What is pricing strategy? How to effectively price products

Pricing strategy takes into account many business factors, such as revenue goals, target audience, brand positioning, marketing goals and product attributes. It is also influenced by external factors such as consumer demand, competitor prices, economic trends, and the general market.

1. What is pricing strategy?

Pricing Strategy is a strategy that businesses use to determine the price of a certain product. Helps organizations achieve marketing goals such as increasing market share, increasing profits, increasing revenue, and even maximizing brand value.

Pricing strategy is influenced by many factors within the business, be it sales goals, marketing goals, brand positioning, or external factors such as consumer demand, market trends, and target audiences. competitor.

For pricing strategy, businesses need to combine calculations, adjustments, and determine risk-acceptable prices to offer to consumers. A good pricing strategy will maximize profits as well as revenue of the business.

2. The role of pricing strategy

Increase conversion rate

Pricing strategy has a huge impact on a business’s revenue and profits. If the price is good and suitable for the target audience, that product/service will attract many customers, increasing the conversion rate into potential customers.

Price also has a significant impact on customers’ buying behavior, so a suitable price will help businesses attract and retain customers to stay longer, thereby helping to optimize conversion rates. .

Enhance competitive advantage

Setting product/service prices lower than competitors can attract customers and help businesses dominate the market. However, it should be noted that profit loss can occur if prices are too low or not enough to cover costs.

For some high-value products/services, setting a high price can create a unique and luxurious brand image, attracting a group of customers who desire class and are willing to pay higher prices. . This can create a competitive advantage based on the exceptional quality and value of the product/service. Or provide price packages and flexible pricing policies that can attract different customers, while maintaining a competitive advantage in many market segments.

Reflects brand values

A higher price strategy than competitors can create a brand image of luxury, quality, and uniqueness. Customers often associate high prices with quality and reliability. Setting a high price can help reflect a brand’s value, creating a competitive advantage based on that unique character and reputation.

Or choose an average price segment that reflects the consideration between value and popularity of the product/service. This can create an honest brand image and provide good value to customers while maintaining a competitive advantage. Pricing products/services lower than competitors reflects a focus on providing value at a lower price. However, setting prices too low can affect the brand value and profits of the business.

Increase brand value in the hearts of customers 

The right pricing strategy requires creating a reasonable relationship between price and value of the product/service. If customers feel the value they receive exceeds the price they pay, this can create satisfaction and increase brand value. However, if the price is higher than the value received, this can cause disappointment and negatively affect brand value.

3. Popular pricing strategies in Marketing

Pricing strategies are particularly diverse, each type has a different purpose and brings different effects. 10 popular pricing strategies in  Marketing  include:

Market penetration pricing strategy

A market penetration pricing strategy is a  business strategy  that a business uses to enter and compete in a new market.  The goal of this strategy is to attract customers and build a position in new markets by pricing the product or service at a lower level than existing competitors. Some ways in this pricing strategy are as follows:

• Competitive pricing : Setting product/service prices at a lower level than competitors’ prices. The goal is to attract customers by creating attractive prices. This can generate initial interest and attract customers from price-sensitive audiences
• Price below cost:  Price products/services below cost to create strong competition. In a short time, businesses can accept large losses or low profits to penetrate the market and build a significant customer base. However, this requires a long-term strategy to increase value and generate profits after having built a solid customer base.
• Product package pricing:  Offer high-value product/service packages where customers only pay a fixed price. This can create appeal and engage customers by providing a comprehensive value proposition and savings compared to purchasing individual products or services.

The benefits of a market penetration pricing strategy are to attract new customers, create a position in a competitive market, increase sales and build a loyal customer base. However, other factors such as product quality, competitive benefits and long-term profitability need to be carefully considered when applying a market penetration pricing strategy.

Skimming price strategy

Skimming pricing strategy is the strategy of pricing a product high when first launched, then gradually lowering the price as demand declines. This strategy is applied when a business has a new, unique product that has high demand from consumers. By setting high prices at an early stage, businesses can reap large profits from consumers willing to pay for the new product. Then, when demand drops, businesses can lower prices to attract more customers.

