How to develop pricing strategies for your business

There’s a lot to think about when you’re setting up your own business, from coming up with your social media strategy to weighing up business name ideas. One key task on your to-do list will be to develop pricing strategies for your products or services, and getting this right can be vital for the success of your business.

It’s not just about putting a price tag on what you do. Your pricing strategy should really be regarded as an integral part of your overall marketing strategy, helping to:

• Position your brand within the marketplace

• Attract your target audience

• Maximise your profit margins

• Generate customer confidence and loyalty

On the other hand, the wrong pricing strategies can cause your business to be incorrectly perceived, inadvertently putting off your desired audience and negatively impacting sales.

So, whether you’re simply brainstorming side hustle ideas or forging an entirely new career path with your business, the question of how to create a pricing strategy needs careful consideration. This guide will break down the things you need to think about, explaining some of the specific strategy types that can boost your business.

What is a pricing strategy?

Simply put, this is your plan for setting the optimum pricing for what your business does. By “optimum”, we mean pricing which satisfies three main requirements:

1. It will generate a sufficient profit margin

The best small business ideas are those which truly excite you, but having a genuine passion for your business won’t count for much if you’re not generating a profit. In other words, money left over after you cover your running costs.

You’ll need to price your products or services so that the money your business brings in exceeds what you’re spending on, say, materials, storage, staff, and any software or hardware used. 

2. It won’t deter customers

The higher your price tag relative to your running costs, the bigger your profit margin. But if you’re overly ambitious in your pricing and go too high, you risk alienating potential customers. 

So, you’ll need to work out how to price a product or how to price a service just high enough to make a good profit but not to the point where customers choose your lower-priced competitors instead. Some trial and error may be required.

3. It will help you achieve long-term business goals

Entrepreneurs researching how to start a business would be forgiven for assuming that pricing is a fairly self-explanatory process compared to, say, online marketing, sourcing products or small business crowdfunding. But the fact is, an effective pricing strategy is often about more than just your profit margins.

It also needs to align with your overall business strategy and goals. For example, you might have an eye on long-term growth, and be prepared to price lower and make a smaller profit margin to begin with. 

Or, you might want to position your brand within the bargain, mid-level or luxury segment of your particular sector, and price accordingly right from the outset.

There are a number of approaches you can take to arriving at an optimum pricing strategy, and that’s what we’ll look into in the next section. 

Types of pricing strategies

Whether you’re looking to turn one of your business ideas from home into a reality, or are all set to open your own café or restaurant, there should be at least a few pricing strategies to suit your purposes.

In this section, we’ll delve into the most prominent examples used by business owners around the world. Just keep in mind that you can shift from one pricing strategy to another, and combine elements of different ones, depending on how your business evolves.

1. Cost-plus pricing 

With cost-plus pricing, the selling price of a product is determined by adding a fixed percentage to the cost of creating that product – an amount known as the cost of goods sold, or CoGS.

With this strategy, the markup is primarily based on the size of the profit margin you’re after, rather than external considerations like how much your competitors are charging.

It’s a strategy that’s typically more suited to retail businesses rather than service providers, since the CoGS of physical products can be easily itemised and then marked up. So, if you’re considering things to make and sell, cost-plus pricing might be a good approach for your eventual business. The strategy can be illustrated with a simple example. Say you’ve set up a food business, such as a street food truck selling pizzas. By combining the costs of ingredients, together with the cost of packaging and associated expenses, you can determine your CoGS per pizza, then add a percentage markup – say, 50% – to determine the selling price.

A key benefit of cost-plus pricing is that it’s straightforward. Your percentage is decided by you, based on the internal factors of your business, rather than extensive and ongoing market research. However, you do run the risk of inadvertently pricing yourself too high or too low, compared to the going rate.

Rigidly sticking to a set percentage markup also means you won’t feel incentivised to make your business run in a more cost-effective way, should production costs go up over time. This can in time lead your pricing to become so high that it deters future customers.

