pricing strategy for business plan

The Ultimate Guide to Pricing Strategies & Models

Discover how to properly price your products, services, or events so you can drive both revenue and profit.

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Determine the best pricing strategy for your business with this free calculator and template.

Updated: 08/16/23

Published: 08/16/23

Pricing your products and services can be tough. Set prices too high, and you miss out on valuable sales. Set them too low, and you miss out on valuable revenue.

Thankfully, pricing doesn’t have to be a sacrifice or a shot in the dark. There are dozens of pricing models and strategies that can help you better understand how to set the right prices for your audience and revenue goals.

That’s why we’ve created this guide.

Whether you’re a business beginner or a pricing pro, the tactics and strategies in this guide will get you comfortable with pricing your products. Bookmark this guide for later and use the chapter links to jump around to sections of interest.

Pricing Strategy

Types of pricing strategies, how to create a pricing strategy, pricing models based on industry or business.

Conducting a Pricing Analysis

Pricing Strategy Examples

A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand.

If only pricing was as simple as its definition — there’s a lot that goes into the process.

Pricing strategies account for many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends.

It’s not uncommon for entrepreneurs and business owners to skim over pricing. They often look at the cost of their products (COGS) , consider their competitor’s rates, and tweak their own selling price by a few dollars. While your COGS and competitors are important, they shouldn’t be at the center of your pricing strategy.

The best pricing strategy maximizes your profit and revenue.

Before we talk about pricing strategies, let’s review an important pricing concept that will apply regardless of what strategies you use.

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• Cost-Plus Pricing
• Skimming Strategy
• Value-Based Pricing

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Determine the Best Pricing Strategy For Your Business

Fill out this form to access the free template., price elasticity of demand.

Price elasticity of demand is used to determine how a change in price affects consumer demand.

If consumers still purchase a product despite a price increase (such as cigarettes and fuel) that product is considered inelastic .

On the other hand, elastic products suffer from pricing fluctuations (such as cable TV and movie tickets).

You can calculate price elasticity using the formula:

% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand

The concept of price elasticity helps you understand whether your product or service is sensitive to price fluctuations. Ideally, you want your product to be inelastic — so that demand remains stable if prices do fluctuate.

Cost, Margin, & Markup in Pricing

To choose a pricing strategy, it’s also essential to understand the role of cost, margin, and markup — especially if you’d like your pricing to be cost-based . Let’s dive into the definition for each.

Cost refers to the fees you incur from manufacturing, sourcing, or creating the product you sell. That includes the materials themselves, the cost of labor, the fees paid to suppliers, and even the losses. Cost doesn’t include overhead and operational expenses such as marketing, advertising, maintenance, or bills.

Margin (in this case, gross margin) refers to the amount your business earns after you subtract manufacturing costs.

Markup refers to the additional amount you charge for your product over the production and manufacturing fees.

Now, let’s cover some common pricing strategies. As we do so, it’s important to note that these aren’t necessarily standalone strategies — many can be combined when setting prices for your products and services.

• Competition-Based Pricing
• Dynamic Pricing
• High-Low Pricing
• Penetration Pricing
• Skimming Pricing
• Psychological Pricing
• Geographic Pricing

Now, let's dive into the descriptions of each pricing strategy — many of which are included in the template below — so you can learn about what makes each of them unique.

Discover how much your business can earn using different pricing strategies with HubSpot's free sales pricing calculator so you can choose the best pricing model for your business.

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1. competition-based pricing strategy.

Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate (or going rate ) for a company’s product or service; it doesn’t take into account the cost of their product or consumer demand.

Instead, a competition-based pricing strategy uses the competitors’ prices as a benchmark. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers.

With competition-based pricing , you can price your products slightly below your competition, the same as your competition, or slightly above your competition. For example, if you sold marketing automation software , and your competitors’ prices ranged from $19.99 per month to $39.99 per month, you’d choose a price between those two numbers.

Whichever price you choose, competitive pricing is one way to stay on top of the competition and keep your pricing dynamic.

Competition-Based Pricing Strategy in Marketing

Consumers are primarily looking for the best value which isn’t always the same as the lowest price. Pricing your products and services competitively in the market can put your brand in a better position to win a customer’s business. Competitive pricing works especially well when your business offers something the competition doesn’t — like exceptional customer service, a generous return policy, or access to exclusive loyalty benefits .

2. Cost-Plus Pricing Strategy

A cost-plus pricing strategy focuses solely on the cost of producing your product or service, or your COGS . It’s also known as markup pricing since businesses who use this strategy “markup” their products based on how much they’d like to profit.

To apply the cost-plus method, add a fixed percentage to your product production cost. For example, let’s say you sold shoes. The shoes cost $25 to make, and you want to make a $25 profit on each sale. You’d set a price of $50, which is a markup of 100%.

Cost-plus pricing is typically used by retailers who sell physical products. This strategy isn’t the best fit for service-based or SaaS companies as their products typically offer far greater value than the cost to create them.

Cost-Plus Pricing Strategy in Marketing

Cost-plus pricing works well when the competition is pricing using the same model. It won’t help you attract new customers if your competition is working to acquire customers rather than growing profits. Before executing this strategy, complete a pricing analysis that includes your closest competitors to make sure this strategy will help you meet your goals.

3. Dynamic Pricing Strategy

Dynamic pricing is also known as surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices fluctuate based on market and customer demand.

Hotels, airlines, event venues, and utility companies use dynamic pricing by applying algorithms that consider competitor pricing, demand, and other factors. These algorithms allow companies to shift prices to match when and what the customer is willing to pay at the exact moment they’re ready to make a purchase.

Dynamic Pricing Strategy in Marketing

Dynamic pricing can help keep your marketing plans on track. Your team can plan for promotions in advance and configure the pricing algorithm you use to launch the promotion price at the perfect time. You can even A/B test dynamic pricing in real-time to maximize your profits.

4. High-Low Pricing Strategy

A high-low pricing strategy is when a company initially sells a product at a high price but lowers that price when the product drops in novelty or relevance. Discounts, clearance sections, and year-end sales are examples of high-low pricing in action — hence the reason why this strategy may also be called a discount pricing strategy.

High-low pricing is commonly used by retail firms that sell seasonal items or products that change often, such as clothing, decor, and furniture. What makes a high/low pricing strategy appealing to sellers? Consumers enjoy anticipating sales and discounts, hence why Black Friday and other universal discount days are so popular.

High-Low Pricing Strategy in Marketing

If you want to keep the foot traffic steady in your stores year-round, a high-low pricing strategy can help. By evaluating the popularity of your products during particular periods throughout the year, you can leverage low pricing to increase sales during traditionally slow months.

5. Penetration Pricing Strategy

Contrasted with skimming pricing, a penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing attention (and revenue) away from higher-priced competitors. Penetration pricing isn’t sustainable in the long run, however, and is typically applied for a short time.

This pricing method works best for brand new businesses looking for customers or for businesses that are breaking into an existing, competitive market. The strategy is all about disruption and temporary loss … and hoping that your initial customers stick around as you eventually raise prices.

(Another tangential strategy is loss leader pricing , where retailers attract customers with intentionally low-priced items in hopes that they’ll buy other, higher-priced products, too. This is precisely how stores like Target get you — and me.)

Penetration Pricing Strategy in Marketing

Penetration pricing has similar implications as freemium pricing — the money won’t come in overnight. But with enough value and a great product or service, you could continue to make money and scale your business as you increase prices. One tip for this pricing strategy is to market the value of the products you sell and let price be a secondary point.

6. Skimming Pricing Strategy

A skimming pricing strategy is when companies charge the highest possible price for a new product and then lower the price over time as the product becomes less and less popular. Skimming is different from high-low pricing in that prices are lowered gradually over time.

Technology products, such as DVD players, video game consoles, and smartphones, are typically priced using this strategy as they become less relevant over time. A skimming pricing strategy helps recover sunk costs and sell products well beyond their novelty, but the strategy can also annoy consumers who bought at full price and attract competitors who recognize the “fake” pricing margin as prices are lowered.

Skimming Pricing Strategy in Marketing

Skimming pricing strategy can work well if you sell products that have products with varying life cycle lengths. One product may come in and out of popularity quickly so you have a short time to skim your profits in the beginning stages of the life cycle. On the flip side, a product that has a longer life cycle can stay at a higher price for more time. You’ll be able to maintain your marketing efforts for each product more effectively without constantly adjusting your pricing across every product you sell.

7. Value-Based Pricing Strategy

A value-based pricing strategy is when companies price their products or services based on what the customer is willing to pay. Even if it can charge more for a product, the company decides to set its prices based on customer interest and data.

If used accurately, value-based pricing can boost your customer sentiment and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.

On the flip side, value-based pricing requires you to constantly be in tune with your various customer profiles and buyer personas and possibly vary your prices based on those differences.

Value-Based Pricing Strategy in Marketing

Marketing to your customers should always lead with value, so having a value-based pricing model should help strengthen the demand for your products and services. Just be sure that your audiences are distinct enough in what they’re willing to pay for — you don’t want to run into trouble by charging more or less based on off-limits criteria .

8. Psychological Pricing Strategy

Psychological pricing is what it sounds like — it targets human psychology to boost your sales.

For example, according to the " 9-digit effect ", even though a product that costs $99.99 is essentially $100, customers may see this as a good deal simply because of the "9" in the price.

Another way to use psychological pricing would be to place a more expensive item directly next to (either, in-store or online) the one you're most focused on selling . Or offer a "buy one, get one 50% off (or free)" deal that makes customers feel as though the circumstances are too good to pass up on.

And lastly, changing the font, size, and color of your pricing information on and around your products has also been proven, in various instances, to boost sales.

Psychological Pricing Strategy in Marketing

Psychological pricing strategy requires an intimate understanding of your target market to yield the best results. If your customers are inclined to discounts and coupons, appealing to this desire through your marketing can help this product meet their psychological need to save money. If paying for quality is important to your audience, having the lowest price on the shelf might not help you reach your sales goals. Regardless of the motivations your customers have for paying a certain price for a product, your pricing and marketing should appeal to those motivations.

9. Geographic Pricing Strategy

Geographic pricing is when products or services are priced differently depending on geographical location or market.

This strategy may be used if a customer from another country is making a purchase or if there are disparities in factors like the economy or wages (from the location in which you're selling a good to the location of the person it is being sold to).

Geographic Pricing Strategy in Marketing

Marketing a geographically priced product or service is easy thanks to paid social media advertising. Segmenting by zip code, city, or even region can be accomplished at a low cost with accurate results. Even as specific customers travel or permanently move, your pricing model will remain the same which helps you maintain your marketing costs.

Download our free guide to creating buyer personas to easily organize your audience segments and make your marketing stronger.

Like we said above, these strategies aren’t necessarily meant to stand alone. We encourage you to mix and match these methods as needed.

Below, we cover more specific pricing models for individual products.

Pricing Models

While your pricing strategy may determine how your company sets fees for its offerings overall , the below pricing models can help you set prices for specific product lines. Let's take a look.

1. Freemium

A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product hoping that users will eventually pay to upgrade or access more features.

Unlike cost-plus, freemium is a pricing model commonly used by SaaS and other software companies. They choose this model because free trials and limited memberships offer a peek into a software’s full functionality — and also build trust with a potential customer before purchase.

With freemium, a company’s prices must be a function of the perceived value of their products. For example, companies that offer a free version of their software can’t ask users to pay $100 to transition to the paid version. Prices must present a low barrier to entry and grow incrementally as customers are offered more features and benefits.

Freemium Pricing in Marketing

Freemium pricing may not make your business a lot of money on the initial acquisition of a customer, but it gives you access to the customer which is just as valuable. With access to their email inboxes, phone number, and any other contact information you gather in exchange for the free product, you can nurture the customer into a brand loyal advocate with a worthwhile LTV .

2. Premium Pricing

Also known as prestige pricing and luxury pricing, a premium pricing model is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.

Prestige pricing is a direct function of brand awareness and brand perception. Brands that apply this pricing method are known for providing value and status through their products — which is why they’re priced higher than other competitors. Fashion and technology are often priced using this model because they can be marketed as luxurious, exclusive, and rare.

Premium Pricing in Marketing

Premium pricing is quite dependent upon the perception of your product within the market. There are a few ways to market your product in order to influence a premium perception of it including using influencers, controlling supply, and driving up demand.

3. Hourly Pricing

Hourly pricing, also known as rate-based pricing, is commonly used by consultants, freelancers, contractors, and other individuals or laborers who provide business services. Hourly pricing is essentially trading time for money. Some clients are hesitant to honor this pricing strategy as it can reward labor instead of efficiency.

Hourly Pricing in Marketing

If your business thrives on quick, high-volume projects, hourly pricing can be just the incentive for customers to work with you. By breaking down your prices into hourly chunks, customers can make the decision to work with you based on a low price point rather than finding room in their budget for an expensive project-based commitment.

4. Bundle Pricing

Bundle pricing is when you offer (or "bundle") two or more complementary products or services together and sell them for a single price. You may choose to sell your bundled products or services only as part of a bundle, or sell them as both components of bundles and individual products.

This is a great way to add value through your offerings to customers who are willing to pay extra upfront for more than one product. It can also help you get your customers hooked on more than one of your products faster.

Bundle Pricing in Marketing

Marketing bundle deals can help you sell more products than you would otherwise sell individually. It’s a smart way to upsell and cross-sell your offerings in a way that is beneficial for the customer and your revenue goals.

5. Project-Based Pricing

Project-based pricing is the opposite of hourly pricing — this approach charges a flat fee per project instead of a direct exchange of money for time. It is also used by consultants, freelancers, contractors, and other individuals or laborers who provide business services.

Project-based pricing may be estimated based on the value of the project deliverables. Those who choose this pricing model may also create a flat fee from the estimated time of the project.

Project-Based Pricing in Marketing

Leading with the benefits a customer will derive from working with your business on a project can make project-based pricing more appealing. Although the cost of the project may be steep, the one-time investment can be worth it. Your clients will know that they’ll be able to work with you until the project is completed rather than until their allotted hours are depleted.

6. Subscription Pricing

Subscription pricing is a common pricing model at SaaS companies, online retailers, and even agencies who offer subscription packages for their services.

Whether you offer flat rate subscriptions or tiered subscriptions, the benefits of this model are endless. For one, you have all but guaranteed monthly recurring revenue (MRR) and yearly recurring revenue. That makes it simpler to calculate your profits on a monthly basis. It also often leads to higher customer lifetime values .

The one thing to be wary of when it comes to subscription pricing is the high potential for customer churn . People cancel subscriptions all the time, so it's essential to have a customer retention strategy in place to ensure clients keep their subscriptions active.

Subscription Pricing in Marketing

When marketing your subscription products, it's essential to create buyer personas for each tier. That way, you know which features to include and what will appeal to each buyer. A general subscription that appeals to everyone won't pull in anyone.

Even Amazon, which offers flat-rate pricing for its Prime subscription, includes a membership for students. That allows them to market the original Prime more effectively by creating a sense of differentiation.

Now, let’s discuss how to build a pricing strategy of your own liking.

1. Evaluate pricing potential.

You want to make a strategy that is optimal for your unique business. To begin, you need to evaluate your pricing potential. This is the approximate product or service pricing your business can potentially achieve in regard to cost, demand, and more.

Some factors that can affect your pricing potential include:

• Geographical market specifics
• Operating costs
• Inventories
• Demand fluctuations
• Competitive advantages and concerns
• Demographic data

We’ll dive deeper into demographic data in the next step.

2. Determine your buyer personas.

You have to price your product on the type of buyer persona that’s looking for it. When you look at your ideal customer, you’ll have to look at their:

• Customer Lifetime Value
• Willingness to Pay
• Customer Pain Points

To aid in this process, interview customers and prospects to see what they do and like, and ask for your sales team’s feedback on the best leads and their characteristics.

3. Analyze historical data.

Take a look at your previous pricing strategies. You can calculate the difference in closed deals, churn data , or sold product on different pricing strategies that your business has worked with before and look at which were the most successful.

4. Strike a balance between value and business goals.

When developing your pricing strategy, you want to make sure the price is good to your bottom line and your buyer personas. This compromise will better help your business and customer pool, with the intentions of:

• Increasing profitability
• Improving cash flow
• Market penetration
• Expanding market share

5. Look at competitor pricing.

You can’t make a pricing strategy without conducting research on your competitors’ offerings. You’ll have to decide between two main choices when you see the price difference for your same product or service:

• Beat your competitors’ price - If a competitor is charging more for the same offering as your brand, then make the price more affordable.
• Beat your competitors’ value - Also known as value-based pricing , you can potentially price your offering higher than your competitors if the value provided to the customer is greater.

To see the competition’s full product or service offering, conduct a full competitive analysis so you can see their strengths and weaknesses, and make your pricing strategy accordingly.

So we’ve gone over how to create a pricing strategy, now let’s discuss how to apply these steps to different businesses and industries.

Not every pricing strategy is applicable to every business. Some strategies are better suited for physical products whereas others work best for SaaS companies. Here are examples of some common pricing models based on industry and business.

Product Pricing Model

Unlike digital products or services, physical products incur hard costs (like shipping, production, and storage) that can influence pricing. A product pricing strategy should consider these costs and set a price that maximizes profit, supports research and development, and stands up against competitors.

👉🏼 We recommend these pricing strategies when pricing physical products : cost-plus pricing, competitive pricing, prestige pricing, and value-based pricing.

Digital Product Pricing Model

Digital products, like software, online courses, and digital books, require a different approach to pricing because there’s no tangible offering or unit economics (production cost) involved. Instead, prices should reflect your brand, industry, and overall value of your product.

👉🏼 We recommend using these pricing strategies when pricing digital products: competition-based pricing, freemium pricing, and value-based pricing.

Restaurant Pricing Model

Restaurant pricing is unique in that physical costs, overhead costs, and service costs are all involved. You must also consider your customer base, overall market trends for your location and cuisine, and the cost of food — as all of these can fluctuate.

👉🏼 We recommend using these pricing strategies when pricing at restaurants: cost-plus pricing, premium pricing, and value-based pricing.

Event Pricing Model

Events can’t be accurately measured by production cost (not unlike the digital products we discussed above). Instead, event value is determined by the cost of marketing and organizing the event as well as the speakers, entertainers, networking, and the overall experience — and the ticket prices should reflect these factors.

👉🏼 We recommend using these pricing strategies when pricing live events: competition-based pricing, dynamic pricing, and value-based pricing.

Services Pricing Model

Business services can be hard to price due to their intangibility and lack of direct production cost. Much of the service value comes from the service provider’s ability to deliver and the assumed caliber of their work. Freelancers and contractors , in particular, must adhere to a services pricing strategy.

👉🏼 We recommend using these pricing strategies when pricing services: hourly pricing, project-based pricing, and value-based pricing.

Nonprofit Pricing Model

Nonprofits need pricing strategies, too — a pricing strategy can help nonprofits optimize all processes so they’re successful over an extended period of time.

A nonprofit pricing strategy should consider current spending and expenses, the breakeven number for their operation, ideal profit margin, and how the strategy will be communicated to volunteers, licensees, and anyone else who needs to be informed. A nonprofit pricing strategy is unique because it often calls for a combination of elements that come from a few pricing strategies.

👉🏼 We recommend using these pricing strategies when pricing nonprofits: competitive pricing, cost-plus pricing, demand pricing, and hourly pricing.

Education Pricing Model

Education encompasses a wide range of costs that are important to consider depending on the level of education, private or public education, and education program/ discipline.

Specific costs to consider in an education pricing strategy are tuition, scholarships, additional fees (labs, books, housing, meals, etc.). Other important factors to note are competition among similar schools, demand (number of student applications), number and costs of professors/ teachers, and attendance rates.

👉🏼 We recommend using these pricing strategies when pricing education: competitive pricing, cost-based pricing, and premium pricing.

Real Estate Pricing Model

Real estate encompasses home value estimates, market competition, housing demand, and cost of living. There are other factors that play a role in real estate pricing models including potential bidding wars, housing estimates and benchmarks (which are available through real estate agents but also through free online resources like Zillow ), and seasonal shifts in the real estate market.

👉🏼 We recommend using these pricing strategies when pricing real estate: competitive pricing, dynamic pricing, premium pricing, and value-based pricing.

Agency Pricing Model

Agency pricing models impact your profitability, retention rates, customer happiness, and how you market and sell your agency. When developing and evolving your agency’s pricing model, it’s important to take into consideration different ways to optimize it so you can determine the best way to boost the business's profits.

👉🏼 We recommend using these pricing strategies when pricing agencies: hourly pricing, project-based pricing, and value-based pricing.

Manufacturing Pricing Model

The manufacturing industry is complex — there are a number of moving parts and your manufacturing pricing model is no different. Consider product evolution, demand, production cost, sale price, unit sales volume, and any other costs related to your process and product. Another key part to a manufacturing pricing strategy is understanding the maximum amount the market will pay for your specific product to allow for the greatest profit.

👉🏼 We recommend using these pricing strategies when pricing manufacturing: competitive pricing, cost-plus pricing, and value-based pricing.

Ecommerce Pricing Model

Ecommerce pricing models are how you determine the price at which you’ll sell your online products and what it'll cost you to do so. Meaning, you must think about what your customers are willing to pay for your online products and what those products cost you to purchase and/or create. You might also factor in your online campaigns to promote these products as well as how easy it is for your customers to find similar products to yours on the ecommerce sites of your competitors.

👉🏼 We recommend using these pricing strategies when pricing ecommerce: competitive pricing, cost-based pricing, dynamic pricing, freemium pricing, penetration pricing, and value-based pricing.

Pricing Analysis

Pricing analysis is a process of evaluating your current pricing strategy against market demand. Generally, pricing analysis examines price independently of cost. The goal of a pricing analysis is to identify opportunities for pricing changes and improvements.

You typically conduct a pricing analysis when considering new product ideas, developing your positioning strategy, or running marketing tests. It's also wise to run a price analysis once every year or two to evaluate your pricing against competitors and consumer expectations — doing so preemptively avoids having to wait for poor product performance.

How to Conduct a Pricing Analysis

1. determine the true cost of your product or service..

To calculate the true cost of a product or service that you sell, you’ll want to recognize all of your expenses including both fixed and variable costs. Once you’ve determined these costs, subtract them from the price you’ve already set or plan to set for your product or service.

2. Understand how your target market and customer base respond to the pricing structure.

Surveys, focus groups, or questionnaires can be helpful in determining how the market responds to your pricing model. You’ll get a glimpse into what your target customers value and how much they’re willing to pay for the value your product or service provides.

3. Analyze the prices set by your competitors.

There are two types of competitors to consider when conducting a pricing analysis: direct and indirect.

Direct competitors are those who sell the exact same product that you sell. These types of competitors are likely to compete on price so they should be a priority to review in your pricing analysis.

Indirect competitors are those who sell alternative products that are comparable to what you sell. If a customer is looking for your product, but it’s out of stock or it’s out of their price range, they may go to an indirect competitor to get a similar product.

4. Review any legal or ethical constraints to cost and price.

There’s a fine line between competing on price and falling into legal and ethical trouble. You’ll want to have a firm understanding of price-fixing and predatory pricing while doing your pricing analysis in order to steer clear of these practices.

Analyzing your current pricing model is necessary to determine a new (and better!) pricing strategy. This applies whether you're developing a new product, upgrading your current one, or simply repositioning your marketing strategy.

Next, let’s look at some examples of pricing strategies that you can use for your own business.

Dynamic Pricing Strategy: Chicago Cubs Freemium Pricing Strategy: HubSpot Penetration Pricing Strategy: Netflix Premium Pricing: AWAY Competitive Pricing Strategy: Shopify Project-Based Pricing Strategy: Courtney Samuel Events Value-Based Pricing Strategy: INBOUND Bundle Pricing: State Farm Geographic Pricing: Gasoline

Pricing models can be hard to visualize. Below, we’ve pulled together a list of examples of pricing strategies as they’ve been applied to everyday situations or businesses.

1. Dynamic Pricing Strategy: Chicago Cubs

I live in Chicago five blocks away from Wrigley Field, and my friends and I love going to Cubs games. Finding tickets is always interesting, though, because every time we check prices, they’ve fluctuated a bit from the last time. Purchasing tickets six weeks in advance is always a different process than purchasing them six days prior — and even more sox pricing at the gate.

This is an example of dynamic pricing — pricing that varies based on market and customer demand. Prices for Cubs games are always more expensive on holidays, too, when more people are visiting the city and are likely to go to a game.

(Another prime example of dynamic pricing is INBOUND , for which tickets get more expensive as the event nears.)

2. Freemium Pricing Strategy: HubSpot

HubSpot is an example of freemium pricing at work. There's a free version of the CRM for scaling businesses as well as paid plans for the businesses using the CRM platform that need a wider range of features .

Moreover, within those marketing tools, HubSpot provides limited access to specific features. This type of pricing strategy allows customers to acquaint themselves with HubSpot and for HubSpot to establish trust with customers before asking them to pay for additional access.

3. Penetration Pricing Strategy: Netflix

Netflix is a classic example of penetration pricing : entering the market at a low price (does anyone remember when it was $7.99?) and increasing prices over time. Since I joined a couple of years ago, I’ve seen a few price increase notices come through my own inbox.

Despite their increases, Netflix continues to retain — and gain — customers. Sure, Netflix only increases their subscription fee by $1 or $2 each time, but they do so consistently. Who knows what the fees will be in five or ten years?

