When thinking about how to differentiate yourself from your competitors, pricing typically isn’t the first thing to come to mind. More often, you think about how your solution is different, how your brand sets you apart or even how your business is more convenient or easy to find.
But pricing is one of the 4 Ps too, and how you price your product or service doesn’t just impact your profitability — it impacts how you compare to competing solutions and how customers perceive you.
Pricing Strategy vs. Pricing Model
Your pricing model is dictated by your product. Your pricing strategy is based on the market your product is in. While there are some pricing models and strategies that won’t align, the two don’t have to be related at all.
Three companies could offer similar products but use completely different pricing models and strategies. For example, one could use a price skimming strategy with a flat rate model. Another could use a tiered pricing model with a penetration pricing strategy, and the third could use a freemium strategy with a pay-as-you-go model.
Your pricing model should be built around the core offering of your product or service, and your pricing strategy is based on how your product compares to your competitors and the demand for it.
17 Pricing Strategies for Your B2B Business
1. Price Skimming
Price skimming is when you have a very high price that makes your product only accessible upmarket.
Price skimming is typically associated with luxury items and only works if you have a product or service that is highly valuable or perceived as highly valuable. Brands like Rolex, Mercedes-Benz, and Louboutin use a price-skimming model, and the high price reinforces their luxury perception.
Regardless of actual quality, a higher price can be associated with a higher value, so if you have a unique, innovative product or a valued brand, a price skimming strategy can be used to gain a higher profit from fewer sales.
A price skimming strategy does limit the market segments you can appeal to, so if you want to grow and expand your business over time, you’ll probably have to eventually incorporate other pricing strategies so you can sell downmarket.
For products, you could continue to use a price-skimming strategy with new releases and lower the price of previous versions. Or product and service providers can offer “economy” versions of their solution to appeal downmarket.
However, if there is more demand for your solution than there is supply and you have brand equity, it is possible to grow while keeping your high price. For example, the marketing agency Ogilvy morphed a price skimming strategy into a prestige pricing strategy.
2. Penetration Pricing
Penetration pricing is the opposite of price skimming. Instead of going to market with a high price, companies using a penetration pricing strategy have a low-priced solution in order to capture as much market share as possible.
For example, expense management software Expensify uses a penetration pricing model in combination with product-led growth. Their low price draws initial users, and then more users within a company will adopt the tool due to its functionality.
Penetration pricing only works if the solution can achieve economies of scale since high volume has to compensate for the low per-unit price. Or, penetration pricing can be used only as part of the go-to-market strategy in hopes of gaining brand loyalty that’ll last when the price eventually rises.
The music streaming platform Spotify uses this model, offering a free version that allows users to listen to music, but if they want to download files to listen to offline, skip songs unlimitedly or adjust their audio quality, they have to upgrade to a paid account.
Freemium can be a part of your go-to-market, or it can be used to break into new markets or introduce new products.
Slack used a freemium model from the start and has had unprecedented success with a 30% conversion rate. Freemium worked well for Slack because they were able to delight users with its free version while still providing additional useful features in the upgraded paid product.
Conversely, HubSpot did not start out using a freemium strategy. They started as a paid marketing automation tool, but as they’ve expanded their product offering into the marketing, sales, and service growth suite, they’ve added freemium features like their CRM.
4. Price Discrimination
A price discrimination strategy is when you set a different price for the same product based on the market status of the buyer.
For example, movie theaters sell discounted tickets for children and seniors. Even though their tickets cost less, people in those demographics can see the same movies and sit in the same seats as customers paying full price for their tickets. The purchased experience is the same, but the price is different based on their demographics.
In B2B, you typically see price discrimination used for startups. HubSpot and Drift are both examples of software that offer their product at a heavy discount to startup companies. This enables companies who would not otherwise be able to afford those tools access, and then as the startups grow, they’ll have developed a loyalty to those tools and be willing to pay more.
This strategy does require having a way to segment your buyers based on market status and then verify that status before a sale is finalized.
5. Value-Based Pricing
Value-based pricing is a strategy that uses the value customers gain from the product or service as the basis for the cost, ignoring the cost of production.
This strategy works well when your product or service is innovative and can’t be easily swapped with an alternative.
The early years of iPhones are a great example of this: the cost to manufacture the phones is significantly less than the market price, but because none of the existing smartphones at the time had similar functionality, Apple was able to set a high price and establish what the “value” of touch screen smartphones was.
Value-based pricing can also be used when your product or service is significantly better than alternatives that can accomplish the same function.
