Choosing the right pricing strategy is not simply about deciding how much to charge. It is about choosing a pricing approach that supports your business goals, reflects the value you provide, covers your costs and helps you make sustainable profit.

The right strategy will depend on your customers, your market, your competitors and what you are trying to achieve. A premium business will usually price differently from a low-cost provider. A new business trying to build market share may price differently from an established business with a strong reputation.

In this episode, we look at six pricing strategies you can use for products and services, together with the numbers and business decisions that should sit behind them.

About this episode

There is no single pricing strategy that works for every business.

Your pricing needs to support the proposition you put in front of your customers. If you position yourself as a high-quality business but charge bargain prices, the message can become confused. Likewise, if your business competes mainly on price, your costs and operating model need to support that position.

Pricing also needs to help the business make profit over the long term.

That is why we should not choose a pricing technique simply because another business uses it.

Don't price to please, price to match your performance, experience, and worth.

What should influence your pricing strategy?

Before choosing a particular pricing method, there are several things we need to understand.

Your business objectives

Start with purpose.

What are you trying to achieve?

You may want to build market share, increase profit, position the business as premium, reach a wider audience or make your product more accessible.

Different objectives can lead to different pricing choices.

Your price should reinforce your business and marketing goals rather than contradict them.

Your costs

You need a good understanding of what it costs to produce and deliver what you sell.

That applies whether you manufacture products, sell digital products, run training, provide consultancy or deliver another service.

As a result, if you do not understand your cost base, it becomes very difficult to judge whether the price you choose is actually making money.

If you need to work out a service rate first, our guide to How to Calculate Pricing Rates for Your Services takes you through costs, profit and realistic capacity.

Your target profit

Think about how much profit you want the product, service or business to generate.

Adding a percentage to every item may sound sensible. However, the bigger question is whether the resulting profit is enough to support the business, pay you properly and make the effort worthwhile.

Profitability is ultimately what keeps the business sustainable.

For a wider foundation, see What Is Profit? Gross Profit and Net Profit Explained.

Your competitors

Competition gives us useful information.

That does not mean simply finding a similar business and copying its prices.

Your real competition may come from businesses solving the same customer problem in a different way.

A restaurant may compete with other experiences for the customer's money. A financial planning service may compete with coaches as well as accountants.

Research what alternatives customers have and what those alternatives cost.

Customer value and the market

We also need to understand what customers value and what they are willing to pay.

Think about the environment you are selling into. Is the market crowded? Are you operating in a specialist niche? Is your proposition genuinely different?

These questions help us decide which pricing strategies are realistic.

Six pricing strategies to consider

1. Premium pricing

Premium pricing means setting your price above competing offers because the product or service is positioned as higher quality, more distinctive or more valuable.

Customers often use price as one signal of quality.

However, the price has to be supported by substance.

If you charge a premium price, the customer needs to experience a premium proposition. Quality, service, reputation, branding and delivery all need to support the price.

Charging more without delivering more can damage trust and reputation very quickly.

2. Market penetration and loss-leader pricing

Market penetration pricing deliberately sets a price lower than competing alternatives to attract customers and encourage them to switch.

In some situations, a business may even price an item below cost. This is often called a loss leader.

The logic is that the initial product brings the customer into the business, giving you an opportunity to sell other profitable products or services later.

However, there is a significant risk.

If customers only buy the low-priced offer and there is no effective cross-sell or upsell, the business can simply end up making losses.

It can also become difficult to raise prices once customers become accustomed to the lower level.

3. Economy pricing

Economy pricing is built around keeping the product and the cost of providing it as lean as possible.

The customer receives what they need without unnecessary extras, and the business charges a low price while still covering costs and making profit.

Low-cost airlines and supermarket own-brand products are familiar examples of the principle.

In practice, successful economy pricing is not simply about being cheap.

The businesses that make it work usually have tight cost control, efficient processes and good visibility of their numbers.

