Industry Pricing Strategies
One of the most difficult parts of running a business in any industry is pricing your products and services. If you price it too low, you can undervalue your goods and lose out on profit, but when it’s too high, you can miss out on sales. Thankfully, there are industry pricing strategies that make pricing easier rather than being a shot in the dark.
When a customer purchases a product or hires a service, they go through a complicated process of comparing the price with its perceived value, benefits, risks, and costs. Since customers have this train of thought when making a purchase, it’s not surprising that industries have to also set prices with these in mind.
In any industry, marketers must understand the different pricing strategies and the customer’s perception of price. There are also different pricing strategies depending on the industry a business is in, and pricing consulting companies have started playing an important role in industries.
We would discuss all of these under industry pricing.
A pricing strategy is a method used to create the best price for a product or service. By using a pricing strategy, you can establish prices that will increase prices and shareholder value, with market demand and consumer wants in mind.
There are different types of pricing strategies, but generally, industries place prices in three basic ways. Initially, businesses set prices based on their internal orientation, which means that the price of their product was dependent on the cost of production and the average price in the industry.
This system is called the cost-plus, but it does not consider a lot of factors like competitors, volume, or customers.
Secondly, businesses in many industries allow their competitors to set prices. This is based on the assumption that they have a direct competitor in the marketplace, and so they set their price a dollar or percentage lower than the competitor.
The final approach, which many businesses are now turning to, is pricing based on the customer. In this case, marketers have to assess the value that customers place on their products. Industry marketers initially did not like this approach, especially since it can involve manipulating the perception that customers have of the product. But now, the need for a customer-based approach is clear in any industry, especially since customers are the most important part of a business.
The right pricing strategy has to account for different business factors like marketing objectives, the brand position, revenue goals, the target audience, and the product. Outside factors can also affect the strategy, including overall economic trends, consumer demand, market environment, and competitor pricing.
Regardless, your pricing strategy should leverage the profit and revenue of your business in any industry.
Types of Pricing Strategies
There are different types of pricing strategies, including the three mentioned above. Let’s take a closer look.
Firstly, we have cost-plus pricing, which focuses exclusively on how much was spent in producing the product or service. It is also called markup pricing because industries that use this strategy calculate how much they would like to profit based on the cost of production.
Basically, you look at how much the product cost to make and add the amount of profit you want to make to the cost of production. It is widely used in industries where businesses sell physical products, not services or SaaS companies.
When using cost-plus pricing, it is also important to consider if your competitors are using the same pricing model so that you can attract new customers.
Also called competitive pricing or competitor-based pricing, this pricing strategy does not account for the cost of a product or service or the consumer demand. Instead, it focuses on the market rate by using the competitors’ pricing as a benchmark.
This is often used in highly saturated industries where many of the businesses are similar, especially when a small difference in the price can cause customers to choose your competitor. With competition-pricing, you can price your products or services slightly below or the same as your competition.
It’s a sure way for businesses to stay ahead of the competition.
In a customer-focused world, value-based pricing has become a popular strategy in industries. This is when companies price their products or services while accounting for what the customer is willing to pay. By checking customer interest and data, companies set their price, even if they end up charging more than normal.
Value-based pricing is very sensitive because you have to be up to date with different customer needs, profiles, and personas. And, the price might change regularly based on these differences. But, if value-based pricing is accurate, it should increase customer loyalty and retention.
It can also help in prioritizing customers when it comes to marketing and service.
Dynamic pricing is a flexible pricing strategy that is increasing in popularity among industries. This method bases the price on market and consumer demand, so it is always fluctuating. It is also called surge, time-based, or demand pricing.
Hospitality and utility industries usually use dynamic pricing by considering demand, competitors, and other factors. By applying certain algorithms, companies like hotels, event venues, airlines, and utility services, can change their prices to match what the customer is willing to pay.
It should also match when they are at the time they want to make a purchase.
A high-low pricing method is when a business first sells a product at a high price, but when the product drops in relevance or popularity, it lowers the price. This is mostly found in retail industries when companies have discounts, year-end sales, and clearance sections.
Also known as the discount pricing strategy, high-low pricing is widely used in retail industries where the firms sell seasonal products that change often. Consumers usually enjoy this type of pricing strategy because they can purchase it cheaper than if they came earlier.
