Setting a product price is nothing less than a balancing act – setting it too high might lead to missing out on some variable sales, and stopping too low might lead to missing out on some valuable revenue. It is thus crucial for companies to ensure that they use their finest resources to decide the best price for their product or service. While the accounting, marketing, and executive management team play a pivotal role in pinning down the price, product management professionals have a say in this process as well. And to help them make this decision effectively, I have worked on this article about product pricing strategies.
- What are product pricing strategies?
- Why do Product Managers need to know product pricing strategies?
- How to create a Product Pricing Strategy
- The top 7 product pricing strategies that you need to know
What are product pricing strategies?
In a nutshell, it is the process of establishing the right product price, which then helps maximize profit while also taking care of consumers and market demand. And for this, they need to take care of certain factors, such as demand and value of the product, competitors’ price, etc.
Why do Product Managers need to know product pricing strategies?
Let’s accept it: nobody knows a product better than a product manager as they are involved in a product’s life cycle. Different teams might be aware of the aspects of their own work, but it is the product manager who oversees the product at every stage. Hence, it is only natural that they have a say in the pricing of their product.
How to create a Product Pricing Strategy
There are multiple factors that one must consider while deciding on the strategy to be used for product pricing. And mentioned below are some of them.
1. Evaluate Pricing Potential
Pricing potential is the price that a product or service can reach, considering its cost, demand, etc. While deciding the pricing strategy, one needs to consider all factors that affect the potential price and reach a number accordingly.
2. Know the Audience
When deciding the product price, one needs to consider why and how customers will use the products according to their needs. One more thing to be kept in mind is the value that the customers will associate with the product, which will decide how much they are willing to pay for it.
3. Analyse Past Data
Study the performance of the previous product pricing strategies. Once aware of what has or has not worked in the past, one can take its example and create their present strategy accordingly.
4. Look at the Competition
You can’t decide the price of your product without first having a look at the competitor’s price. Once you get an idea about the price difference between your and the competitor’s products/services, you can make either of the two choices to stay ahead of them:
- Beat their price – If the competition is charging more for a similar product, price your product lower than theirs.
- Beat their value – If you offer more value than your competitor, you can charge your product higher than the competition, and customers will still buy it.
The top 7 product pricing strategies that you need to know
Like multiple factors determine the price of a product, multiple product pricing strategies can be used to introduce a product to the market.
Mentioned below are the top 7 product pricing strategies that have been tested before and have given excellent results.
- Value-based Pricing Strategy
- Premium Pricing Strategy
- Freemium Pricing Strategy
- Competitive Pricing Strategy
- Demand Pricing Strategy
- Geographic Pricing Strategy
- Skimming Pricing Strategy
Read on to know more about these product pricing strategies and their examples.
1. Value-based Pricing Strategy
It is arguably the most customer-centric strategy since the prices are decided based on what the customer is willing to pay for a product. Even if the company wants to price the product higher, it will not be able to do so considering customer interest and data. The biggest benefit of this strategy is that, if used correctly, it has the potential to increase customer loyalty and sentiment toward the product and/or brand. But there’s a catch: Implementing this strategy requires constantly being aware of customer profiles and buying behaviour to set the prices accordingly.
Example of Value-based Pricing Strategy – Diamonds
Diamonds sell on three points:
1. Their rarity
2. Their image of representing a lifelong commitment
3. Their superlative qualities (hardest mineral, longest-lasting gem, etc.)
All these points create an impression in the buyers’ minds that they are buying something that holds immense value. The money they pay for diamonds is hence for the value that the product holds in their minds.
2. Premium Pricing Strategy
It is one of the top product pricing strategies used in today’s digital times. As the name suggests, this strategy focuses on pricing the products higher to showcase them as premium or luxury. The aim is to build a perceived value of the product, often higher than its actual value. It is one of those product pricing strategies which depend highly on brand value and brand perception.
The strategy is especially effective in pricing fashion and technology because both of these can be marketed as exclusive, luxurious, and rare.
Example of Premium Pricing Strategy – Technology
Smartphones, tablets, and computers are often priced at higher rates than their market counterparts to make the customers feel that they are buying something premium for that extra money. Whether that additional amount does or does not add to the quality of the product is a different discussion, but the customer sure feels a lot more affluent after having bought such products.
