5 pricing strategies to consider (with pros and cons) Skimming, anchoring, penetration; all ways to price products and services, but what do they mean? Here's how you can create a successful pricing strategy. Written by Stephanie Lennox Updated on 11 January 2023 Our experts We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality. Written and reviewed by: Stephanie Lennox Writer Pricing is undoubtedly one of the most important aspects of any business – a make-or-break aspect, in fact.Too high, without anything to really justify it, and you risk losing customers and potentially a bad reputation if your price does not reflect your products’ quality. Too low, and you risk your business looking cheap or scammy. So where is the balance? Just who decides on what is considered high and low? And how do you set your prices so that you can keep the business running and growing, while also keeping your stakeholders and customers happy?In this article, we’ll explain all to help you understand everything you need to know about pricing strategies, and how to choose yours. What is a Pricing Strategy? Pricing Strategy: Competitive or Economy Pricing Pricing Strategy: Freemium Pricing Pricing Strategy: Penetration Pricing Pricing Stategy: Price Skimming Pricing Strategy: Premium Pricing How disruptors often change their industries with their pricing strategies How Do I Choose The Right Pricing Strategy? The detriment of low or “competitive” pricing Pricing Strategy: Do's and Dont's Pricing Strategy FAQs What is a pricing strategy? A pricing strategy is the process behind choosing the best prices for your products, based on your company’s primary objectives, vision and goals. Believe it or not, the best businesses don’t just throw a price on their products randomly without any further thought – you're planning for profit, not loss after all. With a plan or a vision for what you hope to achieve through your pricing (beyond sales of course), you can take your business to new heights in terms of industry recognition, brand perception and customer preference among other things.When we talk about pricing strategy, for the purpose of this article, we will be talking about innovative strategies you can use to make your business stand out in the industry. This article is for those who are ready to take the risk of being different, manage their project to the highest levels, and consider strategies that their competitors haven’t – all in order to rise to the top of the market.These are the top pricing strategies you can consider for your new business, from low-to-higher end of the scale.Competitive or Economy pricingFreemium pricingPenetration pricingPrice skimmingPremium pricingIn The Psychology of Price, Leigh Cauldwell (behavioural economist and pricing expert) shares two interesting tips that you should keep in mind for any pricing strategy you pursue:If you want to change your prices, you must reframe the product or service, andPricing communication shapes the customer’s perception of value.Another interesting strategy and something to keep in mind, which can be added to any of the other more in-depth strategies here, is psychological pricing: According to a study by Strulov-Shlain, Avner 2023:Customers tend to consider prices ending in 9, 99 or 95 as cheaper. Pricing strategy: Competitive or Economy PricingEconomy pricing is widely used by discount retailers and low-cost food suppliers and is targeted at price-conscious consumers looking for a ‘no frills’ product or service.Businesses that employ this strategy can benefit by minimising the costs of their marketing, packaging and production in order to keep prices down.To successfully use the economy pricing strategy and generate sufficient profit from low prices, however, you will need to have large sales volumes.Example of economy pricing: PoundlandWith all of its items priced at £1 when the chain first launched, variety store Poundland is a great example of a business that has capitalised on economy pricing to become a staple of the UK economy.Launched in 1990, originally promoted its sales strategy through the slogan: “Yes, Everything's £1!” and have since scaled to achieve revenues in excess of £1bn. Pros This strategy has the potential for many customers and everyday sales since the pricing is accessible and affordable to ‘everyone’. Cons As mentioned above, low prices can attract high competition giving this strategy the potential to be quite short-lived. On the back of its success of using economy pricing, several other players entered the discount store landscape after Poundland to compete, such as 99p stores LTD, and with just a £0.01 undercut these stores became Poundland’s biggest competitor - prior to Poundland’s company-saving acquisition of them in 2015. Pricing strategy: Freemium pricingFreemium is the process of offering a basic product or service for free, while charging a premium for advanced upgrades or special features.To capitalise the most on this pricing strategy, the upgrade must be something that the product can run functionally without, but that people deeply want and need to add-on. Desirability is key here.Regular web users can be attracted by free services which are paid for by a significant minority of users enthusiastic enough to upgrade to premium ‘added extras'. Skype, LinkedIn, Flickr and dating site Match.com all employ the model. It's also become the favoured monetisation method for fledgling web start-ups.Example of freemium pricing: SpotifySpotify is one of the most well-known companies in the world right now that uses a freemium revenue model: they offer a basic, limited, ad-supported service for free and an unlimited premium service for a subscription fee.With the free version, you can listen to music but you will periodically hear an ad or two – and this is how the company is able to still profit from its free audience. Spotify is one of the largest music providers with millions of active users and subscribers all over the world, so it’s safe to say this strategy has worked well for them. With the premium service, you hear no ads (or other interruptions), can stream your music to listen offline, and more.If you’re considering this