Best Product Pricing Strategies for Small Business
If you’re a small business, every customer counts, which is why pricing is important. Many small businesses focus on a specific neighborhood or niche, product, or service. From hair salons to car mechanics, Etsy shops to coffee shops, getting prospects to convert to customers is key to getting your business off the ground and growing for years to come.
When it comes to small business, it’s particularly helpful to adopt a price point strategy and product selection strategy that supports your bottom line and allows as many prospects as possible to afford to buy your product or service. Below we look at types of pricing strategies overall, including those that work best for small business:
4 Popular Product Pricing Strategies
Premium Pricing: High prices are the key element of this strategy, used primarily by companies that have a market advantage or a strong differentiating factor.
Penetration Pricing: For this strategy, prices are set artificially low to gain market share quickly. This works well for market disruptors like ride share, grocery delivery, or electric cars.
Economy Pricing: This strategy leverages economies of scale to charge rock bottom prices with low profit margins, in exchange for mass sales and market share. Common for commodities and products with less brand loyalty, like gasoline and fast fashion.
Skimming Pricing: The highest prices are charged at the beginning of the product life cycle, when demand is high, supply is low, and competitors haven’t had a chance to get into the market. The price is lowered as more competitors enter the market and trends change, driving demand down.
Below we’ll go into a bit more depth about a few nuanced variations within these pricing strategies, including pricing marketing strategy examples specific to small business.
Premium Pricing Strategy
This strategy is used by luxury brands whose success is dependent upon perceived exclusivity. Businesses practicing this strategy use influencers, limited supply, and increased demand to command high prices for products that may be of superior quality or simply perceived to be such. Luxury brands from cars to cosmetics use this strategy. Fine Dining, this Is for You: If your small business is haute cuisine including a months-long wait list for a table, this is a strategy to consider.
Penetration Pricing Strategy
When looking to enter a new market, disruption is often a key element, and low prices can persuade prospective customers to give the new kid on the block a shot or convince prospects try a new approach to business altogether. An example is the early days of the online bed mattress company Casper Mattresses®, where you order your mattress online and it arrives at your doorstep small, rolled, and sealed, and inflates into a “California King” size when opened. Prices were so much lower than traditional mattresses that early adopters and a new generation of bed buyers jumped at the new mattress supply chain model.
Dynamic Pricing Strategy: With this strategy, prices change almost instantaneously based upon supply and demand. Think of price fluctuations on airlines and hotels based upon demand and time of year. Another example of dynamic pricing is the surge pricing we see with Lyft®, Uber® or other ride share companies.
Classic Penetration Pricing Strategy: Similar to a loss-leader pricing strategy (below), this approach offers a price point that is so remarkably low that it attracts the attention of prospects who can’t resist a product or service at such a drastically reduced price. This strategy is sometimes used by new businesses with deep pockets, entering an established industry. A penetration pricing strategy cannot be maintained in the long-run, and after a critical mass of new customers is secured, a more profitable pricing strategy is adopted. Think about ride share services entering the market at cut-rate prices to pull from the status quo “Yellow Cab” taxi world. Another example is new airlines that enter the market advertising “Fly Anywhere for $100” type deals. Message to That Mom & Pop: Unless your business has enough capital to sustain you during execution, this strategy is risky for a small business.
Loss-Leader Strategy: This strategy, in contrast to most penetration pricing strategies, can be sustainable in the long run. This strategy involves pricing a particular product or service below a profitable margin in order to convert prospects on other products and services that are profitable. Small Business Special Alert: This is a great way to grow your business online and via foot traffic. An example might be offering the lowest cost around for a no-frills manicure but up-selling to gel nails or acrylics, a foot massage or eyebrow threading, once your prospect is a customer.
Freemium Pricing Strategy: This strategy involves giving a customer a free product or discount in exchange for information that will help you convert them into a purchasing customer down the line. This could be a discount when they sign up for emails or text messages. It could also be a free gift (see our suggestions below). Listen Up, Small Business: This is a great way to grow your mailing list and spread the word about your brand (especially if your freebie is customized with your logo). Bring a prospect in to get free air in their tires or a friendly windshield wiper top off, and then book them for their next oil and filter change or smog check.