4. Premium Pricing: AWAY

There are lots of examples of premium pricing strategies … Rolex, Tesla, Nike — you name it. One that I thought of immediately was AWAY luggage .

Does luggage need to be almost $500? I’d say no, especially since I recently purchased a two-piece Samsonite set for one-third the cost. However, AWAY has still been very successful even though they charge a high price for their luggage. This is because when you purchase AWAY, you’re purchasing an experience. The unique branding and the image AWAY portrays for customers make the value of the luggage match the purchase price.

5. Competitive Pricing Strategy: Shopify

Shopify is an ecommerce platform that helps businesses manage their stores and sell their products online. Shopify — which integrates with HubSpot — has a competitive pricing strategy.

There are a number of ecommerce software options on the market today — Shopify differentiates itself by the features they provide users and the price at which they offer them. They have three thoughtfully-priced versions of their product for customers to choose from with a number of customizable and flexible features.

With these extensive options tailored to any ecommerce business' needs, the cost of Shopify is highly competitive and is often the same as or lower than other ecommerce platforms on the market today.

6. Project-Based Pricing Strategy: Courtney Samuel Events

Anyone who's planned a wedding knows how costly they can be. I'm in the midst of planning my own, and I've found that the bundled, project-based fees are the easiest to manage. For example, my wedding coordinator Courtney charges one flat fee for her services. This pricing approach focuses on the value of the outcome (e.g., an organized and stressless wedding day) instead of the value of the time spent on calls, projects, or meetings.

Because vendors like Courtney typically deliver a variety of services — wedding planning, day-of coordination, physical meetings, etc. — in addition to spending time answering questions and providing thoughtful suggestions, a project-based fee better captures the value of her work. Project-based pricing is also helpful for clients and companies who'd rather pay a flat fee or monthly retainer than deal with tracked hours or weekly invoices.

7. Value-Based Pricing Strategy: INBOUND

While INBOUND doesn't leave the ultimate ticket price up to its attendees, it does provide a range of tickets from which customers can choose. By offering multiple ticket "levels," customers can choose what experience they want to have based on how they value the event.

INBOUND tickets change with time, however, meaning this pricing strategy could also be considered dynamic (like the Cubs example above). As the INBOUND event gets closer, tickets tend to rise in price.

8. Bundle Pricing: State Farm

State Farm is known for its tongue-in-cheek advertisements and its bundle deals for home and auto insurance. You can receive a quote on one or the other, but getting a quote on both can save you money on your premiums.

State Farm benefits from bundle pricing by selling more policies, and consumers benefit by paying less than they normally would if they used two different insurance providers for home and auto coverage.

9. Geographic Pricing: Gasoline

Gasoline is notorious for having a wide range of prices around the world, but even within the United States, prices can vary by several dollars depending on the state you live in. In California for example, gas prices have consistently hovered around $3 in the summer months for the past 10 years. On the other hand, gas prices in Indiana have been in the $2 range during the same time period. Laws, environmental factors, and production cost all influence the price of gasoline in California which causes the geographic disparity in the cost of the fuel.

Get Your Pricing Strategy Right

Thinking about everything that goes into pricing can make your head spin: competitors, production costs, customer demand, industry needs, profit margins … the list is endless. Thankfully, you don’t have to master all of these factors at once.

Simply sit down, calculate some numbers (like your COGS and profit goals), and figure out what’s most important for your business. Start with what you need, and this will help you pinpoint the right kind of pricing strategy to use.

More than anything, though, remember pricing is an iterative process. It’s highly unlikely that you’ll set the right prices right away — it might take a couple of tries (and lots of research), and that’s OK.

Editor's note: This post was originally published in March 2019 and has been updated for comprehensiveness.

Don't forget to share this post!

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The pricing strategy guide: Choosing pricing strategies that grow (not sink) your business

Choosing the pricing strategy for your business requires research, calculation, and a good amount of thought. Simply guessing may put you out of business. Here's what you need to know.

Definition of pricing

What are pricing strategies.

• Importance of pricing strategy

Top 7 pricing strategies

• 3 real-world examples
• How to create your strategy
• Determine value metric
• Customer profiles & segments
• User research & experiments
• Bonus: 10 data-driven tips
• Industry differences
• Final takeaway

Pricing strategies FAQs

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Too many businesses set their pricing without putting much thought into it. This is a mistake causing them to leave money on the table from the beginning. The good news is that taking the time to get your product pricing right can act as a powerful growth lever.  If you optimize your pricing strategy so that more people are paying a higher amount, you'll end up with significantly more revenue than a business who treats pricing more passively. This sounds obvious, but it's rare for businesses to put much effort into finding the best pricing strategy.

This guide will cover everything you need to know about setting a pricing strategy that works for your business. 

Check out this introduction video made by the Paddle Studios team.

Price Intelligently is Paddle’s dedicated team of pricing and packaging experts for SaaS and subscription companies. We combine unrivaled expertise and first-party data to solve your unique pricing challenges, break the mold, and catapult your growth.  Learn more

Pricing is defined as the amount of money that you charge for your products, but understanding it requires much more than that simple definition. Baked into your pricing are indicators to your potential customers about how much you value your brand, product, and customers. It's one of the first things that can push a customer towards, or away from, buying your product. As such, it should be calculated with certainty.

Pricing strategies refer to the processes and methodologies businesses use to set prices for their products and services. If pricing is how much you charge for your products, then product pricing strategy is how you determine what that amount should be. There are different pricing strategies to choose from but some of the more common ones include:

• Value-based pricing
• Competitive pricing
• Price skimming
• Cost-plus pricing
• Penetration pricing
• Economy pricing
• Dynamic pricing

Pricing is an underutilized growth lever

Many companies focus on acquisition to grow their business, but studies have shown that small variations in pricing can raise or lower revenue by 20-50%. Despite that, even among Fortune 500 companies, fewer than 5% have functions dedicated to setting the best price possible. There's a missed opportunity in the business world to see immediate growth for relatively little effort. 

Navigating PLG billing and pricing? Read our latest guide on product-led SaaS

Because most businesses spend less than 10 hours per year thinking about pricing, there's a lot of untapped growth potential in optimizing what you charge. In fact, choosing the best pricing method is a more powerful growth lever than customer acquisition. In some cases, it can be up to 7.5 times more powerful than acquisition. 

The importance of nailing your pricing strategy

Having an  effective pricing strategy  helps solidify your position by building trust with your customers, as well as meeting your business goals. Let's compare and contrast the messaging that a strong pricing strategy sends in relation to a weaker one.

A winning pricing strategy:

• Portrays value

The word cheap has two meanings. It can mean a lower price, but it can also mean poorly made. There's a reason people associate cheaply priced products with cheaply made ones. Built into the higher price of a product is the assumption that it's of higher value.

• Convinces customers to buy 

A high price may convey value, but if that price is more than a potential customer is willing to pay, it won't matter. A low price will seem cheap and get your product passed over. The ideal price is one that convinces people to purchase your offering over the similar products that your competitors have to offer.

• Gives your customers confidence in your product 

If higher-priced products portray value and exclusivity, then the opposite follows as well. Prices that are too low will make it seem as though your product isn't well made.

A weak pricing strategy:

• Doesn't accurately portray the value of your product

If you believe you have a winning product, and you should if you are selling it, then you need to convince customers of that. Setting prices too low sends the opposite message.

• Makes customers feel uncertain about buying

Just as the right price is one that customers will pull the trigger on quickly, a price that's too high or too low will cause hesitation.

• Targets the wrong customers

Some customers prefer value, and some prefer luxury. You have to price your product to match the type of customer it is targeted towards.

Let's now take a closer look at the seven most common pricing strategies that were outlined above with more from Paddle Studios .

Click on any of the links below for a more in-depth guide to that particular pricing strategy.

1. Value-based pricing

With value-based pricing, you set your prices according to what consumers think your product is worth. We're big fans of this pricing strategy for SaaS businesses.

2. Competitive pricing

When you use a competitive pricing strategy, you're setting your prices based on what the competition is charging. This can be a good strategy in the right circumstances, such as a  business just starting out , but it doesn't leave a lot of room for growth.

3. Price skimming  

If you set your prices as high as the market will possibly tolerate and then lower them over time, you'll be using the price skimming strategy. The goal is to skim the top off the market and the lower prices to reach everyone else. With the right product it can work, but you should be very cautious using it.

4. Cost-plus pricing 

This is one of the simplest pricing strategies. You just take the product production cost and add a certain percentage to it. While simple, it is less than ideal for anything but physical products.

5. Penetration pricing

In highly competitive markets, it can be hard for new companies to get a foothold. One way some companies attempt to push new products is by offering prices that are much lower than the competition. This is penetration pricing. While it may get you customers and decent sales volume, you'll need a lot of them and you'll need them  to be very loyal  to stick around when the price increases in the future.

6. Economy pricing 

This strategy is popular in the commodity goods sector. The goal is to price a product cheaper than the competition and make the money back with increased volume. While it's a good method to get people to buy your generic soda, it's not a great fit for SaaS and subscription businesses.

7. Dynamic pricing 

In some industries, you can get away with constantly  changing your prices  to match the current demand for the item. This doesn't work well for subscription and SaaS business, because customers expect consistent monthly or yearly expenses.

Three real-world pricing strategy examples

Real-world pricing strategy examples are the best way for a business to better understand the above-listed pricing strategies. Evaluating other businesses' approaches can be a good starting point but keep in mind that the right pricing strategy is based on math, market research, and consumer insights. For now, let’s look at the pricing strategy examples of some of the biggest brands of today: 

1. Streaming services 

Have you noticed that you pay roughly the same amount for Netflix, Amazon Prime Video, Disney+, Hulu, and other streaming services? That's because these companies have adopted competitive pricing , or at least a form of it, called  market-based pricing .

2. Salesforce

When Salesforce first came out, they were the only CRM in the cloud. (It wasn't even called 'the cloud' back then!) Armed with ground-breaking deployment and a target customer of a large enterprise, Salesforce could charge what they wanted. Later, after they'd grown, they were able to lower prices so small businesses could sign up. This is a classic example of  price skimming . 

3. Dollar Shave Club

At one time, you couldn't turn on your TV without an ad for Dollar Shave Club telling you how much cheaper they were than razors at the store. Although an aggressive  marketing strategy  and advertising like that is unusual for the pricing model, they were nevertheless employing economy pricing. It worked out well for them. They were acquired by Unilever in 2016 for a reported $1 billion.

How to create a winning pricing strategy

In the beginning, the actual number you're charging isn't that important.

There are some exceptions, but for the most part, you should first be figuring out the range you're in: a $10 product, $100 product, $1k product, etc. Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you.

Instead, understanding the following is much more important:

• Finding your  value metric
• Setting your ideal  customer profiles and segments
• Completing  user research + experimentation

This video from Paddle Studios goes deep on mastering a winning pricing strategy.

Step 1: Determine your value metric

A “ value metric ” is essentially what you charge for. For example: per seat, per 1,000 visits, per CPA, per GB used, per transaction, etc. 

If you get everything else wrong in pricing, but you get your value metric right, you'll do ok . It's that important. Partly because it bakes lower churn and higher expansion revenue into your monetization.

A pricing strategy based on a value metric (vs. a tiered monthly fee) is important because it allows you to make sure you're not charging a large customer the same as you'd charge a small customer.

If you remember your high school or college economics class, the professor put a point on a demand curve for the perfect price and said “the revenue a firm gets is the area under that point.” The problem here is: what about all that other area under the curve?  You’re missing out on that revenue by charging a flat monthly fee.

“Good, better, best” pricing strategy is a bit more advantageous, because you end up with three points on our trusty demand curve, and thus more revenue potential. You see this problem among many eCommerce businesses and retailers whose products are constrained by being physical goods—the car with the basic package vs. the car with the stereo and sunroof vs. the car with everything. In software, it’s thankfully dying out, but you’ll still see it with mass-market products:  Netflix, Adobe Creative Cloud, etc.

A value metric, however, allows you to have essentially infinite price points—maximizing your revenue potential. In practice, you’ll never show infinite price points on your pricing page , sales deck, or mobile conversion page, but you may have a new customer come in at a certain level and then grow.

Value metrics also bake growth directly into how you charge because as usage or the amount of value received goes up (and those are not the same thing), the customer pays more. If they end up using or consuming less, they pay less (and thus avoid churning). This is why companies using value metrics are typically growing at  double the rate with half the churn and 2x the expansion revenue  when compared to companies that charge a flat fee or where the only difference between their pricing tiers are features.

To determine your value metric, think about the  ideal essence of value  for your product—what value are you directly providing your customer?

In B2B, it's likely going to be money saved, revenue gained, time saved, etc. In  DTC , it may be the joy you bring them, fitness achieved, increased efficiency, etc. Obviously, we can't measure all of these, but if you can,  and  your customer trusts your measurement (meaning you say you saved them $100 and they agree you saved them $100), that’s your value metric.

As an example, the perfect value metric for  Paddle Retain  (our churn recovery product) is how much churn we recover for you. We can measure this, and our customers agree to the measurement, so we can charge on that axis. Other pure value metric products include  MainStreet , which handles government paperwork to automatically get you back tax credits—you pay a percentage of the money saved.

Most of you won't have a pure value metric, so the next step is to find a proxy for that metric. Take for example  HubSpot ’s marketing product. Their pure value metric is the amount of revenue their tool drives for your business. This is hard to measure and hard for the customer to agree to in terms of what percentage of credit HubSpot deserves for revenue from a blog post. Proxies for HubSpot are things like the number of contacts, number of visits, number of users, etc.

To find the right proxy metric, you want to come up with 5-10 proxies and then talk to your customers and prospects. You’ll typically find 1-2 of these pricing metrics will be most preferred amongst your target customers. You then want to make sure those 1-2 also make sense from a growth perspective. Your larger customers should be using/getting more of the metric, whereas your smaller customers should be using/getting less of the metric. You also want to make sure the metric encourages retention.

When we look at HubSpot, if they were to primarily price on “number of seats”, folks could share a login and HubSpot wouldn’t make much more money on large customers vs. small. Ironically they wouldn’t get as many people invested in HubSpot, because there’d be friction to adding additional seats. Instead, if they give unlimited seats and price based on “number of contacts” there’s minimal friction to getting as many people into HubSpot as possible to do activities (e.g., blog posts,  email campaigns , landing pages, etc.) that then produce contacts.

The result: HubSpot’s marketing product’s value metric is “contacts”, which ensures growth is baked directly into how they make money. The usage drives the metric, which therein drives revenue. Most importantly customers small, medium, and large are all paying at the point they see the value and then can grow.

Some other examples:

• Wistia  charges by the number of videos or channels you use/have
• Zapier  invented the concept of zap (connection of software) and charge based on time to connect
• Theater in Barcelona charged based on the number of laughs
• Husqvarna  charges based on time for lawn care products vs. making you buy them
• Rolls Royce  charges per mile for airplane engines. They own the engines on the plane you own and do all the maintenance. Cool model.
• Fresh Patch  charges based on the amount of grass you want per month for your dog—yes they deliver grass to you monthly

As a side note, you should stop pricing based on seats for products where each seat doesn’t provide a unique experience. For instance, imagine you're an AE using a CRM. If you log into the account of the AE sitting next to you, you can’t really do your work because you are only seeing their leads and accounts. Conversely, if you were a marketing exec and were to log in to another marketing manager’s account in HubSpot, you could do all the work you need to. Thus, for the latter, seats are not the right value metric.

Per-seat pricing is a relic of the  perpetual license  era when we couldn’t measure usage or value enough within our products. We’re beyond that point, so use the above as a good litmus test.

Step 2: Determine your customer profiles and segments

The second key component of your pricing strategy is determining your target segment and ideal customer profile. We've all heard about personas, and you may be rolling your eyes at the concept, but most personas are useless because they aren’t quantitative enough. When used properly, quantified personas and segments are beautiful tools. The information needs to go beyond just cute names like “Startup Steve" with a cute avatar, and cute meetings where people tell you they’re targeting "developers."

To get quantified personas, you need to pull out a spreadsheet.  Here’s a template  you can use.

1. Columns: Customer profiles you're targeting

These can take many forms, but the ultimate goal is to be as specific as possible so that you not only know who you’re targeting but how to monetize and retain them. Pragmatically, you typically separate these customer profiles based on size or role (or both). For example, a marketing automation product may target the following profiles:

• Marketing leaders (Director and higher) at companies $1M to $10M
• Marketing leaders (Director and higher) at companies $10.01M to $50M
• Marketing leaders (Director and higher) at companies $50.01M to $100M

The point is you can’t be everything to all people and you need to understand who you’re targeting in order to make better decisions.

2. Rows: Characteristics of each profile to help you differentiate between them

• Most valued features
• Least valued features
• Willingness to pay
• Lifetime value (LTV)
• Customer acquisition costs (CAC)
• ... and any other metric or category you think could be useful

If you're just starting out or you don't have some of this data, it’s fine. Still fill it out though with your hypotheses. You know  something  about your customers.

Next, you then need to validate (or invalidate) the most pressing hypothesis in that spreadsheet based on the decisions you’re going to make. If you're going to validate a new feature for a particular segment, then that's where you should start. Price point the biggest question? Start by researching the price point with each of these roles/segments.

If you don't know who your key roles/segments are, there's no way in hell you’ll set up an efficient growth flywheel, let alone an optimized pricing strategy. Personas act as a constitution within your business to centralize your focus and arguments about direction.

If you don't do segment and persona analysis, you better be able to raise a ton of money. I guarantee you there's some persona or segment on some vision document or in that euphoric part of your entrepreneurial brain that is completely wrong for your business. I see it all the time. Even I—someone who thinks about segments and customer research all the time—fall prey to being an absolute idiot with who we should target.

When we built  ProfitWell Metrics (our free subscription metrics tool) I thought we were geniuses who were going to be billionaires. Turns out analytics products are terrible. Willingness to pay for them is terrible; retention for them is terrible; NPS is terrible. Everything is just terrible, mainly because customers don't appreciate graphs or at least aren't willing to pay much for them. When we did our research this became obvious and put us 18 months ahead of our competitors, pushing us to change up the positioning of the product to freemium, which has fueled our business ever since (oh and our NPS is 70, because we massively over-deliver a free product better than the paid competition).

Never underestimate the power of focusing on the customer through research. You should never, ever just do what they ask, but you need to be an anthropologist who knows them better than anyone else.

Step 3: User research + experimentation

Beyond your value metric and core segments, the monetization game becomes extremely tactical and research-based. Figuring out your price point involves researching those segments and then making decisions in the field. Same with discounting, add-on, and packaging strategies. The point: monetization is never finished because it’s the very essence of translating your value into an optimal framework for your target customer segments.

Practically this is why you should be experimenting with your monetization every quarter. Experimentation can get tricky and have a few quirks, but you’ll find it’s similar to most growth frameworks out there (which are all versions of the scientific method).

Here’s a good prioritization list of what business owners should attack in optimizing their  monetization strategy  once they have the core segments and value metric figured out:

Priority 1: Foundational [see above]

• Core customer segments
• Value metrics

Priority 2: Core

• Order of magnitude price point (are you a $10 product vs. a $500 product)
• Positioning and value props

Priority 3: Optimizations

• Add-on strategy
• Specific price point (are you a $10 product vs. a $11 product)
• Price localization/internationalization
• Discounting strategy
• Contract Term optimization

Priority 4: Growth accelerators

• Market expansion (going up or down market)
• Vertical expansion
• Multi-Product

Your true order of operations with monetization will vary, but for the most part, all companies should work through the foundational and core sections before moving to the optimizations and growth accelerators. If you’re larger or there’s a fire, you may start with an optimization. In fact, this is sometimes a good idea. Something more scoped like “price localization” can help get momentum, be a forcing function to clean up tech and experimentation stacks, and mitigate political conversations. Remember, monetization is something that’s important, uncomfortable, and something you likely don’t know much about, so progress is better than nothing. Start small. You can (and should) always do more.

Bonus: 10 rapid-fire pricing strategy tips rooted in data⚡

In case you're still hungry for more tips on nailing your pricing strategy and achieving maximum profitability, look no further. We've got you covered:

1. You should  localize your pricing  to the currency and willingness to pay of the prospect's region

• Revenue per customer is 30% higher when you just use the proper currency symbol
• Having different price points in different regions increases revenue per customer further, and is justified based on different consumer demands in different regions

2. Freemium is an acquisition model, not a part of pricing

• Think of  freemium  as a premium ebook driving leads, not another pricing tier
• Don't do freemium until you truly understand how to convert leads to customers, because you’ll end up increasing noise or false positives when you’re trying to figure out your segment beachheads. The best folks who deploy free typically don’t implement freemium until two to three years into their business. The exceptions to this notion are if you have a very specific need or network effect (eg., marketplaces, social networks, etc.) or if you have a top 50 growth person on your team.
• To be clear, we're not saying DON’T do freemium. we're saying it's a scalpel, not a sledgehammer that requires thought. A lot of people end up reading our articles on freemium and end up going, “Cool, let’s do freemium and we’ll be a unicorn.” I’m being pragmatic in that you need to realize freemium is fantastic, but doing freemium properly takes a lot of effort and nuance.
• Paid users who convert from free tend to have higher NPS, better retention, and much lower CAC .

3. Value propositions matter oh so much

In B2B value propositions can swing willingness to pay ±20%, in DTC it's ±15%

4. Don't discount over 20%

In some verticals discounting over 20% may be fine, but you're likely not in one of them (although you may think you are), but the size of the discount almost perfectly correlates with higher churn. Large  discounts  get people to convert, but they don't stick around.

5. For upgrades to annual discounts, don't use percentages and try offers

Percentages don't work as well as whole dollar amounts for discounts (ie., "one month" will work better than "X percent off"). Annuals see much lower churn rates.

6. Should you end your price in 9s or 0s? Depends on your price point

Ending your prices in 9s evokes a discount brand, making the customer feel like they're getting something. Ending in 0 evokes luxury or premium, making them feel like they're getting a high-end product. Studies on this for technology products are inconclusive. We have seen it increase conversion in lower-cost products, but retention isn't as good with those customers.

7. You should experiment with your pricing in some manner every quarter

This doesn't mean change you should the price point each quarter, but experiment with variable costs. More changes correlate with increasing revenue per customer. Like all things, focusing on something makes you improve it.

8. Case studies boost willingness to pay quite a bit

Social proof is important.  Case studies  that offer proof of the high quality of your products can boost willingness to pay by 10-15% in both B2B and in DTC.

9. Design helps boost willingness to pay by 20%

This graph didn't look this way 10 years ago when design didn't do much for willingness to pay. Today, affinity for a company's design can boost willingness to pay considerably.

10. Integrations boost retention and willingness to pay

The more integrations a customer is using, typically the higher their willingness to pay and the better their retention. I wouldn't charge for the integrations, but I'd use this as a tool to get people hooked in and paying more or buying different add-ons.

Pricing strategies for different industries

Pricing strategies are not one size fits all. Finding the proper pricing strategy is dependent on your industry, as well as your company's unique objectives. But to give you an idea, we've listed a couple of industries and strategies that are well suited for each other. 

SaaS/Subscriptions

For SaaS and subscription-based businesses, value-based pricing is the winner hands down. As long as your customers are willing to pay, you can charge much more than your competitors.  Because your price is based on how much customers will spend, it isn't artificially lowered like other methods that fail to account for that. 

We also like value-based pricing for B2B companies. Value-based pricing requires you to look outward and understand your customers better. This is good for finding the optimal price, but it's also good for building optimal relationships that will also help grow your company. 

No more price guessing, just pricing that works

Accurately pricing your product for maximum growth requires a lot of market research and even more expertise on how to conduct and analyze that research. Our Price Intelligently  service combines our years of experience in the field with powerful machine learning tools to understand your target customer base and what makes them tick. We know the data to collect, the questions to ask, and the people to ask them of. This is important because businesses in different stages of growth need different strategies for evaluating pricing. Additionally, every business has a unique set of potential selling points and a unique target audience to pitch to.

You need someone in your corner who knows how to evaluate pricing options for your specific businesses. With our help, you can be confident that your pricing strategy and chosen price points will unlock growth levers at your company that have been sitting idle, because they'll be tailored to finding and maximizing the value propositions that are unique to your business. 

Which pricing strategy is best? 

This depends on your business model. For SaaS and subscription companies, as well as many others, we recommend value-based pricing.

How do you determine the selling prices of a product?

First, find a pricing strategy that fits well with your business model and product. As you've seen, pricing strategies differ, but they all give clear instructions for how to use them to set prices.

What is the simplest pricing strategy?

Since you only need to add up the cost to make your product and add a percentage to it, cost-plus pricing is the simplest form of pricing to use.

What is a pricing curve?

A pricing curve is a graph that shows you the number of people who are willing to pay a given price for a product.

What are the 4 major pricing strategies?

Value-based,  competition-based , cost-plus, and  dynamic pricing are all models  that are used frequently, depending on the industry and business model in question.

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What Is a Pricing Strategy? + How To Choose One for Your Business

Explore different pricing strategies, what they offer buyers and sellers, and the steps to making the best pricing decision for your business, products, and brand.

What is a pricing strategy?

Price, one of the 4 Ps of marketing , refers to how much is charged for a product or service. A pricing strategy is the process and methodology used to determine prices for products and services. 

