How to Determine Pricing for Your Business

Pricing is an important aspect for businesses that sell products and services. While seemingly very simple, pricing is a process that should be taken seriously and has a significant impact on small businesses. There are two aspects that go into setting pricing: how to set a price and cost versus price. Here we discuss what pricing is in business, common types of pricing strategies and price vs. cost.

 

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What is pricing in business?

Pricing in business is the process of placing a value on a service or product offered by the business. Pricing your products and services is essential to your organization’s success and should be done using a solid pricing strategy. By pricing your goods or services effectively, you increase your products’ ability to sell and thus contribute to the overall growth of your company.

Related: Planning for Business Success

 

Common types of pricing strategies

There are several strategies small business owners can use to determine pricing for their products and services. Common strategies include:

 

Demand-based pricing

A demand-based pricing strategy is an approach that’s based on the demand of the product or service the business is selling. This strategy is determined by looking at either the decreased demand or increased demand of a good or service. 

 

When basing the strategy off of increased demand, the business owner will increase the price of goods or services due to the limited supply. For example, if a company offers a product that’s available only through that company within its geographical location, the business owner may price the product higher than what it may be worth in other areas where the product is readily available.

 

When using a demand-based pricing strategy that’s dependent on a decreased demand for products or services, the business owner will likely reduce pricing to increase sales and clear inventory. For example, if several businesses sell the same product in one area, one of the businesses may reduce the price of the product to make more sales.

Related: Writing a Mission Statement for Your Team or Business

 

Cost-based pricing

This strategy is based on the cost of producing a good or service and typically discounts what other sellers are offering for a similar product. Mark-up pricing is a popular example of cost-based pricing. Retailers will mark up the price by a certain percentage based on the total cost of production.

For example, if a company sells tennis shoes that cost $5 per pair to make, the company may set the price of the tennis shoes to 300% higher than the cost of production. This would make the cost of the shoes $15 and give the seller a $10 profit.

 

Competitive pricing

Competitive pricing is a pricing strategy that’s based on what other sellers are selling their goods or services for. For example, a business may look at what a similar company is selling its products for and then set its own prices at the same price or a slightly lower price to be more competitive.

 

Penetration pricing

Penetration pricing is a strategy that involves pricing items or services at a lower price than competitors to draw in a significant number of customers. This method helps to immediately bring in sales by offering the same products at a lower price than other companies. An example of penetration pricing can be seen in buy-one-get-one (BOGO) sales in which a customer gets a product free when they purchase a product.

Related: How to Write a Business Description for a Business Plan

 

Geographical pricing

Geographical pricing is a strategy that takes into account the price point of goods or services in a certain location. This is a strategy commonly used by businesses that expand into new geographical locations such as different states. Factors that go into geographical pricing include shipping costs, taxes and business costs associated with operating in the new location.

 

Economy pricing

This type of pricing strategy is used by companies that want to cater to price-conscious customers. Economy pricing aims to limit production and marketing expenses as much as possible in order to offer products and services at the lowest price. With reduced production costs, companies can still make a profit by offering their products at reduced rates.

 

Psychological pricing

Psychological pricing is a pricing strategy centered around encouraging consumers to make purchases based on emotional impulses. The goal of this strategy is to create an illusion of increased value or a great deal. For example, a company may set its primary product at $299 rather than $300 to attract customers. While the difference between these two prices is extremely small, the illusion of better value is created.

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