The skimming pricing strategy can bring big profits to businesses, but it also has some risks. The biggest risk is that if demand is not as high as expected, the business may not earn the desired profit. Additionally, if competitors launch similar products at lower prices, the business may lose market share.

Pricing strategy by product line

Product line pricing strategy is the strategy of pricing products within a product line at different prices to attract many customer segments. The purpose of this strategy is to maximize the revenue and profits of the business.

There are many different ways to apply a product line pricing strategy. A common practice is to price products in a product line according to their feature level and functionality. For example, the Iphone 14 series has many different capacity versions from 64BB, 128GB, 256GB to 512GB and will have a different price.

Psychological pricing strategy

Psychological pricing strategy is a product/service pricing strategy based on consumer psychology. The purpose of this strategy is to influence customer purchasing behavior and increase business revenue. Some ways to apply psychological pricing strategies include:

• Price effect : This is the phenomenon where customers judge the value of a product based on its relative price compared to other products. Prices can be set at a higher level to create a feeling of quality and luxury, or can be set at a lower level to create a feeling of economy and good value.
• Price ends with the digit 9:  This is a popular method in psychological pricing strategy, in which the price ends with the digit 9 (999,000 VND instead of 1 million VND). This creates the illusion of cheaper and attractive prices for customers, even though the actual difference in price is extremely small.
• Comparative Pricing : This strategy involves pricing a product close to or slightly lower than similar products from competitors. This can create the feeling that customers are getting a better value than other options.

Combo pricing strategy

Combo pricing strategy is a package pricing strategy, including many products/services that are similar or can be used together with an overall price lower than the price of each product/service. individual service.

The goal of the combo pricing strategy is to create attractive value for customers, motivating them to buy multiple products at the same time. This can also benefit customers by saving time and effort in searching and purchasing independent items, while providing a more comprehensive value proposition.

For example, in the restaurant industry, a restaurant may offer a lunch combo of one main dish, one side dish, and one drink for a fixed price. Customers can buy this combo at a more reasonable price than buying each item individually.

Competitive pricing strategy

Competitive pricing strategy is the strategy of pricing a business’s products/services based on the prices of similar products/services of competitors. Not based on user needs and normal price components.

A common way is to price a business’s products/services lower than or equal to the prices of competitors. Or price products/services higher or equal to the prices of competitors in different markets.

A typical example is the two giants Pepsi and Coca, these two brands also use different competitive pricing strategies for their different products. For example, Pepsi may price its products lower than Coca-Cola for some products, but may also price its products higher than Coca-Cola for some other products. This approach could help both companies attract more customers and increase sales for their various products.

Promotional pricing strategy

Promotional pricing strategy is a tactic that uses promotions such as vouchers, coupons, discounts, gifts, etc. to stimulate customers to buy products, thereby helping businesses sell more products.

Promotional pricing strategies can help businesses attract new customers, increase sales, motivate purchases from existing customers, and build loyalty. However, it should be noted that this strategy can affect the business’s profits and brand image, so it is necessary to carefully consider cost factors and the importance of retaining product value. product in the eyes of customers.

Pricing strategy by segment

Segment pricing strategy is a strategy for pricing different products/services for each different customer segment. This strategy is applied when a business has many customer segments with different needs and paying abilities. There are many different ways to apply segment pricing strategies as follows:

• High price for the high-end segment : Set a high price to create an impression of quality and uniqueness for high-end customers. The goal is to create something special and create higher value in the minds of customers.
• Average price for the average segment : For the average or popular customer segment, businesses set an average price to compete with competitors and meet customer needs within a reasonable price range.
• Low prices for the low-cost segment:  For the low-cost customer segment or low-income customer group, businesses set lower prices to attract and retain customers. The goal is to create the best value in the low-cost segment and compete effectively.
• Special prices for special segments:  For special customer segments or customer groups with specific needs, businesses can set special prices or create special value packages to serve their needs. unique customer needs in this segment.