As we’ll explore in this article, different pricing strategies work for different products and business models. A good pricing strategy can enable several things for a business: 

Convey value to customers

Attract customers

Inspire customer trust and confidence

Boost sales

Increase revenue

Improve profit margins

But a bad pricing strategy can target the wrong customers, make them feel uncertain about trusting and buying your product, and inaccurately portray the value of your product. We'll guide you through a few ways to determine your pricing strategy to inspire your approach.

Watch the following video from IE Business School’s Marketing Mix Implementation Specialization to learn more about pricing strategy.

Types of pricing strategies 

There are several common pricing strategies to choose from to price products and services. The first step in choosing a pricing strategy is to examine the different types, review pricing strategy examples, and understand how they differ. 

How to choose your pricing strategy 

Now that you know the different types of pricing strategies, your next step is to choose one for your business. Make an effective pricing strategy with this guide.

1. Determine your value.

A value metric refers to how a company determines the value of one product unit for sale. For example, if you sell footwear, then you would determine the value of one pair of shoes. If you sell a monthly service subscription, then you would determine the value of the services and features that a customer can access during a one-month period. 

To establish your value metric, identify the basic unit of the product or service you sell. If you were to sell just one unit of your product or service to one customer, what would this be? 

2. Evaluate pricing potential.

Pricing potential refers to the approximate price you can charge for your product or service. To evaluate the pricing potential for your product or service, consider factors such as your operating costs, consumer demand, and competitive products. 

3. Review your customer base.

Another important consideration when it comes to pricing strategy is how your current customer base has responded to prices thus far. How much have they been willing to pay for products and services? Have any changes in price discouraged or boosted sales?  

Use these insights to refine your buyer personas. Creating fictional versions of your ideal customer segments can help you determine pricing.

4. Determine a price range.  

Price range refers to prices for a product or service that fall within what a customer and seller find appropriate. To determine price range, ask yourself these questions: 

What is the minimum price you can charge for a product or service and still make a profit based on the cost of production, marketing, and any overhead costs? 

What is the maximum price you can charge for a product or service without alienating your target customers? 

5. Check out your competitors.

Another factor in pricing is taking a look at your competitors’ pricing. Make a list of competitive products and how they are priced. Then, decide whether you want to beat competitors’ prices (set your products at a lower price) or communicate more value than competitors and price your products higher. 

Read more: What Is Competitor Analysis? Definition + Step-by-Step Guide

6. Consider your industry.

Different pricing strategies work for different industries, so it’s a good idea to investigate the most common ones used in your industry. For example:  

In the SaaS industry, freemium pricing with different price tiers to purchase more features is a common strategy to offer customers a path to upgrade as their software needs increase. 

In the restaurant industry, luxury brands might use premium pricing to create an image of higher quality.  

In the service provider industry, designers, consultants, and other service providers might use project-based pricing to customize the service outcomes and the price for individual customers.  

7. Consider your brand.

In addition to your industry, your brand and business model are important factors in pricing your offerings. A brand identity can affect consumers’ perception of the brand and quality of the offerings, so make sure your pricing strategy corresponds to the brand.   

For example, a brand that focuses on affordability could choose economy pricing, while a brand that offers innovative products could succeed with a price-skimming strategy.  If you are still working to build brand equity , penetration pricing could make it easier to enter a market and build a customer base. 

8. Gather feedback from customers.

When considering how to price an existing or new product, customer feedback can be invaluable. Survey current and potential customers with questions such as: 

What do you think is an appropriate price for this product? 

How much would you be willing to pay for this product?

If this product were on sale for [example price], how likely would you be to buy it?

What price is so low that you’d question its value?

What price is so high that you'd consider it too expensive? 

Conducting user research can provide quantitative insights, such as what customers currently pay, but also qualitative data. You'll be able to understand the why, such as their beliefs, opinions, and behaviors around pricing.

9. Experiment with pricing. 

Conduct a few live experiments to gather data on how your products will perform at different prices. For example, you could A/B test—introduce a product at two different prices to separate audiences—to find out which price is favored. You could also position your products next to competitive products in your marketing messaging, to find out how consumers respond. 

Live experiment results combined with feedback from customers can supply you with insights for successful product launches. You may even be able to reduce the trial and error that often comes with introducing offers to the marketplace. 

Optimize your pricing strategy with UVA

Taking online courses can be a great way to learn more about pricing strategies, marketing, business operations, and career opportunities. The University of Virginia's Darden School of Business has partnered with Boston Consulting Group to deliver a Pricing Strategy Optimization Specialization that will show you how to increase price realization and maximize your profits in approximately four months.

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Blogs & articles, how to write a pricing strategy for my business plan.

In this blog you will learn about the importance of choosing the right pricing strategy for a successful business plan.

Why is a pricing strategy important for a business plan?

A business plan is a written document outlining a company’s core business practices – from products and services offered to marketing, financial planning and budget, but also pricing strategy. This business plan can be very lengthy, outlining every aspect of the business in detail. Or it can be very short and lean for start ups that want to be as agile as possible.

This plan can be used for external investors and relations or for internal purposes. A business plan can be useful for internal purposes because it can make sure that all the decision makers are on the same page about the most important aspects of the business.

A 1% price increase can lead to an 8% increase in profit margin.

A business plan could be very lengthy and detailed or short and lean, but in all instances, it should have a clear vision for how pricing is tackled. A pricing strategy ultimately greatly determines the profit margin of your product or service and how much revenue the company will make. Thorough research of consultancy agencies also show that pricing is very important. McKinsey even argues that a 1% prices increase can lead up to an 8% increase in profits. That is a real example of how small adjustments can have a huge impact!

It is clear that each business plan should have a section about pricing strategies. How detailed and complicated this pricing strategy should be depends for each individual business and challenges in the business environment. However, businesses should at least take some factors into account when thinking about their pricing strategy.

What factors to take into account?

The pricing strategy can best be explained in the marketing section of your business plan. In this section you should describe what price you will charge for your product or service to customers and your argumentation for why you ask this. However, businesses always balance the challenging scale of charging too much or too little. Ideally you want to find the middle, the optimal price point.

The following questions need to be answered for writing a well-structured pricing strategy in your business plan:

What is the cost of your product or service?

Most companies need to be profitable. They need to pay their expenses, their employees and return a reasonable profit. Unless you are a well-funded-winner-takes-all-growth-company such as Uber or Gorillas, you will need to earn more than you spend on your products. In order to be profitable you need to know how much your expenses are, to remain profitable overall.

How does your price compare to other alternatives in the market?

Most companies have competitors for their products or services, only few companies can act as a monopoly. Therefore, you need to know how your price compares to the other prices in the market. Are you one of the cheapest, the most expensive or somewhere in the middle?

Why is your price competitive?

When you know the prices of your competitors, you need to be able to explain why your price is better or different than that of your competitions. Do you offer more value for the same price? Do you offer less, but are you the cheapest? Or does your company offer something so unique that a premium pricing strategy sounds fair to your customer? You need to be able to stand out from the competition and price is an efficient differentiator.

What is the expected ROI (Return On Investment)?

When you set your price, you need to be able to explain how much you are expeciting to make. Will the price you offer attract enough customers to make your business operate profitable? Let’s say your expenses are 10.000 euros per month, what return will your price get you for your expected amount of sales?

Top pricing strategies for a business plan

Now you know why pricing is important for your business plan, “but what strategies are best for me?” you may ask. Well, let’s talk pricing strategies. There are plenty of pricing strategies and which ones are best for which business depends on various factors and the industry. However, here is a list of 9 pricing strategies that you can use for your business plan.

• Cost-plus pricing
• Competitive pricing
• Key-Value item pricing
• Dynamic pricing
• Premium pricing
• Hourly based pricing
• Customer-value based pricing
• Psychological pricing
• Geographical pricing

Most of the time, businesses do not use a single pricing strategy in their business but rather a combination of pricing strategies. Cost-plus pricing or competitor based pricing can be good starting points for pricing, but if you make these dynamic or take geographical regions into account, then your pricing becomes even more advanced!

Pricing strategies should not be left out of your business plan. Having a clear vision on how you are going to price your product(s) and service(s) helps you to achieve the best possible profit margins and revenue. If you are able to answer thoughtfully on the questions asked in this blog then you know that you have a rather clear vision on your pricing strategy.

If there are still some things unclear or vague, then it would be adviceable to learn more about all the possible pricing strategies . You can always look for inspiration to our business cases. Do you want to know more about pricing or about SYMSON? Do not hesitate to contact us!

Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!

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9 Popular Pricing Strategies to Maximize Revenue Growth

• Table of contents

Pricing is one of the most crucial and influential levers in driving revenue for your company. Unfortunately, many organizations take a “set and forget” approach to pricing and fail to develop a comprehensive, research-backed strategy to determine appropriate price points.

This mistake leaves a significant revenue opportunity on the table and is responsible for as much as 18% of startup failures .

It seems obvious, optimize your pricing strategy to maximize revenue from each customer. This leads to improved growth and higher profit.

However, many SaaS revenue leaders fail to put this simple idea into effective practice.

This guide will dive deep into 9 of the most powerful pricing strategies and outline how to choose the optimal approach based on the type of company you operate.

What Is Pricing, and Why Is It Important to Get Your Pricing Right?

Simply put, pricing is the process of determining what you’re going to charge for your company’s products or services.

The operative term in this definition is “process.” Setting your price must not be an arbitrary decision based loosely on market norms and competitor price points (though these factors should be taken into account).

That “process” (which we’ll discuss in more detail in subsequent sections) is informed by your pricing strategy — the theory and principles behind your product pricing.

So, why is it so crucial to get pricing correct?

The main reason is that pricing optimization leads to increased profits. Studies show that a pricing increase of just 1% can induce profit growth of more than 11%.

Of course, by setting prices too high, you’ll alienate certain market segments and risk pricing yourself out of the market. You need to find the right price, or prices, to maximize market penetration.

More than that, a company’s pricing contains inherent indicators of value and how customers should perceive that product. 

At a basic level, higher-priced items are perceived as being of higher quality (a psychological phenomenon known as premium or prestige pricing ) and vice versa. 

How, then, do you determine the optimal price point for your product or service? First, you need to determine the pricing strategy that best fits your revenue and organizational goals.

What Are Pricing Strategies? 

Your pricing strategy is your methodology, concept, or theory behind your product pricing. 

Pricing strategies allow you to make informed decisions on pricing changes and to understand how those changes will be impactful and appeal to your target audience.

Let’s take two common pricing strategies to illustrate: price skimming and cost-plus pricing (both of which we’ll discuss in more detail shortly).

Price skimming is a strategy where you start by setting high prices — as high as the market can tolerate (capturing maximum revenue per unit early on) — and then gradually lower prices to reach a wider audience as demand reduces.

Cost-plus pricing is a strategy that takes your total production cost and adds a margin on top of it (typically a percentage).

A startup entering the CRM market, for example, might perform research and determine that the maximum they can charge for their product right now is $80 per user (using the price skimming strategy). They’ll capture some high-value clients upfront and then slowly reduce their price over time to widen the pool of potential customers.

If they choose to use a cost-plus pricing strategy, however, with a margin of 50%, they may calculate the total cost of production to $30 per user and so decide to set their price at $45 per user.

Why Are Pricing Strategies Important? 

Without an effective pricing strategy, you’re essentially throwing darts in the dark — there’s a chance you’ll hit the bullseye, but you’re more likely to miss the board altogether.

Several things go wrong when the price of a product is not informed by a sound strategy:

You fail to meet market expectations

You fail to capture as much revenue as you could

You risk losing business to competitors whose pricing more accurately reflects market sentiment

You fail to communicate the real value of your product

Your marketing strategy misses the mark

To illustrate, let’s examine the opposite scenario. 

You’re releasing a new product, and it’s time to nail down pricing and get it to market. Because you aren’t using a specific pricing strategy, you’re just going to make your best guess at what the price should be and see how things pan out.

One of two things will happen:

1. Your price is too high. Most of the market isn’t going to buy from you. If you’re really good at selling value, you might capture a few upmarket buyers, though they’ll likely churn once they realize the value you sold isn’t reflective of the actual product, and they’ll move to a competitor that offers the same value for a lower price.

2. Your price is too low. The majority of the market sees your product as cheap, inferior, and altogether not worth purchasing, as the price point you’ve selected doesn’t indicate the product’s true value. You’ll close a few frugal customers, but you won’t generate much revenue from them. If you’re not careful, you may even fail to set the price high enough to cover your production costs. Then, when you realize you’ve gone too low, you’ll increase your pricing and lose the majority of those buyers who only purchased your product — because the price was the most important factor to them. 

The latter is more likely, statistically speaking, as the majority of startups underprice their products and gradually increase total deal size as they grow.

But it’s not as simple as continuing to bump up your product’s price point. Inevitably you’ll reach a glass ceiling, and you’ll experience diminishing returns. Once you exceed a certain pricing threshold, you’ll narrow your addressable market, close fewer deals, and risk actually reducing total revenue.

So, neither of the above scenarios is ideal, but the problem runs deeper.

Because you don’t have a well-developed pricing strategy in place, pricing across your product range is likely to be disconnected, particularly when you have different leaders in charge of each.

And, as you continue to adjust to the market and learn more about how your pricing fits (and the fact that you got it wrong to begin with), you’re going to keep changing it, which is a sure way to confuse and alienate your existing customer base.

Pricing strategies are crucial because they help you to:

Communicate the value of your product and create expectations you can actually make

Target the right customers to increase average deal size and minimize churn

Differentiate your offering from competitors — a good pricing strategy can be a competitive advantage

Types of Pricing Strategies

There are a number of pricing strategies that SaaS companies adopt to communicate value to their target audience and drive revenue.

Before settling on a singular strategy for your own company, take time to consider these nine approaches and how they might impact your own profitability. 

1. Value-Based Pricing

Value-based pricing is the most common approach for SaaS and subscription businesses . With the value-based pricing strategy, you’re setting pricing based on what your customers believe the value of your product to be.

That is, you charge as much as your customers are willing to pay.

It doesn’t take into account cost factors, as the assumption is that if the cost of producing that product exceeds what customers would be willing to pay, then the business model isn’t viable and not worth venturing into.

Many B2B SaaS organizations use this strategy. Take Asana, for example.

Asana uses a freemium model (more on that later), with two paid pricing tiers: Premium and Business.

Note that the Business plan costs twice as much as the Premium plan. That’s because, with the features included in this plan, Asana can demonstrate how they’ll create significant value for their Business customers, and so they’ve priced this plan based on that value.

Value-based pricing is the most suitable strategy for the majority of subscription businesses for a few reasons.

First of all, determining the cost of production (in order to use a strategy like cost-plus pricing) is more well-suited to physical goods than virtual goods like software platforms. With software, once a product is built, it’s built, and so the cost is less relevant to pricing than it would be for, say, a smartphone.

Secondly, it’s the best way to maximize your revenue. Charging based on value allows you to find the optimal balance between revenue per user and the number of users in total.

Thirdly, it puts the customer at the center of your pricing decisions. 

This ensures an alignment between the product and its pricing (as both are designed around the end-user) and puts upward pressure on your company to provide more value. If you can deliver more value than your competitors, you can justify charging a higher price and prevent engaging in a race to the bottom (a competitive situation that occurs when companies compete solely on price).

However, there is one drawback of using the value-based pricing strategy: it’s a reasonably time-consuming process.

Where strategies like competitive pricing are easy to implement (you monitor what your competitors are charging and adjust when they do), value-based pricing requires a deep understanding of your target audience, their needs, and the benefits your product provides. 

It can also be hard to satisfy different segments, like price-sensitive small businesses and big-budget enterprises, with the same offering.

That said, you should get to know your target market and different segments in-depth anyway if you want to effectively market your product, so it’s not the most concerning drawback.

Value-based pricing is a fairly dynamic approach. It involves testing different pricing points (whether actively in the market or by conducting surveys) as well as performing customer research and interviews.

And, of course, each time you release a new update or feature, your value changes, so you’ll need to reassess how that impacts your pricing.

While the value-based pricing strategy is best implemented through a combination of testing and research, a simple formula called the 10x rule can be used to get you into the ballpark:

Value-based price = Value you provide to client (monetarily) / 10

That is, the value you provide in monetary terms — either the additional revenue you help to create for a customer or the amount of money your product saves them — should be 10x your price.

If your product costs $499 per month, for instance, then you should be saving or creating $4999 of value per month for the customer — a premium price needs to line up with your product’s perceived value in your customer’s mind.

2. Competitive Pricing

Competitive pricing is a fairly straightforward strategy. You’re simply setting your prices in accordance with what your competitors are charging.

It’s not a particularly sophisticated strategy, but it’s an easy one and one that can help you find a decent pricing range fairly quickly, assuming your product or service is very similar to the companies you’re competing with.

A company using the competitive pricing strategy would assess the competitive landscape and the various pricing models used and then determine whether they want to sit slightly above, slightly below, or on par with the market.  

If you’re new to a market that has a few established businesses, then competition-based pricing can be a reasonable approach (though it should really only be used as a starting point).

Let’s say you’ve developed a new CRM for sales reps. You’re entering a pretty well-established (and fairly saturated) market, so there’s plenty of competition to base your pricing on.

First, you check out Pipedrive.

Then, Copper.

And a third for good measure: Zoho CRM.

Now we’ve got some good ballpark figures to work from. If you’re planning on offering three different plans, you should start your pricing in these ranges:

Tier 1 - $15-20 

Tier 2 - $40-50

Tier 3 - $60-90

Remember: use these figures as a starting point only. You should test and optimize from there, and ideally move toward a value-based pricing strategy once you’re able to establish and demonstrate the value your product delivers

If your product or service differs significantly from what your competitors offer, then competitive pricing might not be a suitable strategy, as you’re not comparing apples with apples, despite competing in the same market segment.

The other downside of the competition-based pricing model is that you’re relying on someone else’s research, and as we know, that research isn’t always applicable to your business. 

In some instances, it might even be non-existent, and so you’re setting your prices based on a competitor with a price point that isn’t backed by data.

All things considered, paying attention to your competition is still an important aspect of pricing, regardless of your chosen strategy.

Charge much more than your competitors (without being able to communicate additional value), and you’ll likely alienate a large segment of the market. Charge much less, and customers are likely to make the assumption that your product is somehow inferior.

3. Price Skimming

The price skimming strategy is all about squeezing as much revenue out of each customer as possible, focusing initially on those who are willing to pay the most.

With the price skimming strategy (also known as the high-low pricing strategy), you start by setting your price as high as the market will tolerate. You’ll capture revenue from buyers who have the most need and demand for your product or service, but be priced out of the market for the majority.

As time progresses, you’ll gradually lower your price to capture more of the market.

This is a pretty common approach in the electronic goods market, with console producers like Sony and Microsoft using the price skimming strategy for their PlayStation and Xbox product lines.

This pricing strategy works best for products that are able to be positioned as premium (iPhones, for example) and for one-off purchase items such as electronic goods (the intersection of these two product types is ideal).

It’s not so well-suited to subscription products or services because your intention with this style of business is to grow revenue over time. But if you continue to lower your prices, you’ll reduce your revenue from each existing customer and ruin your Customer Lifetime Value (LTV) .

But many of today’s consumers are aware of this pricing strategy, and they understand that prices for certain goods are likely to come down with time. Many will even wait for price reductions before purchasing. So inevitably, you won’t capture the full market demand in the short term, slowing down your cash flow.

4. Cost-Plus Pricing

Cost-plus pricing is an incredibly simple pricing strategy — it’s your costs plus your markup.

To set prices for a new product, you take the total cost of producing it, then add a percentage on top to determine your price.

It’s easy to calculate but not really suitable for anything other than physical products, where your production costs align reasonably closely with an increase in the number of units produced.

With software products, however, the majority of the production costs happen up front. The cost to develop the product is the cost to develop the product; that doesn’t change each time you land a new customer.

As such, cost-plus pricing is generally unsuitable for subscription-based businesses.

On the other hand, the major benefit of using this pricing strategy is that it guarantees your profit margin and provides some security as far as profitability is concerned. If you build a 50% margin into your pricing, then you’ll always maintain a healthy profit margin.

5. Penetration Pricing

Penetration pricing is a strategy commonly used by new companies looking to break into an existing market and generate a solid customer base that they can then leverage to create social proof and move upmarket.

With the penetration pricing strategy, you set your prices far below what your competitors are charging but provide the same (or similar) value.

The idea here is that customers will switch over to your company from a competitor, and you’ll be able to gain a foothold, despite making less revenue and profit per customer than you could if you charged more. In some cases, companies using penetration pricing actually make a loss but offset this against future gains.

There are, of course, a few drawbacks to this strategy:

You’ll need to close a lot more customers to make decent revenue

There’s a significant risk that as you increase pricing, you’ll lose existing customers

You risk setting a low pricing expectation in the market, which could prevent you from lifting prices later on

There’s always a risk that you’ll be unable to survive the phase of unprofitability while prices are set so low

New Relic, an observability platform for developers, is a great example of a company using penetration pricing to gain some ground in the market.

Competing with existing industry standards like Datadog and Dynatrace, New Relic offers a similar feature set but charges significantly less than its competitors.

It’s worth bearing in mind that some customers may be wary of newcomers who are charging significantly less. Pricing has a major psychological impact on how customers perceive your value, so penetration pricing does put you at risk of customers thinking your product is inferior.

New Relic does a fantastic job of overcoming this objection by providing a breakdown of the features they offer (and how they charge for them) in comparison to competitors, demonstrating that they can offer the same value at a fraction of the price.

The penetration pricing strategy is best utilized by companies in markets where consumer demand is reasonably elastic (demand is significantly influenced by price).

6. Economy Pricing

Economy pricing is all about sales volume.

With the economy pricing strategy, you aim to produce a product with lower production costs than your competitors (which often means you create an inferior product) and sell it at a lower price. The idea is to sell the product at a higher volume and thereby generate the same profit as you would if you sold a lower volume at a greater price.

This is the pricing strategy that generic soda brands use to compete with established and recognizable brand names like Coca-Cola and Pepsi.

However, it’s not a great fit for subscription and SaaS businesses, as it limits your revenue potential and generates downward pressure on market pricing.

Plus, it incentivizes producing an inferior product, which is not a strategy that’s suitable for delivering long-term growth in SaaS, where customer relationships are everything.

7. Dynamic Pricing

Dynamic pricing is a pricing strategy that involves rapid changes to your pricing in response to either market demand or costs of production.

Depending on the approach you take, you set your initial price (based on current conditions) and then continue to alter it upward or downward based on cost or demand.

As you can imagine, this isn’t a very suitable pricing strategy for subscription businesses, but it does have a place in certain markets and is more common than you might expect.

Entities like Shell and Mobil, for example, use a dynamic pricing strategy to set pricing for their fuel. In this case, their dynamic pricing is informed by the cost of crude oil.

On the demand side, we can look to Uber for an example of the dynamic pricing model in action.

When immediate demand for Uber’s service is high, the company imposes “Surge Pricing,” an inflated pricing differential designed to capitalize on the fact that a high number of users in the area are seeking to access Uber’s driver network.

8. Geographic Pricing

The geographic pricing strategy involves setting different prices based on your customers’ geographic location.

Market demand differs from country to country, which has a major impact on local pricing expectations. As such, it may be appropriate to use different pricing structures in different markets.

This approach ensures you’re capturing maximum revenue in markets where demand and price expectations are high and meeting the largest market possible in markets where the opposite is true.

Most global enterprises follow this strategy. Consider Netflix’s pricing in different regions.

In India, the cost of a Netflix subscription starts as low as ₹149 ($1.95).

In Denmark, customers are paying 10x that price, with a Netflix subscription topping $12 a month.

Of course, the geographic pricing strategy can be combined with any of the other strategies we’ve covered here. For example, you could use an economy pricing strategy as your general approach but then use market insights to determine what pricing level is appropriate in each country.

9. Bundle Pricing

Bundle pricing is a strategy employed to create the appearance of greater value while simultaneously maximizing the throughput of product lines that might otherwise be purchased less frequently.

With bundle pricing, you sell multiple similar products as a package (i.e., a bundle) rather than separately.

The bundle pricing strategy is prevalent in the fast-food industry, with companies such as McDonald’s regularly promoting products together.

There are three factors that make this such an effective pricing model for a company like McDonald’s. 

Firstly, meal deal combos include a main, a side, and a drink; a fairly standard combination, meaning they’re appealing to existing demand.

Secondly, the difference in the cost of the bundle and the price of the items individually is significant (it’s much cheaper), so it creates the illusion of greater value. We say illusion because, in reality, very few people purchase the items individually.

Thirdly, the addition of extra items like fries and, in particular, a drink comes at a minimal cost increase to McDonald’s, especially compared to the price increase. The difference in price between the burger on its own and the bundle might be a couple of dollars, but the cost increase to McDonald’s is mere cents.

This pricing strategy has an application in the SaaS and subscription industries as well.

Mailchimp, for example, offers blocks of email credits for purchase individually.

Alternatively, customers can sign up for a bundle plan which includes a designated number of email sends (based on the size of your contact base), as well as access to their other tools such as landing page builders, automation, and A/B testing.

Pipedrive , for example, offers “add-ons” for customers subscribing to their CRM who need additional capability.

A pricing manager at Pipedrive could experiment with bundle pricing by creating a package that includes the standard CRM as well as all four available add-ons.

