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 PRICING STRATEGY

Pricing
strategy
guide: How
to choose
one for your
business

By QuickBooks April 22, 2022

Small businesses play a vital role in the U.S. economy.

However, revenue for small businesses can be scarce.

Data has shown that small businesses with no employees

average just $44,000 a year in annual revenue, with two-thirds
 of these companies earning less than $25,000 per year. While
various factors can affect a business’s revenue potential, one of
the most important factors is its pricing strategy.

To get this right, it’s critical to use financial reporting and

insights to guide your decisions. You also need a good
understanding of the many different pricing strategies that you
can choose from for your product or service. We look at 14
common pricing strategies in detail below.

• Definition and importance

• 14 different pricing strategies

• Pricing strategy best practices

• Pricing strategy FAQ

:
 Review: What is a pricing strategy
and why is it important?

In short, a pricing strategy refers to all of the various methods

that small businesses use when setting prices for their goods
or services. It’s an all-encompassing term that can account for
things like:

• Market conditions

• Actions that competitors take

:
 • Account segments

• Trade margins

• Input costs

• Consumers’ ability to pay

• Production and distribution costs

• Variable costs

Pricing strategies are useful for numerous reasons, though

those reasons can vary from company to company. Choosing
the right price for a product will allow you to maximize profit
margins if that’s what you want to do. Contrary to popular
belief, pricing strategies aren’t always about profit margins. For
instance, you may opt to set the cost of a good or service at a
low price to maintain your hold on market share and prevent
competitors from encroaching on your territory.

In these cases, you may be willing to sacrifice profit margins in

order to focus on competitive pricing, but you must be careful
when engaging in an action like this. Although it could be
useful for your business, it also could end up crippling your
company. 

A good rule of thumb to remember when pricing products is

that your customer base won’t purchase your product if it’s set
too high, but your business won’t be able to cover expenses if
you price it too low.
:
 14 different pricing strategies for
your small business to consider
:
 As we’ve just identified, project management and strategic,
actionable decisions go into setting the price of a product.
Here are 14 different pricing strategies that you should
consider as a small business owner.

1. Penetration pricing 
Penetration pricing strategy aims to attract buyers by offering
lower prices on goods and services than competitors. This
strategy draws attention away from other businesses and can
help increase brand awareness and loyalty, which can then
lead to long-term contracts. 

Penetration pricing can be risky because it can result in an

initial loss of income for the business. Over time, however, the
increase in brand awareness can drive profits and help small
businesses stand out from the crowd. 

In the long run, after penetrating a market, business owners

can increase prices to better reflect the status of the product’s
position within the market.

Best for: Small businesses with the main goal of building

:
 brand loyalty and reputation

Pros: 

• Allows
a product to be quickly adopted and accepted by
customers 

• Generates a high sales quantity

• Creates
a large inventory turnover rate since demand will
be higher

• Encourages positive word of mouth 

Cons:

• Can create pricing expectations for customers—meaning

they might always expect a low price and be dissatisfied if
the price rises

• Mayreduce customer loyalty since most will be bargain

hunters 

• Can trigger price wars 

• May hurt brand image as customers could perceive

discounted products as cheap or bad quality 

Penetration pricing example

Imagine a competitor selling a product for $100. You decide to

sell the same product for $97, even if it means you’re going to
take a loss on the sale. 

2. Economy pricing
:
 Economy pricing is a pricing strategy that aims to attract the
most price-conscious consumers. A wide range of businesses
use this strategy, including generic food suppliers and
discount retailers.

This is a no-frills approach that involves minimizing marketing

and production expenses as much as possible. Because of the
lower cost of expenses, companies can set a lower sales price
and still turn a slight profit.

Best for: Small businesses that want to keep their overhead

costs low and that sell commodity goods 

Pros: 

• Easy to implement

• Keeps customer acquisition costs low

• Attracts price-sensitive customers

• Beststrategy to use during an economic downturn or

recession

Cons: 

• Can be challenging to cut production costs

• Smallbusinesses may not have enough brand awareness

to forgo custom branding 

• Works only if there’s a steady stream of customers

• Potential to negatively impact brand perception

:
 Economy pricing examples

Businesses that utilize the economy pricing strategy include

budget airlines and supermarkets. Budget airlines will use
economy pricing to fill any empty seats and lower the cost per
unit.