For example, the true cost of production for software development is really minimum wage for the developer plus the cost of the equipment and software involved in the development process. However, app programmers are paid more than that because they have a highly desirable skill set and hiring someone else to do the work is more effective and efficient than learning to code and trying to create an app by yourself.
6. Time-based pricing
A time-based pricing strategy is typically used by companies whose product or service has high seasonality or last-minute purchases. Airlines exemplify this: it’s more expensive to book flights during peak seasons and cheaper if you’re traveling during off-seasons. Additionally, the closer you book to the travel date, the more expensive the ticket will be.
For time-based pricing to work, you need to have a system in place tracking the factors at play and adjusting prices accordingly, especially if buyers can make a purchase without talking to sales. For example, a transcription service can charge more for a same-day transcription than it does for transcribing a document within a week. Because of the immediate turnaround, the price is higher.
Or, if you try to hire a service during a high-demand time for that service, they can charge more even if you hire them well in advance. An accounting firm can charge more for work done during tax season than they can at other times because of the high demand for accounting work at that time of year.
7. Competition-Based Pricing
Competition-based pricing, also known as market-oriented pricing, is a strategy where you use your competitors’ prices as the basis for setting yours. This can be done by either undercutting your competitors or offering a higher-quality product at the same price.
Either way, it’s important to understand your competitors’ pricing in order to not only set the right price but also make sure you can still achieve your profit margins. For example, if you’re selling an online course, you might want to look at what other courses similar to yours cost and then adjust your pricing accordingly. If most of them are priced around $50, you could price yours at $49 in order to remain competitive.
Alternatively, if you think your course is better or more comprehensive than the others, maybe it’s worth setting a higher price and positioning yourself as an expert in the field who can deliver higher-value courses at a premium cost. Regardless of which strategy you pursue, Competition-Based Pricing is a great way to make sure you’re not leaving money on the table.
8. Cost-Plus Pricing
Cost-plus pricing is a simple yet effective strategy where you set the price of your product by adding a certain percentage to the cost of goods sold. It’s one of the most straightforward pricing strategies as it doesn’t involve too much market research or analysis — just add up all the costs associated with producing and marketing your product and add a markup to it.
The main benefit of this strategy is that it’s fairly easy to use, but the downside is that you don’t necessarily have an understanding of what the market will bear. As such, cost-plus pricing can be used as a starting point for pricing your product but then you should adjust it based on other factors like customer surveys and market research.
For example, a manufacturer might use cost-plus pricing to set their price for a product but then do customer surveys or focus groups to understand what customers are willing to pay for the item. Then they can tweak the price accordingly.
9. High-Low Pricing
High-low pricing, also known as dynamic pricing, is a strategy where you fluctuate the price of your product or service over time. The goal is to maximize sales by adjusting the pricing strategy based on supply and demand.
For example, high-end retail stores often use this strategy: they’ll offer an item for a higher price during peak demand times and then lower the price when demand is low. This allows them to capitalize on high-demand periods while still attracting customers who are looking for a bargain.
High-low pricing can also be used with services, such as offering discounts for booking in advance or charging more for same-day service. By understanding your market and the demand for your product or service, you can use high-low pricing to optimize your profits.
10. Hourly Pricing
Hourly pricing is a common strategy that’s often used by service-based businesses. With this pricing strategy, you charge your customers an hourly rate for the services you provide.
One advantage to this approach is that it allows customers to have more control over their costs: they can decide how many hours of work they’ll need and how often they’ll need it. This can be especially useful if you’re offering a service that’s highly custom such as consulting or software development, where the amount of work needed for each customer can vary greatly.
On the other hand, hourly pricing also means that your income stream isn’t predictable and can fluctuate from month to month. To manage this, you may want to consider setting minimum packages or offering discounts for larger projects. By doing so, you can ensure that you’re still making a profit while providing your customers with the flexibility they need.
11. Dynamic Pricing
Dynamic pricing, also known as real-time pricing, is a strategy where you adjust the price of your product or service based on factors like customer demand and availability. This allows you to maximize profits by adjusting the price of your product in response to changes in supply and demand.
For example, an airline may use dynamic pricing to increase fares when there is high demand for seats on a particular flight. This allows them to capitalize on customer demand while also ensuring that all of their available seats are filled.
On the other hand, dynamic pricing can be risky if you don’t have an accurate understanding of customer demand and market trends. Before implementing this strategy, make sure that you’re well-informed about the competitive landscape and customer demand for your product or service. By understanding your competition and customers, you can use dynamic pricing to effectively optimize your profits while providing an attractive price point to potential customers.