How to Choose the Right Pricing Strategy for Your Business?

Having a knowledge of the different pricing strategies available to you is important, but knowing how to apply that knowledge and choose the ideal strategy for your business is even more crucial.

We’re going to look here at six key steps to take in choosing the ideal strategy. When following these steps, bear in mind that the initial idea is to determine the broad range your product fits into. Is it a $10 product? A $50 product? A $500 product?

We don’t want to waste time here arguing over the difference between $45 and $49. We’ll optimize for that down the line. The important component here is understanding the broad category you’ll fit into.

1. Conduct Target Market Research

We know that a thorough understanding of our customers’ challenges, goals, and demographics is important for marketing a product, but we need some technical details in order to land on an appropriate pricing strategy.

This template , for example, demonstrates how granular you need to get to understand a customer profile in relation to pricing strategies.

In particular, the data that will guide pricing strategy choice includes:

Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), and Average Revenue per User (ARPU) by customer profile/market segment

Acceptable pricing range and “indifference” price point

Compelling value props

Feature preferences 

2. Assess Your Competitors’ Pricing

While you don’t want to base your product pricing entirely on competitors (unless you’re using a competition-based strategy), this information is still necessary for certain strategies.

Consider Pipedrive’s pricing tiers:

And then look at those of Copper, a close competitor to Pipedrive.

These two products are fairly similar as far as pricing goes. Imagine, then, that you’re in charge of pricing at ActiveCampaign, and you want to use a penetration pricing model to break into the CRM market.

You’d need to know what these two competitors are charging, so you can position your most basic product package at a much lower price point.

3. Consider Your Revenue Model

Your revenue model has a significant impact on the appropriateness of different pricing strategies.

If you’re primarily generating recurring revenue, for example, then the price skimming strategy might not be the most appropriate approach. However, it might be a suitable method for those selling high-value goods such as electronics and vehicles.

Similarly, economy pricing often isn’t the best strategy for SaaS and subscription businesses, though it’s great for many FMCG (fast-moving consumer goods) companies. 

Perhaps, though, your revenue model is a partial subscription model , with the remainder of your revenue made up of services. 

Bench, for example, uses this model.

They have a proprietary software platform and offer services over and above this.

In this instance, it may be suitable to use an economy pricing model for the platform itself (acting as a sort of loss leader to attract new clients) and generate the majority of its revenue using a value-based pricing strategy for service.

4. Get Absolute Clarity on Your Costs

Even if you aren’t going to use a cost-based strategy (such as cost-plus pricing), it’s imperative that you understand the total expense of production.

This will help you to ensure your pricing more than covers that cost and will be crucial in conducting analyses such as calculating your breakeven point .

5. Evaluate Your Company’s Strengths and Weaknesses

What is your company great at, and in what areas are you not so strong?

If, for example, you have a great marketing team with strong storytelling skills, you know you’ll be able to get more leverage out of a value-based pricing strategy.

If, on the other hand, you’re really good at cost reduction and maximizing production, an economy pricing strategy might prove appropriate. 

6. Ensure Your Pricing Strategy Aligns with Your USP

What is your company’s unique selling point? Is it convenience? Financial savings? Customer revenue growth?

Your USP needs to align with the strategy you choose to determine pricing.

For example, if your value props demonstrate your ability to generate the customer thousands of dollars in new revenue, a penetration pricing model where you charge relatively little for your product probably doesn’t align.

Pricing Strategy for Different Industries 

In general, the most appropriate pricing strategy for SaaS and subscription businesses is the value-based pricing strategy.

This pricing strategy:

Maximizes your revenue per user

Allows you to increase pricing as the value your product offers improves

Mitigates the effect of competition that uses penetration or economy pricing models 

2. Ecommerce

For ecommerce companies, the ideal pricing strategy to use depends quite heavily on the industry you’re in, the stage your company is at, and the kinds of products you’re selling.

Value-based pricing is always a good move, and competitive pricing can be a good place to start if you’re unsure about what customers are willing to pay. Both can also be valuable strategies for ecommerce companies moving over to a subscription model.

If you’re selling discount goods at volume, economy pricing can be a viable solution.

3. E-learning

E-learning companies can follow similar advice to SaaS companies (value-based being the ideal strategy), assuming they’re operating on a subscription model.

For e-learning businesses selling using a perpetual license model, penetration pricing can be a viable alternative for market newcomers looking to gain market share, though value-based will win out in the long term.

4. Publishing

Value-based and competitive pricing strategies will be best for subscription-based publishing companies , though price skimming may be suitable if you’re able to position yourself as a premium product.

5. OTT and Video

OTT and video businesses should follow suit with SaaS companies and adopt a value-based approach. 

Competition should be analyzed, but given content varies significantly from platform to platform, a strictly competition-based approach shouldn’t be followed.

Difference Between Pricing Strategy and Pricing Model 

Many revenue leaders confuse pricing strategies and pricing modes, and they’re often used as synonyms, despite this being incorrect.

Your pricing strategy is the theory behind your product pricing. It tells you how you set your price and what data you need to pay attention to when calculating that figure.

Your pricing model, on the other hand, is the way you display, package, and communicate your product pricing to your customer.

Examples of pricing models include seat-based or user-based pricing (common in SaaS, for example, $49 per month, per user), perpetual license (a one-off purchase), and usage-based (such as your monthly utility bills).

When determining product pricing, you’ll need to decide on both. You’ll use a pricing strategy to determine how you’ll set the price, then decide on a pricing method to determine how you’ll communicate and invoice that price.

Types of Pricing Models 

So far, we’ve laid out the most common pricing strategies and discussed what distinguishes these strategies from pricing models.

Here, we’ll examine eight common pricing models, which you can combine with the overall strategy you’ve chosen for your company. 

1. Freemium

Freemium is an extremely common approach to pricing and involves offering a free version of your product with the goal of converting users to a paid plan at a later point.

monday.com, for example, makes use of the freemium pricing model .

With freemium, the idea is to design a stripped-back version of your product, so you retain some leverage to bring users up to a paid plan.

It’s important, however, that you still provide enough value in the free version to make it worthwhile to the user. 

In monday.com’s case, the free plan allows for unlimited boards and access to over 200 templates to get started immediately. 

However, users on the free plan are limited to just two team members, meaning monday.com has built growth right into its pricing (if the free user gets significant value out of monday.com, their team will grow beyond two members, and they’ll need to upgrade to a paid plan).

2. Per Seat

With the per-seat pricing model (also known as the per-user model), your customers pay based on the number of employees that are using the product.

GitHub, for example, uses the per-seat pricing model:

Note, like with both GitHub and monday.com, the per-seat model can be combined with the freemium model.

The per-user model has a few important advantages:

Revenue growth is built-in — as the customer’s company grows in size, they’ll add more users (depending on the need your product serves)

Pricing is easy to digest, and customers can budget accordingly

Customers have immediate access to all features (that are included in their plans)

However, it has some drawbacks as well:

Users can often share passwords to avoid paying for extra seats

Total costs can get expensive for customers when they expand, so they can be reluctant to upgrade

Getting customers from one user to many users can be a challenge

High-usage customers can be a drain on your resources relative to the revenue you’re receiving from them

Low-usage customers may feel they aren’t getting a lot of value out of your product

Most subscription businesses use the tiered approach. With a tiered pricing model , you’ll create different ‘plans’ (generally between three and five) at different pricing points.

ActiveCampaign, for example, uses the tiered model:

With tiered pricing, each subsequent plan gives users access to more features or higher usage volumes.

This is a powerful method for attracting revenue growth from SME customers. When new customers in this segment sign up, they’re more likely to opt for a more affordable plan.

As the company grows, you’ll continue to demonstrate value through the results your product generates, as well as any marketing and sales activities you engage in to increase your annual contract value.

It can also be an effective way to take advantage of price anchoring, a technique where the lowest and/or highest pricing tiers help to establish the middle tier as better value. 

GitHub’s pricing model demonstrates price anchoring in action, where their “Team” plan appears as higher in value when compared with the much higher cost of the “Enterprise” option. 

4. Flat-rate

Flat-rate pricing takes the opposite approach to the tiered pricing model.

With a flat-rate pricing model, you charge one price for access to all of your product features. Basecamp, for example, uses the flat-rate pricing model, which is unusual in SaaS.

Flat-rate pricing models can be considered a form of penetration pricing, where companies compete with industry leaders who charge on a per-user model.

Consider, for example, a company with 30 users comparing Basecamp’s pricing with monday.com’s pricing.

Even at monday.com’s lowest pricing tier ( $8 per month ), that’s a cost of $240 per month vs. $99 at Basecamp.

The primary benefit of running a flat-rate pricing model is this competition. Plus, it makes your pricing much more digestible, as potential customers don’t need to waste time figuring out the differences between your various plans.

It does come with a major drawback though: the inability to grow revenue from existing accounts. 

When you use a tiered pricing model, you’ve got revenue growth built in, as you always have the ability to upsell lower-tier accounts. And if you’re charging per user, you’ll continue adding revenue as your customers scale.

There is a workaround for this problem. Note that Basecamp’s flat-rate pricing model includes unlimited users. It’s also possible to combine the flat-rate model with a per-user pricing model, where you offer only one plan at a flat rate but charge extra per additional seat.

5. Usage-Based

Usage-based pricing is a pricing model where customers pay based on what they use in a given month.

You’ll find this model used across the majority of utility companies.

In the B2B world, usage-based pricing is often used for cloud computing and web infrastructure services. Entrepreneurs and business owners often prefer this model because of the transparency — you pay for what you get.

Amazon Web Services (AWS), for example, uses this pricing model.

Some companies use a hybrid model, where usage-based and per-seat pricing models are combined to provide a set monthly rate with usage ceilings.

Auth0, for instance, takes this approach.

It makes the most sense for high-volume plans — sending an extra invoice for each new user is not feasible.

6. Pay as You Go

The pay-as-you-go pricing model is a variation of the usage-based model in that customers pay only for what they use.

The difference, however, is that they pay in each instance they use the product rather than receiving an invoice at the beginning of the month for the last period’s total usage.

Ride-sharing apps like Uber and Lyft are good examples of the pay-as-you-go model. Customers pay based on usage (longer distances cost more) and are changed at the point of use.

Twilio is an example of a B2B SaaS company who charges using the pay-as-you-go model for certain features.

7. À La Carte

The a la carte pricing model allows customers to pick and choose features or modules, essentially building their own customized solution.

This is beneficial when you offer a large range of features and want to ensure customers are getting maximum value for their dollar. Rather than having to upgrade to a more comprehensive plan to access a single feature, they can simply add it on.

This does, however, have implications for revenue. 

With a tiered approach, customers who need a more advanced feature must upgrade to a more expensive plan. With a la carte pricing, they can simply add on the new feature they need, which typically costs less than the difference between tiered plans, meaning your ability to grow revenue from upsells is limited.

Because of this risk, a la carte is less common as a SaaS pricing model, though some companies, such as Pipedrive, incorporate a la carte into their tiered approach.

8. Perpetual License

The perpetual license is, for lack of a better term, the “old” software model.

Before SaaS was the most common approach, customers would need to purchase the software outright (now known as a perpetual license).

With the perpetual license pricing model, customers pay a one-off fee and have access to the product in perpetuity. Depending on your structure, that might include all future updates, or they may need to pay a crossgrade/upgrade fee in the future.

Microsoft, for example, still sells Word on a perpetual license (though you’ll see that they’re trying to push customers toward a subscription model).

Making the Most of Pricing: Tips and Best Practices

Not sure how to start optimizing your prices? Here are a few tips and best practices.

1. Adopt a Localized Pricing Model

While the USD may be a pseudo-universal currency, failing to display localized pricing inevitably creates friction in the buying process.

Buyers in regions that also use the term “dollar” (Australia, New Zealand, and Singapore), for example, may misinterpret how you’re displaying prices, resulting in an unwelcome surprise when it comes time to enter their credit details (often resulting in cart abandonment).

Moreover, charging exclusively in one currency means customers incur foreign currency fees, and due to fluctuations in exchange rates, your consistent monthly cost is no longer all that consistent.

A simple way to get around this is to install a plugin on your site that detects the visitors’ region and calculates local pricing automatically. There are two drawbacks here, however:

The nature of exchange rates means that prices are displayed differently each time the customer visits. So unappealing price points ($43.67, say) limit your ability to take advantage of psychological pricing.

You’re not truly localizing pricing.

Localized pricing must reflect the demands and expectations of the geography you’re selling into, and this is not always the same as a simple exchange rate calculation.

Zoho, for example, makes it clear to Australian visitors that they’re charging in AUD, and uses localized pricing to set digestible, round numbers for each of their pricing tiers. You also need to consider the buying power of your target market in each country.

2. Messaging Matters

Though the price points you choose do influence how customers perceive the value your product offers, they’re far from the only lever you can pull.

The messaging around your pricing, and the value propositions you use to communicate the benefits your customers can expect to receive, can influence buyers’ willingness to pay by as much as 20% .

Testing is the best (and really only) way to nail your messaging with 100% confidence. The problem is, testing messaging on a live audience can be time consuming, and presents a risk to revenue growth, because testing ineffective messaging on real customers means you’ll convert less than you could.

To maximize impact (and minimize time spent in A/B testing in a real-life scenario where revenue is on the line), use a message testing service like Wynter to gather in-depth feedback from relevant B2B audiences.

Start by testing internally before investing in professional message testing. Perform Voice of Customer research by interviewing your current buyers and questions about the challenges they faced previously and how your product impacts their lives today.

Pull important quotes and insights from these interviews to use as fuel for your product messaging. Develop several messaging options, and ask for feedback from internal stakeholders (marketing, sales, and customer service).

Use this feedback to refine your message and draft the final landing page copy, then submit it for testing, and use the feedback from that professional process to polish, finalize, and publish.

3. Test Psychological Pricing

Psychological pricing is somewhat of a misnomer — all pricing is psychological.

The term itself, however, refers to the concept of manipulating price points at the micro level to influence buyers’ perceptions of value.

The classic example, and one which you see nearly everywhere, is ending price points with a 9 (such as $19 instead of $20, or even better, $19,99).

Ending your pricing in 9s isn’t the only method, however. While this strategy does work for lower-value products (think FMCGs like those pictured above), it tends to be coupled psychologically with discount brands.

Pricing that ends in a 0, on the other hand, can establish the opposite; an appearance of luxury or premium quality.

The most important factor here is what works for your audience. Set up multivariate testing to establish whether 9, 0, or 5 (or any other number, for that matter) appeals most to your target customer.

4. Keep Pricing Packages Simple

Many studies support the notion that offering too many choices results in something known as “ analysis paralysis .” Buyers are too overwhelmed with the number of options they have and are less likely to make a decision than those given fewer options.

Limiting your selection to three to five packages tends to be the most effective approach. It is also enough space to incorporate a free plan and a custom enterprise plan on either side of the scale, like monday.com does.

Pricing presented like this is extremely easy to digest, because most customers will fall into one of three categories:

Customers who are just getting started who know they want a free platform

Customers at the enterprise level who will gravitate automatically to the Enterprise plan

Customers that are anywhere in between, who’ll then only have three options to choose from

Plus, presenting three options makes it easy to take advantage of the center stage effect , the tendency for consumers to choose the middle option when presented with a row of pricing packages.

Note also how monday.com uses a subtle design cue (the “Most Popular” icon) to further influence this decision pathway with a bit of social proof.

5. Use Design to Impact Purchase Decisions

The design of your pricing page (in conjunction with the price points you set and the messaging you use to sell your value props) can have a significant impact on pricing decisions.

It’s fairly well-established that buyers more readily choose the middle option when presented with a selection of products or packages.

But, if, like many SaaS brands, you want to influence customers to choose a more extensive package with a higher price point, you can use subtle design cues to make one package stand out.

ActiveCampaign, for example, uses a couple of simple yet effective design tricks to make their Professional plan stand out, as well as a subtle “Most Popular” banner to influence choice based on social proof.

Conclusion 

Your pricing strategy is one of the most crucial growth levers you have.

It helps you establish a price point that serves market expectations, and if you choose the appropriate strategy for your industry and company type, can build revenue growth right into your price tags.

Of course, determining pricing is just one small step on a very large journey towards revenue optimization. On the other side of that journey is a need to manage, influence, and grow subscription revenue , which is where a platform like Chargebee comes in.

Chargebee is a dedicated revenue management and subscription billing platform designed to help you streamline revenue operations and consistently improve profitability.

Retail | Listicle

19 Pricing Strategies (+ Pricing Strategy Examples)

Published June 15, 2023

Published Jun 15, 2023

REVIEWED BY: Meaghan Brophy

WRITTEN BY: Katie-Jay Simmons

Your Privacy is important to us.

This article is part of a larger series on Retail Management .

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• 1 Keystone Pricing
• 2 Cost-plus Pricing
• 3 Manufacturer’s Suggested Retail Price (MSRP)
• 4 Psychological Pricing
• 5 Value-based Pricing
• 6 Discount Pricing
• 7 Loss-leader Pricing
• 8 Price Anchoring
• 9 Competitive Pricing
• 10 Penetration Pricing
• 11 Bundle Pricing
• 12 Project-based Pricing
• 13 Hourly Pricing
• 14 Premium Pricing
• 15 Price Skimming
• 16 Freemium Pricing
• 17 High-low Pricing
• 18 Dynamic Pricing
• 19 Geographical Pricing
• 20 Pricing Strategies Frequently Asked Questions (FAQ)
• 21 Bottom Line

Pricing strategies are the methods and formulas that businesses use to determine the cost of their products. A good pricing strategy finds the sweet spot between what customers are happy to pay and what makes your business money. It should also adapt to changes in the market or economy.

Here’s a list of 19 effective pricing strategies—from using the manufacturer’s suggested price to aligning with your competitors’ pricing to changing pricing in real time based on events—with examples of how to use them.

1. Keystone Pricing

What Is It: Doubling the product cost to get the selling price Commonly Used By: Retailers and ecommerce sellers

Keystone pricing is a strategy in which the asking price is double the product’s wholesale cost, or close to a 50% profit margin. It’s the default pricing strategy across both retail and ecommerce due to its simple application and ability to yield profits.

Occasionally businesses will use keystone pricing as a base markup on most goods, then apply higher markups or discounted pricing to certain items based on demand, volume, and competition. It’s a particularly common strategy in fashion, consumer goods, and grocery sectors.

For example , say you run a jewelry store. You purchase a birthstone ring from a wholesaler for $90. To maintain a keystone pricing strategy, you set the retail price for the ring at $180, ensuring a consistent 100% markup. This approach allows you to cover your costs, account for operating expenses, and generate a reasonable profit while offering the product to customers at a perceived fair market value.

Keystone pricing may not be the best strategy for every type of product. If your goods have low turnover rates, involve high shipping and handling costs, or are unique or rare, you may be undervaluing them by using keystone pricing. However, if your products are widely available and easily replaceable, keystone pricing may put them at too high of a price to generate sales.

Check out our guide on how to price your products for step-by-step instructions.

2. Cost-plus Pricing

What Is It: Applying a standard markup percentage on top of your cost of goods sold (COGS) Commonly Used By: Wholesalers, manufacturers, artisans, and private label sellers

Cost-plus pricing (also known as markup pricing ) involves calculating the total fixed and variable costs associated with your product (labor, marketing, shipping, etc.), and then adding a markup to achieve your desired profit margin. Most retail brands aim for a 30%–50% margin, which means roughly a 40%–100% markup.

Cost-plus pricing works well for companies that sell labor-intensive products or large amounts of similar products. Here are some examples of how wholesalers, manufacturers, artisans, and craftsmen typically use cost-plus pricing:

• Wholesalers: Wholesalers usually add a flat percentage markup to all goods that pass through their hands. A common wholesale or middleman markup on most consumer goods is 20%, but that can vary depending on your industry.
• Manufacturers: Manufacturers use different cost-plus prices depending on the buyer. A manufacturer might sell bulk goods to wholesalers at a cost-plus of 100%, just like a keystone markup—but then also sell single units directly to consumers on its website at a 200% markup (generating a 67% margin). This way, it makes more money per unit on smaller sales.
• Artisans and Craftsmen: Labor is the cornerstone of artisanal and craft works, so the cost-plus price represents the value of the labor and the product. For example, if you have a wooden chest built by an artisan, the cost-plus markup might be 70%. The base price represents materials and hours, and the 70% markup represents the value of the labor and finished product.

Use this formula to calculate cost-plus pricing based on the markup you want:

Item Cost x (1 + [Markup/100]) = Selling Price

So, if you are a craftsman who spent $150 making that wooden chest we mentioned above and wants to sell it at a 70% markup, your calculation would be:

150 x (1 + [70/100] 150 x (1 + 0.70] 150 x 1.70 Selling price = $255

3. Manufacturer’s Suggested Retail Price (MSRP)

What Is It: Using the price that product manufacturers recommend for their goods Commonly Used By: Retailers and ecommerce sellers

The MSRP pricing strategy is popular among retailers that purchase goods rather than making the products themselves. The MSRP often matches the Keystone price, but there can be exceptions.

Some retailers may have the flexibility to adjust the MSRP, but certain manufacturers or brands strictly prohibit alterations to their suggested prices. This is called MAP or Minimum Advertised Pricing , and it’s commonly used by brands like Apple to maintain their products’ value. Because of this, it’s crucial to know the pricing terms before you start working with a manufacturer to avoid legal trouble.

The downside of using MSRP as your pricing strategy is that you’ll have the same prices as your competitors. So, you’ll have to differentiate your store in other ways—for example, offering free shipping for ecommerce sellers and exceptional in-store promotions for retailers.

Some brands print the MSRP on their product packaging to ensure retailer compliance. If you choose to use a different pricing strategy in these cases, you’re likely to upset your customers as well as the manufacturer. (Source: Reddit)

4. Psychological Pricing

What Is It: Using prices that end in an odd number (typically 9, 5, or 7) to give the impression of a lower price and a good deal Commonly Used By: Retailers, ecommerce sellers, big box stores, and discount chains

Have you ever walked into a store or viewed an infomercial and noticed that all of the prices end in 99 cents? That’s psychological pricing at work.

A store may price a product at $199 instead of $200 or $4.95 instead of $5. With psychological pricing, the theory is that customers put a greater emphasis on the first digit of a product price, so $199 seems like a much better value than $200, even though the actual price difference is minimal.

By providing customers with the sense that they’re getting a bargain or paying less, psychological pricing reduces the psychological pain of loss that customers experience when parting with their money. This incentivizes shoppers to buy, especially in impulsive scenarios. It also gives them the sense that they’re walking away with a good deal.

An ad from Food Lion shows all the deals that it is currently offering and gives us a great example of a retailer creating the illusion of a deal with psychological pricing. (Source: Pinterest)

Psychological pricing is also a great “bang for your buck” pricing strategy, where only a few cents can inspire customers to make much larger purchases. For example, at my boutique, we decided to re-price our jeans from $70 to $69.99. Immediately, we saw a massive uptick in denim purchases, simply due to the 1-cent price change.

Many retailers choose to mark all their goods with 99-cent endings. Some, however, will reserve the power of psychological pricing exclusively for their sale pieces to incentivize faster turnover of old merchandise. Other common prices that retailers use to make a more appealing sticker price are 95 cents, 89 cents, and 69 cents.

Steer clear of psychological pricing techniques if you sell high-value items, as it may decrease the perceived worth.

5. Value-based Pricing

What Is It: A strategy in which pricing is based on perceived value or how much the customer believes the product is worth Commonly Used By: Specialty stores, luxury stores, sellers of rare and unique goods

The value-based pricing strategy works best for merchandise with high brand recognition, luxury goods, and unique products that have exclusive features that set them above the competition. It does not work well for businesses that sell commoditized goods or products that lack exclusive features (such as grocery or convenience retailers).

As a value-based pricing strategy example, say you own a shop that sells vintage luxury handbags. The value of your products is not represented by doubling the production cost price or by any MSRP. In this case, you would use a value-based pricing system that accounts for the exclusivity of designer labels and the rarity of the bags to reflect perceived value.

To implement a value-based pricing strategy, you have to analyze three things:

• Your Customers: Conduct surveys, research locally, and understand your target market so that you can learn their value system (and set prices accordingly).
• Your Market: Research industry trends and national consumer patterns to understand the value-based price that the greater population is willing to pay for your products.
• Your Competitors: Look to competing sellers to see how they are pricing their products. Successful businesses in your industry can help you understand the pricing that is helping them prosper, as well as what prices will allow you to compete.

6. Discount Pricing

What Is It: A strategy of regularly selling goods at prices under competitors’ Keystone or MSRP prices Commonly Used By: Retailers, ecommerce seller, big box stores, and discount chains

Discount pricing drives entire business models—think Dollar Store, Big Lots, and Home Goods. It’s best for volume-driven businesses that can get lower prices from suppliers by purchasing large quantities.

Be sure customers know they’re getting a deal by clearly displaying your discount or even including the undiscounted MSPR/Keystone price on the tag. This shows customers exactly how much they are saving.

Mark your racks and tags with the discount you are offering so customers know just how much they are saving. (Source: Crazy Coupon Lady)

For the small retailer, an overall discount pricing strategy can leave you with razor-thin profits that easily dip into losses. But running occasional sales, markdowns, seasonal specials, and coupons is an excellent way for small businesses to move through old products and attract new shoppers.