2. Competitive pricing

Anyone thinking of setting up their own business should be clear on how to do a competitor analysis, which means assessing what rivals in your sector offer, how they engage with customers, and what they charge. The latter forms the basis of a prominent pricing strategy, known as competitive pricing.

Just what is competitive pricing? Simply put, it’s a strategy primarily based on what existing competitors are charging – in other words, the “going rate” – rather than business costs or predetermined profit goals (which come to the forefront with cost-plus pricing).

This is a common pricing strategy for businesses which, rather than carving out their own new or unusual niche, are competing in a crowded space where their products or services are very similar to their rivals’. As a result, pricing may be the key factor setting rival businesses apart.

Say, for example, you opened an online store selling gourmet brownies for delivery across the UK. Aside from differences in branding and perhaps a few quirky recipes of your own, there might not be much to differentiate you from other online suppliers of premium baked treats. This is where this pricing strategy might come into play.

Common competitive pricing approaches include:

Matching your competitors’ prices

This approach is also known as co-operative pricing, and means adhering to the market going rate by offering your goods at the same price as your rivals. This may be the best option if you don’t want to risk profits by reducing prices, or – on the flipside – don’t feel justified in pricing yourself higher than the competition.  

Setting a lower price than your competitors

Undercutting your rivals can certainly be an effective strategy for attracting customers. After all, wouldn’t we all prefer to pay less for a product or service without compromising on the quality?

This approach will reduce the size of your profit margin per product or service, but the hope is your overall profits will surge because of the higher numbers of consumers coming your way.

An even more aggressive undercutting strategy is to use loss leaders. This means slashing the price on certain products so much that you make only a very minimal profit, or even an outright loss, but substantially increase customer traffic. The additional customers will then hopefully buy some of your more profitable wares, whose sales will make up for the loss leaders.

Setting a higher price than your competitors

Deliberately making your product or service more expensive than your rivals’ will position you as a premium alternative to others in your sector. This is a bold strategy that should only be employed if you feel confident in the superior value of what you do. 

The good news is you don’t necessarily have to splurge on expensive raw materials or business tools to do this. If you have the appropriate expertise and motivation, even low cost business ideas can yield high-end products and services which can be justifiably priced higher than the competition.

Say you launch a graphic design company after having built a reputation in the industry as an employee of global advertising agencies. Given your impressive experience, you can reasonably charge higher than the typical going rate for graphic designers, with the expectation of attracting clients with deeper pockets.

3. Dynamic pricing

Dynamic pricing goes by a number of alternative names, including surge pricing and time-based pricing. As the term suggests, it’s a flexible approach which takes consumer demand and market forces into account.

Anyone who’s ever used rideshare apps will probably have come across dynamic pricing. Think how such apps will show price surges during busy periods like Friday and Saturday nights. Hotels and airlines will also increase and decrease their prices in response to peak periods throughout the year.

In the case of large companies like rideshare apps and hotel chains, prices are automatically adjusted by complex software algorithms. But even if your goals are more modest and you’re planning how to start a business from home, say, you can employ dynamic pricing by simply adjusting your prices manually when you need to.

It’s not a recommended strategy if you’re selling products through an ecommerce store or in a physical shop, since frequently fluctuating prices can cause customers to see your business as unstable or unreliable.

However, dynamic pricing can work well for those selling bespoke products to order, and for service-based businesses which can tailor their prices for different projects – think copywriting, social media marketing and music production.

4. Skimming pricing

Skimming refers to the practice of charging the highest possible price when your product enters the marketplace, only to decrease the price as time goes on. This is often seen with tech items like smartphones and video game consoles, which become less expensive after initial buzz fades and they are superseded by other products.

The strategy isn’t just for the big tech multinationals, though. Many creative ways to make money can involve selling products that tie into the zeitgeist and are priced highly to start with.

For example, you might set up a print-on-demand clothing store, with designs based on films, music, or political campaigns that are in the news. Implementing a skimming price strategy can allow you to capitalise on current interest in these subjects, maximising your profit margin before interest inevitably declines and you consequently lower prices.

Savvy use of skimming pricing can often be an integral ingredient of low cost high profit business ideas, since you can generate higher returns by capitalising on trends rather than investing in expensive materials and processes.

