The successful launch of new products/services is critical for any small business growth.
If you’re launching a value-driven product, you’d want to go low on price – but how low is too low for your margins and your brand? It’s usually the same with luxury products too – how high is too high for the market and your brand?
Luckily, there are a lot of experts who have been there and done that. There’s plenty of information out there on competitive pricing strategies that have been developed and refined over many, many years and plenty of learnings.
What we’re here to do today is get you a one-stop guide that tells you, at a glance, the 7 best pricing strategies we’ve seen work.
Let’s start with the basics.
Why Does Small Business Growth Need a Robust Pricing Strategy?
The price of your product or service doesn’t only define the value you’ll receive in exchange for your effort.
It defines the way your customers view your product and the value your consumers see in your product – that is the primary reason why your pricing can basically make or break your brand.
Several pricing strategies have evolved over the years, as experts and founders make their way across newer ways to create a framework that’s both logical for the company and psychologically impactful for the customer.
These strategies are what we will detail today.
Our advice: Learn from the experts. The strategies we’ll share here have been devised with plenty of trials and errors, and if you can pick one up and apply it to your brand as is, there’s nothing like it.
When it doesn’t fit cookie-cutter-like into your brand, feel free to simply pick up on the theory of one strategy and then make your own way forward from there.
1. Cost-Plus Pricing
This is the most basic pricing strategy and the most commonly used among small business owners who aren’t planning on putting too much thought into brand and value.
Cost-plus pricing for small businesses is exactly as it sounds: you calculate the cost of producing your product or offering and then add a margin to it for the amount of profit you want to make.
Is there a particular recommended amount of margin? Not really, though we imagine you don’t want to go completely off the books in terms of what your competitors offer.
That’s the uniqueness of this strategy though – you don’t need to take into account competitors who might follow the same. You can slap on a percentage margin out of thin air.
|It’s one of the easiest pricing strategies to implement. All you really need is a great mathematical and analytical approach to calculate costs accurately.||Does it work? Not always. If you haven’t calculated costs properly, you’ll find the cost of your product constantly extending or fluctuating.|
You’ll also find that you might not meet your target margins because this strategy doesn’t take into account consumer perception.
2. Competitor-Based Pricing
What do you do when the market you’re entering is quite crowded already?
We’re sure you’ve thought of some great brand differentiators and unique value propositions. However, the competitive pricing strategy is still going to be a tough nut to crack.
In a crowded market, your pricing ends up being determined more by the competitors’ pricing rather than the margin you would like to make.
The only way around this is if your product somehow puts you in a league above your competitors. If your customers can see that your product is miles ahead of competitors, you’ll find an audience willing to pay you a premium even in a crowded market.
If, however, you’re not visibly different from the current players, your pricing must be in the same ballpark as theirs.
|This strategy helps you place your brand a little more advantageously in the market and stay fluid with your pricing||Because your prices are being determined by the averages in the market, you’re not necessarily able to offer customers a big price advantage – in fact, your margins are also limited by the competition.|
3. Bundled Pricing
‘Bundle’ is a common term in the consumer world – one everyone is used to seeing in supermarkets, e-commerce stores, and among B2B software providers too.
As a seller, you should know that bundles usually work in your favor. There is even evidence proposing that the framing of bundles can motivate your buyer to make a purchase.
When using bundled pricing for greater customer value, you group together two or more of your products/services and offer them at a discount.
This makes consumers feel like they’ve gained a great deal. As a result, you sell more products and have customers try more products at a time. Thus, leading to a much higher Customer Lifetime Value.
To get the best out of this strategy, you can even allow your customers to choose the products they want to add to a bundle (and you can offer a limited selection here) or offer pre-designed bundles based on what you think customers like.
|You can gain favor with customers while increasing your long-term sales. Bundles are also a great way to attract new customers.||This usually can’t be a primary pricing strategy (it really depends on your offering) – and not necessarily a long-term one either, based on your product or service.|
4. Prestige Pricing
You’ve probably heard of this one or subscribed to it yourself. A Prestige pricing strategy is one where companies price their products/services higher than market value to give the impression of better quality.
The pricing is attributed more to the brand image than it is to the actual cost, leading to higher margins for you and a positive self-image for an exclusive niche clientele that’s willing to shell out top dollar.
What do customers get out of this higher pricing? Quite literally, the prestige. In fact, a 2021 report from PWC states that consumers are willing to pay a price premium of up to 13% (highest 18 %) for luxury and indulgence services.
Think of how designer brands or brands like Dyson & Apple can get away with charging much higher prices – it’s because using these products gives customers the satisfaction of having a particular image.
Of course, the quality needs to match the perception of luxury too and you’ll find the two brands we mention tend to be leagues ahead of competitors.
For the growth of small businesses, the ideal way for you to employ prestige pricing is to create a premium image for your brand in the market, right off the bat. This is not a strategy where you start small and then go big.
|The margins are much higher and you know exactly who your audience is.||Your target audience is a niche one and you’ll have to invest in creating and maintaining brand image.|
5. Tiered Pricing
This one is commonly adopted among SaaS companies. A tiered pricing strategy is one where you have different price ranges for different types of customers.