Plus, small businesses can use discount pricing strategies to kick-start drooping sales, unload stale stock, and take advantage of seasonal shopping trends.

To ensure that you don’t sacrifice your bottom line, run your numbers and determine whether a discount will leave you with healthy margins before applying this strategy.

7. Loss-leader Pricing

What Is It: A strategy that sets prices below production costs to attract new customers or increase sales Commonly Used By: Retail, ecommerce sellers, convenience stores, big box stores, and discount chains

Loss-leader pricing is when you sell select products at extremely low prices to draw customers in and then get them shopping for more profitable goods as well.

A good loss-leader pricing strategy example is Costco, a popular wholesale grocery membership club that sells rotisserie chickens for $4.99 each. Costco states that it actually loses money on each chicken sold, but they function as a loss leader that inspires people to sign up for memberships and shop the rest of their store.

Take a note out of Costco’s book and place your loss leaders in the back of your store . This will force shoppers to go through your entire space and be exposed to lots of other products before they reach the deal.

Loss-leader pricing is a great strategy for grocers and other stores where people make multi-item purchases, but it can be a risky pricing strategy for small businesses. The strategy relies on the fact that the profits you lose from your loss leader will be made up by profits of other items. This is difficult to ensure if you don’t sell many items per ticket or if your margins on other goods are small. Be sure that you run the numbers and know your typical units per ticker (UPT) before introducing a loss leader to your pricing strategies.

Units per ticket (UPT): A popular retail metric that tells you the average number of items in each transaction over a certain period of time. Also called IPC or Items Per Customer.

UPT formula:

UPT = total units sold / total number of transactions

8. Price Anchoring

What Is It: A strategy that involves displaying a higher anchor price alongside your product price to make it look like a better deal to customers Commonly Used By: Retail stores, ecommerce stores, discount chains, secondhand stores

There are two primary ways that you can implement an anchor pricing strategy. This first is when you display a regular or MSRP price and your lower price on the same tag. Stores like Marshalls, TJ Maxx, and other discount, consignment, and antique stores use this pricing strategy storewide.

TJ Maxx, a popular discount store, shows the “compare at” price on all their tickets so shoppers know just how much they are saving. (Source: Consumer Products Safety Commission)

Another anchoring strategy that you can use is to display multiple models of the same product together so that the cheaper model seems like a good deal. For example, if you have ever had to choose a new phone or computer, you’ve seen that the cheaper models are typically displayed together with the most expensive model acting as the anchor price. In effect, when a customer chooses one of the less expensive models they feel as though they are getting a good deal compared to the anchor price.

Anchor pricing can work well for small sellers. It’s especially useful if you sell in a niche that has a lot of competition, but not so much that you have to substantially lower your price to compete. Often, a standard storewide 5% to 10% anchor pricing discount is enough to create a memorable sense of value that brings shoppers back for more.

9. Competitive Pricing

What Is It: A pricing strategy in which you use competitors’ prices to set the price of your same or similar products Commonly Used By: Convenience stores, big box chain stores, discount stores, gas stations, retail stores

Competitive pricing ensures that your goods are priced low enough to compete with other sellers. It’s a smart option for products that are common and easily attainable elsewhere. It’s also a useful strategy to use when testing new products that are similar to competitor’s.

Alternatively, you can use this strategy to set yourself a step ahead by making your prices lower than the competition.

In the age of Amazon and other large-scale retailers, competitive pricing is particularly important. If a shopper could just as easily buy your product on Amazon, it’s crucial to have a better price. If that’s not attainable, consider creating value in other ways—like offering free shipping or a free gift with purchase.

10. Penetration Pricing

What Is It: A pricing and marketing strategy that involves temporarily selling at a lower price to attract customers and increase brand recognition Commonly Used By: Retailers with membership options, discount stores, and big box retailers

Penetration pricing is a smart way to introduce a product to new customers, build brand recognition, and foster customer loyalty .

It works particularly well for promoting new products or things that you have to buy on a subscription or membership basis. The idea is that the low price will penetrate the market and get customers to make an initial purchase. Then, once hooked, they will continue purchasing the item as its price increases (or buying for other products from your store).

Penetration pricing strategy examples include:

• Offering a free month of membership upon sign-up
• Selling a new product at a steep price to drum up hype
• Offering a limited-time deal

For example, Fabletics, a fitness clothing membership retailer, offers new customers two bottoms for $24 and 70% off everything when they sign up. This is a deal that really gets people excited and willing to sign up for the $50 monthly subscription. The catch? The deals that reeled you in are only available for your first purchase, and after that, prices are back to their normal rates.

Fabletics has mastered the art of penetration pricing with its enticing sign-up offers. (Source: Fabletics)

11. Bundle Pricing

What Is It: A pricing strategy that offers a discount when two or more products are purchased together, rather than buying them separately Commonly Used By: Discount retailers, beauty supply, office supply, and grocers

Bundle pricing is a pricing strategy in which retailers sell multiple items together at a lower price than if purchased individually. This type of pricing typically has two objectives: giving customers a sense that they are getting a bargain and selling more products.

The benefit behind bundle pricing is that retailers are able to sell more items and increase their transaction sizes while customers walk away feeling like they got a deal.

Fast food restaurants famously take advantage of bundle pricing by offering discounted combo meals. (Source: Burger King)

In retail, bundle pricing is primarily used by discount stores or businesses that sell a lot of complementary products, like beauty or craft stores. It is also sometimes used around the holidays to promote gift baskets.

12. Project-based Pricing

What Is It: When you charge a flat fee for a specific service Commonly Used By: Service providers, freelancers

Project-based pricing is a service pricing strategy in which you set your pricing based on the service/project provided, not based on an hourly rate. This is a great way for service-based businesses to create security in the minds of their customers because it allows them to know the price upfront.

Some businesses will set a time limit on the project-based price and then upcharge or set an hourly rate for the additional time the project requires.

This strategy works best for businesses that provide services with set parameters and few potential variables, and should not be used for more creative projects. For example, nail salons charge a set price for manicures and pedicures or a tire shop offers the same price for wheel removal. Home improvement projects, on the other hand, have more variability, so hourly pricing may be better suited here.

13. Hourly Pricing

What Is It: When your price is based on an hourly rate that correlates to the length of a project Commonly Used By: Service industries that offer creative or highly variable services

This pricing strategy is the flip side of project-based pricing. It’s typically used for projects with more creative elements or less controllable or consistent parameters. This strategy is usually less favorable than project-based pricing in the eyes of the customers, but it’s more practical for most service-based industries.

For example, consider if a company charged a flat “landscaping” fee for their landscaping projects. This pricing structure would not make sense, as there are countless types of landscaping services and as well as sizes of yards and gardens. In this case, the company would have been better off using an hourly pricing strategy, so it could charge accordingly for the variability of the work and make a fair profit based on labor, resources, and time.

14. Premium Pricing

What Is It: The practice of setting a high price to give the impression that a product is superior or high quality Commonly Used By: Luxury retailers, specialty shops, antique goods, and tourist shops

Premium pricing is when retailers artificially inflate prices to create a sense of value among customers. This is a practice commonly used by luxury retailers and specialty stores to help them demonstrate the value of their goods. In other words, the price of the good creates its perceived value, which increases its demand, and, in turn, justifies its price.

Retailers that sell established brands (or are established brands themselves) can use premium pricing on all their products. However, it is also a popular strategy to select only one or a few goods to set at a premium. The products with premium pricing will raise your entire brand’s perceived value and make customers willing to pay more all-around.

For example, say that you own a specialty pool store, and Walmart sells the same pool floaties that you carry. Rather than pricing your floaties equal to or lower than Walmart’s, you can price them slightly higher to reflect your expertise, personalized service, and unique value proposition.

15. Price Skimming

What Is It: Selling a product with a higher-than-usual markup and then lowering the price over time Commonly Used By: New product launches, subscription-based businesses, retailers with membership options

Price skimming (also known as skim pricing) is a strategy that involves charging the highest initial price that customers will pay for your product then lowering it over time. The main goal is to generate the highest possible revenue by targeting customers who are willing to pay premium prices. Then, as consumer demand fades and new competitors enter the market, you reduce the price and attract more cost-conscious customers.

This strategy doesn’t work in every scenario. Price skimming is usually used when:

• There is enough demand from prospective customers who are willing to pay a high price
• There is no direct competition that would deter buyers
• A high price can effectively contribute to the item’s perceived value
• You need to recoup development and/or production costs

A classic price skimming example is the iPhone. When Apple launches a new model, they sell it at a high price to plenty of loyal, price-insensitive customers who value having the latest technology. Then, as new versions and competing devices are introduced, the company drops the price to capture more sales.

Price skimming can also be used by businesses that require recurring payments (like subscriptions and memberships). It helps foster loyalty by rewarding long-term customers with better prices. The strategy can even help with the initial signup by creating an incentive to “earn” the better rate.

16. Freemium Pricing

What Is It: A model that provides a free basic service with the option to upgrade to a paid premium version for additional features Commonly Used By: Subscription-based businesses, retailers with membership options, service providers, software-as-a-service companies

Freemium pricing is when a business will offer a base-level service, plan, or membership tier for free, as well as the option to upgrade to a premium or paid version with enhanced features, advanced functionality, or additional benefits.

By offering a free option at the forefront, the freemium pricing structure helps businesses reel in customers and get them interested in their products or services. You may be familiar with this pricing model from streaming services like YouTube or Spotify.

In both of these companies’ freemium pricing structures, there is a free service where you can play music or videos without charge. But, to listen to the entertainment without advertisements or breaks, you have to join their monthly subscription.

Another form of freemium pricing is offering a free trial . The free initial product also serves to get customers interested in your business and makes them more likely to sign up for your paid service.

Generally, you use freemium pricing on services and products that are low-cost and need to be sold in high volumes. A popularly cited stat says that there is between a 1% and 10% conversion rate from free trials to paid services through freemium pricing. If you’re thinking about using this pricing structure, be sure that your product’s overhead and marketing costs are low so you don’t end up digging yourself into an unprofitable situation.

Shipping software companies (like ShippingEasy, pictured here) use a freemium pricing model to offer a low-volume base plan. When the customer’s business grows and sales increase, they must upgrade to a paid plan to meet their order volume.

17. High-low Pricing

What Is It: When a company alternates between offering high prices and promotional discounts to attract customers Commonly Used By: Discount stores, electronics stores, clothing brands, supermarkets

High-low pricing is a strategy in which retailers alternate between discounted promotional prices and prices that are or above the product’s MSPR. This is accomplished by having frequent sales during which prices are lowered for a short time.

This strategy establishes the value of a product then uses limited-time promotions to deliver a bargain— which drives bursts of high-volume sales. Similar to loss-leader pricing, the high-low strategy works to drive store traffic and encourage customers to buy additional items once they’re in store. It also uses the same structure as price skimming to capture sales from multiple target markets by using different price points.

But, unlike price skimming, hi-low pricing can retain the product’s perceived value after the promotion as long as you’re careful. Too many sales and discounts will result in shoppers perceiving your sale prices as the actual value, which dilutes your brand.

One example of high-low pricing is the fashion retailer Zara, which frequently introduces new collections at regular prices and then offers promotional discounts during seasonal sales. This strategy helps Zara attract customers with the initial higher-priced items and later bring in price-conscious shoppers with discounted prices. It also creates a sense of urgency and drives sales.

18. Dynamic Pricing

What Is It: A strategy where prices are adjusted in real time based on factors such as demand, supply, competitor pricing, and market conditions Commonly Used By: Hospitality, tourism, transportation, entertainment, and utilities

Dynamic pricing is when a business changes its pricing based on the seasons or other demand-shift indicators (weather, day of the week, political climate, etc.). It takes into account things like competitor pricing, supply and demand, and other external market factors in setting its prices. This pricing strategy works best for services in the hospitality and transportation industry and essential goods like gas and electricity.

This strategy can help companies maximize their profits in industries with a lot of volatility in terms of traffic and demand. For example, a resort might charge $300 for a room during the peak season and $220 for the same room during the offseason. This type of pricing helps the business owners capitalize on busy times when demand is high, and use lower prices to incentivize offseason purchases.

To use dynamic pricing, be sure to understand your industry and its peaks and valleys in demand. Then assign higher prices during peaks and lower pricing during valleys. It’s important that your dropped prices can still generate enough revenue to cover your costs, or, alternatively, profits acquired during peak prices can cover profits lost from low prices.

19. Geographical Pricing

What Is It: The practice of adjusting an item’s price based on the location of the buyer Commonly Used By: Multilocation retail stores, franchise businesses, ecommerce sellers, luxury brands

Geographical pricing is a strategy that adjusts the price of a product based on the buyer’s location. This pricing strategy takes into account several factors— including shipping costs, local market conditions, economic status, and buying habits of different geographical areas. Sometimes, it also considers the cost of living and the average income of people in a specific region.

For example, a multilocation clothing store might charge different prices for the same item in New York City versus a rural town in Kansas. In the city, the price could be higher due to increased demand, higher average income, and a higher cost of living. This higher price also helps to offset the inflated cost of the retailer’s rent and other utilities. On the other hand, in a rural town where income levels and cost of living are lower, the seller may opt for a lower price to match the local market’s purchasing power.

Pricing Strategies Frequently Asked Questions (FAQ)

What is the most used pricing strategy.

The most popular and common pricing strategies are:

• Cost-plus pricing: calculating your costs and adding a markup
• Keystone pricing: doubling the wholesale price
• Competitive pricing: setting your price based on what competitors charge
• Value-based pricing: pricing your goods based on what the customer thinks they’re worth

These pricing strategies are used by businesses throughout a number of industries, from small companies and startups to enterprise-level companies. They’re popular because they’re simple to use across large inventories and generate profit while attracting customers.

Can You Combine Pricing Strategies?

You can combine multiple pricing strategies to find the best (and most profitable) ways to price and market your products.

For example, a handcrafted furniture business might use cost-plus pricing for a table that costs $200 to make. They add a 50% profit margin and sell it for $300. That business can then combine bundle pricing by offering a living room set that features the table along with a bookshelf and a chair. Bought separately, these items would cost $950, but as a bundle they sell for $850.

Another example of combined pricing strategies could be a retailer using high-low pricing to attract customers with promotional deals, while also implementing geographical pricing to adjust prices based on the location of their stores. This allows them to attract a wide range of customers while accounting for local market conditions and cost variations.

How Do You Determine the Selling Price of a Product?

Setting the perfect price for your products means you need to understand your costs, know how much your customers are willing to pay, and keep an eye on your competitors. With this information, you can choose from a variety of pricing strategies to set a price that will be attractive to customers and still make you a profit.

It may take some experimentation to find the best prices for your goods. Even once pricing is dialed in, most businesses continuously test and adjust their pricing strategies based on market conditions and customer feedback.

Bottom Line

With nearly 20 pricing strategies to choose from, there are a lot of options when it comes to pricing your products. The best thing you can do to sell through your products and maximize your profits is to use a mix of pricing strategies based on what works for each individual item you sell. Whatever you choose, be sure to continuously monitor their success and ability to generate sales and profits, so you can make adjustments and continue to maximize your retail business.

About the Author

Find Katie-Jay On LinkedIn

Katie-Jay Simmons

Katie-Jay Simmons aims to put answers in the hands of small business owners by leveraging more than 10 years of retail and hospitality experience. Informed by a background in jewelry and gemology, she specializes in ecommerce with a focus on fulfillment and global sourcing. Her scope of expertise ranges from traditional brick-and-mortar businesses to innovative, high-volume ecommerce operations.

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Pricing Strategy in a Business Plan: Deep Dive

• March 21, 2024
• Business Plan , How to Write

In this blog post, we’re diving into how to choose and explain your pricing strategy in your business plan. We’ll cover different pricing models like penetration, premium, and value-based. We’ll also dive into how to present your pricing strategy in your business plan.

Whether you’re starting a new business or preparing a business plan for an existing company, getting your pricing right is key to attracting customers and making a profit. Let’s break down how to make your pricing strategy clear and effective. Let’s dive in!

What are the different pricing strategies?

Different pricing strategies can significantly influence demand, profitability, and market positioning for businesses. Here’s an overview of some common pricing strategies:

• Cost-Plus Pricing: Adds a markup percentage to the cost of producing a product or delivering a service. It’s simple to calculate and ensures a profit margin.
• Value-Based Pricing: Sets prices based on the perceived value to the customer rather than the cost of production. This strategy focuses on the benefits and value the product or service brings to the customer.
• Competitive Pricing: Prices are set based on competitors’ pricing structures. Businesses might price their products slightly lower than competitors to gain market share or at a similar level to match the market rate.
• Penetration Pricing: Involves setting lower prices to enter a competitive market and attract customers quickly. The goal is to gain market share and then gradually increase prices.
• Premium Pricing: Setting the price of a product or service higher than the competitors. This strategy is used to signal superior quality or exclusivity to justify the higher cost.
• Dynamic Pricing: Adjusting prices in real-time based on market demand, competition, and other factors. Common in industries like hospitality and airlines.
• Freemium Pricing: Offering a basic product or service for free while charging for premium features. This strategy is often used by software and service companies to attract users.
• Bundle Pricing: Combining several products or services and selling them at a single price, often lower than the total cost of buying each item separately. This can increase the perceived value and encourage sales.

How to choose a pricing strategy

Here’s how to come up with an efficient pricing strategy:

Align Pricing with Market Strategy

Begin by articulating how your pricing strategy complements your overall market strategy. If you’re aiming for market penetration, explain how your pricing is designed to attract a large volume of customers by being more affordable than competitors.

For a premium pricing strategy, discuss the exceptional quality, exclusivity, or unique value your offerings bring, justifying higher price points.

If you’re adopting a value-based pricing model instead, illustrate how your pricing directly correlates with the perceived value to the customer, possibly through superior benefits or cost savings they provide.

Relate Pricing to the Target Market

Your pricing strategy should be closely tied to your understanding of your target market .

For instance, if your target market highly values sustainability and is willing to pay more for eco-friendly products, your pricing should reflect this. Similarly, if you’re targeting a price-sensitive segment, explain how your pricing strategy enables you to offer competitive value while maintaining profitability.

Consider the Competitive Landscape

A comprehensive pricing strategy also considers the competitive landscape . Analyze your competitors’ pricing and how your strategy positions you within this context.

Are you offering a more affordable alternative to premium products, or are you introducing a higher-quality option in a market segment dominated by low-cost competitors?

Discuss how your pricing strategy gives you a competitive edge, whether it’s by filling a gap in the market, offering better value, or challenging the status quo with innovative pricing models.

Where to include your prices in your business plan?

In your business plan, prices should be detailed under “Products or Services” within the Business Overview section of your business.

This part of the plan not only describes what you are offering but also provides an ideal opportunity to outline your pricing strategy and the specific prices or price ranges of your products or services.

Here, you can explain how your pricing fits into the market and aligns with your overall business strategy, giving potential investors or lenders a clear understanding of your approach to generating revenue.

Remember your pricing strategy should align with your financial projections (projected income statement, cash flow statement, and balance sheet). Indeed, you will need to give some high-level explanation of how you came up with these financial projections, based on your pricing strategy too.

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The Power of Pricing: How to Create a Pricing Strategy that Drives Profits (+Examples)

Pricing is one of the most important aspects of any business. After all, you won't make a profit if you don't charge enough for your product or service. On the other hand, if you charge too much, you may struggle to find customers. Enter: pricing strategies .

Finding the right pricing strategy is essential for every business. A thoughtful, well-constructed pricing strategy allows you to remain competitive while still being able to cover all of the costs that are involved with running your business.

There are several different pricing strategies--and no one-size-fits-all solution. Your pricing strategy can even become an integral part of your marketing strategy and contribute to bolstering your competitive advantage.

In this guide, we’ll explain 11 different pricing strategies and provide examples of how they work. This way, you’ll have a better understanding of the intricacies involved with pricing—and can determine which strategy makes the most sense for your business.

What is a Pricing Strategy (+ Why is it Important?)

A pricing strategy is a strategic plan for how you will price your products or services and earn a profit. The right pricing strategy considers costs, the perceived value of your offering, market research, and a competitive analysis

Let's say you're selling a unique product or service that has a high perceived value, like an enterprise software suite, you might be able to charge a premium price. If you're selling a commodity product that is more price-sensitive and can easily be replaced by competitors' offerings, you might need to focus on competitive effective pricing to win market share.

Businesses should continually monitor and adapt their pricing strategy as economic and competitive landscapes evolve. In fact, according to Profitwell , most successful companies review their prices quarterly and make adjustments every six months .

Why does pricing strategy matter? It's not just about profits. (Though that is part of it!) Here's a few other reasons why pricing strategy matters:

• Gain a Competitive Advantage : In a highly competitive market, your pricing strategy can be key to gaining a competitive advantage. Companies can use a strategic pricing strategy to attract a new customer base or retain current customers.
• Attract Your Target Audience : Pricing strategy can impact consumer behavior. For example, a low price might attract price-sensitive customers in SMBs, while a higher pricing plan can signal quality and attract enterprise customers .
• Support Brand Image : The right pricing strategy can also bolster your brand image. For example, Rolex’s higher pricing strategy supports its image as a luxury brand.

Whatever pricing strategy you choose, it's important to have a clear plan backed by market research. But be ready to adapt if needed.

11 Types of Pricing Strategies with Real Examples

Now that we've covered the importance of having a pricing strategy in place, let's go over 11 common pricing strategy examples you can use as inspiration for your own pricing strategy.

1. Competitive Pricing Strategy

Many business owners use the competitive pricing strategy to attract customers and increase market share. Essentially, this involves doing a comprehensive competitive landscape analysis and setting prices at or below the level of their competitors’ prices.

This can be a useful strategy if the competitor is a large company with significant overhead and cannot reduce its prices much further. By offering a lower price, small businesses can compete without sacrificing profitability.

However, there are also risks associated with this strategy. If the competitor can lower its prices, the smaller company may be forced to follow suit and risk losing money.

In addition, if customers perceive the quality of a lower-priced offering is also lower, they may be reluctant to purchase it even at a lower price.

Competitive Pricing Strategy Example

Competitive pricing is often be seen in e-commerce. Take, for example, Apple’s AirPods vs a competitor’s “Earbuds.” As you can see below, AirPods cost $329, which Apple can justify thanks to their brand recognition and the quality of their products.

If you go to Amazon and find a similar product from a smaller competitor, you’ll see that these earbuds are just $39.99. They’re similar in style, and they may or may not be similar in quality, but they’re definitely cheaper.

Although nobody knows this brand, they can still compete with big players. This is thanks to the massive discount they’re offering for a product that does more or less the same thing.

Other examples of competitive pricing include bundle pricing, where companies group similar items together and offer a discount.

With competitive pricing, a company may rely more on sales volume than profit margin. With a high enough sales volume, a company can make up for low profit margins with sheer numbers.

2. Price Skimming

Price skimming is a strategy in which a company charges a high price for a new product or service at first, and then gradually lowers the price over time. The goal of price skimming is to generate the highest possible revenue in the shortest amount of time.

To do this, companies typically target early adopters willing to pay a premium for new products or services. The high price also helps to recoup the costs of developing and marketing the new product or service.

Once the early adopters have been captured, the company lowers the price to appeal to a wider range of consumers. This pricing strategy can be very effective in market conditions where there is a lot of consumer demand for new products or services. However, it can also backfire if the company cannot sustain high prices for long enough to make a profit.

Price Skimming Pricing Strategy Example

Gaming consoles are the perfect example of price skimming. Every time a new gaming console hits the market, the price is much higher than what it will be a few years later.

For example, take the Xbox 360. When it was launched in 2005, Microsoft was charging $400 for the console . Now, you can get an Xbox 360 from Walmart for just $183.59.

Due to the novelty of a brand-new product, Microsoft was able to take advantage of the price skimming strategy and maximize its profits in the beginning.

3. Penetration Pricing Strategy

Penetration pricing can be a great way to quickly gain market share. The basic idea is to set the initial price of a product or service low to entice customers. Once customers are hooked, the price increases to a more profitable level.

Of course, this strategy only works if the quality of the product is high enough to justify the higher price. But when done correctly, penetration pricing can be a powerful tool for driving growth.

Penetration Pricing Strategy Example

Jasper.ai is an AI writing software that uses machine learning to produce content. However, now they’re extending their feature set and introducing a new product called Jasper Art.

This tool uses AI and can produce art based on the inputs you give it. It’s a brand-new product, and they’re using penetration pricing to quickly onboard new customers. Here is a screenshot from their product launch post on Facebook.

The post states that their pricing will start at $20/user/month but will likely change (i.e. increase) in the future. A brand new feature combined with an enticing initial price is the perfect combination to get their target audience excited about using their new product, and simultaneously helps them test market demand.

4. Premium Pricing

Premium pricing involves setting a high price for a product or service to convey quality and prestige. This strategy can be particularly effective for luxury goods or products that are higher quality.

There are a few potential drawbacks to premium pricing, however. For one thing, it can alienate potential customers who don't perceive the product as worth the high price tag. In addition, it leaves little room for discounts or promotions, which can be important tools for boosting conversions.

Premium Pricing Example

What better example is there to use for premium pricing than Rolex? Although made with superior craftsmanship, Rolex watches are the epitome of premium pricing. Rolex as a company doesn’t want everyone to own a Rolex. They want to make customers feel like they are purchasing something rare and valuable.