method, it might be smart to think about an alternative way you can monetise your free product or service. That way, you have an additional guarantee of cash-flow and income while your premium upgrade or service is being considered by your audience. Pros Regardless of whether or not certain people purchase the upgrades, there is typically a high customer satisfaction rate and high word of mouth with this type of strategy. This is probably due to the ‘Law of Reciprocity’: the idea that people feel indebted and have the desire to repay the kindness in some way when given something for free. Cons There will always be people who never intend to upgrade to your more premium versions (you can however put products that you have on this kind of pricing strategy on a time-limited basis). It can also have a large upfront time-based cost, as this strategy works best when you have an existing audience or are prepared to build a cult following. Pricing strategy: Penetration pricingPenetration pricing is when a business offers low introductory prices on products and services (not to be confused with competitive or economy pricing, as penetration pricing is considered more of a strategic move / short-term strategy).It is typically used by new companies or to support a new product launch to draw consumers away from the competition.Example of penetration pricing: NetflixWhile now a market leader, Netflix is a great example of a business that successfully used penetration pricing to its advantage when it first launched back in 1997.Starting as a mail-order, online e-commerce business for movie rentals, Netflix used low price points initially to attract customers away from Blockbuster; its largest competitor at the time.Its original package offered tiered price points and enabled customers to rent three DVDs simultaneously for $14.99, amounting to just over $1 per DVD per month for customers. This low pricing, combined with its streaming and online offering, enabled Netflix to pull in subscribers and gain its competitive advantage. Pros While the use of penetration pricing generally results in an initial loss of profits for a business, in the long term, the exposure gained can drive profits up. If you successfully penetrate the market using this strategy, it could be justified to raise prices to reflect your new position within the market (as most who are successful with this strategy do). Cons Some businesses are not able to sustain themselves financially during the ‘loss of profits’ stage, making this a high-risk, high-reward kind of strategy (and vice versa). Businesses considering this pricing strategy should be able to afford to sacrifice profit margin for a period of time, which means that most would need to keep their accounting software open in a tab on their laptops at all times to ensure the strategy is still sustainable for them. Most companies that use this pricing strategy will have secured some funding to give them some leeway. Price SkimmingPrice skimming is a pricing strategy whereby businesses set high prices for their product or service during the introductory phase.Intended to help businesses capitalise on sales of new products and services, price skimming allows businesses to maximise profits from early adopters who have an interest in new and innovative products.Example of price skimming pricing: AppleTech businesses are known to regularly adopt price skimming as they can use their patented, original technologies as their competitive advantage.One industry that’s synonymous with price skimming is the smartphone market, and Apple is the industry leader. When Apple launched its iPhone to the market it set a high price point, despite being an entirely new product. This price point maximised on consumer willingness to pay more for cutting-edge technology and helped generate an aura around the iPhone.Apple has since evolved its approach to price skimming, and while prices have dropped slightly for its smartphones, it has largely maintained its price by increasing the value of its future iterations. In the Apple shop, the iPhone 14 Plus currently retails at £1,099, while the iPhone 14 retails at £849*.*Prices correct as of January 2023 Pros Creates prestige and intrigue to any new product, particularly if you are in an ever-evolving industry such as tech - and that in itself can attract a lot of potential press and features. Cons May cost up front to run a product launch campaign to attract early adopters who would be interested, especially if the product is something unusual or never-seen-before. Early adopters may tire of this strategy if you relaunch too frequently, or if the upgrades you make are not awe-worthy enough. Premium pricingPremium pricing is when a business intentionally sets its prices higher than competitors.For new businesses with a luxury product or service, premium pricing often works best. The more unique your product is, the more you can aim for the premium price segment.Example of premium pricing: Louis VuittonLouis Vuitton Malletier, commonly known as Louis Vuitton, is a French luxury fashion house and company founded in 1854. Spanning a long history of tailoring to high-class clientele including royalty, what started as a small-town cobbler’s story ended up as one of the biggest fashion ‘houses’ in the world. All due to its dedication to:Uniqueness (which meant that no one could ever directly compete with them, lest be seen as a copycat and inferior product)Legacy (meaning they have never skimped on quality, integrity and standards of excellence), andQuality (this also speaks to their reputation, but they have made a promise to consumers to try and ensure that every product is of the same, exceptionally high quality.) Pros Once a luxury brand is established, they probably have the longest and most profound success rate of any other type of company. From fashion to perfume, luxury brands build legacies that have the potential to span through generations - and best of all, maintain their high price points. Cons Luxury brands can sometimes take a long time to gain the brand reputation they need in order to command their high prices and garner the levels of word of mouth, celebrity endorsements, content