If your costs are badly controlled, a low-price strategy can quickly become a low-profit strategy.

4. Price skimming

Price skimming can work where a business launches something distinctive into a market with relatively little competition.

Initially, the price is set high while the product is new and the business has an advantage.

As competitors enter the market and alternatives become available, that position may become harder to maintain.

This means businesses using price skimming need to watch the market and keep developing what comes next.

It tends to fit businesses with innovation, differentiation or a strong early advantage.

5. Psychological pricing

Pricing is not purely mathematical. Psychology also affects how customers interpret a price.

For example, a business might price something at £99.99 instead of £100.

The financial difference is tiny, but the number can feel different to the customer.

The same principle can be applied to hourly rates, daily rates and other offers.

Psychological pricing is about how the price is perceived, not just the number itself.

6. Bundle pricing

Bundle pricing combines several products or services into one overall package.

The customer may pay less for the bundle than they would if every element were purchased separately.

For example, a business might separately offer tax support, financial planning, accounting systems and regular meetings, then create a package that combines several of those services.

For bundle pricing to work, you need to understand the cost and profitability of the individual elements.

Do not simply chase a bigger sales figure.

The bundle still needs to make financial sense.

Which pricing strategy is right for your business?

In practice, the answer may be more than one.

You do not have to use the same pricing strategy across everything you sell.

One product might use premium pricing. Another might be used to attract new customers. Services may be bundled together, while a new product may use one strategy at launch and another as the market changes.

One size does not fit all.

Come back to the basic questions:

• What are we trying to achieve?
• Do we understand our costs?
• What profit do we need to make?
• What are competitors and alternatives charging?
• What does the customer value?
• What is happening in the market?

Then choose the pricing technique that supports those answers.

Another useful pricing approach is target costing, where we start with the market price and required profit, then work backwards to the cost the business can afford.

Do not set prices blindly

Research matters.

For example, talk to customers, use surveys, test landing pages and look at competitor offers to understand what customers are comparing you with.

Do not rely entirely on assumptions.

If the price is too low, bringing it back up later can be difficult. If the price is too high, you may lose customers and opportunities.

Pricing should therefore remain flexible.

Markets change. Demand changes. Competitors change. Your costs and proposition may change too.

Your pricing strategy should be reviewed as the business develops.

FAQs

What is a pricing strategy?

A pricing strategy is the approach a business uses to decide how its products or services will be priced. The choice should reflect costs, profit goals, customers, competitors, positioning and wider business objectives.

Which pricing strategy is best?

There is no single best strategy. The right approach depends on what you are selling, what you are trying to achieve, your costs, your customers and the market you operate in.

Can a business use more than one pricing strategy?

Yes. Different products, services and customer groups may need different pricing approaches. Your strategy may also change as the market and business develop.

Is premium pricing just charging more?

No. A higher price needs to be supported by a strong proposition, quality, service and customer value. Otherwise, the premium can be difficult to justify.

Is economy pricing the same as selling cheaply?

Not quite. Economy pricing relies on low costs and efficient operations as well as a low selling price. The business still needs to make profit.

What should I check before changing my prices?

Review your costs, target profit, competitors, customer feedback, demand and the purpose behind the pricing change. Avoid changing prices based on guesswork alone.

Episode Timecodes

• 00:28 - Why pricing should reflect performance, experience and worth
• 00:53 - Introducing six pricing strategies
• 02:07 - Why pricing must support your business goals
• 03:39 - Costs, target profit, competitors and customer value
• 06:11 - Premium pricing
• 07:19 - Market penetration and loss-leader pricing
• 08:24 - Economy pricing
• 09:51 - Price skimming
• 10:38 - Psychological pricing
• 12:24 - Bundle pricing
• 13:30 - Choosing the right mix of pricing strategies
• 14:21 - Customer research, flexibility and avoiding guesswork

Related episodes

• How to Calculate Pricing Rates for Your Services
• What Is Profit? Gross Profit and Net Profit Explained
• How to Price Using Target Costing

Key takeaway

Choosing a pricing strategy is not a formula.

