Price is one of the four elements in the marketing mix, a foundational framework that guides your marketing initiatives. There are many ways to decide on your product price. What are the four basic pricing strategies? You will find that this list varies across different resources. However, Meneide (2023) listed some of the common four:
Cost plus pricing
Competitive pricing
Value-based pricing
Penetration pricing
Cost plus pricing: This pricing strategy provides a basic product and service price equation. It is the most common pricing strategy due to its simplicity. It is calculated by finding the total cost of the product or service and adding a markup. There are benefits to this strategy; however, there are pitfalls. Some benefits include simple cost equations, the ability to be transparent, and reduced price war risks and profits, among others (Bookstaber, 2024; Dholakia, 2018). The pitfalls include various inefficiencies, miscalculated prices, and ignoring competitors and value (Bookstaber, 2024; Dholakia, 2018).
Competitive pricing: This pricing strategy assesses the current environment to understand competitor pricing. Part of it consists of understanding the value differentiation amongst the competitors and completing a holistic analysis of the benefits and opportunities. Some benefits include improving profits, growing market share, and tracking market position (Tanir, 2022). Some pitfalls include pricing wars, reduced profitability, focus on price vs. value, and limited differentiation (WebDataGuru, 2024).
Value-based pricing: This pricing strategy relies on how the customer perceives the product or service's value to determine the costs (Storbierski, 2022). The value-based strategy is dependent on the customer's willingness to pay, the price of the product/service, the cost of the good(s) sold, and the producer's willingness to sell. Though this model is beneficial in many ways, there are some challenges. One of the main benefits of this pricing approach is that you learn the motivation of all the relevant parties to make informed decisions on how to price the product or service (Storbierski, 2022). Though many managers find this approach the most beneficial (Dholakia, 2018), the research to support it requires significant resources, specifically time and money.
Penetration pricing: This pricing strategy is used to gain market share, usually by entering at a price lower than its competitors to gain market share. The nature of this model makes it short-term because it is not often sustainable. This model may be beneficial for entering the market, but there is a high risk of losses. However, if you can gain significant market share and customer loyalty, those immediate losses can be beneficial in the long run. We won’t mention the benefits since they are clearly stated above; however, there are some considerations within its potential pitfalls. There are some ethical or potentially legal pitfalls, such as loss-leader and predatory pricing (Prater, 2022).
These are just some of the common pricing strategies. There are others, such as dynamic pricing, subscription pricing, or bundles. Each method has its costs and benefits. Your decision should depend on your business model and your marketing plan. Keep in mind that most good pricing strategies are not exclusive to one approach. Though one approach may be the core strategy, they often blend other approaches.
Bookstaber, P. (2024, February 7). What is cost plus pricing - how do you use it in sales? Salesforce. https://www.salesforce.com/blog/cost-plus-pricing/#h-advantages-and-disadvantages-of-cost-plus-pricing-strategy
Dholakia, U. (2018, July 12). When cost-plus pricing is a good idea. Harvard Business Review. https://hbr.org/2018/07/when-cost-plus-pricing-is-a-good-idea
Storbierski, T. (2022, November 10). A beginner’s guide to value-based strategy. Harvard University Business School. https://online.hbs.edu/blog/post/value-based-strategy
Tanir, B. (2023, October 10). Why and how you should perform a competitive analysis. Forbes. https://www.forbes.com/sites/forbestechcouncil/2023/10/10/why-and-how-you-should-perform-a-competitive-pricing-analysis/
WebDataGuru (2024, May 17). Competitive pricing - definition, examples, pros and cons. Medium. https://medium.com/@webdataguru/competitive-pricing-1108956a8fd4
YouTube: Meneide, J. (2023, April 04). 4ps of the marketing mix: watch this to level up your campaigns (explainer). YouTube. https://www.youtube.com/watch?v=HFjbrjWjUWc
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