5. Penetration pricing

This is the opposite approach to skimming pricing. Instead of going in at a high price, with penetration pricing you launch your product or service at a rock-bottom, “introductory offer” rate. 

It’s not a pricing strategy for the long term, since charging a drastically discounted rate for your product or service won’t allow your business to survive over a protracted period. However, this disruptive tactic can be an effective way for a new business to announce its arrival and draw customers away from rivals.

Penetration pricing runs the risk of backfiring when you start to raise your prices to a normal setting, because customers attracted to the super-low initial pricing may pull away. However, you can mitigate against this by providing high-quality products or services, along with attentive customer service.

A penetration pricing strategy can also be factored in when you’re planning how to use social media for small business, as low introductory prices can make for eye-catching content on Instagram, X (formerly known as Twitter) and other platforms.

6. High-low pricing

High-low pricing is the strategy of dramatically dropping the price of products and services to attract customers. At first glance, this may look a lot like the skimming pricing strategy, but there are some key differences.

The skimming approach is applied to new products and services entering the market, whereas high-low pricing is utilised for those that have been around for a while. With skimming, the price reduction tends to be gradual: an incremental normalising of the price after an inflated beginning. With high-low, the price drop is quick and steep.

This strategy is commonly used by businesses whose stock has to change to stay relevant to trends and seasons. Think of the clearance sales you’ll so often see at clothing and furniture retailers. The Black Friday sales in the run-up to Christmas are a classic  example of high-low pricing strategies at work.

High-low pricing can be a powerful weapon in your eventual marketing arsenal, whether you’re currently thinking of how to make money online or gearing up to open a shop or food outlet. Applying temporary discounts on what you offer – be it web development services, online courses or takeaway tacos – can bring in droves of new customers.

7. Value-based pricing

This pricing strategy is shaped by customer perceptions and feedback, with the business pricing its offerings based on what people are willing to pay. Or, to put it another way, based on how the value of its product or service is regarded in the marketplace.

This is in stark contrast to other pricing strategies which are based on more tangible, pragmatic factors like production costs and competitors’ prices. Perhaps unsurprisingly, this pricing strategy lends itself to unique, deluxe, unusual and niche businesses catering to a discerning customer base.

Products perceived as prestigious, such as high-end clothing or fine art, are very often sold using this pricing model. In fact, a strikingly high markup can itself be a selling point, highlighting the desirability of the products which in turn elevates the perceived worth in the eyes of customers.

The question of how to do market research for small business is particularly relevant if you’re intending to appeal to the public’s perceptions of value. You’ll need to assess the products that already exist in your target market, what prices they command, and how they are discussed by aficionados on social media platforms and online marketplaces.

8. Economy pricing

Economy pricing means setting very low prices for your business offerings. In contrast to penetration pricing, which utilises ultra-reduced prices only as an opening gambit to attract customer attention, economy pricing is an ongoing, long-term strategy.

This approach is only profitable if you keep your CoGS even lower than your pricing. You might do this by using cheaper raw materials, and using cost-effective business solutions like SumUp One, which provides access to payment, invoicing management tools and more at highly discounted rates.

Economy pricing will position your business as the budget brand in your sector, and may be a great match for business ideas with low investment requirements.

9. Psychological pricing

Psychological pricing seeks to influence and play upon customers’ sometimes irrational perceptions of prices. There are a number of popular methods you can employ.

Charm pricing

The standout example of psychological pricing is charm pricing. This is the time-honoured “trick” of pricing something one penny below a round number. For example, selling a shirt for £29.99 rather than £30.

The price difference is negligible, but seeing the number “2” will tend to make customers irrationally perceive the price as being closer to £20 than £30. (For the same reason, deluxe items are often deliberately sold at round number prices as these figures convey prestige.)

Artificial time constraints

This is the technique of announcing a big sale (see high-low pricing above) with a tight deadline. The idea is to generate a sense of urgency for customers, who’ll fear they’ll miss out if they don’t move fast. Of course, many businesses will simply run the same sorts of sales time and time again.