Rolex watches often cost multiple 5-figures and sometimes even 6-figures.

Although the Rolex watches are priced at a premium, it gives their customers a sense of status. This pricing method certainly doesn’t work for everyone (especially new businesses), but it can be a powerful pricing strategy with the right business model, sales strategies , and product offering.

5. Cost-Plus Pricing Strategy

Cost-plus pricing is a popular pricing strategy in which a company sets its prices by adding a fixed markup to the total production costs of its goods or services.

Because cost-plus pricing takes all costs into account, it can help to ensure that a company is making a profit on each sale. However, it can also lead to higher prices for consumers, which can limit demand. In addition, cost-plus pricing can encourage companies to cut corners to provide lower-cost products, which can subsequently lead to lower-quality products.

Cost-Plus Pricing Strategy Example

Cost-Plus pricing is difficult to show as an example as it’s merely a formula:

Cost of goods sold x fixed markup percentage = final price

Cost-Plus pricing is oftentimes used with the sale of alcohol . If a bar is charged on a per liter basis from their supplier, they can then set a markup percentage and pass that fee onto their final customer to make their profit margin.

6. Economy Pricing

Economy pricing is a strategy in which products are priced at a low, competitive rate. The goal of economy pricing is to attract customers looking for a good deal in a competitive market .

This pricing strategy is often used for essential items in high demand, such as food and clothing. Economy pricing can also be used as a loss leader, to attract customers to a store with the hope that they will purchase other, more profitable items as well.

While economy pricing can be an effective way to attract customers, it is important to make sure the low price does not come at the expense of quality. Otherwise, customers may not return in the future.

Economy Pricing Example

For an example of economy pricing, just check your local grocery store’s flyer every week. Grocery stores typically add their best-priced items on the first page to entice people to come shop at their store.

Take, for example, the Big Y flyer below. The weekly sales items are prominently featured, using larger images and attractive pricing.

Grocery stores aren’t worried about making a small margin on their sale items because they know, more often than not, you’ll pick up additional (larger margin) items while you're shopping.

7. Discovery Call Pricing

Discovery call pricing is used by businesses to provide potential customers with an estimate for services. Under this pricing model, customers are required to book a consultation with the business to discuss their needs.

Based on the information gathered during the consultation, the business will provide the customer with a price for their services.

While discovery call pricing can be beneficial for businesses, it is important to note that it can also be frustrating for customers who are not given a clear price upfront.

Discovery Call Pricing Example

Parakeeto for example, a company that helps agencies become more profitable, requires that you fill out an application form and jumping on a call before pricing is disclosed.

This type of strategy can work well for businesses that offer more custom services because it allows you to better understand the customer’s needs before putting together a proposal.

8. Value-Based Pricing Strategies

Value-based pricing is an ideal pricing strategy for SaaS companies that takes into account the perceived value of your offering. This can be based on factors like brand recognition, quality, or even customer service .

When setting prices using this method, businesses typically start with their costs and then add a markup that reflects the perceived value of their product or service. While this approach can help you to attract customers who are willing to pay more for a high-quality product, it's important to remember that perception is often subjective.

Value-based pricing is not an exact science, and there is always some risk involved. Nevertheless, when done correctly, value-based pricing can be an effective way to boost your profits.

Value-Based Pricing Strategy Example

Starbucks is a great example of value-based pricing. They can charge a large markup mainly due to the perceived value of their brand. Even more shocking is that lower-priced competitors, like Dunkin’ Donuts, scored higher in a blind taste test .

A small Dunkin’ Donuts coffee (10 oz) is priced at $1.69. Compare that to a Short Starbucks coffee (8 oz), and you’re paying $2.55, that’s a whopping 41 percent price increase (for less coffee.)

Are you curious about value-based selling and how it can improve your sales performance? Check out this article to discover the benefits and best practices.

9. Dynamic Pricing Strategies

The basic idea of dynamic pricing is to charge customers different prices based on factors, such as time of day, demand, and even the weather.

For example, a business might charge higher prices during peak times, or when demand is high, and lower prices when demand is low. Dynamic pricing can be a very effective way to increase revenue, but it can also be controversial. Some customers feel like they are being charged more than others, based on factors that they cannot control.

As a result, businesses need to be careful when implementing dynamic pricing strategies. But when done correctly, dynamic pricing can be a very effective tool for increasing profits.

Dynamic Pricing Example

Ride-sharing companies like Uber and Lyft take advantage of dynamic pricing. This allows their prices to fluctuate based on the current demand.

Try to find an Uber after a stadium concert, while it’s raining. You’ll pay a lot more for that ride than you would on a sunny Sunday morning when half of local businesses are closed.

10. Psychological Pricing Strategies

Have you ever noticed that some prices end in .99? That’s because businesses are using a pricing strategy called psychological pricing.

Studies show consumers perceive prices ending in .99 as being significantly lower than prices that round up to the next dollar. Businesses can increase their profits by using this seemingly small change in pricing. In addition to prices ending in .99, businesses also use a variety of other pricing strategies to manipulate consumer behavior.

For example, SaaS companies may use anchoring to make a high-priced package seem more reasonable by offering a premium package that costs even more. Or they may use loss aversion to encourage people to buy now by stressing the potential loss of a sale price.

Whether we realize it or not, businesses constantly use pricing strategies to influence our behavior.

Psychological Pricing Strategy Example

You’re likely very aware of what psychological pricing looks like. We see it daily, both online and in physical stores. Just do a quick search on Amazon for any product, and you’ll probably see some form of psychological pricing at play.

Take the example above. Whether products are priced at .99 or .95, they’re all using psychology to trick our brains into thinking prices are lower than they are.

11. Freemium Pricing Strategy

With freemium pricing, businesses offer a basic version of their product for free, with the option to upgrade to a premium version for a fee. This can be an appealing option for customers who are undecided about whether they want to commit to a paid subscription. And it can be a great way for businesses to generate interest in their products.

If you're considering using freemium pricing for your business, you should keep a few things in mind. First, make sure the free version of your product is still useful and enjoyable to use. Otherwise, customers will have no incentive to upgrade to the paid version.

Second, consider what features you will include in the premium version. You want to strike a balance between offering enough value to justify the price tag, but not so much that there are no compelling reasons for customers to continue using the free version.

Finally, be prepared for an influx of users when you launch your freemium pricing strategy. If your dedicated servers can't handle the increased demand, customers will be turned off and may never come back. If you can manage the pitfalls successfully, freemium pricing can be a great way to grow your business.

Freemium Pricing Strategy Example

Dropbox and Google Drive are great examples of the freemium model at work.

Dropbox, for example, offers a free basic account with 2GB of storage. If you need more storage, you can upgrade to a paid plan.

This provides new users with the ability to try out a service, and as they find more value in it, they can upgrade to a paid account. Freemium pricing is typically found in software service-based businesses due to the low marginal costs of providing additional service to customers.

How to Create a Pricing Strategy for Your Business in 5 Steps

Every business needs to have a pricing strategy to remain competitive and profitable. But how do you create a pricing strategy? It's not as difficult as it might seem. Here are five steps to follow.

1. Determine Your Pricing Objectives

The first step is to determine your pricing objectives. What are you trying to achieve with your pricing? Do you want to maximize profits? Or are you more focused on getting market share? Once you know your objectives , you can start to develop a pricing strategy that will help you achieve them.

2. Understand Your Customers

The second step is to understand your customers. Who are they, and what are they willing to pay for your product or service? If you don't understand your customers, it will be very difficult to price your products correctly. Take the time to create your ideal customer profile and get to know what they want.

3. Research Your Competition

Third, research your competition. How are they pricing their products or services? What strategies are they using? You need to be aware of what other businesses in your industry are doing so that you can stay competitive.

4. Find Your Value Proposition

The fourth step is finding your value proposition . What makes your product or service better than the competition? Why should someone pay more for what you're offering? What’s the customer value? If you can't answer these questions, then it's going to be difficult to justify a higher price point. An effective pricing strategy starts with knowing the real value of your product.

5. Collect Data and Modify If Necessary

The fifth and final step is collecting data and modifying it if necessary. Once you've launched your pricing strategy, it's important to monitor how it's working and make changes if necessary. Don't be afraid to experiment a bit and see what works best for your business.

Pricing Strategy FAQs (Frequently Asked Questions)

What are the best pricing strategies for a new product.

When it comes to pricing a new product, there are several different strategies that businesses can use. However, two strategies that work well for new products are price skimming and penetration pricing .

With price skimming, businesses charge a high price for the initial release of the product to capitalize on early adopters who are willing to pay a premium. This strategy is typically used for products with no close substitutes.

Penetration pricing, on the other hand, involves setting a low introductory price to attract customers and gain market share. This strategy is often used for products that face intense competition.

What is the best pricing strategy for SaaS companies?

While many factors can impact the right pricing strategy for a company, most SaaS companies use either freemium pricing or psychological pricing strategies to drive user adoption and target customers in their ideal customer market.

How can pricing strategies be improved?

There are a few general tips that can help to improve your pricing strategy. First, make sure that your selling prices are in line with the competition. If you are too high, you will lose customers; if you are too low, you will struggle to make a profit.

Second, don't be afraid to experiment. Try different price points and see how your customers respond. Finally, keep an eye on your bottom line. At the end of the day, your goal should be to maximize profits, not just sales. These are simple ways to find the right price for your product without decreasing the customer life cycle.

Final Thoughts on Developing Pricing Strategies

Pricing is a critical part of your business and, if done correctly, can be the deciding factor between you and your competition.

By understanding the different pricing strategies and how to create your own strategy amongst the sea of advice floating around, you'll be able to put yourself in a much better position to increase profits, grow your business, and keep your customers happy.

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An effective pricing strategy is essential for continued sales success. Here's how to determine the right tactic for your business.

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

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

What to consider when setting your pricing strategy

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

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

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

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

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

Pricing strategies to attract customers to your business

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

1. Price skimming

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

2. Market penetration pricing

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

3. Premium pricing

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

If you’ve already launched your business, you can experiment with these strategies until you determine what works best for your business. You can also vary strategies between products depending on the market for each good or service.

4. Economy pricing

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

5. Bundle pricing

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

6. Value-based pricing

Value-based pricing is similar to premium pricing. In this model, a company bases its pricing on how much the customer believes the product is worth. This pricing model is best for merchants who offer unique products, rather than commodities.

How do you know what a customer perceives a product to be worth? It’s hard to get an exact price, but you can use certain marketing techniques to understand the customer’s perspective. Ask for customer feedback during the product development phase, or host a focus group. Investing in your brand can also help you add “perceived value” to your product.

7. Dynamic pricing

Dynamic pricing allows you to change the price of your items based on the market demand at any given moment. Uber’s surge pricing is a great example of dynamic pricing. During low periods, Ubers can be quite an affordable option. But, when a rainstorm hits during the morning rush hour, the price of an Uber will skyrocket, given that demand is also likely to rise. Smaller merchants can do this too, depending on seasonal demand for your product or service.

Which pricing strategy is right for you?

Each of these seven strategies offers different advantages and downsides. At the very least, you must make sure your pricing strategy covers your costs and includes a margin for profit. Determining your needs upfront can clarify which strategies are ideal for your business.

Focus on finding the right range of costs, rather than pinpointing a specific number. “Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you,” wrote Profitwell .

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

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Pricing Strategies and Models Explained

4 min. read

Updated January 18, 2024

What’s the right price for your product or service?

What price will make you profitable and attract customers?

Not sure? Keep reading to learn the basics of pricing strategy and setting the right price.

• What is a pricing strategy?

A pricing strategy is the overarching approach or plan a business uses to determine the price of its products or services. 

It considers various factors such as market conditions, competition, production costs, and the perceived value to the customer. The ultimate goal of a pricing strategy is to maximize profitability, maintain or grow market share, and ensure long-term sustainability while meeting the company’s other objectives.

• What is a pricing model?

A pricing model is the specific method used to set the price of a product or service. It provides a structure to implement your chosen pricing strategy.

What’s the difference?

The distinction between a pricing strategy and a pricing model lies in their scope, purpose, and application.

The pricing strategy aligns prices with business objectives, market conditions, and customer perceptions. A pricing strategy considers market entry tactics, customer psychology, brand positioning, and long-term market objectives. 

The pricing model is the mathematical method you use to create a specific price. It usually involves manufacturing costs, customer demand, and competitor pricing. 

Think of the strategy as the roadmap guiding where a company wants to go with its pricing and the model as the vehicle it uses to get there.

• Types of pricing strategies

1. Penetration pricing

Setting an initial low price to quickly attract customers and establish a market presence. Ideal for new entrants wanting rapid market share. 

Example: Streaming services offering discounted rates for the first three months.

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2. Price skimming

Starting with a high price and then reducing it over time. Suitable for innovative products. 

Example: New tech gadgets like smartphones often use this strategy.

3. Value-based pricing

Pricing based on the perceived value to the customer rather than production costs. Works best for unique products or services. 

Example: Luxury brands like Rolex or Louis Vuitton.

4. Competitive pricing

Setting prices based on competitor rates. Ideal for industries with many competitors offering similar products. 

Example: Supermarkets pricing staple goods.

5. Premium pricing

Charging a higher price to reflect a product’s premium status and quality. 

Example: Brands like Apple or Tesla.

6. Economy pricing

Offering no-frills products at a low price. Common in mass markets. 

Example: Budget airlines like Ryanair.

7. Bundle pricing

Grouping multiple products together at a discounted rate. Useful for increasing sales volume. 

Example: Cable TV packages.

8. Price leadership

Price leadership occurs when one dominant company, usually the largest or most influential in an industry, sets the price of a product or service, and other competitors in the market follow suit.

Example:  

OPEC often influences global oil prices by adjusting its production levels. 

9. Preemptive pricing

Intended to drive away competition or deter others from entering the marketplace by deliberately selling at below market prices (temporarily, of course).

Amazon launching the Kindle with e-books priced below typical hardcover prices. 

• Types of pricing models

1. Cost-plus pricing

Calculating the cost of production and adding a fixed gross margin. Common in retail. 

Example: A shirt that costs $20 to make might be sold for $40.

2. Geographic pricing

Adjusting prices based on location or region. 

Example: A software product priced differently for the U.S. versus India.

3. Dynamic pricing model

Prices change based on real-time factors. 

Example: Uber’s surge pricing during high demand.

4. Tiered pricing model

Different prices for varying levels of product features. See an example of how tiers and introductory pricing can be used to introduce and grow your business.

Example: Software packages with Basic, Pro, and Premium tiers.

5. Freemium model

Basic services are free, with charges for advanced features. 

Example: Spotify offers free music streaming but charges for an ad-free experience.

6. Subscription model

Recurring fee for product or service access. 

Example: Monthly Netflix subscriptions.

7. Pay-what-you-want model

Customers choose their price. Often seen in indie industries. 

Example: Some indie video games or music albums.

8. Volume-based pricing

Decreased price per unit with increased quantity. 

Example: Wholesale retailers like Costco.

9. License pricing model

One-time fee for product usage over a period. 

Example: Microsoft Office’s one-time purchase option.

10. High-low pricing model 

Products have a higher standard price but are frequently discounted. 

Example: Department stores having frequent sales.

• How to choose your pricing strategy

Selecting a pricing strategy comes down to cost, goals, and customer perception. Here’s how:

1. Set business objectives

Define clear goals, such as maximizing profit, penetrating the market, establishing a premium brand image, or achieving specific revenue targets. Your pricing should align with these objectives.

2. Understand your costs

Consider both direct costs (like raw materials and labor) and expenses (such as rent and marketing). Factor in variable costs that change with production volume and expenses that remain constant. Determine the break-even point to identify the minimum price needed to cover all expenses.

3. Analyze the competition

Research competitor prices and understand their value propositions. Identify their market positioning, whether premium or budget and observe any historical pricing trends or changes to gauge market reactions.

4. Know your audience

Understand your target audience’s demographics and what they value in a product. Gauge their price sensitivity and gather feedback on pricing preferences to ensure your price resonates with them.

5. Test and adjust

Before a broad rollout, test the new pricing on a segment of your audience. Refine your pricing based on customer input.

• More on pricing products and services

Check out our other startup pricing resources to turn your pricing strategy into profitable steps for your business.

• How to price your products
• How to price your services
• Mistakes to avoid when setting prices

Clarify your ideas and understand how to start your business with LivePlan

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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Everything You Need to Know About Pricing Strategies in Business Planning

By henry sheykin, introduction.

Pricing is an essential component of any business plan, and it’s important that you carefully consider your pricing strategy when writing your business plan. A successful pricing strategy can mean the difference between having an effective business plan or one that leads you to an unsuccessful outcome. In this blog post we will discuss the importance of coming up with the right pricing strategy when writing your business plan, and provide tips and advice on how you can go about developing the most effective plan for your business.

Assess What You’re Offering

Pricing your product or service is a critical element of your business plan. You must clearly assess what you’re offering and what it’s worth before setting a price. Here are some key steps to creating a successful pricing strategy:

Calculate Cost of Goods and Services

The starting point for setting prices is to calculate the cost of the goods or services you're providing. This involves looking at the cost for production materials, along with the cost of human labor and any other related costs. This is the amount you need to charge to make sure your product covers expenses, and it will be the lower end of your price range.

Consider Time, Resources and Materials Required

When calculating your costs, it's important to consider the resources and materials needed to complete the project and the time it will take to do so. You may need to pay subcontractors or hire additional staff, and you may need to account for any special tools or equipment required. Be sure to factor in all of these expenses when pricing your product.

Evaluate Pricing Points and Marketplace Factors

Once you've calculated your costs, you can start to consider other variables in the marketplace. This includes your competition, overhead costs, and any other relevant economic or demographic factors. Ultimately, you’ll have to decide if the price you set will be attractive enough to your customers.

• Consider competitors’ prices when evaluating your pricing.
• Evaluate overhead, such as utilities, rent, and payroll.
• Think about market trends and fluctuations that might change pricing.
• Determine the quality of your product or service and adjust pricing accordingly.

Analyse the market and competition

Review the demographics of potential customers.

When developing a pricing strategy for your business plan, it's important to analyze the demographics of potential customers, i.e. their age, location, gender, and income. This will help you decide which price points are most suitable for each type of customer and understand what features they need and prefer. To get a better understanding of their demographic profile, consider conducting surveys, market research, and focus groups.

Examine competitors’ prices and services

Another important step in developing a pricing strategy is examining competitors’ prices and services. While looking at their prices, it's important to consider the quality of their services as well as the overall cost. Try to get as much information as possible about their products and services, such as quality, customer service, delivery times and shipping costs. Once you have collected all the information, you will be able to make an accurate comparison between services and decide if your business plan should provide higher or lower prices.

Compare services between competitors

Once you have gathered all the necessary information from competitors and potential customers, it's time to compare the features and services that they offer. This will help you decide which features will be most valuable to customers and which ones are not worth including in your business plan. Make sure you compare the same type of services and features, such as delivery times, product quality, customer service, etc. By analyzing the different features offered by each competitor, you will get an accurate understanding of the market and choose the right pricing strategy for your business plan.

4. Understand Pricing Strategies

When it comes to pricing, there are many strategies businesses can use to set prices, research data, and even adjust prices as needed. It is important to understand the strategies involved, as these techniques can play an essential role in a business plan.

A. Illustrate Strategies for Setting Prices

In order to find the right price for a product or service, businesses must consider the cost of production, the value relative to others on the market, and the target customer base. A few common pricing strategies that businesses use include cost plus pricing (adding a marked-up price to recoup costs), value-based pricing (pricing that reflects the value that customers place on the product or service), and competition-based pricing (adjusting prices based on the competition).

B. Describe Research and Gathering of Data for Pricing

In order to effectively price a product or service, businesses must be mindful of the data they are using to set prices. This data is often easy to find, as customers are always providing feedback either directly or through market research. Businesses should regularly seek out feedback from potential customers and their markets to understand what they are willing to pay for different products and services.

C. Explain Strategies for Raising or Lowering Prices

Once a business has determined the right price for its product or service, it can use different techniques to adjust the price as needed. Increasing prices is a common tactic for businesses looking to increase their revenue. When businesses raise prices, they should communicate the change clearly and in a timely manner to ensure customers don't feel like their loyalty is being taken for granted. On the other hand, businesses can also lower prices to increase their customer base. Discounts and special offers can be effective tactics for attracting customers who may not have otherwise considered the business.

Implement changes

Once you have refined your pricing strategy for your business plan, it's time to implement the changes. To help get you started, consider the following variables that may be incorporated into your pricing structure.

A. Explain variables such as rates, bundle pricing and discounts

Rates, bundle pricing and discounts are all strategies to consider when setting your prices. Rate pricing is when you charge based on the amount of time or quantity of a product. For example, if you are a photographer, you might offer a rate of $50/hour for each photo shoot. If you are a consultant, you might offer a rate of $150/hour for consultation services.

Bundle pricing is when you offer multiple products or services in one package for a single fee. This allows customers to get more value for their money. As an example, if you own a restaurant, you could offer a bundle platter with an entree, salad and a drink for one discounted price. This will give customers the ability to select their own items while getting a discounted rate.

Discounts are another way to incentivize customers to purchase your products or services. Discounts can include items such as free shipping, special offers or a percentage off the total cost. For example, you could offer a 10% discount off the total purchase price if customers order in bulk.

B. Estimate budget to set price

Before you officially set your prices, you need to determine what your budget is. This will help ensure you are pricing your products or services correctly in order to make a profit. The budget should include both fixed and variable costs associated with running your business. That includes items such as wages, utilities, rent, materials, and marketing, as well as taxes and licenses.

C. Account for change over time

As your business grows, customer needs may also change. It's important to monitor the market and your pricing strategies to make sure you remain competitive. You also want to be mindful of potential external changes such as legislation or customer trends that could affect your prices.

As you move forward with your pricing strategy, keep in mind that it may need to be adjusted over time. That could include increasing or decreasing your prices to remain competitive. It's also important to note that your customer’s preferences may change over time, so remain open to experimenting with different pricing strategies.

Maximize Price and Service

Having a clear understanding of the costs associated with running your business is essential to building a successful pricing strategy. It is important that you understand what expenses you could incur that would impact the pricing of your products and services to manage margins accordingly. Furthermore, creating multiple variations of your product or service can help you maximize profits as you are able to tailor pricing and features to different segments.

When it comes to controlling costs, it is important to understand the marketplace and develop a strategy to ensure you remain competitive in order to maximize profits. Every decision you make about pricing should be backed up with data to ensure sound decision-making. Additionally, consider cost-reducing methods such as utilizing cost-effective production methods and managing operating costs such as marketing and overhead.

The use of technology can also play a key role in optimizing prices. With automated systems, you can eliminate redundant and manual tasks to save on labor costs. Automation can also allow you to save money through accurate predictive analysis, allowing you to adjust prices and prevent losses. Additionally, you can offer dynamic pricing, enabling you to adjust prices depending on changes in supply and demand.

Explaining How to Create the Best Pricing Versions

Having a comprehensive understanding of your customer segments is paramount when it comes to creating an effective pricing strategy. It is important for your pricing strategy to be tailored to different customer segments so that you can maximize profits through differentiating features and price points. This is why it is important to thoroughly research your customer segments and understand the value they place on your products and services.

By knowing your customers, you can determine what would be the best pricing strategy for each segment. You could potentially offer discounts and incentives to certain segments to increase the perceived value of your products and services. This can help to increase the average sale size. Furthermore, you can use pricing tools such as bundles and subscriptions to increase the value of your products and services.

Illustrating Techniques for Controlling Cost

The key to controlling cost is understanding your market thoroughly. This means having an understanding of both the direct and indirect costs that accompany your products and services. Understanding the costs and associated margins will enable you to determine the pricing of your products and services based on how well you must price in order to remain competitive.

Additionally, you should focus on cost-reducing techniques to get the most out of your pricing strategy. Implementing cost-saving measures in production settings can help keep prices competitive. This can involve using more affordable materials and cost-efficient production techniques. Ensuring that operating costs, such as marketing and overhead, remain low can also help keep prices competitive.

Show How to Use Technology to Optimize Prices

In today’s digital age, automation is essential when it comes to optimizing prices. Automation can help eliminate manual tasks, allowing your team to focus on more important tasks. Predictive analysis can be used to assess customer needs in order to optimize the pricing of your products and services, reducing the risk of losses.

Dynamic pricing is another key technique that enables you to adjust pricing depending on changes in the supply and demand. This can help to keep you competitive in the market. Additionally, it is important to ensure that your pricing system is optimized for mobile platforms such as smartphones and tablets, as customers expect to be able to access your product or service on any device.

Developing a pricing strategy for a business plan is an incredibly important tool for achieving sustainable profitability and growth. Knowing the various pricing strategies and techniques can help business owners make informed decisions about how to price their products or services and which strategies best fit their customers, resources, goals, and objectives.

To recap, it is important for business owners to understand that a well-crafted pricing strategy should go beyond simply setting a price. It requires them to dig deeper into customer segments, competition, industry benchmarks, distribution channels, cost of goods, and other related topics. Additionally, they should continually research and explore potential strategies, cycle and bundle their products, employ pricing models to manage customer expectations, and adjust to changing consumer behaviors.

Finally, it is important to recognize that pricing strategies, like business strategies, should not be a static decision. As market and consumer trends change, it is beneficial to continue surveying and researching pricing strategies in order to remain competitive and remain profitable.