Value-Based Pricing Strategy: This strategy involves pricing based upon a keen awareness of, tracking of, and responding to what the prospect is willing to pay. This strategy relies less on an individual business setting prices according to a target profit margin, and more on setting pricing based upon perceived customer value. This requires a business to have its finger on the pulse of demand surrounding a product or service and can be difficult for small businesses to manage successfully. Into Small Business but Not Algorithms? This strategy may best be left to behemoth businesses such as Starbucks, Apple, and the diamond industry (ethically sourced, please).
Bundle Pricing Strategy: Bundle pricing is offering a lower price if two or more items are purchased together, or only offering a certain set of products together. Bundle pricing is a great way to increase average order value (AOV) and introduce customers to more of your products or services. It also aids in inventory management, as you can bundle a slower-selling or excess inventory product with another that is faster-selling. Hello there, Small Business: Works well for small businesses to increase order value, control inventory, and encourage repeat customers based upon introduction of new products and services.
Skimming Pricing Strategy
Multiple variations of this strategy exist, including a classic “skimming” strategy plus a related approach:
Classic Skimming Price Strategy: Prices are lowered in planned increments over time. Think of products with a “planned obsolescence” such as the latest smartphone or newest car model.
High-Low Pricing Strategy: High-Low pricing adjusts pricing based upon seasonality or trendiness. The latest hoodie style may start at a premium price and end up in the clearance bin at the end of the season. Some businesses, especially those whose merchandise is seasonally- or trend-driven, incorporate this demand flow then ebb expectation into their pricing.
Popular Retail Pricing Strategies
These price point strategies work well for small businesses in the retail space.
Competition-Based Pricing Strategy: This pricing strategy focuses on the “going rate” for a product or service. The pricing benchmark is a function of what everyone else is charging, rather than your own P&L and desired profit margin. Both Ecommerce companies like Amazon and established companies like Coca-Cola use competitive pricing to ensure their products are always priced within the competitive landscape.
Cost-Plus Pricing Strategy: This strategy is used more commonly for pricing physical products rather than services. It takes a look at what a product costs the business to acquire, and adds a pre-defined markup based upon what the target profit margin is. This is a straightforward strategy that works well in an industry where price is not the driving factor or where competition isn’t causing prices to fluctuate rapidly. Retail businesses including clothing, grocery, and department stores often use this pricing approach. When using this strategy it’s a good idea to focus on value-adds your business provides, such as only the freshest, organic foods in a grocery store, only clothes made of sustainable materials using fair trade labor for a clothing store. This distinguishes your business from the competition and allows you to maintain margins that meet your business goals.
Popular Services Pricing Strategies
If you’re in the service industry, you may be deciding between these two popular types of pricing strategies:
Hourly Pricing Strategy: This is common among freelancers, lawyers, and business consultants. Customers pay for time, and the service provider estimates how much time the project will require. Clients often receive an estimate to sign prior to work commencement; this estimate may stimulate that changes in scope will result in a revised price estimate. This pricing strategy is helpful in creative or dynamic projects like logo development, media planning, or account management, where time requirements can fluctuate based upon research, secondary and tertiary findings once the project has begun.
Project-Based Pricing Strategy: As opposed to hourly pricing, some freelancers or service providers set prices based upon a project, not hours worked. Many customers and businesses prefer this approach. On the customer side, the customer does not worry about how efficiently their provider is being with their time. It is impossible at worst and frustrating at best to attempt to manage a project from the other side of the buyer/seller desk, and project-based pricing takes that burden off the customer. It also rewards the service provider for efficiencies of work and smart selection of products and clients.
Other Pricing Strategies
Although pricing sounds like a data-driven exercise, there are strong emotional and cultural components as well:
Geographic Pricing Strategy: If your online business serves international customers, you may have several country-specific websites with products and prices specific to that region’s customer and buying power.
Psychological Pricing Strategy: This pricing involves using terms and prices that a consumer might unconsciously perceive to be lower than it is. Examples of this include $19.99 vs $20, or “Buy one, get one free.” Changing signage around a sale table can make sales seem newer and price discounts more dramatic. An example is “up to 75 percent off” for a discount shopping area where in fact most products are 25-50 percent off.