Wording of deals

Studies show customers tend to prefer the idea of getting something extra rather than getting a discount, even if both deals result in the same outcome. So, if you’re selling items online, your customers may respond better to a “buy one get one free” deal compared to a “50% off if you buy two” deal.

Price appearance

The way the price looks on the screen or price tag can influence customers. For example, if you’re listing items or services at round-numbered prices such as £15.00 or £60.00, you may be better off ditching the zeroes and listing them as £15 and £60 as the “shorter” numbers can come across as cheaper.

Research has also shown that the very sight of the currency symbol can negatively influence customers. So, if you open a small arts and crafts shop, you might want to consider leaving the “£” symbol off the price tags.

Specific pricing models

So far, we’ve looked at general pricing strategies in business which can help shape the overall direction and perception of a brand. But there are also some more targeted pricing models you might choose to apply to specific product lines and services within your portfolio.

Bundling

Bundling can be an effective component of your marketing strategy for small business success. It means offering multiple related products or services for one price. For example, if you’re running a homeware online store, you might catch the attention of foodies by bundling cast-iron frying pans and pots together for one price.

Or, if you’re operating a café, you can encourage customers to tap their cards on your card reader by offering a “breakfast bundle” of coffee with a choice of baked goods.

Providing attractive deals for customers like this can add value to your brand while also cross-selling products and services and increasing your revenue.

Freemium pricing

Freemium pricing involves offering a free version of a particular product or service, with the aim being that customers will like it so much that they’re willing to pay for an advanced, premium version which has more features.

This pricing model is frequently offered by tech businesses. Think about how dating apps will often allow you to sign up and send a limited number of messages for free, but will then charge a fee to allow you to send more messages or access more detailed search functionality.

When considering online business opportunities such as creating a no-code app using a platform like Bubble or Appy Pie, you might want to offer a more basic free version to capture audience interest.

Remember that even if users don’t escalate to using the paid version, they’ll still have to provide you with information such as their phone number, email address and user preferences. You’ll then be able to reach out to them with emails, newsletters and discount offers, hopefully nurturing them into becoming paying customers in time.

Hourly and project-based pricing

If you’re looking into how to start an online business providing services like corporate copywriting, website development or design, you’ll need to weigh up whether to price your services per-hour or per-project.

Hourly pricing

Charging by the hour is a popular pricing model for freelancers, consultants and small businesses, and brings some advantages. For one thing, it can psychologically strike clients as a more cost-effective way of hiring you, since a per-hour figure will look smaller and more affordable than a per-project figure. 

It also means that you’ll continue to get paid if a project takes longer than initially expected. This makes hourly pricing a good fit for projects where the brief is open-ended or subject to sudden changes. Just be aware that some clients may insist on a “do not exceed” time limit they’ll expect you to adhere to.

One potential snag is that it penalises efficiency, since the quicker a job is completed, the less you’ll get paid. So, if you’re a highly seasoned graphic designer whose expertise allows you to finish a job more quickly than a rival who’s less experienced, you’ll end up being paid less than they would have. 

On the other hand, the more seasoned you are, the higher you can price your services. And by being efficient with your time, you can work with more clients.

Project-based pricing

The main alternative to hourly pricing is to charge a single, flat fee for the entire project. For example, you might charge a single fee for writing all the copy for a website, or for completing a social media marketing campaign.

This model will award you for your efficiency, since you’ll be paid the agreed amount whenever you happen to complete the project. Clients can also feel more secure about hiring you, since they’ll know ahead of time what your eventual invoice will show.

Subscriptions

A subscription pricing model can be highly appealing for a new business, since your customers will be committing to paying you on an ongoing basis – typically monthly or annually.

This kind of pricing is synonymous with online business ideas like supplying SaaS (subscription-as-a-service) software tools and mobile apps. But it can also be utilised in ecommerce – for example, if you set up a subscription box food business providing monthly packages of gourmet treats for customers.

It’s important not to get complacent when your customers sign up to a subscription plan, because there’s always the risk they’ll cancel if they feel the novelty of your service has worn off.