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The Marketing Plan Section of the Business Plan

Writing The Business Plan: Section 5

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

• Products, Services, and Your USP

Pricing and Positioning Strategy

Sales and distribution plan, advertising and promotion plan.

The marketing plan section of the business plan explains how you're going to get your customers to buy your products or services. The marketing plan, then, will include sections detailing your:

• Products and services and your unique selling proposition (USP)
• Pricing strategy
• Sales and distribution plan
• Advertising and promotions plan

The easiest way to develop your marketing plan is to work through each of these sections, referring to the market research you completed when you were writing the previous sections of the business plan . (Note that if you are developing a marketing plan on its own, rather than as part of a business plan, you will also need to include a target market and a competitors' analysis section.)

Let's look at each of these four sections in detail.

Products, Services, and Your Unique Selling Proposition

Focus on the uniqueness of your product or service and how the customer will benefit from what you're offering. Use these questions to write a paragraph summarizing these aspects for your marketing plan:

• What are the features of your product or service?
• Describe the physical attributes of your product or service and any other relevant features such as what it does or how it differs from competitors' offerings.
• How will your product or service benefit the customer?
• Remember that benefits can be intangible as well as tangible; for instance, if you're selling a cleaning product, your customers will benefit by having a cleaner house, but they may also benefit by enjoying better health. Brainstorm as many benefits as possible to begin with, then choose to emphasize the benefits that your targeted customers will most appreciate in your marketing plan.
• What is it that sets your product or service apart from all the rest? In other words, what is your USP, the message you want your customers to receive about your product or service? This will be at the heart of your marketing plan.

Examples of Unique Selling Propositions

Unique selling propositions should be short (no more than a sentence) and concise. Here are a few great examples:

• Domino's Pizza : "We deliver hot, fresh pizza in 30 minutes or less, or it's free."
• FedEx Corporation : "When it absolutely, positively has to be there overnight."
• M&Ms : "The milk chocolate melts in your mouth, not in your hand ."
• Dollar Shave Club: “Everything you need in the bathroom—from razor blades to grooming products—automatically delivered to your door. It doesn’t get any simpler than that.”

The pricing strategy portion of the marketing plan involves determining how you will price your product or service. The price you charge has to be competitive but still allow you to make a reasonable profit.

Being reasonable is key—you can charge any price you want to, but for every product or service there's a limit to how much the consumer is willing to pay. Your pricing strategy needs to take this consumer threshold into account.

The most common question small business people have about the pricing strategy section of the marketing plan is, "How do you know what price to charge?" Basically, you set your pricing through a process of calculating your costs, estimating the benefits to consumers, and comparing your products, services, and prices to others that are similar.

Set your pricing by examining how much it cost you to produce the product or service and adding a fair price for the benefits that the customer will enjoy. You may find it useful to conduct a  breakeven analysis to determine your minimum threshold. Competitor pricing will also help guide you toward the fair market value and help you determine how high you can reasonably go.  

The pricing strategy you outline in your marketing plan will answer the following questions:

• What is the cost of your product or service? Make sure you include all your fixed and variable costs when you're calculating this. The costs of labor and materials are obvious, but you may also need to include freight costs, administrative costs, and selling costs, for example.
• How does the pricing of your product or service compare to the market price of similar products or services?
• Explain how the pricing of your product or service is competitive. For instance, if the price you plan to charge is lower, why are you able to do this? If it's higher, why would your customers be willing to pay more? This is where the strategy aspect comes into play; will your business be more competitive if you charge more, less, or the same as your competitors, and why?
• What kind of return on investment (ROI) are you expecting with this pricing strategy, and within what time frame?

Remember, the primary goal of the marketing plan is to get people to buy your products or services. Here's where you detail how this is going to happen.

There are usually three parts to the sales and distribution section, although all three parts may not apply to your business.

Distribution Methods

• How is your product or service going to get to the customer? Will you distribute your product or service through a website, through the mail, through sales representatives, home delivery, or through retail?
• What distribution channel is going to be used? In a direct distribution channel, the product or service goes directly from the manufacturer to the consumer. In a one-stage distribution channel, it goes from manufacturer to retailer to consumer. The traditional distribution channel is from manufacturer to wholesaler to retailer to consumer. Outline all the different companies, people and technologies that will be involved in the process of getting your product or service to your customer.
• What are the costs associated with distribution?
• What are the delivery terms?
• How will the distribution methods affect production time frames or delivery? How long will it take to get your product or service to your customer?

If your business involves selling a product, you should also include information about inventory levels and packaging in this part of your marketing plan. For instance:

• How are your products to be packaged for shipping and for display?
• Does the packaging meet all regulatory requirements (such as labeling)?
• Is the packaging appropriately coded, priced, and complementary to the product?
• What minimum inventory levels must be maintained to ensure that there is no loss of sales due to problems such as late shipments and backorders?

Transaction Process

• What system will be used for processing orders, shipping, and billing?
• What methods of payment will customers be able to use?
• What credit terms will customers be offered? If you will offer discounts for early payment or impose penalties for late payment, they should be mentioned in this part of your marketing plan.
• What is your return policy?
• What warranties will the customer be offered? Describe these or any other service guarantees.
• What after-sale support will you offer customers and what will you charge (if anything) for this support?
• Is there a system for customer feedback so customer satisfaction (or the lack of it) can be tracked and addressed?

Sales Strategy

• What types of salespeople will be involved (commissioned salespeople, product demonstrators, telephone solicitors, etc.)?
• Describe your expectations of these salespeople and how sales effectiveness will be measured.
• Will a sales training program be offered? If so, describe it in this section of the marketing plan.
• Describe the incentives salespeople will be offered to encourage their achievements (such as getting new accounts, the most orders, etc.).

Essentially the advertising and promotion section of the marketing plan describes how you're going to deliver your USP to your prospective customers. While there are literally thousands of different promotion avenues available to you, what distinguishes a successful plan from an unsuccessful one is the focus—and that's what your USP provides.

So think first of the message that you want to send to your target audience. Then look at these promotion possibilities and decide which to emphasize in your marketing plan:

Advertising

The best approach to advertising is to think of it in terms of media—specifically, which media will be most effective in reaching your target market. Then you can make decisions about how much of your annual advertising budget you're going to spend on each medium.

What percentage of your annual advertising budget will you invest in applicable methods of advertising, such as:

• The internet (including business website, email, social media campaigns, etc.)
• Direct mail
• Door-to-door flyer delivery
• Cooperative advertising with wholesalers, retailers, or other businesses
• Directories
• Bench/bus/subway ads

Include not only the cost of the advertising but your projections about how much business the advertising will bring in. 

Sales Promotion

If it's appropriate to your business, you may want to incorporate sales promotional activities into your advertising and promotion plan, such as:

• Offering free samples
• Point of purchase displays
• Product demonstrations

Marketing Materials

Every business will include some of these in its promotion plans. The most common marketing material is the business card, but brochures, pamphlets, and service sheets are also popular.

This is another avenue of promotion that every business should use. Describe how you plan to generate publicity. While press releases spring to mind, that's only one way to get people spreading the word about your business. Consider:

• Product launches
• Social media
• Special events, including community involvement
• Writing articles
• Getting and using testimonials

Your Business's Website

If your business has or will have a website and a business Facebook page, describe how these fit into your advertising and promotion plan.

Trade Shows

Trade shows can be incredibly effective promotion and sales opportunities if you pick the right ones and go equipped to put your promotion plan into action.

Other Promotion Activities

Your promotion activities are limited only by your imagination. But whether you plan to teach a course, sponsor a community event, or conduct an email campaign, you'll want to include it in your advertising and promotion plan. Sporadic, disconnected attempts to promote your product or service are bound to fail. Your goal is to plan and carry out a sequence of focused promotion activities that will communicate the message you want to send about your products or services.

No business is too small to have a marketing plan. After all, no business is too small for customers or clients. And if you have these, you need to communicate with them about what you have to offer.

Harvard Business Review. " How to Find Out What Customers Will Pay ." Accessed Jan. 16, 2020.

• STARTUP COURSE AND DOCUMENTS

Coffee Shop Business Plan Pricing: Setting the Right Price

Starting a coffee shop is an exciting venture that requires careful planning and strategizing. One crucial aspect of developing a comprehensive business plan is determining the pricing strategy for your coffee shop. Pricing plays a vital role in your profitability, customer perception, and overall achievement.

Pricing for menu items should consider factors like ingredient costs, labor expenses, overheads, desired profit margins, and market competition. Conducting a cost analysis and market research will help you find the right balance. Find the right balance between costs, competition, and customer value.

In this article, I will explore key considerations and strategies to help you develop an effective pricing plan for your coffee shop business.

Table of Contents

Understanding Cost Structure

Before implementing pricing strategies for your coffee shop business plan, it is crucial to have a solid understanding of its cost structure. This entails carefully examining the various expenses associated with running your coffee shop. Consider factors such as rent, utilities, employee wages, ingredient costs, equipment purchases or leases, marketing expenses, and overhead costs. 

To determine the optimal pricing for your products, conduct a thorough analysis of your fixed and variable costs. Fixed costs include expenses that remain constant regardless of your sales volumes, such as rent or monthly subscriptions. Variable costs, on the other hand, fluctuate with your sales volumes, like ingredient costs or wages based on staff hours. By clearly identifying these costs, you can calculate the minimum amount required to cover expenses and establish a baseline for pricing.

Additionally, consider other factors that may impact your pricing decisions, such as profit margins, desired return on investment, and market competition. Balancing these factors will help you determine the appropriate pricing range that aligns with your business goals while remaining attractive to your target market.

Taking the time to thoroughly analyze your cost structure will provide you with valuable insights for setting prices that not only cover your expenses but also contribute to your coffee shop’s profitability and long-term success.

Read more about: Business Plan Introduction for Coffee Shop: The Essential Elements

Market Research and Competitive Analysis

Market research is an essential component when it comes to establishing and growing a successful business. It serves as a compass, guiding you toward understanding your target market, their preferences, and the competitive landscape you’ll be navigating. When it comes to the world of coffee shops, delving into the pricing strategies of other local establishments can provide valuable insights into the ever-changing market dynamics and customer expectations.

Take a moment to sip on this: by analyzing the pricing strategies of neighboring coffee shops, you can gain a deeper understanding of how they position themselves in the market. Pay attention to factors such as the quality of their offerings, the ambiance they create, the strategic location they’ve chosen, and the specific target audience they cater to.

This thorough analysis will serve as the grounds for positioning your coffee shop. Armed with knowledge about the market landscape, you can confidently determine a competitive pricing strategy that sets you apart while appealing to your desired customer base.

Remember, in this aromatic world of coffee, finding the right balance between pricing and value is paramount. So, grab a fresh brew, put on your entrepreneurial hat, and let market research be your guiding star on this caffeine-fueled journey!

Value-Based Pricing

Value-based pricing revolves around recognizing and capitalizing on the perceived value your products or services hold for your customers. In the case of your coffee shop, it’s crucial to consider the unique selling points that set you apart from the competition. Whether it’s the aromatic allure of specialty coffee, the use of organic ingredients, a commitment to sustainable practices, or an unwavering dedication to exceptional customer service, these aspects contribute to the value your coffee shop delivers.

By aligning your pricing strategy with the value you provide, you can establish a strong foundation for success. A value-based approach empowers you to charge premium prices that reflect the quality and distinctiveness of your offerings. Customers who recognize and appreciate the added value you bring to the table are more likely to embrace and support your pricing decisions.

Value is more than just the product itself; it encompasses the overall experience and satisfaction your coffee shop offers. So, embrace the essence of your unique selling points and let them guide your pricing strategy, allowing you to create a pricing model that speaks to the hearts and taste buds of your discerning customers.

Cost-Plus Pricing

Cost-plus pricing is a straightforward approach that involves determining the total cost of producing a cup of coffee and adding a desired profit margin to arrive at the selling price. To implement this strategy, carefully calculate all the costs involved in the coffee-making process, such as the cost of ingredients, labor, and overheads. Once you have a clear understanding of your costs, you can determine the profit margin you aim to achieve and set your prices accordingly.

However, it’s important to keep a few considerations in mind. While cost-plus pricing provides a practical and transparent method, it’s essential to be aware of the market competition and customer expectations. Simply relying solely on this pricing strategy may not always lead to maximizing profitability. Factors such as market demand, perceived value, and customer willingness to pay should also be taken into account.

Pricing decisions should be a delicate balance between covering costs and generating profit while remaining competitive in the market. By incorporating a comprehensive understanding of costs, competition, and customer expectations, you can develop a pricing strategy that strikes the right chord, allowing your coffee shop to thrive in the caffeinated world of business.

Read more about: Business Plan Introduction About a Coffee Shop: Fueling Your Entrepreneurship Spirit

Competitive Pricing

Competitive pricing is a strategic approach that involves setting your prices by the prevailing rates in the market. It requires a thorough analysis of your direct competitors to ensure your prices are in line with theirs. By doing so, you aim to attract price-conscious customers and gain a competitive edge in the market. However, it’s important to tread carefully and avoid getting caught up in destructive price wars that could erode profitability.

While competitive pricing is essential, it’s equally crucial to differentiate your coffee shop from the competition beyond just price. Highlighting additional value factors can set you apart and create a strong brand identity. Focus on aspects such as product quality, unique offerings, or exceptional customer experiences to showcase the added value customers receive when choosing your coffee shop.

Remember, price is just one element in the overall equation. By emphasizing the distinctive qualities of your offerings, you can cultivate customer loyalty and draw in those who value more than just the lowest price. By striking the right balance between competitive pricing and value differentiation, you can carve out a niche for your coffee shop, attracting a loyal customer base that appreciates the overall experience you provide. So, brew up your unique selling points, pour in some creativity, and let your coffee shop shine in the sea of competition!

Dynamic Pricing

Dynamic pricing is a strategic approach that involves flexibly adjusting prices in response to real-time factors like demand, time of day, or seasonality. By implementing this pricing strategy, you can optimize revenue and maximize the potential of your coffee shop. One effective method is to establish different pricing tiers for peak and off-peak hours. During busier periods, when demand is high, slightly higher prices can be set to capture the willingness of customers to pay more. Conversely, offering discounts or promotions on certain products during slower periods can help attract customers and stimulate sales.

To successfully implement dynamic pricing, it’s important to leverage technology. Utilize advanced point-of-sale systems or data analytics tools to track sales patterns, monitor customer behavior, and gain valuable insights. These insights will enable you to make informed pricing decisions, identifying the most opportune moments to adjust prices and capitalize on market dynamics.

However, it’s crucial to strike a balance. Dynamic pricing should not be used excessively or unfairly. It’s essential to maintain transparency and ensure that customers perceive the value they receive for the prices they pay.

Bundling and Upselling

Ah, the power of bundling and upselling! These clever strategies have the potential to take your customer satisfaction to the next level while simultaneously giving your average transaction value a delightful boost. Imagine the joy on your customers’ faces as they enjoy the perfect pairing of coffee with a delectable pastry or other complementary items.

Bundling is the name of the game here. By offering irresistible bundled deals that combine the comforting warmth of a cup of coffee with mouthwatering pastries or other enticing add-ons, you’re enhancing the overall customer experience and encouraging them to explore and indulge in more of what your coffee shop offers. It’s a win-win situation that leaves taste buds tingling and wallets happily opened.

And let’s not forget the art of upselling! Empower your staff with the know-how to suggest additional products or tempting upgrades to customers. Whether recommending a scrumptious specialty beverage or highlighting a delectable seasonal treat, upselling can transform an ordinary purchase into an extraordinary experience. With a well-trained and enthusiastic team, you can effortlessly guide customers toward discovering new favorites and indulging in a little something extra.

Read more about: Business Plan for Selling Coffee Online: From Farm to Digital Cup

Monitoring and Adjusting Prices

Keeping a close eye on the performance of your pricing strategy is crucial to staying ahead in the game. Regular monitoring, coupled with gathering customer feedback, allows you to gain valuable insights into the effectiveness of your pricing decisions. Dive into your sales data, scrutinize your profit margins, and pay attention to your customers’ responses. These pieces of the puzzle hold the key to identifying areas where adjustments can be made to enhance your strategy.

By analyzing your sales data, you can spot trends and patterns that reveal the impact of your pricing choices. Are there certain products or services that consistently outperform others? Are there particular price points that attract more customers? This information can guide you in refining your approach and capitalizing on the strengths of your offerings.

Customer feedback is another invaluable resource. Listen to what your customers have to say about your pricing, whether it’s through surveys, reviews, or direct conversations. Their perspectives can shed light on how well your pricing aligns with their expectations and perceived value. Take note of any concerns or suggestions, and use this feedback to fine-tune your strategy.

Developing an effective pricing strategy for your coffee shop is a critical component of your overall business plan. It requires carefully balancing your cost structure, market dynamics, and customer expectations. Pricing is not a one-time decision. Continuously monitor and evaluate your pricing strategy, and be open to adjustments based on market conditions and customer feedback. Adaptability and flexibility will help your coffee shop thrive in a competitive industry.

With a well-crafted pricing strategy tailored to your coffee shop’s unique strengths and market positioning, you can set the stage for a successful and profitable business venture.

Frequently Asked Questions

Q: Should I offer discounts or promotions to attract customers?

A: Offering discounts or promotions can effectively attract new customers and increase sales during slower periods. However, ensure that the discounts don’t undermine your profitability and consider the long-term impact on your brand image.

Q: How can I differentiate my coffee shop’s pricing from competitors?

A: Differentiate your pricing by focusing on value factors beyond price. Emphasize the quality of your coffee, unique offerings, exceptional customer service, ambiance, or sustainability practices. Create a distinctive experience that justifies premium pricing.

Q: How often should I review and adjust my pricing strategy?

A: Regularly monitor your pricing strategy’s performance and gather customer feedback. Evaluate your pricing strategy quarterly or annually, considering market conditions, changes in costs, and customer preferences. Flexibility and adaptability are crucial to maintaining competitiveness.

To learn more on how to start your own coffee shop, check out my startup documents here.

Disclaimer: The information provided by  StartMyCoffeeShop.com  (“The Site”) is for general informational purposes only. All information on the Site is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information on the Site. Under no circumstance shall we have any liability to you for any loss or damage of any kind incurred as a result of the use of the Site or Reliance on any information provided on the Site. Your use of the Site and reliance on any information on the Site is solely at your own risk. This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs. Terms and Conditions. ( https://startmycoffeeshop.com/terms-and-conditions/ )

Hi! I’m Shawn Chun

My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!

As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.

I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.

Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.

Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.

Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.

Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!

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How to write an effective business plan in 11 steps (with workbook)

February 02, 2023 | 14 minute read

Writing a business plan is a powerful way to position your small business for success as you set out to meet your goals. Landmark studies suggest that business founders who write one are 16% more likely to build viable businesses than those who don’t and that entrepreneurs focused on high growth are 7% more likely to have written a business plan. 1 Even better, other research shows that owners who complete business plans are twice as likely to grow their business successfully or obtain capital compared with those who don’t. 2

The best time to write a business plan is typically after you have vetted and researched your business idea. (See How to start a business in 15 steps. ) If conditions change later, you can rewrite the plan, much like how your GPS reroutes you if there is traffic ahead. When you update your plan regularly, everyone on your team, including outside stakeholders such as investors, will know where you are headed.

What is a business plan?

Typically 15-20 pages long, a business plan is a document that explains what your business does, what you want to achieve in the business and the strategy you plan to use to get there. It details the opportunities you are going after, what resources you will need to achieve your goals and how you will define success.

Why are business plans important?

Business plans help you think through barriers and discover opportunities you may have recognized subconsciously but have not yet articulated. A business plan can also help you to attract potential lenders, investors and partners by providing them with evidence that your business has all of the ingredients necessary for success.

What questions should a business plan answer?

Your business plan should explain how your business will grow and succeed. A great plan will provide detailed answers to questions that a banker or investor will have before putting money into the business, such as:

• What products or services do you provide?
• Who is your target customer?
• What are the benefits of your product and service for customers?
• How much will you charge?
• What is the size of the market?
• What are your marketing plans?
• How much competition does the business face in penetrating that market?
• How much experience does the management team have in running businesses like it?
• How do you plan to measure success?
• What do you expect the business’s revenue, costs and profit to be for the first few years?
• How much will it cost to achieve the goals stated in the business plan?
• What is the long-term growth potential of the business? Is the business scalable?
• How will you enable investors to reap the rewards of backing the business? Do you plan to sell the business to a bigger company eventually or take it public as your “exit strategy”?

How to write a business plan in 11 steps

This step-by-step outline will make it easier to write an effective business plan, even if you’re managing the day-to-day demands of starting a new business. Creating a table of contents that lists key sections of the plan with page numbers will make it easy for readers to flip to the sections that interest them most.

• Use our editable workbook to capture notes and organize your thoughts as you review these critical steps. Note: To avoid losing your work, please remember to save this PDF to your desktop before you begin.

1. Executive summary

The executive summary is your opportunity to make a great first impression on investors and bankers. It should be just as engaging as the enthusiastic elevator pitch you might give if you bumped into a potential backer in an elevator.

In three to five paragraphs, you’ll want to explain what your business does, why it will succeed and where it will be in five years. The executive summary should include short descriptions of the following:

• Business concept. What will your business do?
• Goals and vision. What do you expect the business to achieve, both financially and for other key stakeholders, such as the community?
• Product or service. What does your product or service do — and how is it different from those of competitors?
• Target market. Who do you expect to buy your product or service?
• Marketing strategy. How will you tell people about your product or service?
• Current revenue and profits. If your business is pre-revenue, offer sales projections.
• Projected revenue and profits. Provide a realistic look at the next year, as well as the next three years, ideally.
• Financial resources needed. How much money do you need to borrow or raise to fund your plan?
• Management team. Who are the company’s leaders and what relevant experience will they contribute?

2. Business overview

Here is where you provide a brief history of the business and describe the product(s) or service(s) it offers. Make sure you describe the problem you are attempting to solve, for whom you will solve it (your customers) and how you will solve it. Be sure to describe your business model (such as direct-to-consumer sales through an online store) so readers can envision how you will make sales. Also mention your business structure (such as a sole proprietorship , general partnership, limited partnership or corporation) and why it is advantageous for the business. And be sure to provide context on the state of your industry and where your business will fit into it.

3. Business goals and vision

Explain what you hope to achieve in the business (your vision) as well as its mission and value proposition. Most founders judge success by the size to which they grow the business using measures such as revenue or number of employees. Your goals may not be solely financial. You may also wish to provide jobs or solve a societal problem. If that’s the case, mention those goals as well.

If you are seeking outside funding, explain why you need the money, how you will put it to work to grow the business and how you expect to achieve the goals you have set for the business. Also explain your exit strategy—that is, how you would enable investors to cash out, whether that means selling the business or taking it public.

4. Management and organization

Many investors say they bet on the team behind a business more than the business idea, trusting that talented and experienced people will be capable of bringing sound business concepts to life. With that in mind, make sure to provide short bios of the key members of your management team (including yourself) that emphasize the relevant experience each individual brings, along with their special talents and industry recognition. Many business plans include headshots of the management team with the bios.

Also describe more about how your organization will be structured. Your company may be a sole proprietorship, a limited liability company (LLC) or a corporation in one or more states.

If you will need to hire people for specific roles, this is the place to mention those plans. And if you will rely on outside consultants for certain roles — such as an outsourced CFO — be sure to make a note of it here. Outside backers want to know if you’ve anticipated the staffing you need.

5. Service or product line

A business will only succeed if it sells something people want or need to buy. As you describe the products or services you will offer, make sure to explain what benefits they will provide to your target customers, how they will differ from competing offerings and what the buying cycle will likely be so it is clear that you can actually sell what you are offering. If you have plans to protect your intellectual property through a copyright or patent filing, be sure to mention that. Also explain any research and development work that is underway to show investors the potential for additional revenue streams.

6. Market/industry analysis

Anyone interested in providing financial backing to your business will want to know how big your company can potentially grow so they have an idea of what kind of returns they can expect. In this section, you’ll be able to convey that by explaining to whom you will be selling and how much opportunity there is to reach them. Key details to include are market size; a strengths, weaknesses, opportunities and threats (SWOT) analysis ; a competitive analysis; and customer segmentation. Make it clear how you developed any projections you’ve made by citing interviews or research.

Also describe the current state of the industry. Where is there room for improvement? Are most companies using antiquated processes and technology? If your business is a local one, what is the market in your area like? Do most of the restaurants where you plan to open your café serve mediocre food? What will you do better?

In this section, also list competitors, including their names, websites and social media handles. Describe each source of competition and how your business will address it.

7. Sales and marketing

Explain how you will spread the word to potential customers about what you sell. Will you be using paid online search advertising, social media promotions, traditional direct mail, print advertising in local publications, sponsorship of a local radio or TV show, your own YouTube content or some other method entirely? List all of the methods you will use.

Make sure readers know exactly what the path to a sale will be and why that approach will resonate with customers in your ideal target markets as well as existing customer segments. If you have already begun using the methods you’ve outlined, include data on the results so readers know whether they have been effective.

8. Financials

In a new business, you may not have any past financial data or financial statements to include, but that doesn’t mean you have nothing to share. Preparing a budget and financial plan will help show investors or bankers that you have developed a clear understanding of the financial aspects of running your business. (The U.S. Small Business Administration (SBA) has prepared a guide you can use; SCORE , a nonprofit organization that partners with the SBA, offers a financial projections template to help you look ahead.) For an existing business, you will want to include income statements, profit and loss statements, cash flow statements and balance sheets, ideally going back three years.

