Pricing strategies for marketing

About Pricing Strategy:

Most entrepreneurs never think too much about their pricing strategy. They might take a peek at
a similar product from a competitor, adjust the price by a couple dollars, and joila – the product
is ready for sale.

But in the classic business world, pricing was an art form. Pricing gurus at major companies
obsessed over finding the perfect price to maximize profit from a given product or service.

In other words, that Gillette razor is priced the way it is for a reason. Not because it makes the
most sense for the consumer, but because it maximizes shareholder value.

So, keep in mind that a pricing conversation is really about how you will get the most value from
the product or service you decide to sell. Thankfully, independent business owners don’t have
shareholders, so we can also take into account things like doing what’s right for the customer.

Price Elasticity of Demand:

While we’re not crazy about business school terms, we wouldn’t be doing our jobs if we skipped
over price elasticity of demand in this conversation about pricing.

All you really need to know about price elasticity is this: if all else remains equal, demand for
your product or service will decrease with an increase in price.

As an example, imagine this: you can sell 100 units of a $100 dollar product to your current
audience. If you increase the price to $105, you are able to sell 95 units. Your costs are $20 per
unit. Should you sell at $105 or $100?

The answer: $105. Why? Because you’ll earn $8,075 profit as compared to $8,000 at $100 per
unit.

Great. That’s all the theory you need to know. When price increases, demand goes down. There
is an optimal pricing level you can reach to make the most money from your thing. Capiche?

8 Pricing Strategies to Help You Price Your Digital or

Physical Product, Service, or Workshop:
Elasticity is great in theory, but it doesn’t tell us anything about where to start with your pricing
strategy. Instead, let’s talk about some of the most common methods for pricing:

1. Cost-plus Pricing – Cost-plus pricing is an effective way to build a profit margin directly
into the price of your product or service. It’s just what it sounds like: you calculate the
cost to deliver a product or service (cost) and then add a 10% margin, for example (plus).
 Cost-plus is straightforward for the entrepreneur, but doesn’t take into account the
mindset of the customer. You may also leave money on the table by focusing on cost.
2. Competitive Pricing – Competitive pricing focuses neither on costs or customers.
Instead, competitive pricing is all about the existing market for your product or service.
In competitive pricing, your job is to research the pricing strategies of many competitors
to establish a pricing range. The range should have a high end and a low end, and the
price of your product or service should fall somewhere between those bookends so that it
is competitive.
3. Luxury Pricing – Luxury pricing is a classic strategy used by brands like Louis Vuitton,
Mercedes, and Rolex. The price has more to do with the aspirations and image of the
person making the purchase than anything else. By buying a product or service at a
luxury price, we are buying our way into a club. That club is a representation of how we
want others to see us in the world.
4. Rate-based Pricing – Also known as hourly pricing. Freelancers, consultants, and
coaches most commonly use rate-based pricing for their services. The downside is that
you have to trade time for money. The upside is that you’re guaranteed to get paid for
every hour of work. Clients are sometimes hesitant about hourly pricing because they fear
the incentive is to work more hours to make more money as opposed to being efficient.
5. Project-based Pricing – Project-based pricing is a flat fee arrangement agreed to at the
outset of a project. The entrepreneur may make an estimate of how many hours she thinks
the project will take and then price accordingly. Or, she may combine this strategy with
some of the upcoming pricing strategies to charge more. The incentive is to finish the
work quickly and with high quality. For this to work well, the scope of work should be
well defined up front.
6. Value-based Pricing – Value-based pricing takes into account two key questions: 1) Can
they pay?; 2) Will they pay? They are the customers, which makes value-based pricing a
customer-centered approach to pricing. The determinant factor in this pricing strategy is
how much your customers are willing to pay, rather than how much a product or service
costs to produce or deliver. There is huge upside for the entrepreneur when value-based
pricing is used well.
7. Tiered Pricing – A tiered pricing strategy gives consumers the option of choosing
between different versions of the same product or service. For example, imagine
considering a single gear bike for $299, a three-gear bike for $399, and a seven-gear bike
for $499. A tiered pricing strategy turns a yes or no decision into an either or decision for
the potential customer. It also provides a price anchor (as a consumer, I can convince
myself I am being frugal by spending $299 on the single gear bike as compared to $499
on the seven-gear).
8. Pay What You Want Pricing – Also known as a donation-based pricing strategy, pay
what you want pricing allows the customer to make the decision on how much the
product or service is worth to her. Pay what you want allows you to test market demand
without knowing the price elasticity for your thing. When combined with a “suggested
price,” a pay what you want pricing strategy can sometimes lead to more profit than a set
price. As you read through the eight pricing strategies, you might have noticed
something… These pricing strategies are not mutually exclusive. And, in fact, they are
not.

Many of the pricing strategies can be used together to create the best outcome for your business
and your customers.
Pricing Strategies for Digital Products, Physical Products,
Services, and Live Events
Now that you have an arsenal of pricing options available to you, let’s get into the specifics of
how to apply them.

Digital Products:

For digital products, pricing strategies range widely. From $.99 books on Amazon to $2,000
courses, digital products truly run the gamut. Your price should be a reflection of your industry,
your customers, and the value provided through your product or service.

Pricing strategies to consider: Competitive Pricing, Value-based Pricing, Tiered Pricing, Pay-
What-You-Want Pricing

Physical Products:

Unlike digital products, there are hard costs (other than time and energy) to producing a physicial
good. While services like drop shipping, print-on-demand, and 3D printing are helping drive
costs down, the physical product world is still very unique. It’s important to keep in mind unit
economics when it comes to pricing physical products: if you lose money selling one product,
you’ll lose more money with every successive sale.

Pricing strategies to consider: Cost-Plus Pricing, Competitive Pricing, Luxury Pricing, Value-
based Pricing, and Tiered Pricing

Services:

Pricing services can be challenging, as so much of the value comes from your personal ability to
deliver. Customers like to see things like testimonials, portfolios, and case studies of your work
before they’re even willing to consider hiring you. While price is important, make sure you don’t
disqualify yourself by keeping necessary information from your customers. Additionally,
“productizing” your services can be a great way to help customers understand exactly what you
can do for them.

Pricing strategies to consider: Rate-Based Pricing, Project-Based Pricing, Value-Based Pricing,

and Tiered Pricing

Live Events:

Like services, workshops and live events are highly dependent on the speakers or workshop
leaders to deliver value. The experience of the attendee can vary greatly from session to session.
Setting clear expectations up front helps frame the value of the event so that a potential attendee
is ready to consider the price you’ve set for the ticket.
Pricing strategies to consider: Competitive Pricing, Value-Based Pricing, Tiered Pricing, and
Pay-What-You-Want Pricing

Pricing Strategy Matters, But a Great Product or Service

Matters More
Hopefully this gives you a great overview of the pricing strategies available to you, and the ways
you can use them to help price different kinds of products and services.

But if you take one thing away from this podcast episode and article, let it be this: no matter how
well you price your product or service, nothing can make up for the importance of having a truly
great product or service.