Your objectives matter. So do your numbers, your customers, your competitors and the market you operate in.

Premium pricing, penetration pricing, economy pricing, price skimming, psychological pricing and bundle pricing can all work in the right circumstances.

The important thing is to understand why you are choosing a particular approach and whether the numbers support it.

Start by knowing your costs and understanding the profit you need. Then research your customers and competitors, and be prepared to adapt as the market changes.

Plan it, Do it, Profit.

Further Support

If you want to explore the numbers behind your pricing decisions, use our free online business calculators to test different costs, profit and pricing scenarios.

If you need help understanding your pricing, costs, profit or wider business numbers, you can contact us for an initial chat.

You can also watch more practical finance and business support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Don't price to please, price to match your performance, experience, and worth. I love that quote by Ned Bryan, advocate. Hi, folks. Welcome to episode 57 of the I Hate Numbers podcast with your host, Mahmood. I've been an accountant in practice for over 26 years. I'm an educator and mentor. I've worked in the world of business, both nationally, internationally, and across all business sectors.

What's the mission of I Hate Numbers, I hear you ask. Well, it's to improve your money mindset, make you more money, save you time, and give you the business balance that you deserve. Today's podcast episode is about pricing, particularly product pricing, and I'm going to share with you six techniques or six strategies

for which you can apply in your business when you come to pricing your products. And by the way, when we talk about products, we're lumping in services here, but a lot of these techniques evolved out of the world of manufacturing, out of the world of physical products. But, nowadays, in the world that we occupy, whether you are selling services, whether they're training, consulting, online, digital products, or you're selling physical things, you are retailing or manufacturing them,

then these techniques, these approaches about pricing apply to your business. Let's crack on with the broadcast. Now, some general things to remind ourselves about pricing, and we did a previous podcast on pricing or services. It's worthwhile checking out. I'll show the link in the show notes here, but let's remind ourselves about some of those points that were made in that previous podcast.

Now, before you jump into choosing a particular price technique here, remember that pricing plays a vital part in your business, and it plays its part in a number of different ways. It's there to help you meet your business and marketing goals. It reinforces a message that you are getting out there or it contradicts that.

So, if you imagine that situation of a very high-end-quality restaurant that charges a bargain price for its meals, that's a contradictory message that doesn't support its proposition. If, however, you are a low-end takeaway, a low-end business, and there's nothing wrong with low-end, think about those businesses that compete on price, like EG

Jet, the BMIs of this world that once were there, then that pricing has got to support that proposition. So, it's there ultimately to meet your business and marketing goals. It's there, more importantly, to make you profit on a sustainable and long-term basis. Whatever price you choose, and all businesses will have a variety,

not one size fits all. You'll have different pricing approaches to use within your business toolbox. Remember, purpose and objectives, your purpose, your objectives, drive and determine the approach that you make. Before we dive deeper into this, consider also some general factors as a good comfort zone, a good comfort blanket to help you when you look at the pricing strategies and the pricing techniques that you'll adopt in your business.

It's critical firstly, to make sure you've got a good understanding about the costs of producing your product, providing your product to the end customer, what an accurate cost is for the projects you are delivering, for the courses you are provided, and if you don't have that cost data, you will find the pricing will be very skewed and you will end up losing money.

Secondly, estimate what your expected or target profit will be for the product over a year to make your business viable, to make it feasible. So, typically, are you looking to add a percentage on each item sold? So, if you consider how much you're going to sell, you consider that pricing, adding 20% on each item,

does that generate enough profit for you to live, to pay yourself a decent wage, and to reward yourself in your business? Competition. Now, your business, you may have a different viewpoint on competition, but we can't get away from the fact that we have competition. Competition is good. Competition keeps us on our toes, and we can learn from competition.