In this strategy, the price increases in tiers are based on either the number of users or the amount of usage. Companies usually offer a corresponding number of features and access also with each tier.
The idea is that individual, low-engagement customers fall into the first tier (because they need lower pricing and supposedly lesser features), and you move on until you have enterprise customers in the 3rd or 4th tier, being charged the highest amount with all available features.
However, you need to conduct consumer research for each segment that tells you where to price your product.
What should the average price be, what’s too expensive and what dilutes the brand?
Calculate your margins for each customer segment and consider your cost & competition as well, before settling on the tiers.
|You can cater to different audiences and increase your product adoption.||You could create a bit of confusion for small business owners who aren’t yet certain where their needs lie, and how they should strike the right balance between a lower price & plenty of features.|
6. Freemium Pricing
This is another one that’s quite common for SaaS companies these days.
The idea is that you offer a base version of your product for free – meaning with limited features – in the hope that your customers will love the product and upgrade to use more features.
You need to put significant thought into whether this pricing strategy works well for your target audience.
Are they likely to be resistant to trying your product? How much are they willing to pay for the premium version?
Also, being a SaaS company doesn’t automatically make this the right pricing strategy for you. Freemium is more complex than it sounds, mainly because you can’t always predict customer behavior.
|This strategy is great for widening the top of your funnel.||If your customers aren’t engaged, you won’t be able to get them to upgrade.|
|People are extremely open to trying a great-looking product with a free version, so you’ll find that your lead generation goals and freemium download goals will most likely be met quite easily.||With software, a certain number of users who have signed on simply don’t end up using it, and many of them only use some features.|
|If you want to simply get a lot of people to try your product, this works.||This is a positive for you when you’ve charged them a price – when the product they’re using is free, not so much.|
7. Psychological Pricing
This is more of a pricing representation than it is an entire pricing strategy. It doesn‘t tell you what your product/service should be priced at, just how to represent it.
There are a few ways to do this:
1. Charm Pricing
You might have heard of the approach where you price your products ending with a “.99” rather than a “0” – for example, $2.99.
This is called charm pricing, it is a very popular psychological pricing technique that is based on the fact that customers tend to read these numbers for their smaller value like “$2” in this case rather than the accurate value of “$3”.
This approach is great when you want your product to scream ‘value’ – customers now directly associate this sort of pricing representation as an indication of value.
The opposite has also come to be true. Ending your product with a “0” now tells customers that you offer a premium product of premium quality – for example, saying “$30” rather than “29.99”.
2. Scarcity or FOMO Pricing
This is when you literally create the “Fear Of Missing Out” among customers, with flash sales and quick offers.
FOMO pricing gives your customer the impression that the pricing is a limited-period opportunity that can’t be missed.
3. Shortened Pricing
Rather than using multiple digits to denote your price, you keep it short & simple – just 30 or 9 (not even a dollar sign). The psychology behind this is that since customers have to read fewer numerals, the impact of the price is much lesser.
4. Pricing Placement
Always place your prices in a way that customers tend to see them after the product has already caught their eye.
When customers see pricing first, they approach the purchase with a logical mindset – “I don’t want to spend so much”.
When they get tempted by a product first, however, they tend to find a way to justify the price.
Let’s look at the pros and cons of psychological pricing.
|You can subtly influence customer behavior without it seeming underhanded or really influencing your brand in any negative way.|
Just make sure that the tactics you use are always in line with your brand image and your customer preferences.
|None, really! As long as you implement these tactics with care, you’re all good to go.|
And that concludes our list of must-know pricing strategies!
We’ve seen these 7 strategies work and find them ideal for growing companies, so feel free to comfortably choose from these.
The case with Kylas: Also, while we are on the topic of discussing the various pricing plans visible in the market, we would like to share our thinking behind Kylas pricing.
We strongly believe in adding value to our customers with a great feature set and making it accessible too!
Most sales CRM software offers confusing pricing plans with multiple variations and support options for each. Investing in a CRM is not a small decision as it will be a recurring cost for any business.
Most CRM tools come with a per-user cost; so, as the team size increases, growing businesses, have to shell out increasing amounts toward the license cost.
As a result of which, small business owners decide to restrict the number of users/licenses and only a few members of the organization can access the tool.
This results in a lack of collaboration as most team members don’t have access to the data and conversations happening on the tool.
Kylas sales CRM software comes at a fixed cost of only INR 12,999/month and provides unlimited access to all features. Say you have 20 users on the platform, which comes to INR 649.95/month per user or just INR 7799.4/year per user.
Unlike other CRMs, Kylas is designed for small business growth, so no matter how many users you bring to the platform, you end up paying the same.
Moreover, from a cost perspective, the more users you bring to Kylas, the more the CRM price per user becomes much more affordable.
If you have any questions about any of these strategies or otherwise, feel free to reach out in the comments section below!