Make a list of the specific steps you plan to take to achieve the financial results you have outlined. The steps are generally the most detailed for the first year, given that you may need to revise your plan later as you gather feedback from the marketplace.

Include interactive spreadsheets that contain a detailed financial analysis showing how much it costs your business to produce the goods and services you provide, the profits you will generate, any planned investments and the taxes you will pay. See our startup costs calculator to get started.

9. Financial projections

Creating a detailed sales forecast can help you get outside backers excited about supporting you. A sales forecast is typically a table or simple line graph that shows the projected sales of the company over time with monthly or quarterly details for the next 12 months and a broader projection as much as five years into the future. If you haven’t yet launched the company, turn to your market research to develop estimates. For more information, see “ How to create a sales forecast for your small business. ”

10. Funding request

If you are seeking outside financing such as a loan or equity investment, your potential backers will want to know how much money you need and how you will spend it. Describe the amount you are trying to raise, how you arrived at that number and what type of funding you are seeking (such as debt, equity or a combination of both). If you are contributing some of your own funds, it is worth noting this, as it shows that you have skin in the game.

11. Appendix

This should include any information and supporting documents that will help investors and bankers gain a greater understanding of the potential of your business. Depending on your industry, you might include local permits, licenses, deeds and other legal documents; professional certifications and licenses; media clips; information on patents and other intellectual property; key customer contracts and purchase orders; and other relevant documents.

Some business owners find it helpful to develop a list of key concepts, such as the names of the company’s products and industry terms. This can be helpful if you do business in an industry that may not be familiar to the readers of the business plan.

Tips for creating an effective business plan

Use clear, simple language. It’ll be easier to win people over if your plan is easy to read. Steer clear of industry jargon, and if you must use any phrases the average adult won’t know, be sure to define them.

Emphasize what makes your business unique. Investors and bankers want to know how you will solve a problem or gap in the marketplace differently from anyone else. Make sure you’re conveying your differentiating factors.

Nail the details. An ideal business plan will be detailed and accurate. Make sure that any financial projections you make are realistic and grounded in solid market research. (If you need help in making your calculations, you can get free advice at SCORE.) Seasoned bankers and investors will quickly spot numbers that are overly optimistic.

Take time to polish it. Your final version of the plan should be neat and professional with an attractive layout and copy that has been carefully proofread.

Include professional photos. High-quality shots of your product or place of business can help make it clear why your business stands out.

Updating an existing business plan

Some business owners in rapidly growing businesses update their business plan quarterly. Others do so every six months or every year. When you update your plan make sure you consider these three things:

• Are your goals still current? As you’ve tested your concept, your goals may have changed. The plan should reflect this.
• Have you revised any strategies in response to feedback from the marketplace? You may have found that your offerings resonated with a different customer segment than you expected or that your advertising plan didn’t work and you need to try a different approach. Given that investors will want to see a marketing and advertising plan that works, keeping this section current will ensure you are always ready to meet with one who shows interest.
• Have your staffing needs changed? If you set ambitious goals, you may need help from team members or outside consultants you did not anticipate when you first started the business. Take stock now so you can plan accordingly.

Final thoughts

Most business owners don’t follow their business plans exactly. But writing one will get you off to a much better start than simply opening your doors and hoping for the best, and it will be easier to analyze any aspects of your business that aren’t working later so you can course-correct. Ultimately, it may be one of the best investments you can make in the future of your business.

Business plan FAQs

What are common mistakes when writing a business plan.

The biggest mistake you can make when writing a business plan is creating one before the idea has been properly researched and tested. Not every idea is meant to become a business. Other common mistakes include:

• Not describing your management team in a way that is appealing to investors. Simply cutting and pasting someone’s professional bio into the management section won’t do the trick. You’ll want to highlight the credentials of each team member in a way that is relevant to this business.
• Failing to include financial projections — or including overly optimistic ones. Investors look at a lot of business plans and can tell quickly whether your numbers are accurate or pie in the sky. Have a good small business accountant review your numbers to make sure they are realistic.
• Lack of a clear exit strategy for investors. Investors may want the option to cash out eventually and would want to know how they can go about doing that.
• Slapdash presentation. Make sure to fact-check any industry statistics you cite and that any charts, graphs or images are carefully prepared and easy to read.

What are the different types of business plans?

There are a variety of styles of business plans. Here are three major types:

Traditional business plan. This is a formal document for pitching to investors based on the outline in this article. If your business is a complicated one, the plan may exceed the typical length and stretch to as many as 50 pages.

One-page business plan. This is a simplified version of a formal business plan designed to fit on one page. Typically, each section will be described in bullet points or in a chart format rather than in the narrative style of an executive summary. It can be helpful as a summary document to give to investors — or for internal use. Another variation on the one-page theme is the business model canvas .

Lean plan. This methodology for creating a business plan is ideal for a business that is evolving quickly. It is designed in a way that makes it easy to update on a regular basis. Lean business plans are usually about one page long. The SBA has provided an example of what this type of plan includes on its website.

Is the business plan for a nonprofit different from the plan for other business types?

Many elements of a business plan for a nonprofit are similar to those of a for-profit business. However, because the goal of a nonprofit is achieving its mission — rather than turning a profit — the business plan should emphasize its specific goals on that front and how it will achieve them. Many nonprofits set key performance indicators (KPIs) — numbers that they track to show they are moving the needle on their goals.

Nonprofits will generally emphasize their fundraising strategies in their business plans rather than sales strategies. The funds they raise are the lifeblood of the programs they run.

What is the difference between a business plan, a strategic plan and a marketing plan?

A strategic plan is different from the type of business plan you’ve read about here in that it emphasizes the long-term goals of the business and how your business will achieve them over the long run. A strong business plan can function as both a business plan and a strategic plan.

A marketing plan is different from a business plan in that it is focused on four main areas of the business: product (what you are selling and how you will differentiate it), price (how much your products or services will cost and why), promotion (how you will get your ideal customer to notice and buy what you are selling) and place (where you will sell your products). A thorough business plan may cover these topics, doing double duty as both a business plan and a marketing plan.

Explore more

Editable business plan workbook

Starting a new business

1 . Francis J. Green and Christian Hopp. “Research: Writing a Business Plan Makes Your Startup More Likely to Succeed.” HBR. July 14, 2017. Available online at https://hbr.org/2017/07/research-writing-a-business-plan-makes-your-startup-more-likely-to-succeed.

2 . CorpNet, “The Startup Business Plan: Why It’s Important and How You Can Create One,” June 29, 2022.

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Mark Zuckerberg laid out 3 ways Meta will make money from its huge AI investments

• Mark Zuckerberg has become "more optimistic and ambitious" about Meta's ability to win in AI.
• The Meta CEO now plans to spend about $40 billion this year, largely on AI investments.
• He sees three ways AI can become a "massive business" for Meta in the next few years.

Mark Zuckerberg is now convinced that Meta is a top artificial-intelligence company, and he has even laid out how the technology will become a significant source of profit in the years ahead.

With the recent release of Llama 3 , Meta's latest AI model , Zuckerberg said he became "more optimistic and ambitious on AI" and his company's ability to deliver on the tech.

He made it clear during a Wednesday earnings call with analysts that he intended to "invest significantly more over the coming years to build even more advanced models and the largest-scale AI services in the world."

"With the latest models, we're not just building good AI models that are capable of building some new good social and commerce products," the CEO told analysts. "I actually think we're in a place where we've shown that we can build leading models and be the leading AI company in the world. And that opens up a lot of additional opportunities beyond just the ones that are the most obvious for us."

Heavy spending again

Such ambition doesn't come cheap. Meta increased its guidance on capital expenditure for this year, saying it now planned to spend between $35 billion and $40 billion, largely on AI investments. Its stock slumped 16% in after-hours trading.

The last time Zuckerberg got excited about a new technology — the metaverse — Meta spent wildly and freaked investors out. The stock collapsed and didn't recover until the company embarked on a "year of efficiency" marked by mass layoffs and a more business-minded CEO .

Zuckerberg on Wednesday made a concerted effort to head off Wall Street panic that his new AI enthusiasm is lacking in business acumen.

Related stories

He said he saw "several ways" generative AI could make money and laid out three specific paths to this becoming "a massive business" for Meta. Although he warned that getting there was a "long-term" prospect.

'Business messaging'

One of the ways AI can make money is by building up "business messaging" so that companies pay Meta for generative-AI tools, such as services that support automated interactions with users and customers. Zuckerberg envisions Meta's AI moving beyond just being a chatbot and becoming an AI "agent" that handles more complex tasks and processes multiple queries to solve user problems instead of coming back instantly with rote answers.

Zuckerberg said revenue from AI business messaging was "one of the nearer-term opportunities." While it may not become a reality this year, he said it was less than five years away. He explained that the immediate goal on this front was "getting many hundreds of millions or billions of people to use Meta AI as a core part of what they do."

Ads appearing in AI interactions

Another way generative AI could make money for Meta is by "introducing ads or paid content into AI interactions," as Zuckerberg said. Although brands and companies paying for products to show up in generative-AI results is not yet the standard for AI chatbots, Meta's entire business is effectively driven by selling digital advertising. Inserting ads into its social and messaging products is at the core of Meta as a company.

AI is already being more widely deployed by Meta in its newer "unconnected content" algorithm for social-media content recommendations, which Zuckerberg said was leading to more app engagement. That, in turn, leads to more people seeing more ads. He said that 30% of the content that Facebook users were seeing was recommended by AI, and the same applied to 50% of the content seen by Instagram users.

Selling access to AI models

A third distinct way Meta may make money from AI is by selling access to models as they get larger. "Enabling people to pay to use bigger AI models and access more compute," as Zuckerberg put it on Wednesday.

Right now, Llama 3 and Meta's other large language models are freely available to users and companies below a certain size threshold. Charging for access may be a move away from Meta's "open source" approach.

"So if the technology and products evolve in the way that we hope, each of those will unlock massive amounts of value for people and business for us over time," Zuckerberg said, adding, "I think it makes sense to go for it, and we're going to."

Watch: AI expert explains how to incorporate generative AI into your business strategy

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Buffett Live: Berkshire cuts Apple stake, doesn't know what to do with its $189 billion in cash

Berkshire Hathaway significantly reduced its enormous stake in Apple in the first quarter, as Warren Buffett's conglomerate let its cash hoard swell to a record $189 billion.

India's Kansai Nerolac Paints reported a higher profit for the fifth straight quarter on Saturday, aided by sustained demand from decorative and industrial coatings.

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Federal Reserve says interest rates will stay at two-decade high until inflation further cools

Federal Reserve chair Powell says interest rates will stay at high until inflation further cools

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, May 1, 2024. (AP Photo/Susan Walsh)

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Federal Reserve Board Chair Jerome Powell arrives for a news conference at the Federal Reserve in Washington, Wednesday, May 1, 2024. (AP Photo/Susan Walsh)

FILE - Federal Reserve Board chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, March 20, 2024. The Federal Reserve wraps up its two-day policy meeting Wednesday, May 1, 2024. Most analysts expect that the central bank will leave its benchmark borrowing rate alone for the sixth straight meeting. (AP Photo/Susan Walsh, File)

WASHINGTON (AP) — The Federal Reserve on Wednesday emphasized that inflation has remained stubbornly high in recent months and said it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target.

The Fed issued its decision in a statement after its latest meeting, at which it kept its key rate at a two-decade high of roughly 5.3%. Several hotter-than-expected reports on prices and economic growth have recently undercut the Fed’s belief that inflation was steadily easing. The combination of high interest rates and persistent inflation has also emerged as a potential threat to President Joe Biden’s re-election bid.

“In recent months,” Chair Jerome Powell said at a news conference, “inflation has shown a lack of further progress toward our 2% objective.”

“It is likely that gaining greater confidence,” he added, “will take longer than previously expected.”

Powell did strike a note of optimism about inflation. Despite the recent setbacks, he said, “My expectation is that over the course of this year, we will see inflation move back down.”

Wall Street traders initially cheered the prospect that the Fed will cut rates at some point this year as well as Powell’s comment that the Fed isn’t considering reverting to rate increases to attack inflation.

“I think it’s unlikely that the next policy rate move will be a hike,” he said.

Later, though, stock prices erased their gains and finished the day essentially unchanged from where they were before Powell’s news conference.

Still, Powell sketched out a series of potential scenarios for the months ahead. He said that if hiring stayed strong and “inflation is moving sideways,” that “would be a case in which it would be appropriate to hold off on rate cuts.”

But if inflation continued to cool — or if unemployment rose unexpectedly — Powell said the Fed would likely be able to reduce its benchmark rate. Cuts would, over time, bring down the cost of mortgages, auto loans, and other consumer and business borrowing.

Those comments were “a signal that the (Fed) is a lot less confident that they know how policies are going to unfold over the course of this year,” said Jonathan Pingle, an economist at UBS. “We were all sort of hoping for an update on the committee’s path forward. And instead what we got was, ‘We’re really not confident enough to tell you what our path forward is going to be.’ ”

The central bank’s overarching message Wednesday — that more evidence is needed that inflation is slowing to the Fed’s target level before the policymakers would begin cutting rates — reflects an abrupt shift. As recently as their last meeting on March 20, the officials had projected three rate reductions in 2024, likely starting in June.

But given the persistence of elevated inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.

The Fed’s warier outlook stems from three months of data that pointed to chronic inflation pressures and robust consumer spending. Inflation has cooled from a peak of 7.1%, according to the Fed’s preferred measure, to 2.7%, as supply chains have eased and the cost of some goods has actually declined.

Average prices, though, remain well above their pre-pandemic levels, and the costs of services ranging from apartment rents and health care to restaurant meals and auto insurance continue to surge. With the presidential election six months away, many Americans have expressed discontent with the economy, notably over the pace of price increases.

On Wednesday, the Fed announced that it would slow the pace at which it’s unwinding one of its biggest COVID-era policies: Its purchase of several trillion dollars in Treasury securities and mortgage-backed bonds, an effort to stabilize financial markets and keep longer-term rates low.

The Fed is now allowing $95 billion of those securities to mature each month, without replacing them. Its holdings have fallen to about $7.4 trillion, down from $8.9 trillion in June 2022, when it began reducing them. On Wednesday, the Fed said it would, in June, reduce its holdings at a slower pace.

Instead of allowing $60 billion in Treasuries to roll off each month, it will allow just $25 billion. At the same time, it will continue letting $35 billion in mortgage-backed bonds mature each month.

By cutting back its holdings, the Fed could contribute to keeping longer-term rates, including mortgage rates, higher than they would be otherwise. That’s because as it reduces its bond holdings, other buyers will have to buy the securities instead, and rates might have to rise to attract the needed buyers.

The U.S. economy is healthier and hiring stronger than most economists thought it would be at this point. The unemployment rate has remained below 4% for more than two years , the longest such streak since the 1960s. And while economic growth reached just a 1.6% annual pace in the first three months of this year, consumer spending grew at a robust pace, a sign that the economy will keep expanding.

He also downplayed any concerns that the economy might be at risk of sliding into “stagflation” — a toxic combination of weak growth, high unemployment and elevated inflation that afflicted the United States during the 1970s.

“I was around for stagflation,” Powell said, “and it was 10% unemployment, it was high-single-digit inflation. And very slow growth. Right now, we have 3% growth which is pretty solid growth, I would say, by any measure. And we have inflation running under 3%. ...I don’t see the ‘stag’ or the ‘flation,’ actually.”

Local elections live: Losing candidate heckles Khan at declaration; West Midlands race 'too close to call' - with recount in one area

Sadiq Khan wins a third term as mayor of London - but it looks like we could be in with a bit of a wait for the West Midlands result.

Saturday 4 May 2024 18:29, UK

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• Khan heckled by losing candidate as he's declared winner of London mayoral election
• West Midlands mayoral race 'too close to call' - recount ordered in one area
• Electoral Dysfunction:  Ruth Davidson says loss there could see Tory MPs try to change leader
• Andy Burnham re-elected as Greater Manchester mayor
• Lib Dems win more council seats than Tories in England
• Sam Coates:  Tory MPs sad but not mutinous
• Vote 2024:   Council results in full  |  Mayoral results in full
• Live reporting by  Ben Bloch   and Charlotte Chelsom-Pill

With two voting areas left to report, the West Midlands race really is too close to call.

Conservative Andy Street leads Labour candidate Richard Barker by 31,000 votes or seven percentage points.

We're awaiting the results from Coventry and Sandwell.

The fact that the Tory incumbent is in contention for the West Midlands mayoral race shows the Conservative Party shouldn't be "written off" ahead of the next election, Tory MP and deputy foreign secretary Andrew Mitchell tells Sky News.

Mr Mitchell says the West Midlands is an area "Labour have to win and win well in order to be in government".

So, he says the fact Andy Street is in contention to win the mayoral race shows the Conservative Party are "doing very well here".

"It also shows that those who have written off the next election for the Conservatives are pre-judging the voters' intentions," he says.

The Conservative Party has suffered its worst local election result in years, losing more than half of its councillors who stood for re-election across England.

Should Mr Street be defeated in his high-profile West Midlands race,  Sky News political editor Beth Rigby  asks Mr Mitchell whether the party would move against the prime minister. 

He says he is confident they would not, saying it would be "self-indulgence of a very high order indeed for anyone to try to do that".

"We need to unite behind the prime minister," he says.

The West Midlands mayoral race is currently on a knife edge with five of the seven results now in. 

We have five of seven results now in the key West Midlands mayoral race.

Incumbent Conservative Andy Street is up against Labour's Richard Parker, with the race currently "on a knife edge".

The first five results give Mr Street 39.5% of the vote to Mr Parker's 35%. 

But  Sky News political editor Beth Rigby , who is in Birmingham, says sources from both the Labour and Conservative camps are telling her Mr Parker may just edge the race. 

She says it is "very tense", stressing it is still "too close to call".

In Birmingham, Mr Parker won 80,251 votes to Mr Street's 66,296.

A full recount has been ordered in the Coventry area.

Labour candidate Richard Parker has won the largest of the seven wards in the West Midlands mayoral race. 

Mr Parker won 80,251 votes in Birmingham to Tory incumbent Andy Street's 66,296.

Sky News political editor Beth Rigby ,who is in Birmingham, says sources from both the Labour and Conservative camps are telling her Mr Parker may just edge the race. 

But, she stresses it is "still too close to call" as we wait for the full results.

A full recount has been ordered in the Coventry area, with the race currently on a "knife edge".

Defeated Conservative candidate for London mayor Susan Hall has taken to the stage.

She began by congratulating Sadiq Khan on his victory, but said she hopes Mr Khan will make reforming the Met Police and making London safe again his "priority".

"I hope too that he stops patronising people like me who care," she says.

"This isn't an episode of The Wire, this is real life on his watch.

"I love London and I urge Sadiq to try harder to make it better for all our sakes," she concludes.

Sadiq Khan has promised to work "tirelessly" to deliver a "fairer, safer and greener" London. 

Mr Khan made the promise as he resumed his speech after being  interrupted by the Britain First candidate who heckled him with a shout of "Khan killed London" (see previous post).

The London mayor said the last few months had been "difficult", saying he had faced a campaign of "non-stop negativity". 

But he said he "couldn't be more proud that we answered fearmongering with facts, hate with hope and attempts to divide with efforts to unite".

Thanking Londoners, he said they have "proved that London is a city of progress, a city of pluralism, and above all, a city of possibility."

He concluded by saying a Labour government led by Sir Keir Starmer, together with City Hall, would "accomplish so much more, ensuring that for our capital and for our country our brightest days are still ahead of us".

Mr Khan has won a historic third term as London mayor with 43.8% of the vote.

  Sadiq Khan has been officially declared winner of the London mayoral election. 

As he took to the stage to speak, Mr Khan was heckled with boos and a shout of "Khan killed London".

The heckle came from the Britain First candidate Nick Scanlon, who then proceeded to walk off the stage where the mayoral candidates were assembled.

Mr Scanlon finished 10th in the election, behind satirical candidate Count Binface.

Mr Khan won his historic third term with 43.8% of the vote.

Labour sources have suggested a recount in Coventry isn't going to "change materially" Tory incumbent Andy Street's numbers in the West Midlands mayoral race,  Sky News political editor Beth Rigby says .

A full recount has been ordered in the Coventry area, with the race currently "too close to call".

Beth, who is in Birmingham, says that while the result is on a "knife edge," there is hope in the Labour camp that Richard Parker could have edged the race.

She says there will be a "massive upset" if Mr Street loses the mayoralty, with one former cabinet minister telling her it would be "devastating".

Beth adds that there is chatter within the Conservative Party that if Mr Street does lose, he may be offered a parliamentary constituency, however, that remains "speculative".

A short time ago, Labour sources told Sky News a recount was requested by Mr Street's team. 

The Coventry recount is expected to take a couple of hours.

Coventry is one of seven voting areas in the West Midlands race.

Sadiq Khan has won a historic third term as London mayor, becoming the first person to achieve the feat.

He achieved it with the biggest ever margin of victory in a mayoral election, and the best ever re-election result for any Mayor of London.

One of the most controversial aspects of Mr Khan's mayorship has been the expansion of the Ultra Low Emission Zone (ULEZ) to outer London - and it seems many are still upset with him, despite his resounding win.

As we await the formal declaration of Mr Khan's win at City Hall (expected very shortly), some protesters have appeared outside with a message for him...

A full recount has been ordered in the Coventry area in the West Midlands, where the mayoral race is currently "too close to call".

The recount is expected to take a couple of hours.

A short time ago, Labour sources told Sky News a recount was requested by Conservative incumbent Andy Street's team. 

Our  lead politics presenter Sophy Ridge  noted: "You don't tend to ask for a recount if you're happy with the way the results have gone".

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Apple’s stock surges on solid earnings and $110bn share buyback plan

Apple's shares surged more than 6% in after-hours trading as the tech giant reported earnings for the March quarter that surpassed the market's expectations, accompanied by the largest share buyback plan of $110 billion.

Apple reported better-than-expected earnings for the second quarter of the fiscal year 2024, which propelled its share price up by over 6% in extended trading hours to nearly $184. The iPhone maker has also announced the largest share buyback program of $110 billion, further fuelling the tech giant’s stock rally.

Apple’s earnings top Wall Street’s expectations

Apple reported a net income of $23.64 billion, which is down 2% from a year ago. Meantime, the earnings per share stood at $1.53 on net sales of $90.75 billion, surpassing the estimated $1.50 and $90.01 respectively. The fastest-growing segment, Service revenue, reached $23.9 billion, significantly exceeding the estimated $23.27 billion. The company anticipates that overall sales will return to low single-digit growth, with its Services sales maintaining a stable pace of double-digit growth in the current quarter.

• Finance minister says France will 'fight' TotalEnergies’ New York listing

Nevertheless, the overall revenue decreased by 4% from a year ago, attributed to a 10% year-on-year drop in iPhone sales. The 13% decline in sales in China had a significant impact on its product revenue. However, CEO Tim Cook indicates a potential recovery in mainland China sales during the current quarter, following his visit to the country in March. 

In other products, Apple surpassed market expectations in Mac sales with revenue of $7.5 billion, marking a 4% increase from a year ago, compared to the estimated $6.86 billion. However, iPad revenue was recorded at $5.6 billion, falling short of the expected $5.9 billion, down 17% from the same quarter in 2023. During the earnings call conference, CFO Luca Maestri mentioned that iPad sales may rebound to double-digit growth with the release of new products.

Apple Services gain momentum

A notable trend is the diminishing reliance on iPhone sales within Apple's business model, with its revenue now representing only 50% of the total revenue, compared to 58% in the final quarter of 2023. Conversely, services sales have gained prominence, accounting for 25% of net sales, up from 20% in the same period.

Apple Services, encompassing Apple Store, Apple Pay, Apple TV+, Apple Music, Apple Arcade, and iCloud, has emerged as a standout performer for the company. It is the most profitable segment, with revenue experiencing accelerated growth, up by 14% year-over-year. Its gross margin reached 75% in the March quarter, an increase from 73% in the previous quarter. Meanwhile, the gross margin for Product sales, including

iPhone, iPad, Mac, and other products, stood at 37%. These figures collectively propelled Apple's overall gross margin to a record level of 47%.

• Losses balloon at luxury car maker Aston Martin as SUV sales plunge

Apple expresses a positive outlook on AI development

Unlike other tech giants such as Microsoft, Alphabet, and Meta Platforms, Apple has maintained a relatively low profile regarding its advancements in AI, which has pressured the company's share price. Despite a 6% surge in its share price, Apple continues to underperform compared to its tech counterparts, with a stagnant year-to-date movement.

However, Apple has a dominant eco-system with huge potential in AI development. When questioned about Apple's AI strategy, CEO Tim Cook stated, "We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software, and services integration; groundbreaking Apple silicon with our industry-leading neural engine, and our unwavering focus on privacy." 

Cook hinted that he would elaborate further on the AI strategy in the upcoming weeks, potentially aligning with the Apple Worldwide Developers Conference on 10th June.

Previously, Apple had engaged in discussions with OpenAI and Google about potential deals to integrate chatbots into its iOS 18. However, as of now, there has been no firm confirmation of either agreement.

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