How to Choose the Right Pricing Strategy for Your Business in 2024

How to Choose the Right Pricing Strategy for Your Business in 2024
A list of the most common pricing strategies, along with why they might work (or not) for your business.
by Square Mar 22, 2021 — 6 min read
How to Choose the Right Pricing Strategy for Your Business in 2024

Researching how to price a product might feel like an endless black hole, but as we’ll explain, the compact size and flexibility of your small business put you in a good position to make it work. To begin with, there’s no one strategy that should be used at any one time, and no demand for you to stick to the one you choose.

Getting started with pricing strategies

Getting your pricing strategy right is important for your business’s sustainability. If your prices are too high, you’ll struggle to sell; too low, you won’t be able to cover your costs. Setting your pricing is one of the first things to do when starting a new business. It forms an important chapter in your business plan, and arms you with the knowledge to sway investors. And when it’s time to scale, your pricing strategy will heavily influence how that happens.

The factors that influence and affect the pricing of your products include:

Common pricing strategies for small businesses

Pricing strategies can be overlaid, used at strategic points throughout the year, implemented as a reaction and more. It’s unlikely you’ll ever need to use just one strategy, and likely that the strategies you choose today will get tweaked in the future as you grow and develop.

Full cost pricing

With the full cost pricing strategy, the production costs of a product (material, manufacturing and labour costs) are added to the selling and admin costs (accounting, legal, marketing, facilities, sales and corporate costs), before a markup is added to create a profit margin. This number is then divided by the number of units the business expects to sell.

(Total production costs + selling and administration costs + markup) ÷ Number of units expected to sell

Benefits

Disadvantages

Price creaming

Creaming (also known as “skimming”) is where a business initially sets a high price for its product, before gradually reducing it over time. Price creaming works best if you’re bringing a new concept to the market where very few or no other competitors are present: your business brings an original and desirable product to market, as there is high demand, customers are happy to pay a premium price. You then gradually reduce prices as both demand decreases and competitors begin to emerge, known as “riding down the demand curve”.

Benefits

Disadvantages

Freemium Pricing

Freemium pricing is used a lot by digital companies, like software providers and game developers. It works by drawing customers in with a basic, free product, then charging a premium price for add-ons, like more storage or additional tools.

Benefits

Disadvantages

Loss leader

A loss leader pricing strategy uses a product sold at a low price (often below the cost it took to make it) to encourage profitable sales of other products. The psychology behind this is that if you can draw a customer in to buy “bargain” items, you can then upsell higher-priced items. Businesses with physical stores often place loss leader products far from the entrance, so that customers are exposed to higher-value products en route.

Benefits

Disadvantages

Pay what you want

As you’d expect, the pay what you want pricing strategy asks the customer to choose their purchase price, sometimes with a minimum price in place. This strategy is best used only occasionally, for example when you’re testing a new product or running a promotion.

Benefits

Disadvantages

Penetration pricing

A penetration pricing strategy sets product prices low to gain market share through customer volume. The price is gradually raised over time as you make that gain. Done right, it can discourage new competitors who simply don’t think it’s worth their time to contend with such good value being offered.

Benefits

Disadvantages

Premium pricing

A premium pricing strategy keeps the price of a product or service high to encourage sales. It’s a method that uses the psychology of “you get what you pay for” — from the luxurious connotations of certain watch brands, to the perceived ethics of organic food products. New trends, social consciousness and social aspiration are three big drivers of premium pricing.

Benefits

Disadvantages

How to price a product

To price your products so that they drive cash flow, you need to be clear on these things:

Your pricing should take all of these into consideration with the ultimate goal of making your business profitable. What that looks like is different for everyone, and could require any number of pricing strategies. You may even uncover a need to tweak your business model through the process of setting your pricing strategy. This includes things like cost-cutting, restructuring your team or developing your brand.

Pricing strategies aren’t for life. All businesses test and change over time, and your compact size and management structure make it far easier to make changes quickly. Your sales are a good source of proof when deciding if and when those changes need to be made. So it pays to have an integrated payments system that tells you how much your selling, when and to who. To find out which payments and business tools would suit your business best, you can contact our sales team.

This article is intended to offer helpful guidance and does not constitute qualified financial advice. Please consult an accountant or financial advisor if you have any questions related to your business.

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