You need to understand your competitor's prices and by competition, remember, you're not necessarily doing this on a like for like basis. So, a restaurateur may not necessarily look at another restaurant as competition. It could be a theater, it could be a venue that's competing for that experience dollar, that experience pound note.

When you're offering online training, who are you competing against in that space? So, don't look at it just as a light for light. In my own business, for example, I do a lot of financial planning for my clients, I do a lot of cash flow forecasting, and I'm actually competing, not with other accountants, but actually with coaches who will be in that space

and actually offering the same service. The quality may not be the same, but that's not necessarily something that the client would fully understand. So remember, research a competitor, see what they're charging, and use that as a framework to form your final decisions. Consider the value that your customer places on your product or project.

How much are they willing to pay? What's the environment in which your business is being delivered, your products and services are being sold? Is it very competitive? Is it a small niche environment? With this in mind, we can now look deeper into six examples of ways to set prices depending on your aims and the types of products that you have.

The first one I'm going to look at is something called premium pricing. Now, if your product or service is unique or high-quality, then premium pricing could be an option. Now, this means that you set a price which is actually higher than your competitors. Rightly or wrongly, your customers will often consider high prices to equate to superior quality.

So, setting your prices higher may get your customers to perceive and reinforce that perception that your products are of high value. Now, critically, let's be sensible about this. If you're looking to build a sustainable business, make sure you've got the substance, make sure you've got the quality, and make sure you deliver the value your customer is expecting.

Otherwise, your reputation will get damaged. Your customers will communicate their disappointment to others. Therefore, it's a very dangerous step to go down. Apple exhibited this very well, this technique here, when they launched the iPad, they specifically added a premium to that product. Apple, obviously a very well recognised brand, managed to do that because it added all the marketing and business assets to support that.

But if you feel that your business is in that space, then that's an option for you to consider. At the end of the podcast, I'm going to share with you, by the way, a very brief overview about how you can find out and check your assumptions. A second technique is something called market penetration or what's called a loss leader.

So this is where within your product portfolio, you set a price deliberately lower than your competition. The understanding is that because your customers will buy from you instead of their usual supplier, so they will switch. Now, however, the price may be less than the cost to you, which means that you will make a loss.

Sometimes it's called a loss leader. Now, that is used by many businesses. The idea that it attracts somebody into their business shop, so to speak, whether it's virtual or physical, and they then get the opportunity to upsell. Now, that's a massive risk, I would suggest, by the way, because once you start to establish that approach here, unless you've got the ability to cross-sell, upsell,

it's going to be very difficult to move your pricing forward. A third technique is something called economy pricing. So, this is where typically a product is made simply as cheaply as possible. It has that minimum customer expectation and threshold, and it's priced as low as possible while covering the cost but still making a profit.

Right. This is a policy that we are all as consumers used to seeing, so we consider airlines, for example, we have what we call our no-frills, low-cost airlines. Their pricing will not be based on customer service, customer experience, therefore, they do very well. So, the likes of RyanAir, EasyJet have managed to build up very successful businesses on the back of that, no-frills product.

Supermarkets adopt that same approach when they do their own brands. However, there's a secondary thing that's got to be taken on board for that. Those companies that are successful in economy pricing also have very tight control of their costs. They’ve got good transparency of what their costs are.

They manage them, they control them. They've got data that informs them. They're efficient in their processes. So, it's not just a question of prices cheaply. You also have got to pay attention to your costs. So, let's summarise where we are. We talked about premium pricing, we've talked about market penetration, we've talked about economy pricing.

Let's run up with three more. We're now going to look at something called price skimming. Now, this is a pricing technique that works typically when you have very little competition. So, if you consider that you have got unique selling propositions, USP as marketing people would call it, then this is likely to be successful.

