Choosing Your Business Pricing Strategy - 6 Options

Setting price on your products or services is one of the weightiest decisions you'll make in your business. It will touch every part of your business, from the financials to how you are perceived in the marketplace.

So why do so many business owners get their pricing strategy wrong?

Because you're allowing your own bias to dictate how you price your products or services. I'm going to show you the right way to set pricing.

What to consider when setting your pricing strategy?

Too many small business owners pay little attention to the psychology and marketing potential of price. More often than not, business owners set prices based on what their competitors charge.

So they'll set their prices slightly lower than the market leader in their industry. Or they'll take the cost price and add what feels like an acceptable margin.

Both of these are good starting points. But if you're not thinking about the marketing or psychological implications of price, you're likely leaving vast sums of money on the table.

Don't let your own bias influence how you set your prices

If you’ve been raised to buy the cheapest version always, that will rub off on your prospect.

How many sales have you blown because of your own bias?

A lot of business owners do this. They think I'd never pay that much for a course or a consulting session. So why would someone else?

The truth is, plenty of people would. Don’t let your own bias get in the way of a big stash of cash. Price can be elastic. Make sure you’re not underselling yourself.

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Pricing for businesses: avoid too many or too few options

Regardless of industry, most products or services offer multiple flavors or variants of the primary offering.

Henry Ford famously offered his customers the Model T "in any color that he wants so long as it is black."

While it may seem backward by today's expectations of infinite choice and expressions of individuality through ever-increasing personalization, the great industrialist brings up an issue relevant to all entrepreneurs.

How much choice should we offer?

Conventional wisdom would have you believe the more choice you offer, the more sales you'll make. Wrong!

A famous study by a professor of business at Columbia University illustrates this point well.

In a California gourmet market, Professor Iyengar and her research assistants set up a booth of samples of jam.

Every few hours, they switched between a selection of 24 flavors of jam to only six flavors.

  • On average, customers tasted two jam flavors, regardless of the assortment size.
  • 60% of customers were drawn to the large assortment, while only 40% stopped by the small one.
  • 30% of the people who sampled from the small assortment decided to buy.
  • Only 3% of those confronted with the full selection purchased a jar.

Their findings: offering too much choice can prevent sales.

The psychology behind this finding is that people get caught like a deer in the headlights. Fear of making a suboptimal choice prevents them from making any choice.

6 types of pricing strategies

It's really important that you find a winning pricing strategy for your business. I've listed three of my favorite pricing strategies which I've used in my business and my client's businesses.

1. The Standard/Premium Pricing Strategy

If you look at Apple and its wildly successful products, you’ll see they are usually offered in only two or three variations each.

This seems to be the happy medium between too few options and the brain overload caused by too many options.

Along these lines, a pricing strategy that I’ve seen work very well is offering a “standard” and “premium” variation of a service or product.

The “premium” version is priced at about 50% above the “standard” but offers twice or more value than the “standard” variation.

When using this strategy, it’s essential to ensure that you genuinely offer much more value with the “premium” than the “standard.”

This strategy works exceptionally well in cases where the incremental cost of delivering the “premium” is relatively low because the price differential ends up as pure profit on your bottom line.

2. The Unlimited Pricing Strategy

Most people are extremely risk-averse. They fear being stung by unexpected charges whether this is related to data usage, medical costs or consulting fees.

If you can remove this risk for them, you greatly increase the opportunity for a sale.

An excellent strategy for removing this risk is to offer an “unlimited” variation of your product or service at a fixed price.

For example, an IT company could offer unlimited technical support for a fixed monthly fee, a restaurant could offer unlimited beverage refills and so on.

While many business owners fear that abuse of an unlimited option will send them broke, this can easily be remedied in your terms and conditions which would allow fair use but would stop or limit abuse.

Especially when you are selling something that needs to be consumed in a particular time frame, the risk of offering an unlimited option is very low.

Looking at your average transaction value over time and working with the law of averages can give you a very accurate idea of what it will cost you to offer an unlimited option.

People tend to overestimate how much they'll use a product or service when they are at the point of purchase – my ab workout machine is a testament to this!

So offering an unlimited option helps you capitalize on this and removes any perceived risk of overage charges.

3. The Ultra High Ticket Item Pricing Strategy

In every market, a small percentage of the population wants to buy “the best” variant of product in its class.

The indicator most often used by consumers as to what is “the best” is price.

