The Top 3 Product Pricing Strategies

Highlights

  • A product pricing strategy is the overarching framework that defines how the company will increase market share, revenue and profits using price. Some strategies go further and define how to penetrate new markets or defend markets from competitor encroachment.
  • The strategy defines how to optimize item or service sale amounts to maximize financial performance. It calculates the highest price a customer segment will pay for a product or service.
  • Product pricing research shows that adoption of formal product pricing strategies increase annual revenues by 2 to 8 percent and nearly all of the increase falls straight to the bottom line.
Johnny Grow Revenue Growth Consulting

Pricing Starts with Strategy

Product pricing strategies design item or service prices to achieve company financial goals. Those goals include increasing market share, revenue or profits. Notice the prior sentence is an "or" statement, not an "and" statement. It's possible but very difficult to grow all three with a single strategy so success is improved by focusing on one at a time.

There are many strategic methods but the following three are the most used, and the most extensible to create more precise derivative methods.

1

Value-based Pricing Strategy

In contrast to item sale amounts based on cost, margin or competitors, value-based pricing is based on the customers willingness to pay. And this is based on their perceived value for your goods or services.

This strategy is used by companies that can differentiate their offerings. It is designed to maximize profitability per unit sold. It will not maximize market share but it can maximize customer share or customer lifetime value.

Customers are not homogeneous, so this method segments customers and measures product value and price sensitivity for each segment.

Customer value is heavily influenced by the company's brand, item or service differentiation, unique value proposition and competitive advantages.

Customer value is also of course relative to the competition. So, you need to compare and benchmark your solution against the top competitor as perceived by each customer segment. The comparison should prioritize both tangible and intangible differentiation by the degree of variation and importance to customers. And recognize that value is about more than just the acquisition price. It's about the entire customer experience before, during and following the purchase transaction.

With this information, a price-to-value calculation can be used to set or adjust price for each customer segment. More mature strategies will look beyond a sale amount in isolation and consider product portfolio implications.

Depending upon your target market, value-based pricing may itself influence the value. For impulse or non-considered purchases, customers may determine value based on the sale amount, believing high priced products are higher quality or that low prices products are higher value.

Value-based pricing may include a demand-based or pricing elasticity model to measure how the sale amount fluctuates based on supply and customer demand.

Pricing Strategy
2

Cost Leader Pricing Strategy

This method is designed to minimize profit per unit sold but maximize profit from the overall market. It exploits low pricing to maximize sales volume and market share. It is built upon operational efficiencies and economies of scale. This financial model is most often adopted by companies with commoditized products, nominal differentiation and little brand value.

Companies may drive down cost of customer acquisition with digital channels (i.e., ecommerce) and indirect channels (partners, resellers, manufacturing sales reps). They can also minimize cost to serve with customer self-service tools such as online knowledgebases, customer communities and virtual agents or chatbots. For inventory carrying organizations, distribution and supply chain management efficiencies are critical.

Product price strategies for cost leaders go beyond just low prices and include frequent promotions and discounting campaigns often linked to inventory balances and manufacturer rebates. Item sale amounts are most often based on cost-plus and competitor benchmarking.

More sophisticated cost leader strategies include penetration pricing whereby the sale amount is set below competitors to acquire market share. Customers are then offered higher margin up-sell, cross-sell or bundled products or support services. The goal is to acquire market share quickly and increase customer lifetime value over time.

Pricing
3

Niche Leader Price Strategy

Some pricing consultants suggest that the niche leader strategy is a value-based variant while others suggest it's a unique strategy. What makes this method different is that it seeks high profit per unit sold and maximum market penetration, albeit within a narrowly defined market.

This strategy is used by companies that create differentiation based on the customer, not just the vendors product. Niche leaders acquire customers based on their superior understanding and communication of the customer industry or business model, and their unique objectives and challenges. It's essential that the niche leader understand the economics of the customers' business better than the competitors.

This method is dependent upon customer strategies such as customer relationship management (the strategy not the software), customer affinity, customer experience management or customer loyalty.

Product Pricing Strategies Positioning

When Used

Market Share

Revenue Growth

Profit Growth

Value Based

Differentiation

Customer Experience

Price premium

3

2

1

Cost Leader

Commoditized products

Little differentiation

Little brand value

1

2

3

Niche Leader

Innovative products

Specialized products

Specialized knowledge

2

3

1

See the three most effective product pricing strategies to increase market share, revenues and profits.

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The Many Variants

There are dozens of price strategies that stem from the above three.

At a high level there are B2B price strategies and B2C price strategies. But these then go deeper to create industry specific methods.

For example, a skimming strategy is a strategic choice when releasing innovative products. A freemium, subscription, or consumption method is common with Software as a Service companies. A long tail strategy works well for industrial companies or distributors that manage thousands of different items. Capture management or loss leader pricing works well in retail. Yield management strategies are essential when dealing with perishable goods.

However, each of these industry specific strategies are variants of the big three categories and best accomplished by starting with the fundamentals of value-based pricing, cost leader pricing or niche leader pricing.