opportunities that will enable you to reach your goals.
Pricing software can help you to analyze your pricing strategies and measure the key performance indicators, optimize your pricing, and even enhance your strategy with the use of AI.
If you fall into the category of needing a strategy partner, check out our partner showcase, with pricing software vendor agnostic firms, to choose the one that’s right for you.
Or if you feel like you have a good handle of implementing the strategy but want to maximize its potential, then you can check out this article on how to choose the right software provider for your specific needs.
On the other hand, if you know who we are and what we do and feel like we’d be the right fit for you, then reach out to a representative today to discuss how we can partner together to implement your pricing strategy for better results.
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