Some consumers will pay 10, 20, or 100 times the price of other functionally similar products, e.g., Rolls Royce car, private jet travel, etc.

While you might not sell these high-ticket products every day of the week, if you don’t make them available among your regular product mix, you are leaving money on the table.

These ultra-high ticket items can

  • make up a huge percentage of your net profit even if you only sell a small number of units.
  • help you attract a more affluent customer who shops based on prestige, service, and convenience rather than price.
  • make the other variations in your product range look much more reasonably priced by comparison.

4. The Price Skimming Strategy

Skim pricing isn't necessarily a strategy that small businesses would employ or one I'd recommend you adopt.

Price skimming is best for attracting early adopters and generating a great deal of profit in a short term.

5. The Penetration Pricing Strategy

I'm sure you've seen this before. Penetration pricing is something I've used myself. Often when you're launching a new product, you'll set the price of your product or service quite low until it gains traction.

For example, when I launched my course it was still under production. I used the early launch to get invaluable feedback from customers and improve it.

While I now sell the course for $497, it launched at $397.

Startups often use penetration pricing to entice customers to switch brands.

6. The Competitive Pricing Strategy

Earlier in this article I mentioned a competitive pricing strategy. It's the act of strategically pricing your products and services based on competitor prices rather than business costs or target margins.

The problem with this strategy is there's always someone who'll price their products and services cheaper than you.

So really it's a losing strategy.

Winning pricing strategy: 10 top tips for pricing your products or services

  1. To determine pricing, start with the product cost and the desired margin, building in room for discounts
  2. Understand what features of your offering are most important to your client. Do these elements make or break a sale? Or are they nice features to have?
  3. Keep pricing as simple and transparent as possible
  4. Price products just under a round dollar amount (for example, The 1PMP Course is $497)
  5. Make the value of the offer seem higher than the asking price. (For example, noting the normal price of individual items in a package or stating the average gains for past customers.)
  6. Create a "most popular" middle-priced item as an anchor
  7. Research competitor pricing
  8. Don't enter into pricing wars - no one in your industry will win
  9. If possible, test higher and lower price points to estimate volume vs. profit margin
  10. Sending or publishing a list of features leaves the prospect guessing what the benefits are. Focus on communicating the benefits to the prospect and help them to understand what type of product is best for their profile. (For example, Personal, Small Business, and Enterprise software products.)

How to display price online

If you run an eCommerce business or sell online, it's crucial that you display prices in such a way that prospects can easily segment themselves.

Here are my top tips:

Example of how to show price online

Pricing Tip 1: Make it easy for your customer to identify the best option for them.

Sounds simple enough, and yet, so many businesses get this wrong.

If you’re presenting a pricing plan choose a good headline and include a short summary that segments your customers according to their needs.

In the example above, we mention exactly who the package is designed for and what it costs. So there's no chance for confusion.

Pricing Tip 2: Add a clear call to action.

Tell your customers what they need to do next. Don’t make them guess.

It could be an apply now, book a call, or buy now button. Really it depends on what is the next logical step.

Pricing Tip 3: Give them the option to choose between monthly and annual billing.

Look, if you give me a 20% discount on the annual price of a service, and I've got the available cash, why would I choose monthly billing?

  • I'm saving money.
  • Plus, I don't need to worry about this cost until next year.

Now, not all your customers think like me or can afford to invest in annual billing. So always give them options. But some can so give them the option.

Pricing Tip 4: Use a table

Can your customers see what is included and excluded from each plan at a quick glance.

For example, if they want to compare premium with economy they need to see the added value they get.

I’ve found a table is best for comparative analysis. The problem is it can be difficult to view on mobile. Really, it works best on a desktop.

A table is a quick and easy way to compare prices

Resist the urge to discount price

When the market you operate in is highly competitive, there is a strong urge to discount your prices. This strategy needs to be used with extreme caution, because of the pressure it puts on your margins and profit.

Unless you have a very specific loss leader strategy whereby you try to entice a customer based on price and then upsell or cross-sell then try to avoid discounting.

A better option than discounting is to increase the value of your offering. Bundling in bonuses, increasing quantities or adding peripheral services can be of genuine value to your customer but cost you very little to do.

Regardless of which pricing strategies you implement, it is important to continually test and measure.

Consumers are bags of emotion and are not driven purely by rational motivations.

Make setting price a central part of your overall marketing strategy.

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