3. Freemium Pricing Strategy
Freemium, a combination of free and premium, is highly prevalent in pricing digital products. As the name says, this product pricing strategy incorporates offering some product features or/and services for free with the hope that the customer will want to switch to the premium version, once the free trial ends.
By providing a free trial, a customer gets an idea about the product’s functionality, often making them opt for the paid version. Before pinning down this strategy, companies need to ensure that they must keep the charges for the paid version in sync with the idea that the customer is transitioning from a free trial phase and hence can’t be expected to pay a large amount.
Example of Freemium Pricing Strategy – Audio/Video Streaming Platforms
The music or video streaming platforms that provide free trials for a few days/weeks/months work on the freemium strategy. Their idea is to make customers like their product and build your trust in their brand so that they can switch to the paid versions once the trial is over.
4. Competitive Pricing Strategy
Unlike the aforesaid product pricing strategies, this one does not focus on the customer demand or product value but rather on prices quoted by competitors. Businesses that usually use this method are the ones that operate in an environment where even a slight difference in the price can decide the interest of customers.
It is not always necessary to price your product below your competitor’s. You can keep them the same as or close to the price of your competitors as well. The idea is to be on top of the competition by keeping your price dynamic and making the customers believe that you are providing them with the best value for their money.
Example of Competitive Pricing Strategy – Milk
If you visit a grocery store and take a look at the milk packets of different brands, you’ll find that there’s very little difference between their prices. For example, low-fat milk from brand A will be priced within one or two rupees of low-fat milk from brand B. This is because, in a market where the customer can switch brands for as little as one or two rupees, the brands have to be careful about their competitors’ prices and price their products accordingly.
5. Demand Pricing Strategy
Commonly known as Dynamic Pricing, Time-based Pricing, or Surge Pricing strategy, it operates on customer demand and market conditions. This is one of the most common product pricing strategies that we can see daily in the pricing of utility-based products. Multiple factors decide what the customer can or will pay for a product at a certain point in time. Companies analyse these factors and move the prices of their products to match the customer willingness and market demand of the moment.
Example of Demand Pricing Strategy – Air Tickets
During festival season or around a long weekend, the airfares are always directly related to the willingness of people to travel. Airlines constantly monitor their potential customers’ interests and possible times of travel and manoeuvre their prices accordingly. As the demand for air tickets goes up, so do the fares. It is the most common form of demand-based pricing strategy.
6. Geographic Pricing Strategy
As the name suggests, pricing products differently for different geographies is called Geographic Pricing Strategy. Multiple reasons explain how and why geographies dictate product demand and price. For physical products, it is mostly used depending on the cost the company needs to bear to get the product to the customers in different geographical areas. But in the context of digital products, since there is virtually no transportation cost, the pricing depends on the disparity in factors like the economy and wages of the customers.
Example of Geographic Pricing Strategy – Fruits
We all know that the prices of fruits vary a lot in different geographies. For example, apples will be priced lower in higher altitude areas as compared to the plains or coastal regions. And this scenario will be the exact opposite in the case of coconuts. There could be many reasons for this variation. The cost of fruits usually fluctuates based on the following factors:
1. Availability of the fruit (depending upon the climate, cultivability, etc.)
2. Transportation costs
3. Demand for the fruit in a region
All these factors are almost entirely dependent on the geography of the region where fruits are grown and that of the region they are supplied to. Hence, we see a difference in the prices of fruits across geographies. This difference is based on the geographic pricing strategy.
7. Skimming Pricing Strategy
Skimming pricing is also one of those product pricing strategies that aim to keep the price variable. Companies charge the highest price for their product when it is launched, and then keep lowering the price as the popularity of the product decreases over time. This strategy is also highly prevalent in the pricing of digital products and services, where the relevance of the products decreases with time. Skimming pricing allows businesses to continue selling products even after their novelty is long over.
Example of Skimming Pricing Strategy – Gaming Consoles
Every new launch of a gaming console sees a price higher than the earlier, but it keeps going down with time as newer technology, games, and features keep coming in. With the launch of the next gaming console, whether from the same brand or from the competition, the price of the existing console takes a further dip. Hence, a skimming pricing strategy is followed through the entire lifecycle of such products.
We hope that the product pricing strategies mentioned above have given a better idea about how to decide on the pricing of the product. To get in detail knowledge about product pricing strategies and various other facets related to product management, enrol in the PG Program in Product Management and Analytics. The program focuses on developing an analytical mindset in its learners, by the virtue of which they will be able to build innovative products.