Skimming pricing is often compared to high-low pricing, but it involves placing the highest possible price on a new product, then reducing the price over time as the product becomes less popular. It is different because the prices are lowered gradually as time goes on.
This type of pricing is usually used in tech industries, like smartphones, video game consoles, and other products become less relevant over time, and their prices reduce. However, the skimming strategy allows businesses to still sell products even when they’re no longer relevant. But, consumers who first bought the product at a higher price might be upset when they become cheaper later.
Another pricing strategy is the premium pricing method, in which businesses place a high price on their product to represent the brand or concept that their products are luxurious. It does not account for the actual value of the product or the cost it took to produce it. Instead, it focuses on the perceived value of the product.
It is also called prestige pricing or luxury pricing and is for industries where they sell high-value or premium goods or services. Companies that use the premium pricing method usually provide a sort of status to the customers that purchase their products. It is widely used in the fashion and technology industry.
We also have the bundle pricing strategy, in which a company offers a group of two or more products together or services and sells them for a lower price. These products or services are put together in a bundle and can also be sold individually. Customers usually like this sort of pricing because it allows them to purchase more for less.
For instance, each product can be $20, but purchasing three can go for $35 instead of $60 when you buy them individually. Bundle pricing also adds value to your product and makes your customers get hooked to your products quicker. It’s also a great marketing strategy.
Industries that span globally usually use the geographic pricing method. This involves pricing products or services based on the geographical location or market and is often used in online stores. It is used when the customers are from another country or when the economies of the different target locations are different.
For example, an online store can make a product for about $20 in the United States while it could be $30 outside of the country. It is often easy to carry out geographic pricing, although those who have to buy it more expensive find it offensive.
Freemium pricing is widely used among SaaS companies and others in the software industry. It involves offering a basic version of a product and prompting users to purchase a paid plan for more features or upgrades. It is a combination of free and premium and is different from offering free trials and limited memberships.
So, customers can use the free plan, but if they want more features, they would have to check the paid plans instead. With this pricing plan, the price of the service must account for the perceived value of the product. It must also offer a low barrier to entry to attract customers and increase gradually as customers get more features in more expensive plans.
Industries with consultants, contractors, laborers, and freelancers that provide particular services usually go for hourly-based pricing. Also called rate-based pricing, this is based on the concept of exchanging time for money. You simply place a price on every hour you provide a service to a client.
Although in some cases, clients are wary about hiring businesses with this strategy because it rewards their labor and not efficiency. If your business is based on high-volume projects or quick work, hourly pricing can encourage clients to purchase your services.
Penetration pricing is kind of the opposite of skimming pricing, and these strategies are often contrasted. Penetration pricing strategy is when a business starts their product out with a very low price, which would attract a lot of attention from customers. It also takes revenue away from competitors with higher prices.
This type of pricing strategy isn’t feasible in the long run, but brand new businesses usually apply it for a short time. It works best when a new business wants to stand out in a competitive market. It is also a disruptive strategy but might not work because it’s based on the hope that the customers who buy it when it’s cheap will stay when the prices are eventually increased.
Furthermore, we have project-based pricing, which is a strategy that is contrasted with hourly pricing. This method involves placing a flat fee on a project rather than directly exchanging money for each hour. If a consultant, contractor, freelancer, or laborer charges a flat fee, they don’t collect any more money and finish the project.
Some businesses also provide hourly and project-based pricing choices, so their prospective customers can choose the one that works best for them. For the latter, the flat fee accounts for the entire value of the project and the service. It must also depend on how long the project is expected to last.
Another industry pricing strategy is economy pricing, which is a volume-based strategy. In this strategy, a company will price goods at a low price and gain profit based on how many customers purchased their product. It is mostly used in industries where companies sell commodity goods, especially groceries and medications.
Economy pricing is very similar to the cost-plus strategy, and the price consists of the production cost and profit margin. The strategy is a volume play, so the company will make a profit when they have many customers purchasing the product on a regular basis.
Businesses in the service and SaaS industry are known for their pay-as-you-go pricing strategy. In this model, customers pay for the usage of the service as they use it rather than paying a single fee. It usually appeals to consumers who use a service infrequently.
For instance, it could be a pay-as-you-go mobile plan that allows your customers to pay for access to the internet on a usage basis. It could also be on an hourly or daily basis. It attracts customers in industries where the services require subscriptions.
