The successful launch of new products/services is critical to small business growth.
Small businesses face greater challenge in terms of pricing strategy, because there’s usually a tough balance to strike between market share and branding.
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 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 moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – Katherine Paine, News Group.
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.
A number of 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 out today.
- Why Does Small Business Growth Need a Robust Pricing Strategy?
- Pricing Strategy 1: Cost-Plus Pricing
- Pricing Strategy 2: Competitor-Based Pricing
- Pricing Strategy 3: Bundled Pricing
- Pricing Strategy 4: Prestige Pricing
- Pricing Strategy 5: Tiered Pricing
- Pricing Strategy 6: Freemium Pricing
- Pricing Strategy 7: Psychological Pricing
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, however, feel free to simply pick up on the theory of one strategy and then make your own way forward from there.
Pricing Strategy 1: Cost-Plus Pricing
This is the most basic pricing strategy – the most commonly used among small business owners who aren’t planning on putting too much thought into brand and value.
Cost plus pricing is exactly as it sounds: you calculate the cost of producing your product or offering your service, 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.
Pros: 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.
Cons: 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 at all, because this strategy doesn’t take into account consumer perception.
Pricing Strategy 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 proposition, but the 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, even in a crowded market, you’ll find an audience willing to pay you a premium.
If, however, you’re not visibly different from the current players, your pricing must be in the same ballpark as your competitors.
Pros: This strategy helps you place your brand a little more advantageously in the market and stay fluid with your pricing.
Cons: 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.
Pricing Strategy 3: Bundled Pricing
‘Bundle’ is a common term in the consumer world – one everyone is used to seeing it in supermarkets, ecommerce stores and among B2B software providers too. As a seller, you should know that bundles generally work in your favor.
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 helps consumers feel like they’ve gained a great deal and helps you sell more products at a time, have customers try more products at a time, ideally leading to a much higher Customer Lifetime Value.
You can also allow you customers to choose the products they want to add into a bundle (and you can offer a limited selection here) or offer pre-designed bundles based on what you think customers like.
Pros: You can gain favor with customers while increasing your long-term sales. Bundles are also a great way to attract new customers.
Cons: 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.
Pricing Strategy 4: Prestige Pricing
You’ve probably heard of this one or subscribed to it yourself. Prestige pricing is when companies price their products/services at 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.
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 small business growth, 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.
Pros: The margins are much higher and you know exactly who your audience is.
Cons: Your target audience is a niche one and you’ll have to invest in creating and maintaining brand image.
Pricing Strategy 5: Tiered Pricing
This one is commonly adopted among SaaS companies. Tiered pricing is when you have different price ranges for different types of customers.
The idea is that you price increases in tiers based on either number of users or amount of usage. Companies also usually offer a corresponding number of features and access 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 up 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.
Pros: You can cater to different audiences and increase your product adoption.
Cons: 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.
Pricing Strategy 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.
What you need to do is 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.
Pros: This strategy is great for widening the top of your funnel.
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.
If you want to simply get a lot of people to try your product, this works.
Cons: If your customers aren’t engaged, you won’t be able to get them to upgrade.
With software, a certain number of users that have signed on simply don’t end up using it at all and a large number of them only use some features.
This is a positive for you when you’ve charged them a price – when the product their using is free, not so much.
Pricing Strategy 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:
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 because customers tend to read these numbers as “$2″ rather than the more accurate “$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”.
Scarcity or FOMO Pricing
This is when you literally create the “Fear Of Missing Out” among customers, with flash sales and quick offers. It gives them the impression that the pricing is a limited period opportunity that can’t be missed.
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.
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, the approach 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.
Pros: 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.
Cons: 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 offer 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 towards the license cost.
As a result of which, small business owners decide to restrict the number of users/licenses and only a few members in 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 $99/month and provides unlimited access to all features. Say you have 20 users on the platform, that comes to $4.95/month per user or just $59.4/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 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!