Best Pricing Approach for Small Business
Higher price point vs lower price point; upper funnel vs lower funnel. When defining your pricing and marketing strategy, the approaches above are not mutually exclusive—meaning, you can combine strategies based upon what, where, and who you’re targeting, and whether your goal is growth, maintenance, or a shift in brand and target personae. Some questions to ask that will help you identify the best pricing model or combination of models that works for you. Consider:
Handmade, Homemade, and Custom: Do I offer something that no one else does? If so, look at premium pricing.
Close to a Commodity: Does my service or product attract a discount shopper? If so, look at bundle pricing and psychological pricing.
Can’t Help But Lead: Is your brand built around being on top of every trend? If so, consider a high-low pricing strategy.
Pricing Strategy When the Sales Funnel Is Flat, Upside Down, or Jumbled
When looking at the ideal product pricing strategy for your small business, it makes sense to choose a pricing strategy that applies marketing funnel tactics to move your prospects further along the funnel, rather than providing a hard and fast barrier to entry. However, today’s sales funnel is less linear than it used to be. A typical sales cycle used to proceed down a general stream from “top of the funnel” awareness, then interest, consideration, intent, evaluation, and purchase. Today, buying decisions are made differently based upon channel, product, and target customer:
Online Means Leveled Playing Field: Many buyers start their decision-making online and are served products and pricing at the same time that they are researching a product category.
When Influencers Have Influenced: Having spoken to friends or read a plethora of online reviews, prospects may be entering the sales funnel at the intent stage, or even at the purchase phase. What used to be bottom of the funnel content might just as likely be on top.
When reviewing types of pricing strategies, you won’t necessarily have the prospect’s attention and time long enough to educate them on your superior product before they see a lower priced product online offering free shipping and a free gift with purchase. By pricing appropriately, you can “buy” yourself some time, once you’ve got your prospect’s attention, to upsell on other services or explain what makes you the best choice. In this way, your pricing and marketing strategy can work hand in hand to attract and retain customers.
Secret Sauce for Small Business Product Pricing
Whether you’re selling a product or service; whether you’re a brick and mortar, brick-and-click, or ecommerce pure play, a winning pricing strategy for any small business includes a price point strategy that allows as many prospects as possible to become customers. A few examples:
Can’t Touch This (But Wait!): High end, luxury clothing brands often sell haute couture costing thousands of dollars, but also offer t-shirts and key chains for those with an affinity for the brand and a lower budget. This allows all fans to be brand ambassadors, not just those with unlimited resources. If you run a clothing boutique targeted toward the well-healed, ensure you offer high-end though affordable options for aspirational customers. This could include printed scarves, unique costume jewelry, or super soft graphic t-shirts.
One-Stop Shop: A local hardware store that becomes the neighborhood favorite across generations, might sell top-of-the-line tools as well as no-frills but equally dependable basics for college students and homeowners with a fixer upper and a budget. A store like this, that becomes a neighborhood resource, may also offer candles, plants, wind chimes, and other items that address all types of tasks and budgets within a family.
Customized Products for Freemium Pricing and Gifts with Purchase
In support of a freemium type of pricing strategy, grow your small business with gifts that incentivize prospects to purchase or to share contact information so you can convert them down the road. We like these:
Full Color Bright Soft Touch Hughes Gel Pen: This cap pen has the appeal of a high-end writing instrument but at a price point that allows you to invite customers to “Add your name to our mailing list, and keep the pen, no problem!”
Full Color Galina Tote Bag: Long straps and natural cotton give this bag staying power that will help move your prospect down the sales funnel just a little faster, from the consideration phase to the purchase phase, and back for more! Practical gifts like this bag encourage brand loyalty and deliver daily advertising, as well.
Product Pricing Strategies for Small Business Success
Review various types of pricing strategies to help you define what works best for your business, funding, risk tolerance, and target customer. The best thing about prices and your pricing strategy? If it‘s not working, you can pivot fast and keep sales flowing, no matter what kind of funnel your prospects prefer.
1 year ago
Karleen Wise Andersen
From marketing tips to product recommendations, I’m here to help small businesses be their best.