Finally, there is the psychological pricing strategy, which is focused on influencing the psychology of the human being to increase sales. A popular strategy is a 9-digit effect when a company prices a product at $99.99 instead of $100 because it makes it seem more affordable to customers.
Also, there are offers like buy one and get one free or 50% off, making customers believe that the promotion is too good of a deal to pass by. Psychological pricing can involve placing an expensive item beside the item you actually want to promote, thus influencing the customer to buy the latter.
Popular Pricing Strategies Based on the Industry
Companies can use a wide range of pricing strategies based on their marketing objectives and goals. But, the pricing method can also be based on the industry the company is in. Here are the popular pricing strategies that are used based on industries.
In the manufacturing industry, the most popular strategy used is cost-plus or cost-based pricing. The pricing decisions are dependent on accounting data because the main aim of the company is to get a particular return on investment on their production costs.
Manufacturing companies use the product cost as the basis for the selling price by adding a fixed amount to it or a percentage. The added amount is the profit and helps you arrive at the selling price. Manufacturing industries benefit from this because it’s a simple strategy and accounts for production and overhead costs.
It also ensures a steady influx of profit. But on the other hand, if cost-plus pricing isn’t well-done, it can lead to underpriced products. Also, the demand for the products and other competitors in the industry are not accounted for, which is quite inefficient. This is why competitor-based pricing is often used along with cost-plus pricing in manufacturing companies.
Hospitality and Travel
In the hospitality, travel, retail, and eCommerce industries, dynamic pricing is popularly used. Companies in the hospitality industry use dynamic pricing to change the price of packages, rooms, and other goods or services, based on the demand and supply in the industry. Basically, they need to place the highest price that consumers are willing to pay.
But, those in the travel industry, like airlines, usually change the prices of flights depending on the day, time, and the number of days before the flight. It also involves the departure time, the number of seats on the flight, and how many flights are canceled on average.
Even in the sports and ticketing industry, the price can also change based on different factors like the weather, date of the game, opponent, and others. As for retailers and eCommerce businesses, the price of their products changes based on the sales goals, competitors, time, conversion rates, and traffic.
The SaaS industry is highly competitive, and there are different pricing models used by the companies in this space. One of the most popular is freemium, as many online companies provide their services for free but have a paid plan. Project-based pricing or a flat fee is also popularly used.
The two main types of the pay-as-you-go model are the user-based and the usage-based, and these are also used in the SaaS industry. The former bases the price on the number of users that are actively or passively using the service, while the latter is founded on paying for the volume you use.
Another popularly used pricing model for SaaS companies is the feature-based model. This is for services that have a lot of features offered, as consumers will pay based on how many features they want. Then, there is the tiered pricing model, which puts together all the possible features of your SaaS package and lets customers choose one plan.
The service industry has many pricing strategies, as it is a very diverse industry. The major strategies include market penetration strategy and price skimming, which include setting prices low or high at the beginning, then increasing or decreasing over time.
The industry also uses premium pricing, especially when they charge higher prices because their services are unique. And, economy pricing is often used because the overheads of the service are low. Although cost-plus pricing is mostly used in the manufacturing industry, the service industry can also do so, although it’s not as straightforward.
In the service industry, the bundled pricing strategy is widely used, as they can put different services and offer a lower price. Then, there’s the tiered pricing or good, better, best pricing. This involves offering clients the option of choosing between different levels of services. And when a service has a lot of competition, it can use competitive pricing as a basis.
Although this isn’t strictly an industry, when a business first emerges in the market, there are particular pricing strategies that they should use to attract customers. Firstly, there is the skimming strategy which is mostly used by businesses that are new to an emerging market. It gives them a chance to attract customers and undercut future competitors.
Some new businesses also use market penetration pricing, especially if they have something unique to offer. Just as the name implies, the company tries to penetrate the market by offering a low price and then gradually increasing it. It’s also advisable for new businesses to use value-based pricing since it is based on the perception of the customer.
Other advisable pricing strategies for new businesses include bundle pricing, premium pricing, and economy pricing, and when they’re used accurately, a new business can gain profit and attract a wide customer base. New businesses also use dynamic pricing to base the price of their product on market demand.
One pricing strategy that can be used by a wide range of industries and attract profit is the value-based method. Since this is based on the perceived or estimated value that a customer places on a product. It doesn’t base the price on the production costs or historical prices.
