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Setting prices correctly, based on a well-thought-through pricing strategy, is essential for every business to achieve sustainable long-term success. “Pricing strategy” refers to the processes and methods companies use to set prices for their products and services. As stated by McKinsey & Co., “Pricing is by far the biggest tool for earnings improvement.” Determining the best pricing requires some thoughtful examination because there are different pricing theories to consider. 

Why it is Important to Have Solid Pricing Strategies 

Selecting the most appropriate pricing strategy from among the different pricing theories or strategies is important because the right pricing helps a company maximize profits, enhances a customer’s perception of the company and its products and services, encourages customer loyalty, facilitates financial planning and forecasting, and helping it be competitive. A good pricing strategy symbolizes value, attracts buyers, and gives customers confidence in a company’s offerings.

Pricing Strategy Objectives and Considerations 

The objectives for determining a good pricing strategy include, most basically, achieving profits, whether in the short or long term. Other objectives include ensuring company survival, limiting or overcoming competition, gaining market share, making products and services as widely available and appealing as possible, and achieving enduring customer satisfaction. 

Pricing strategy considerations involved in the evaluation and selection among the different pricing theories include profit goals, sales trends and totals, company financial health, company operating flexibility, competition, and government regulations.

Different Pricing Theories 

Here are 11 different pricing theories or strategies that can be used singularly or in combination to set prices: 

  1. Competitive pricing. Pricing products based on prices charged by competitors instead of based on cost or target profits. 
  2. Dynamic pricing. Pricing can vary based on marketing and customer demand
  3. Value-based pricing. Pricing products based on how much customers perceive they are worth. 
  4. Price skimming. Setting new product prices high and then lowering prices as competitors enter the market. 
  5. Economy pricing. Pricing products low due to low production costs and relying on high sales volume to generate acceptable profits. 
  6. Cost plus pricing. Adding a fixed percentage to the production cost of a product. 
  7. Premium pricing. Pricing a product at a deliberately high level to establish a premium brand image. 
  8. Penetration pricing. Entering a market using a low price to “buy” rapid market share and then increasing prices over time. 
  9. Freemium pricing. Offering products for free or at a low price alongside a more expensive version with more features. 
  10. Promotional pricing. This approach is commonly used to attract new customers and is also used as demand ebbs or products approach the end of a selling season. 
  11. Project-based pricing. Pricing each project or finite service based on the value of the project. 

How to Choose Among Different Pricing Theories 

First, consider your industry. Second, check out your competitors. Third, consider your brand. Fourth, know your customers. Fifth, determine your value. Sixth, determine pricing potential. Seventh, determine pricing ranges. Eighth, gather feedback from customers. 

Seek Professional Accounting Assistance 

Contact Irongate Business Partners, which is based in Charleston and serves small businesses in nearby areas. We provide bookkeeping, financial analysis, and outsourced accounting services. Some of our major client categories include construction companies, restaurants, HVAC and home services companies, and medical practitioners. Our aim is to empower growing small businesses with accounting and financial insights and services that otherwise might be out of reach.