Now, it effectively involves setting the price high initially to gain that traction, that initial traction. As you do that though, however, your competition will be watching what's going on, and more and more people will come into that space. So, there is a risk. You've got to keep an eye on the competition, and if you are an innovative company, an innovative business, then you need to think about the next product coming along,

but in that early stage, there's an opportunity to price skim. The fifth technique is psychology, and it's worth reminding ourselves here at this stage that pricing is not just the numbers game. Numbers feature very heavily in setting the price, but it's about, also, the psychology because most of our decisions as individuals and businesses are made by an emotion.

The survey suggests 95% and the remaining decisions are made logically. Logic comes in to back up our emotional decisions, so psychology plays a big part there. Now, the aim of psychological pricing is to make the customer, your customer, feel they're paying less than they actually are. We typically see that in shops, in retailing where a hundred pound item

is priced at £99.99. Now, we may scoff at that. We may laugh, we may think it's ridiculous, but the perception is, is that actually it's priced at a good price and we feel psychologically better paying £99.99 compared to a hundred pounds. So, that perception in your client's eyes, your customer's eyes of getting value for money is reinforced.

Now, this can work also for quoting an hourly or daily rate for work, you know, 29 pounds per hour, don’t do 30. Now, before we go into the last technique here, what's called bundle pricing, just as a flagging up here, if you're thinking Mahmood, there's a lot of numbers involved here. Certainly, numbers play their part.

Think about the framework, think about your objectives, think about what you're trying to achieve, and also tap into the free online business calculations that we've got displayed on the website. I'll show you a link at the end, and a lot of the heavy lifting of the number crunching can be done for you,

simply you entering in the numbers and hey presto, the results will appear. Let's run up now with bundle pricing. Now, the bundle pricing is where you sell more than one product or service, and you bundle this together, and you can offer that at a lower price than if the individuals purchase them separately.

So again, typically, in my business, I may offer a client to say, here's the price for a tax service. Here's the price for producing your financial plans. Here's the price for setting up a wonderful accounting system, and here's the price for accessing meetings and the like. Then, they could be separately priced and the customer has, stuck in a restaurant, the option of choosing each one, or they may prefer to buy them as a bundle.

Now, for bundle pricing to work, and that's a very popular mechanism adopted by a wide variety of businesses. You've got to understand a number of things. Number one, you've got to have an appreciation of your cost base. You've got to have an appreciation of the profits that you're making on those product groups,

and, therefore, that gives you a better idea about whether bundle price is going to work for you. Do not chase the sales value. Profitability is the name of the game involved. Now, to summarise, what price do you choose? Well, the short answer is some of them, all of them, and typically, depending on what your objectives are, you may find that certain pricing techniques suit that objective better.

One size does not fit all, and it's important that you have an appreciation and understanding of your own business and your own goals. Make sure you've got a good grip on your costs. So, having good accounting systems that capture the data, whether you're selling digitally, whether you're selling face-to-face, whether you're selling online; however you are selling it, you need to understand the cost of delivering and producing and providing that product.

Know your customer. Do not just guess at what your customer wants, ask them. There are a number of ways of doing that. We'll cover that in a future podcast. But typically things like surveys, landing pages, collecting mailing lists, talking to your customers is a very good way to validate that. So, do not do it blind.

Do not rely on what goes on between your ears. If you make a mistake, it can be very expensive, and if your price is set too low, it can be quite challenging to bring that price back up to where it should be. If it's too high, you may be losing out on customers and you may be losing out on opportunities. Be flexible, be adaptable.

As the market changes and demand fluctuates, you may have to alter your prices. So, you need to be on your game, research your competitors, and be realistic. Folks, I hope you got some value from this podcast. So, let's wrap up what we are going to do here. So, we're talking about pricing. We're saying it's not scientific, you've got psychology, marketing objectives, your goals,

numbers come into it, cost control, validating your decisions is important here. We've got superb free online business calculators. Tap your numbers into there and see what the answers are. I hope you've got some great value from this podcast. I'd love it if you could subscribe. Share it with your friends and family, and until next week, I'll see you then.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.