Whenever you’re getting a startup off the ground, odds are you’ll need to consider your pricing strategy. Everyone in business does this even if they don’t think of it as a strategy at all. It is important, whether launching products or services or figuring out how much to charge as a freelancer in your field.
But the way you charge for your services or products and how much you charge can make or break your business or freelancing career.
That’s why it’s a good idea to think about your pricing strategy and consider the five main techniques you can use.
Even better, checking out some top podcast episodes that go over these very topics can help you gain some critical insight and prevent you from making a big error.
The 5 Main Pricing Strategies
There are five key pricing strategies you can use in order to set the monetary value for your product or service. These strategies are:
- Price skimming
Each pricing strategy has its advantages and disadvantages, although some strategies have fallen out of favor in recent years. As the market shifts, some pricing strategies have become more common or more trusted, while others have faded into the background.
The right pricing strategy for your company or product will depend heavily on what exactly are some of and your own skills.
In a nutshell, value-based pricing involves you setting your price based on perceived value. Note that this is distinct from the actual value of your product or service and thus can be heavily influenced by your marketing efforts.
Competitive pricing is much simpler and involves you setting your price just based on competitor products or services. If your closest competitor charges $9.99 for their product, you will charge something similar, like $9.98.
Cost-plus pricing occurs when you calculate your costs, then add a little extra to your final price to make a profit.
Price skimming has you set an initial high price but lowering it as you gather more data and the market changes.
Finally, penetration pricing will have you set an initial low price to “break into” the market and raise it once you are more settled in place.
Let’s dive into each strategy in more detail and showcased some podcasts that discuss each one.
Value-based pricing is becoming more popular as time goes on, especially thanks to the proliferation of entrepreneurs and freelancers service providers.
With this pricing strategy, you’ll charge not based on the quantity of work or product you provide but on the value that your work or product gives your client or customer.
Pricing By Value Can Increase Value
How We Solve Episode 08: The 4-Step Process to Pricing for Value
One of the best podcasts detailing this pricing strategy is How We Solve. In this episode, HWS invites Paul Klein to talk about his own pricing expertise and experience as an entrepreneur and business consultant. Klein’s advice is interesting to listen to as he also hosts his own pricing podcast, aptly titled “Pricing is Positioning.”
The podcast dives deep into how you can price based on value, particularly if you’re an entrepreneur or freelancer. Klein necessarily dives into why many entrepreneurs make initial mistakes when pricing their services, especially at the beginning.
They enter an agreement believing that all that matters is the raw product for material exchanged in a business deal when they should be charging for the actual value provided to the client.
Klein notes throughout the podcast that:
- pricing high based on the value you can provide a customer actually helps your chances of landing a deal and can positively impact their perception of your work
- pricing based on value is a great strategy overall if you have real value to provide a customer and have some expertise in a service or skill
- the most basic example of this pricing is when a freelancer charges a high rate for a relatively small amount of work — As the saying goes, the client “doesn’t pay for the work that was done that day, but for the decades of experience it took to gain the skills in the first place.”
Marketing School Episode 986: Pricing Secrets for Your Product or Service
In this episode of Marketing School, the hosts discuss how to appropriately price your business or service. High value is positively correlated with high pricing. It also covers some ways in which you can demonstrate the value you can offer. You can then leverage that to justify your high price. This particular skill may be helpful for beginning entrepreneurs and freelancers.
Competitive pricing is much simpler than the first strategy. All you have to do is look at the local or global prices for your products or services (whichever are most relevant for your market) and base your price on those numbers.
This does require you to do plenty of research based on how your competitors came up with that price so you can be sure that the price is reasonable. You may expose a pricing weakness based on your market research.
However, competitive pricing does have its own disadvantages. For one, your competitor may know something about the business or product that you don’t, and so might be making more of a profit than you initially realize.
This can prevent you from making a profit if you price your product or service similar to their own without having enough of a profit margin to make it worthwhile.
Competitive Pricing is Tricky To Master
In this podcast episode, Jack Grise is invited on to discuss his entrepreneurial experiences, as is Mike Lewis. Grise goes into great detail describing:
- the potential pitfalls of competitive pricing
- why you may want to avoid the strategy unless you really know a business or service inside and out
- you need to be careful if you choose this pricing strategy because of the potential monetary losses you can suffer
- pricing competitively without fully understanding how your direct competitors arrived at those numbers in the first place is a risky bet at best.