When the value-based pricing strategy is used accurately, it can increase profit without affecting sales volumes. The value-based approach is often used in fashion, pharmaceutical, niche, or tech industries. It is also used when a business is selling during a shortage or indispensable add-ons, like headsets for smartphones.
Customers’ Perception of Price and How to Analyze It
Many businesses are shifting towards customer-based pricing approaches in this age. This is because customers always look at what they’re benefiting from a product and compare it to the actual price of the product. If the benefits outweigh the price of the product or there is a reasonable relationship between the benefit and the cost, the customer will purchase the product.
On the other hand, if customers think that they are paying too much for too little, they won’t purchase the product. But, it’s difficult for businesses to define the benefit or cost of a product from the perspective of a customer.
The benefits of a product in any industry can differ. It can be functional, financial, operational, or personal, and it depends on what your customers are looking for. Also, the cost or value that a customer perceives of a product can also differ. They can account for more specific factors like the seller’s price, installation, shipping, and order handling costs. But, there are also less-defined factors like risk of product failure, modification after the item has been purchased, or the fear of late delivery.
Basically, the benefits that a customer is looking for are more complex than businesses realize, and the value that a customer places on a product is more than the seller’s price. Basically, before a customer decides to purchase a product, they go through a complicated process based on their perspective.
With a customer-based pricing strategy, the business has to figure out the highest possible price that the customer will be willing to pay for the product. In this, the keywords are the ‘highest possible price’ and the ‘willingness to pay.’ The business has to make a profit but can only do so if the customer does not mind paying for it.
To find the right price, the company has to understand the customer’s perspective of the product in terms of the benefits it offers. In any industry, the company also has to know that their cost is not important in the customer’s thought process. What the customer is thinking about is their own costs, not the company’s costs. In other words, the customer cares about what they are losing to get the product, not what the company spent to make it.
In a customer-based pricing model, companies also have to be aware of what their competitors are offering to the customer. Customers usually compare the benefits of different businesses together before making a purchase.
To analyze the customer’s perceptions, companies in an industry must understand the complete use of their product, analyze the benefit and cost variables, and make a cost-benefit trade-off. It is only when a company thoroughly understands the product that they are marketing and attempting to sell that they can know the value the customer places on it and the price based on this.
Relationship Between Pricing and Product Planning
Once you understand that the value a customer places on a product can be used in setting price and that customers usually consider the benefits of the product, you will notice the relationship between product planning and pricing.
In any industry, it’s impossible to separate the process of planning your product from pricing it. Price is used to determine the market, application, and competition of a product. Also, the cost of a product also determines the volume and performance. Thus, a business should manage pricing and product planning together.
Although usually, when a company has a problem with its sales, they find it easier to change the price rather than upgrade the product or service. By making it cheaper, they can quickly attract customers, rather than changing it completely.
On the other hand, it’s easier for your competitors to copy your pricing than your product planning. This makes it harder to have a strong position in the industry, except they have a cost advantage over the competitors, which makes it hard to copy the pricing.
Relationship Between Pricing and Cost Structure
Also, a company’s cost structure plays an important role in the pricing process. Even if industries are now focusing on consumer needs, the need of the company cannot be completely thrown to the side. A pricing plan should be arranged in a way that takes the main benefits of the company’s cost structure and builds upon them.
In many situations, the price can be used to influence demand, but it can’t change it completely. Thus, the costs and benefits have to be considered. Many companies build their pricing plan based on the existing cost structure.
What Are Pricing Companies?
Nowadays, one of the major pricing strategies for businesses in any industry is to turn to a pricing company. A pricing company is a firm or service that analyses a business and its products and helps them set the right price and benefit from this. When it comes to pricing, businesses have different mindsets, and there are two categories that need pricing companies.
Some businesses don’t understand the importance of pricing and cannot leverage it to make a profit and build a dedicated customer base. Others don’t understand how to properly price their products, even when they know it’s important, causing them to make a loss anyways.
But with a pricing tool, businesses can assess their performance constantly and adjust their pricing based on this. Pricing companies offer different services depending on the one you hire. These include providing pricing strategy, analytics, research, and training. Some companies also provide market strategies based on the business goals and the competition, and how the price is connected to these all.
