What is a pricing strategy?

How do you decide on the right price for your product or service? A great pricing strategy strikes a balance that covers your production costs, stays competitive with the market and ensures that your customers feel they’re getting a good value. In turn, this can influence buying behavior and boost financial performance.

Pricing strategies can help businesses of all sizes remain competitive and optimize profits. Because each business has unique goals, costs and market conditions, understanding different pricing strategies can help you develop a plan that fuels your success. 

Use this guide to learn about some of the most effective pricing strategies, why they’re important and how to build one for your business.

What you’ll learn:

• A robust pricing strategy can help create a strong foundation for your business.

• No two businesses are the same, and pricing strategies should be tailored to your unique goals and market.

• Pricing strategies are best evaluated and adjusted regularly as market conditions and customer expectations evolve.

• Pricing decisions typically account for key factors like costs, competition and perceived value.

Having a pricing strategy is important because a well-planned approach can help businesses:

• Maximize profits

• Increase revenue 

• Strengthen brand positioning

• Develop a competitive edge 

One of the first things consumers check when shopping is the price of a product, and it can make or break a sale. A price point that’s too low may cast doubt on the quality of your product (and compromise your earnings). At the same time, a price point that’s too high may deter consumers. 

Ultimately, a thoughtful pricing strategy allows businesses to align their pricing with their goals, market conditions and customers.

There are a variety of pricing strategies to consider for your business. Here are five options that highlight different ways to set prices so you’ll attract customers and achieve your profitability goals.

Penetration pricing is when a company enters the market with a product or service priced very low to capture market share and attract customers quickly. Once the brand is established, prices typically increase. 

An example would be an internet provider offering new customers a 25% discount for the first year of a two-year contract. This strategy depends on customers staying loyal after the price adjustment or the business lowering costs to remain competitive.

Price skimming refers to setting an innovative product’s price high initially, then lowering it over time as demand shifts and competitors emerge. One example would be virtual reality gaming devices, which were released at very high prices due to their groundbreaking technology. Since their release, prices have gradually declined as more businesses have begun offering them. This strategy helps businesses generate revenue quickly after launch to recoup research and production costs.

Cost-plus pricing is when a business determines the cost of producing a product or service—then adds a percentage to that cost as profit. For example, if it costs a business $40 to produce a product, it might add a 25% markup and sell it for $50.

By accounting for all costs, this approach supports a reliable profit margin on each sale. It is simple to apply, making it popular in industries such as manufacturing and retail. However, it doesn’t account for competitors’ pricing or customer demand, which may result in prices that are either too high or too low.

Competitive pricing models adjust product prices in response to competitors’ prices. It’s why discount store brands of popular food items often increase in price shortly after leading name brands raise their prices. Competitive pricing can help businesses maintain their revenue stream and market share when competition is tough. This strategy requires near-constant monitoring of competitors’ products, which can require significant time and resources, but it’s a popular and effective model.

Value-based pricing is a strategy that sets prices based on the perceived value of a product or service to the customer, rather than solely on costs or competitors’ prices. Businesses often enhance this value through factors such as exceptional customer service, quality or brand reputation, allowing them to charge a premium. This is why a reservation-only wedding dress boutique with personalized service may charge more than a franchise store with limited customer service. While delivering added value may require additional investment, customers are often willing to pay more for a comfortable, positive experience.

Choosing the right pricing strategy requires evaluating your business goals. Whether you’re focused on driving growth, capturing market share, maximizing profits or establishing a premium brand position, each objective shapes how you should price your offerings.

Aligning your pricing approach with these priorities can help support your overall success. The process doesn’t have to be difficult. By following a few best practices and asking the right questions, you can find the approach that fits your business.

Your pricing strategy can be influenced by the cost of making and selling your product or service. Create a list of each expense your business has—including material, labor and overhead costs—and divide them into fixed and variable categories.

• Fixed costs: Fixed costs stay consistent regardless of business operations or sales numbers. They include payments for rent, insurance, loans, software subscriptions and similar expenses. Labor that doesn’t fluctuate, such as a salaried accounting professional, and expenses, like property taxes or software subscriptions, also qualify as fixed costs.

• Variable costs: Variable costs fluctuate based on production levels or product demand. They include expenses directly related to product assembly and individual sales—such as raw materials, hourly wages and shipping costs. Services or expenses—such as credit card processing fees and certain marketing deliverables—may also be variable.

To estimate monthly costs, divide last year’s fixed and variable expenses by 12, then combine them.

To calculate cost per unit, divide total annual expenses by the number of units sold—this gives you a baseline minimum price.

Once you understand your expenses, the next step in pricing your product is deciding on a good profit margin. Your profit margin is the percentage of revenue that exceeds your product’s per-unit cost. If you’re unsure how large your profit margin should be, a good place to start is by researching and comparing the profit margins of other businesses in your industry.

Keep in mind that if your profitability is too low, your business may struggle to sustain itself. If prices are too high and your business is small or new, you may risk alienating consumers or pricing out your target audience. Large, high-end and in-demand brands can usually maintain wider profit margins, but if you own a startup or a smaller business, you may want to align your pricing with industry standards. 

Ensure you differentiate between gross profit and gross margin, as the two provide separate business insights.

Understanding your target audience is imperative for gauging what they may be willing to pay and what they value most in products. Consider comparing products from other companies in your industry to get a sense of the offerings and price ranges competitors offer. These comparisons can help you determine a competitive price range for your products and services and identify unique offerings that other companies provide.

Conducting online or in-person surveys to get real feedback on what people look for when buying—such as affordability, features, convenience or exclusivity—may also inform your pricing strategy. If your consumer prefers exclusivity, for example, you might be able to charge higher prices for your products. If they value affordability, selling cost-effective or bundled items may draw them in.

Every business has unique needs that influence its pricing strategy. What works for a competing business may not necessarily work for yours. Choosing a strategy now doesn’t mean you’re locked into it.

Sometimes your strategy may not achieve its desired results. For instance, you may be seeing fewer purchases and less profit than anticipated. In such instances, consider adjusting your strategy or adopting a new approach. It can take time to find a pricing model that works for you and your business, and even then, your strategy may need to adapt to market trends. 

For example, if you were relying on a price-skimming strategy for an exclusive product but are now being edged out by competitors developing similar products, adopting a value-based pricing strategy by offering first-class customer service or added value may help you maintain profits and regain clientele.

Developing an effective pricing strategy is a necessary process that never truly stops. As markets, consumers and your business change, your strategies will need to adapt too. If you stay focused and flexible, you’ll reap the rewards of a thriving, successful business.

To execute strategic shifts with confidence, it helps to know you have the resources available—start with a Capital One business credit card. The best part? You can see what you’re already pre-approved for before applying—without any impact on your credit scores.