You can prevent this kind of “customer churn” through active engagement via email and social media, asking for feedback, and offering new products and services to keep things fresh.

How to create a pricing strategy

Now that we’ve looked at the various pricing strategies in business, let’s lay out some of the questions you should ask when determining which ones are the right fit for you.

What is your pricing metric?

Your pricing metric is fundamental to any pricing strategy. This term pricing metric refers to what you’re selling, and the units by which you sell.

Depending on your business type, this may be self-explanatory. For example, if you’ve opened a sandwich shop, you’ll simply be charging per sandwich. Or, if you’ve set up a coffee roastery delivering beans by post, you’ll likely charge by weight.

However, when pondering how to price a service such as coding and design work, more thought will need to go into what kind of metric works best for you and your clients, and whether you’re more inclined to price your work by the hour or by project.

Having a firm idea of exactly what you’re selling will be the foundation upon which you can base your eventual pricing strategy.

What is your buyer persona?

The question of how to identify your target market needs to be answered when working out your pricing strategy. A good approach is to create a buyer persona – this is a profile of your imagined, ideal customer, laying out their traits and characteristics.

If you’re planning to create your own podcast chronicling crimes and other mysteries, you might draw up a buyer persona named “True Crime Katy”. If you’re creating an online fashion flipping store aimed at men, you might create a “Stylish Sam” persona.

A typical persona will include details like average age, income level, interests and hobbies, how they consume media, where they’re geographically located, and pain points they might experience in relation to your chosen business sector.

Information for this persona can be gleaned from a number of sources, including social media, online forums and blogs, and any industry media such as magazines and websites specific to your sector.

Crystallising your ideal customer like this will make it easier to formulate a pricing strategy that will appeal to their lifestyle and spending habits.

What is your price range?

Your price range can be defined as the minimum and maximum price you can theoretically charge when running your business.

The minimum price will be determined by your operating costs. It must be higher than the combined total of the cost of production, marketing and utilities in order for you to turn a profit.

The maximum price will be determined by your target customers. It is the highest figure you will be able to charge before you deter potential buyers.

Being aware of these parameters can influence your choice of pricing strategy. For example, if your maximum price is high – perhaps because you’re supplying artisanal products or a highly specialised online service – then value-based pricing may be right for you.

Example strategies for different industries

As we’ve been discussing, pricing strategies are very subjective, and every business will have its own ideal requirements. But to illustrate the utility of different strategies, here are some examples of business categories and the kinds of strategies that pair well with them.

Ecommerce (existing products)

Ecommerce – specifically, selling items you haven’t created yourself – encompasses a wide range of possibilities. These include passive income ideas like running a drop shipping site where products are delivered to your customers by third-parties, and more hands-on concepts like a subscription box service.

Ecommerce is a highly competitive field, with industry giants like Amazon and countless smaller online stores often selling very similar or identical items. So it stands to reason that competitive pricing strategies are common in this category.

Value-based pricing can be a fine approach if your ecommerce store specialises in high-end items, while a high-low pricing strategy can serve you well at certain points of the year, such as just after Christmas.

Ecommerce (your own products)

Creating and selling your own products – such as artworks, greetings cards and jewellery – is among the most popular business ideas from home. Since these items are by definition unique, you have scope to utilise value-based pricing to capitalise on the fact customers will not be able to get the same items elsewhere.

If you believe your product to be genuinely innovative or in tune with a current trend, you may also want to bring in a skimming pricing strategy, charging a higher price when you hit the market to make the most of customer interest.

Alternatively, if you diligently source the lowest-cost materials, you may be able to permanently undercut other artisans by following an economy pricing strategy.

Food and drink

The food and drink sector is so disparate that it can accommodate every kind of pricing strategy. For example, if you’re setting up your own food stall in an open-air market, with lots of competitor stalls nearby, you might employ penetration pricing to grab people’s attention.

Penetration pricing can also be an effective way to make your takeaway stand out amid rivals on sites like Deliveroo and Just Eat. If you’re aiming for a more discerning audience – say, using gourmet ingredients or more niche recipes – then value-based pricing can come into play.