If a business is having trouble with determining the right price, or it’s a new business in an industry, it will need a pricing company. It is also important for businesses that don’t have pricing specialists on their teams or are not well-versed in how to properly carry out pricing research. There’s no harm in getting some extra help.
Benefits of Pricing Companies
The main benefit of hiring a pricing company is that they help customers gain a lot from the pricing. It’s not only about setting a price for your goods but also making them a sustainable source of profit for a business. These companies don’t only look at the pricing but also at other challenges that are usually associated with it, like delivery, communication, customer targeting, and customer success.
With a pricing company, it becomes easier to design a pricing model for a new product or service and make a consistent profit from it. It’s also easier to design a pricing intervention in a value chain or for a pricing process.
There is also the need to provide training to those in the company on pricing, another thing that a business can benefit from pricing companies. If you don’t have pricing specialists in your business, you can hire pricing companies to provide training to your marketing and sales team so that they can properly leverage pricing in the future.
How to Choose Pricing Companies?
There is a wide range of pricing consultant companies that you can choose from, but one size doesn’t fit all, so one has to look closely before hiring these services. You might need a pricing company to assess if your current pricing strategy is suitable, look for alternative pricing approaches, and identify the ways you can make a change in your strategy.
If you want your act of hiring a pricing company to actually lead to business transformation, there are a few things you should do and questions you should ask before hiring one.
The Size of the Company
With a human sized team, it’s easier to form a strong, personal relationship with the consultant and make progress.There are different types of pricing consultant companies out there, from one-man services to large firms with hundreds of workers. For one, your business might do better with just a couple of person that specializes in your market.
On the other hand, some businesses have different challenges that require many hands on deck to solve the problem. In this case, a larger firm with a lot of consultants, researchers, analysts, and trainers will be much better. It is also a good idea for larger businesses.
The Pricing Company’s Specialty
Pricing companies usually have a set of specialties, and it’s important to check this before hiring them. Just like your business specializes in a particular field, you need to hire a pricing company that provides what you need. So, check what the different firms that you’re considering are offering before deciding.
Some pricing companies are good at market pricing and competitor research, while others do better with analysis and identifying whether you are underpricing or overpricing. Some offer pricing tools for your business, and others simply run tests. There are some companies that just provide pricing training.
Check for Client Results
Another important factor to consider is the clients of the pricing company. When it comes to pricing, the benefits that a business sees if they get it right are very obvious, so you will know whether they did a good job with their clients or not. You can ask the company for their track record or do some research.
Although you can’t find out the specific financial results of the client they worked with, they can provide the average results for a year, a case study, or a before and after situation. This can be considered when making a decision.
Check for their Failures
Although it’s nice to know the clients they have succeeded with, it’s also important to check the mistakes or failures that the pricing company has to their name. Every pricing company should have at least one failure or a project that went sour or didn’t turn out the way they wanted.
You can ask them about their main failures, not because you don’t want to hire them, but because you want to check the mistakes and make sure that it doesn’t happen to your business as well.
Look Out for References
Finally, you should look out for or ask for reference customers. Asides from knowing the results of the pricing company, asking their other clients can help you in understanding how this pricing service works, the dedication of their professionals, how good their customer service is, and other factors.
You can do this when you’re comparing your final options and want to see just how good the firms are before making a final decision. It also helps to ask the company to give you a list of willing references and ask them a few questions. Be considerate to them since they are taking time out to provide help to you.
The main purpose of any company is to serve the needs of its customers, which is why pricing strategies in any industry are targeted toward this. It is important to analyze the different types of pricing models that are available right now and then check those that are mostly used in a particular industry.
But regardless of the model that a business is using, there are some factors that cannot be thrown aside, such as the cost of production, the competitor’s pricing, and the value that the customer places on the product. All of these should be put in mind even while using any industry pricing strategy.
Using pricing companies also saves businesses in any industry a lot of time and makes it easier for them to design and implement strategies that will work. Rather than making a shot in the dark, hiring professionals to do your pricing plan for you is more cost-effective.
In conclusion, pricing is one of the most important parts of a company that wants to be successful and should be treated as such.
Industry Pricing Strategies
Related Articles part of our Product Life Cycle Series
You are looking for concrete cases where pricing & commercial excellence have made a difference click here
Get in touch for a casual conversation
Engage with us on Linkedin