Pricing strategy depends on geographical area

Geographic pricing strategy is a strategy for pricing products/services differently in different geographical areas. This strategy is applied when a business has many geographical areas with different production costs, competition levels and customer needs.

There are different ways to apply pricing strategies depending on the geographical area. A common way is to price products/services higher in areas with high production costs. Or lower prices in areas with higher competition.

Pricing strategies depending on geographical area allow businesses to take advantage of differences, meet the characteristics of each market area, create relevance and increase competitiveness. However, to successfully apply this strategy, businesses need to master information about geographical areas, needs and competitive situations in each area.

Dynamic pricing strategy

Dynamic pricing strategy is a business strategy in which a business adjusts the price of its products/services based on changing factors in the market and/or customer information. Instead of applying a fixed price, businesses use data and technology to adjust prices in real time, depending on demand, supply and demand, competition, etc.

Factors and information that can be used for dynamic price adjustments include:

• Supply and demand : Prices may change based on fluctuations in supply and demand in the market. When demand increases or supply decreases, businesses can increase prices to take advantage or reduce prices to attract more customers.
• Time : Prices may vary by time of day, week, month or season. For example, prices may be higher during peak hours or on weekends or discounted during holiday periods.
• Customer data : Customer data such as previous purchasing behavior, geographic location, customer type, purchase history, etc. can be used to customize prices for each specific customer. For example, loyal customers may receive better pricing than new customers.
• Competition : Prices may adjust based on the pricing activity of competitors. When there are price changes from competitors, businesses can adjust their prices to remain competitive or take advantage of opportunities.
• Market data : Using technology and market data, businesses can track and analyze information about prices, supply and demand and other factors to adjust prices in real time.

The goal of a dynamic pricing strategy is to optimize revenue and profits by taking advantage of changing factors in the market. However, careful consideration and management is needed to ensure that price adjustments do not cause negative reactions from customers or damage the image and trust in the business.

4. Factors affecting pricing

There are many factors that affect the pricing of a business’s products/services. Some important factors include:

• Production costs: Production costs are an important factor in pricing a product or service. If production costs increase, product prices will have to increase to ensure profits
• Competitive Pricing: If a business’s product prices are higher than similar products from competitors, this could result in losing customers.
• Product value: If the product is highly appreciated by customers for its quality, features and efficiency, the business can set a higher price
• Customers’ ability to pay often depends on their income, finances and social class
• Marketing goals, such as increasing market share, optimizing profits, creating value for customers.

5. How to determine the pricing strategy for your business

Determine marketing goals

When determining the value per product unit, this suggests businesses ways to build appropriate marketing campaigns. Marketing goals affect the strategic vision of the business. It helps determine overall strategy and guides pricing decisions. Marketing goals can be to increase conversion rates, increase brand awareness or increase interaction levels, based on which to have campaigns and channels corresponding to the cost and value that the business has determined.

Evaluate current customer files

By evaluating customer files, businesses can collect important information about current customers, better understand their needs, purchasing preferences and the value they bring. This provides the basis for determining appropriate pricing and creating maximum value for existing customers. In addition, evaluating customer files also helps minimize customer discomfort when businesses make price adjustments.

Consider competitors’ prices

By comparing prices with competitors, businesses can determine whether they are providing products/services at prices higher or lower than the industry average. At the same time, clearly define the business’s competitive strategy and adjust its pricing strategy accordingly.

Looking at competitors’ prices also helps evaluate the value a business offers compared to competitors. It can be clearly determined whether customers are willing to pay a higher price to receive better value. This helps determine the appropriate price to create attractiveness for customers, while ensuring profits for the business.

Identify marketing trends of the industry

Each industry and field will favor different marketing trends, because it affects the nature of the product and the way customers approach that product. Marketing trends provide important information about purchasing behavior, purchasing decisions and customer attention in each specific category.

