If you’re a small business, every sale and every customer counts, which is why the pricing marketing strategy you choose is important. So, what is the best pricing strategy for a small business? Small business pricing has its own unique circumstances. Many small businesses focus on a specific location, product or service. From hair salons to car garages, clothes 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.
Why Is Pricing Important?
When it comes to types of pricing strategies that are best for small business, the best product pricing strategy and product selection strategy will encourage two outcomes: as many prospects as possible will buy your product or service, and your revenue and profit goals will be met. Below we take a look at different types of pricing strategies, including those that work best for small business pricing:
4 Popular Product Pricing Strategies
These four types of pricing strategies are common among all types of businesses:
- Premium Pricing: Higher price points 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 or grocery delivery services.
- Economy Pricing: This strategy leverages economies of scale, resulting in lower price points and lower profit margins, but larger sales and market share. This price point strategy is common for commodities and products with less brand loyalty, like 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 have not 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 will go into a bit more depth about a few nuanced variations within these service and product 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 higher price points for products that may either be of superior quality or simply perceived to be. Luxury brands from cars to cosmetics use this strategy. Example: if your small business is a fine-dining restaurant including a months-long waiting 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 a new business a try.
- Dynamic Pricing Strategy: With this strategy, prices change almost instantaneously based upon supply and demand. Think of price fluctuations on plane tickets and hotels based on demand and time of year. Another example of dynamic pricing is the surge pricing we see with ride share companies.
- Classic Penetration Pricing Strategy: Similar to a loss-leader pricing strategy (below), this approach offers a much lower price point to attract the attention of prospects who cannot resist a product or service at such a drastically reduced price. This strategy is sometimes used by new businesses 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. An example is ride share services entering the market at cut-rate prices to pull business from the taxi world. Another example is new airlines that enter the market advertising deals like ‘Fly Anywhere for £100’. Small Business Pricing Tip: 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 Pricing Tip: 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 upselling 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). Small Business Pricing Tip: This is a great way to grow your mailing list and spread the word about your brand (especially if your freebie is customised with your logo). Bring a prospect in to get free air in their tyres, and then book them in for their next oil change or MOT.
- Value-Based Pricing Strategy: This strategy involves pricing based on 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. Small Business Pricing Tip: 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.
- 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 stock management, as you can bundle a slower-selling product or something you have excess stock of with another product that is faster selling. Small Business Pricing Tip: This product pricing strategy works well for small businesses to increase order value, control stock and encourage repeat customers based upon the 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 seasonal or trend driven, incorporate this demand 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 balance sheet and desired profit margin. Large online retailers 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. This type of pricing strategy starts with 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 is not causing prices to fluctuate rapidly. Retail businesses including department stores, clothing and food shops often use this pricing approach. When using this strategy it is a good idea to focus on the value-adds your business provides, such as only the freshest organic foods in a food shop, or only clothes made of sustainable materials using fair trade labour for a clothes shop. This distinguishes your business from the competition and allows you to maintain margins that meet your business goals.
Popular Services Pricing Strategies
If you are in the service industry, you may be deciding between these two popular types of pricing strategies:
- Hourly Pricing Strategy: This type of pricing strategy 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 stipulate 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 efficient their provider is being with their time. It also rewards the service provider for efficiencies of work and smart selection of products and clients.
Other Types of Pricing Marketing 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 customers and buying power.
- Psychological Pricing Strategy: This pricing involves using terms and prices that a consumer might unconsciously perceive to be lower than they are. Examples of this include a ‘Buy one, get one free’ offer. Another example is verbiage like ‘up to 75% off’ for a discount shopping area, where in fact most products are 25–50% off.
Best Pricing Strategy for a Small Business
When defining your pricing and marketing strategy, you can combine strategies based upon what, where and who you are targeting. Your strategy should take into account 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:
- 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.
- Market Leader: 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 Information All at Once: Many buyers start their decision making online and are served products and pricing at the same time that they are researching a product category.
- Influencers Can Turn the Sales Funnel Upside Down: 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 will not necessarily have the prospect’s attention and time long enough to educate them on your superior product before they see a lower-priced product somewhere else online offering free delivery and a free gift with purchase. By pricing appropriately, you can get your prospect’s attention, and then upsell on other services or explain what makes you the best choice. In this way, your pricing and marketing strategy can work together to attract and retain customers.
Secret Ingredient for Small Business Pricing
You might sell a product or a service. You might have a physical business or an ecommerce business. In all cases, the type of pricing strategy that is best for your small business encourages as many prospects as possible to become customers. A few examples:
- Cost Prohibitive with Exceptions: High-end, luxury clothing brands often sell products at extremely high price points, but also offer T-shirts and keyrings 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 wealthiest of customers, ensure you offer high-end though affordable options for aspirational customers. This could include printed scarves, unique costume jewellery or super-soft graphic T-shirts.
- One-Stop Shop: A local hardware shop that becomes the local favourite across generations might sell top-of-the-line tools as well as no-frills but equally dependable basics for uni students and homeowners with a house that needs work on a budget. A shop like this, that becomes a local resource, may also offer candles, plants, wind chimes and other items that address all types of tasks and budgets within a family.
- Elite Gifts for Prospects: Even if you’re after only the one percent, encourage everyone to aspire to your offering. If you run a luxury car dealership, offer everyone who takes a test drive a promotional product that allows them to feel an emotional connection with your brand, even if their dream car is not quite within reach. We suggest a quality promotional pen or a branded metal travel mug.
Customised Products for Freemium Pricing and Gifts with Purchase
In support of a freemium type of pricing strategy, grow your small business with gifts that incentivise prospects to purchase or to share contact information so you can convert them later. We like these:
Full Colour Bright Soft Touch Hughes Gel Pen: This capped 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’.
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.
Tip: For more ideas on increasing sales using gifts with purchase, read our blog, Gift with Purchase Ideas to Grab Attention and Increase Sales
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.