and presence etc. Your product also has to be worthy of the luxury brand moniker, which means there are no opportunities for cost-cutting or shortcutting. How disruptors often change their industries with their pricing strategiesCome with me on a relevant but non-business-related tangent for a moment: The Four-Minute MileIn the sporting world, in 1954, it was considered impossible to run a mile in under four minutes. No one could do something so superhuman, could they? That was – until it was accomplished by Roger Bannister, at age 25, at 3:59.40.People don’t know what is achievable until it’s done. And people often can’t see a vision until it’s actually executed in front of their very eyes. Henry Ford, founder of the Ford Motor Company in 1903, is believed to have said: 'If I had asked people what they wanted, they would have said faster horses.' It is a rare feat, but as we’ve established – achievable. And this is something that the perfect pricing strategy may be able to do for your company.StarbucksStarbucks is the perfect example of a world-changing disruption done right. Before the nineties / early 00s, where was the concept of coffee being considered a luxury?Where was coffee revered as a star seller, so much so that it had to have its own stores exclusively dedicated to it, and its own brand lexicon that garnered a cult following for its brand?This is an example of a great premium pricing strategy: one where they elevated their product and the narrative around it to create a whole new experience for customers and the higher price could now be justified. The strategy completely disrupted the idea of what an acceptable price of coffee could be forever – and not to disdain, but to applause. How do I choose the right pricing strategy?The best thing to do in order to choose the right pricing strategy is to try and align it with your business vision, mission and goals. For example:What is your product, and do you have the resources for the pricing strategy you want to attempt? (For example, elevating a ‘regular’ product to a luxury one may require more budget, branding knowledge and customer service staff etc in order to truly succeed)How does each pricing strategy fit with your marketing strategy? (For example, would starting with competitive pricing be the best idea if you’re hoping to become a luxury brand in 2-5 years?)Are you aiming for sales from the general population or a luxury clientele?What do you want your reputation as a company to be?There may also be instances where you combine different pricing strategies – as mentioned above, using psychological pricing in addition to any of the other strategies in this guide has the potential to increase your success rate even further. The detriment of low or “competitive” pricingPricing your products similar to everyone else in the market is the “strategy” of most new businesses. Trying to be like everyone else is a common but dangerous mistake to make, for a couple of reasons. When you price your products and services along your typical ‘industry standard’:You become like everyone else, i.e. indistinguishable.Even if you do have a USP or stand-out feature, it will not be recognised if the price is the same as other companies without.There will typically always be someone, somewhere, prepared to undercut you and go even lower in price.Most people are of the belief that “you get what you pay for” so low prices can sometimes equal low quality and value in customers' minds.It tends to attract lower-quality customers too, increasing the likelihood of returns, refunds and complaints. Not to mention a lack of customer loyalty and a complete cacophony of outrage if you ever change your mind and dare to raise any prices again.Despite the caution here, there are some benefits to lower pricing strategies as long as they are executed correctly – particularly in the ways we’ll discuss in the ‘Competitive Or Economy, Penetration and Price Skimming’ sections of our pricing strategies below.So with that in mind, let’s begin. In summary, DO:Consider this as one of the most important decisions you will make for your businessWrite your strategy down in your business plan as soon as you first start your business so you can remember it, know what your goals are and implement it dailyTry not to do what everyone else is doing (unless you truly believe that to be the best strategy for you)And DO NOT:Do what everyone else is doing without thinking it through for your business first. Pricing Strategy FAQs Frequently Asked Questions Which pricing strategy is best? There is no one-size-fits-all strategy for every business: the best pricing strategy for you would depend entirely on what your business aims to do in terms of its mission, vision and values. Why is a pricing strategy important? Pricing is undoubtedly one of the most important aspects of any business - a make-or-break aspect, in fact. Too high, without anything to justify, and you risk losing customers - too low, and you risk your business looking cheap or scammy, so you want to ensure you get it right for the best chance of success. What should a pricing strategy involve? Your pricing strategy should involve the method you intend to use (for example penetration, price skimming or premium) and the plan for what that looks like in terms of pricing your products. Share this post facebook twitter linkedin Written by: Stephanie Lennox Writer Stephanie Lennox is the resident funding & finance expert at Startups: A successful startup founder in her own right, 2x bestselling author and business strategist, she covers everything from business grants and loans to venture capital and angel investing. With over 11 years of hands-on experience in the startup industry, Stephanie is passionate about how business owners can not only survive but thrive in the face of turbulent financial times and economic crises. With a background in media, publishing, finance and sales psychology, and an education at Oxford University, Stephanie has been featured on all things 'entrepreneur' in such prominent media outlets as The Bookseller, The Guardian, TimeOut, The Southbank Centre and ITV News, as well as several other national publications.