12. Premium Pricing
Premium pricing is the strategy of setting a higher price for your product or service in order to emphasize its quality and exclusivity. This strategy can help you establish your brand as a premium option, attract customers who are willing to pay for quality and differentiate your business from competitors.
For example, luxury car brands such as Porsche typically use this strategy by charging a premium for their vehicles. This allows them to emphasize the luxury and exclusivity of their brand and appeal to customers who appreciate high-end cars.
It’s important to note that successfully using this strategy requires more than just setting a higher price — you need to be able to back up your claims with quality products and services. If you don’t, customers may be disappointed with your offering and look elsewhere for better alternatives. By ensuring that you’re delivering a quality product or service, you can use premium pricing to differentiate yourself from the competition and capture more value for your business.
13. Tiered or Value-Based Pricing
Tiered or value-based pricing is a strategy where you offer customers different levels of service at different price points. This allows customers to choose a product or service based on their individual needs and budget.
For example, many software companies use tiered pricing by offering basic, standard, and premium plans. This allows them to appeal to both budget-conscious customers and those who are willing to pay for additional features or higher levels of support.
By offering multiple tiers of your product or service, you can appeal to more customers, increase the value of each sale, and maximize profits. Just make sure that you’re offering enough value at each tier to make it worthwhile for customers to upgrade.
14. Project-Based Pricing
Project-based pricing is a strategy where you charge a flat fee for a specific service or project. This allows you to provide customers with the flexibility they need while still getting paid for your services. For example, if you’re an independent contractor or consultant, this may be the best pricing strategy for you as it ensures that you get paid for your time and expertise.
Project-based pricing can also be beneficial for businesses that offer custom products or services due to the fact that it allows them to accurately estimate their costs upfront, ensuring that they make a profit no matter how much time is required to complete the project.
By understanding your customers’ needs and estimating your costs accurately, you can use project-based pricing to maximize profits and ensure that you’re getting paid for your services.
15. Bundle Pricing
Product bundling is a strategy where you combine multiple products or services into one package and sell them at a discounted rate. This is a great way to attract new customers and increase sales by offering a deal that’s too good to pass up.
For example, if you run a business that sold web design services, you could create a bundle of multiple services and offer them at a discounted rate. This could include logo design, website development, search engine optimization (SEO), and content writing — all in one package for a discounted rate.
Bundle pricing is also great for boosting upsells and getting customers to spend more than they originally intended. For example, a customer may come in with the intention of buying one service but end up purchasing the bundle because it offers more value at a lower cost.
16. Geographic Pricing
Geographic pricing is a strategy where you charge different prices for the same product or service based on the region in which it’s being sold. This can be beneficial if you are selling products or services that vary in price depending on their location.
For example, if you were a grocery store chain with multiple locations around the country, you could use geographic pricing to charge different prices for the same products based on the region in which they’re being sold. This would allow you to adjust your pricing according to regional trends and local competition.
Geographic pricing can also be used if you’re a business that sells online services, such as digital marketing or web hosting. By charging different prices based on the region in which a customer is located, you can ensure that you’re capturing maximum value from each sale and maximizing your profits.
17. Psychological Pricing
Psychological pricing is a strategy in which you intentionally price your products or services at certain levels to evoke an emotional response from customers.
For example, some businesses will use odd-numbered prices that end in a ‘9’ (e.g. $19.99) as they have been found to be more appealing than whole-numbered prices (e.g. $20). This strategy is based on the idea that customers perceive odd-numbered prices as being lower than whole-numbered prices, even though they are actually the same amount.
In addition to using odd-numbered prices, you can also use other psychological pricing strategies such as setting high list prices and offering discounts, emphasizing the savings that customers are getting from buying from you or offering special promotions and limited-time offers.
By understanding what motivates your customers to buy, you can use psychological pricing to maximize sales and increase profits.
Once you’ve chosen your pricing strategy, the next step is to pick a pricing model based on your product or service.
Neither your pricing strategy nor pricing model is set in stone, and as your product shifts, your pricing model can change, and likewise if your market positioning changes, so can your pricing strategy.
Pricing is just one piece of your overall product-led strategy, for a more comprehensive look into how to put your product at the forefront of your acquisition check out our guide below.
Tag(s): Demand Generation
Guido is Head of Product and Growth Strategy for New Breed. He specializes in running in-depth demand generation programs internally while assisting account managers in running them for our clients.