Based on competition, value or demand: there are many ways to determine the cost of a product. Designing a pricing strategy according to a startup’s needs and objectives is key to scaling up. But what aspects should be taken into account when choosing a pricing strategy and what alternatives are available?
Becoming profitable: this is the goal of all startups. To achieve this goal, it is not enough to offer an interesting product; it is essential to generate profits to cover production costs and scale the business. In this context, defining an appropriate pricing strategy that can attract and retain customers is essential for growth within the ecosystem.
What is a pricing strategy?
It is the process by which a company determines the price of its products. Establishing an optimal pricing strategy is a key factor in a company’s success, as it has a direct impact on profitability and determines its break-even point, i.e. the point at which costs and profits are aligned and the company starts to make a profit. In addition, these strategies provide a clear view of the associated costs and the value delivered to the customer, which facilitates decision making.
- Setting the selling price too low. This can have an impact on the profit margin as the company may not be able to cover its costs. In addition, the products may be perceived as low quality.
- Setting the selling price too high. This can drive consumers away, especially if prices are more competitive and the product you want to sell does not have a differentiating factor.
How to design a pricing strategy?
In order to make a profit, it is essential to develop the right pricing strategy, taking into account not only the company’s objectives and fixed costs (those that do not depend on the volume of production, such as rent) and variable costs (those that are directly related to the production activity, such as the cost of raw materials), but also other factors:
- Target audience. Before any launch, it is necessary to define what the buyer persona is, which is the people to whom the product to be sold is addressed, and to analyse their financial situation, their needs, their purchasing power and their likeliness to buy again.
- Competitors. A study of direct competitors should be carried out in order to know their prices, offers and strategies.
- Product value. The product to be sold must be analysed: its characteristics, the added value it offers over other competitors and the existing demand are aspects to be considered.
- Brand image. The competitive position of the brand, its market share and the customer’s perception of it must be taken into account.
It is also advisable to consider the economic situation and market fluctuations, as these will affect customer behaviour.
Types of pricing strategy
Companies can choose from a variety of pricing strategies. Some of the most prominent according to Forbes magazine, the US Chamber of Commerce and ESERP Business School are:
Price skimming strategy
The highest possible price is charged and then reduced over time. It is usually used with new and disruptive products that have little or no competition and it aims to maximise profits by targeting customers with high purchasing power. As the market becomes saturated with competitors’ offerings, prices are lowered to attract other customers.
For this strategy to be successful, it is important for the product to be of high quality and that a certain level of expectation is created when it is launched. Among the companies that typically use this methodology, technology companies stand out.
Penetration strategy
The product is launched at a heavily discounted price to attract new customers. As demand increases, prices are raised, taking advantage of the fact that a loyal consumer base already exists.
Startups can benefit from this method to break into the market. Companies such as Spotify and Netflix have adopted this strategy to grow within their ecosystem. To be successful, you need to be able to cope with initial losses and develop good marketing strategies.
Dynamic pricing strategy
It applies different prices to the same product depending on demand and seasonality, so the expected profitability fluctuates, even though it tries to maximise it. Airlines and startups such as Uber are examples of companies using this method.
Strategy based on competition
Set prices based on competition. There are three types:
- Average price. The price will be the same as your competitors.
- Discounted price. The price will be lower than that of competitors in order to attract consumers.
- Premium price. The price will be higher than that of the competition to improve the perception of the product.
Cost-based strategy
Prices are based on the cost of the product: all costs are added together and a percentage is added to determine the profit to be made on each sale. This strategy allows the profit margin to be defined, but does not take customers into account, so there is a risk of losing potential consumers.
Value-based strategy
Prices are set according to the customer’s perception of the product, i.e. the value they place on it. This strategy tends to offer high profit margins as it is in line with what consumers want and helps to increase their loyalty and sense of belonging. To be effective, it requires a deep understanding of buyer personas and the ability to tailor prices to their profiles.
Psychological pricing strategy
Set a price that appeals to consumers’ emotions and encourages them to buy. This strategy is related to behavioural economics because it is based on customers’ cognitive biases. A common practice in this methodology is to set prices ending in nine, as this gives the false impression that the cost of the product is lower.
There are a variety of pricing strategies that companies can use to attract new customers. Understanding the needs of the company, its objectives and the market in which it intends to position itself is key to defining the most appropriate type to gain an advantage and scale up.