This involves looking at the marketing and distribution channels used in the category. Businesses can learn about online shopping trends, social networks, and other traditional communication channels that customers use. This helps adjust the pricing strategy to match the Marketing channels currently developing in the industry.

Collect feedback from customers

Researching customer feedback on prices, businesses can determine customer psychology. When launching a new product/service, businesses can answer questions such as:

• What is the appropriate price that customers are willing to pay for this product?
• If the product is on sale, how likely are customers to buy it?
• Do customers hesitate about the true value of a product if it has a low price?
• At what point do customers consider the price too expensive?

Evaluate the pros and cons of different pricing strategies

Evaluating the advantages of different pricing strategies helps businesses know the benefits that each strategy brings. For example, a high price strategy can build a premium image and exceptional value for the product/service.

Evaluating the disadvantages of pricing strategies helps recognize the limitations and risks of each strategy. For example, a low-price strategy can hurt profits and limit the ability to invest in product/service upgrades. A high price strategy can cause a business to lose part of its market share and price-sensitive customers.

Therefore, evaluating the pros and cons of different strategies is important to make smart decisions about pricing. It helps businesses better understand the benefits and limitations of each strategy, position themselves competitively, and ensure the success of the final pricing strategy.

6. Steps to building an effective pricing strategy

Step 1: Determine production costs

Determining production costs is one of the important steps in the process of building an effective pricing strategy. Production costs play an important role in determining selling prices to ensure profits and competition in the market. Some costs that businesses need to consider to build a pricing strategy:

• Cost of raw materials
• Labor costs
• Machinery and equipment costs
• Costs of operating a factory or manufacturing facility: energy costs, internal transportation costs, facility maintenance and repair costs, other costs related to maintaining and operating the facility production facility.
• Management costs: These are costs related to the general management of the business
• Costs for Marketing campaigns such as advertising,  PR , events,…

Step 2: Analyze the potential of the current market

Analyzing market potential is an important element in the process of building a pricing strategy. This allows businesses to forecast the number of products that can be sold. At the same time, better understand the market size, trends and growth rates. By capturing this information, businesses can determine the appropriate price to exploit market potential and optimize profits.

Step 3: Determine a reasonable price range and a good competitive price

Determining a reasonable price range helps you ensure that the price of the product/service is high enough to ensure profit, but not too high to be uncompetitive in the market. Determining a reasonable price range is based on factors such as production costs, product value, marketing goals, market value and customer price sensitivity.

Businesses can localize reasonable prices by answering questions such as:

• What is the lowest price that can be offered?
• What is the highest price in the current market that consumers can accept?
• What is the lowest price for a similar product on the current market?

Step 4: Based on the product structure to come up with a pricing strategy

The product structure provides businesses with the necessary information to price each product/service based on the value and convenience they bring to customers. Include factors such as quality, features, uniqueness, brand and potential value to build an accurate pricing strategy.

The product structure provides flexibility in responding to market needs and changes. Businesses can adjust the price of each product/service in the product structure to suit new customer or market requirements. A pricing strategy is considered complete if it meets the following 3 requirements:

• Ability to provide a detailed framework for calculating product prices for businesses.
• Provides a specific framework to calculate the price of a business’s products/services
• Give a clearer view of your business’s position in the market when compared to your competitors
• Detecting financial gaps helps minimize unnecessary costs, thereby optimizing product/service prices.

Step 5: Give the price

After determining the product/service price structure, businesses need to provide specific prices. In addition, binding issues related to the relationship between customers and agents, and the interests of sellers and buyers also need to be taken into account, thereby determining effective distribution channels based on the pricing strategy. fruit.

7. Distinguish between pricing strategy and pricing method

Pricing strategy is sometimes a headache for many businesses. They have to consider competitors, production costs, customer needs, industry needs, profit margins, etc. This book is endless. However, note that businesses only need to pay attention to certain factors, such as cost of sales and profit goals, to figure out what is most important to the business, which helps Determine the right type of pricing strategy to use.