Cost-plus pricing is a much older type of pricing strategy that still sees use today. In a nutshell, to use cost-plus pricing, all you have to do is:
- add up the fixed costs from your business
- add up any variable costs from a job or service
- combine those costs for a total
- add another fee so that you can make a profit on a deal or product
That’s it. It’s incredibly simple, but it can prevent you from making the maximum profit possible from a deal or product. In many cases, cost-plus pricing is a better strategy for certain markets like remodeling or homeownership.
In these markets, costs for business are relatively fixed and stable, so it makes sense to anchor your own pricing points on the costs it takes to run your business.
Cost-Plus Pricing Is Best on a Case-by-Case Basis
Remodeler’s Advantage Episode 31: How to Successfully Use Cost-Plus Pricing with Josh Baker
This is a great podcast episode if you want to learn more about cost-plus pricing, including its advantages and disadvantages. Josh Baker, a co-founder of a successful remodeling company, discusses cost-plus pricing with the hosts Victoria and Mark.
Baker uses cost-plus pricing so that he can differentiate his company from his competitors, but he does note that it’s not for everyone. Listen to this podcast if you want to dive deep into his thought processes and imagine how well it might work for your endeavor.
Price skimming is a relatively risky pricing strategy right off the bat. You start off by selling your product or service at a high price in order to make a quick profit.
It usually works best if your market size is small, particularly when you don’t have many competitors who can quickly undercut you and compromise your profits. It also relies on the availability of early adopters that will pay higher prices to try out new products or services before anyone else.
Price Skimming Has High Potential for Success or Failure
Subscribed Podcast Episode 3: Pricing Strategies with Tom Tunguz
In this podcast show, hosts Tom Krackeler and Rachel English discuss many elements of the subscription or software as a service economy.
This episode invites Tom Tunguz aboard, during which all three people discuss many aspects of pricing strategy, particularly in a subscription economy.
While they don’t talk about price skimming specifically, Tunguz does talk about how many startup entrepreneurs ask the wrong questions when trying to discover their original price.
- asking how much a person will possibly pay for your service is wrong
- the right price is always changing
- it’s better to get the right price by asking people how much they would be willing to pay a competitor for a similar service or product
Ultimately, price skimming may be a valid strategy, but it’s risky for many and should likely only be undertaken if you have a solid grip on your market and can count on some income regardless of product or service popularity.
A great example of price skimming can be seen with the original iPhone. There was nothing like it before, so the high asking price wasn’t much of a deterrent for the early adopters who swarmed the mobile devices.
Penetration pricing is all about penetrating the market, as the name suggests.
For those trying to enter an inundated market or a market with many competitors for the same product or service, this pricing model may be helpful. You start off with a very low asking price in order to make your product or service more attractive to consumers.
This pricing model does have its own potential pitfalls, however. Pricing your services so low can impact your profit margins or may cause you to operate without any profits for a certain period of time.
But it can be very helpful if you manage to obtain a market majority in a short period, allowing you to squeeze out your competitors and potentially raise your prices later. Be warned that this may be seen as manipulative by your customers if they catch on to your strategy.
Penetration is Often Prime
In this podcast episode, marketing professors Jagmohan Raju and John Zhang discuss how so many companies don’t think enough about their pricing models as they should.
They also talk in detail about penetration into different markets and how certain companies, like Google, use their free pricing models to penetrate markets that would otherwise be relatively unreachable.
It’s an invaluable podcast episode for those deciding whether to use this pricing strategy.
How You Know Which Pricing Strategy to Use
There’s no single trick to determining which pricing strategy will be best for your market or service. Certainly, listening to the podcasts above is a great place to start. But you should also spend lots of time thinking about:
- your pricing models
- the services you offer
- the types of products you make
- the expertise or value you can provide to a client.
All of these aspects will influence what pricing strategy will likely be most successful for your business or entrepreneurial endeavor. Some pricing strategies work best for certain markets like housing or real estate, whereas others are more suitable for the agile freelancer economy.
You may also need to try out multiple pricing strategies as your business evolves and change your pricing points over time.
This isn’t a failure, either. Many entrepreneurs need to switch things up multiple times before they hit their stride or achieve ultimate success.
In fact, many of the most successful businessmen and women likely use several pricing strategies in conjunction with several of their companies or services.
Either way, do a lot of research and listen to as many experts as you can before settling on a pricing strategy in order to hedge your bets and maximize the odds of choosing the right strategy the first time!
Overall, the best way to determine the right pricing strategy to use for your next business venture will likely only be discovered through trial and error.
But relying on the advice of experts and listening to what they have to say on subjects as dense and complex as business and pricing is a great idea, anyway. T
he fewer mistakes you make, the greater the profits. Good luck!