Teaching

Online teaching ranks among our recommended ideas for second income generation, and can take many forms.

If you’re tutoring kids or adults via videoconferencing, and listing yourself on an online marketplace, competitive pricing will likely be an important strategy. You might price yourself lower than other tutors to edge them out, or price yourself higher because you have a PhD in your field.

Competitive pricing may not be as significant when selling complete online courses made up of pre-recorded videos and other materials. After all, your course will be a highly bespoke product, structured according to your own unique curriculum, featuring your personal insights, and probably markedly different from other experts in the same field.

This is where value-based pricing comes to the fore, although penetration and high-low strategies can help you make a splash when you first launch your courses.

Creative services

Whether you’re a copywriter, coder, musician, photographer or any other kind of creative, dynamic pricing is likely to be high up on your list of strategies. That’s because you’ll probably have to tailor your pricing to accommodate different kinds of clients and projects.

If you’re a newcomer to your field, you can also bring in an economy pricing strategy to position yourself as the “bargain” alternative to expensive veterans. And if you are one of those veterans, you can emphasise this with a value-based component to your strategy.

What are the other Ps to consider?

The pricing strategy is traditionally considered part of the “7Ps marketing mix”. These are the seven major components that will influence how potential customers perceive your business. 

Pricing is one of the most important, since it can be the ultimate dealbreaker as far as many customers are considered. But what are the other Ps which you may want to bear in mind when you plan how to advertise your business? Let’s consider them in turn.

Product

The most significant “P” is your product. After all, this is the very heart of your business, the reason it exists. Product-forward marketing means emphasising what makes your product (which by this definition can also mean service) worth your customers’ attention and money.

A product-forward approach should highlight your unique selling points, how your offering differs and improves upon your rivals’, and how it can ease pain points experienced by potential customers.

Promotion

It stands to reason that methods of promotion will be integral to your marketing mix. Thanks to social media, you can reach out to potential customers without spending any money whatsoever. However, achieving this kind of “organic” engagement can take time, and will require frequent, diligent posting on social media platforms. 

The alternative is to pay to have your business website appear higher up search engine rankings, or to pay for social media ads. You can also promote your business through email newsletters, special webinars, and writing thought leadership blog posts on your industry.

Place

This “P” refers to where your business exists, and may take multiple forms. Say you’re looking at how to make money from home – the “place” in this case won’t just be your living room, but also your business website, and any marketplace sites like Etsy and Fiverr where you advertise your products and services.

If you have a physical premises like a shop or food outlet, you’ll need to consider how its appearance and layout will influence customers and encourage them to spend time there.

For example, if you’re running a restaurant you might want to install a self-service SumUp Kiosk, which reduces queues and leads to orders that are on average 25-35% greater than verbal orders.

Physical evidence

It may sound a little like something from a crime scene, but “physical evidence” simply refers to the tangible elements of your business which customers will see, hold and keep. This can include everything from the design of your website to the packaging items are dispatched in.

It can also encompass business cards, digital receipts and invoices. Well-designed, professional-looking physical evidence can make all the difference when you’re attracting customers and clients.

People

A business is only as effective as the people who run it. If you’re keeping things small scale, perhaps weighing up how to make money on the side, then chances are the “people” will simply be you. But however many staff are involved in your business, the priorities remain the same.

Namely, providing excellent customer service at all times – whether that’s by phone, email, social media, or in person. Remember, thanks to platforms like Trustpilot, Google Reviews, and X (formerly known as Twitter), word quickly spreads if a business doesn’t respond to complaints or shows poor customer service.

Process

“Process” is a catch-all term for how your business operates. This will encompass everything from when and how you receive necessary materials from suppliers, through to the kinds of software and hardware you use to manage orders and payments.

Depending on the nature of your business, the process may include setting up an online business account and providing online gift cards for customers to purchase.

If your business operates from a shop or food outlet, a POS system like SumUp’s Point of Sale Pro – which tracks orders and tasks, and provides real-time data on sales and stock – can make life much easier.