This strategy also applies to generic food brands that are sold
in supermarkets—they’re priced lower because they require
minimal promotion and marketing expenses. 

3. Premium pricing
With premium pricing, businesses set costs higher because
they have a unique product or brand that no one can compete
with. You should consider using this strategy if you have a
considerable competitive advantage and know that you can
charge a higher price without being undercut by a product of
similar quality.

Because customers need to perceive products as being worth

the higher price tag, a business has to work hard to create the
perception of value. Along with creating a high-quality
product, business owners should ensure that the product’s
packaging, the store’s decor, and the marketing strategy
associated with the product all combine to support the
premium price.

Best for: Small businesses that have a considerable

competitive advantage and know that they can charge a higher
price without being undercut by a product of similar quality

Pros: 
:
 • Makes your brand appear more desirable

• Higher profit margins

• Provides a competitive advantage

Cons: 

• Higher cost of production and marketing

• Smaller target audience

• Reduced sales volume

Premium pricing examples

Examples of this strategy can be seen in the luxury car and

tech industries. Car companies like Tesla can get away with
higher prices because they’re offering products, like
autonomous cars, that are more unique than anything else on
the market.

Additionally, tech giants like Apple can sell their products at a

premium price compared to their competitors because of their
name.
:
 New Businesses

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4. Price skimming
Price skimming is a type of dynamic pricing strategy that is
designed to help businesses maximize sales on new products
and services. This involves setting rates high during the initial
phase of a product, then gradually lowering prices as
competitor goods appear on the market. 

Best for: Small businesses that have products that are in high
demand, like tech companies

Pros: 

• Allows businesses to maximize profits through early

:
 adopters 

• Helps small businesses recoup development costs

• Creates an illusion of exclusivity and quality 

Cons: 

• Excess inventory may occur if this strategy fails 

• Thequality of the new service or product must justify the

higher cost to be effective 

• Won’t
work if your competitors are creating similar
products

Price skimming examples

An example of price skimming strategy is seen with tech

companies with the introduction of new technology. An 8K TV
would benefit from a higher marked price when only 4K TVs
and HDTVs currently exist on the market. 

This also works well with iPhones—the expected sales volume

and speed of developing new products is so high that
lowering prices throughout the skimming cycle will have very
minimal effects on overall sales volume.

5. Psychological pricing
Psychological pricing refers to techniques that marketers use
to encourage customers to respond based on emotional
impulses, rather than logical ones.

One explanation for this strategy is that consumers tend to

:
 give more attention to the first number on a price tag than the
last. The goal of psychology pricing is to increase demand by
creating an illusion of enhanced value for the consumer.

Best for: Small businesses aiming toward short-term goals and

quick wins 

Pros: 

• May offer a high return on investment 

• Allows for cost transparency

• Simplifies the decision-making process for customers 

Cons: 

• Could
cause customers to feel as though they’re being
manipulated

• Doesn’tset you apart from competitors since it’s a popular

strategy 

• Requires consistent demand for your product

Psychological pricing example

Psychological pricing is often seen in retail. For example,

setting the price of a watch at $199 is likely to attract more new
customers than setting it at $200, even though the actual price
difference is quite small. 

Other tactics retailers use is the use of “buy one get one free”
language versus “50% off two items.” This strategy relies on the
customer favoring one wording over another even though
:
 they’re the exact same deal. 

6. Bundle pricing
With bundle pricing, small businesses sell multiple products
for a lower rate than selling each item individually. 

Customers feel as though they’re receiving more bang for their

buck. Many small businesses choose to implement this
strategy at the end of a product’s life cycle, especially if the
product is slow-selling.

Small business owners should keep in mind that the profits

they earn on the higher-value items must make up for the
losses they take on the lower-value product. They should also
consider how much they’ll save in overhead and storage space
by pushing out older products.

Best for: Small businesses that want to create large margins

while offering a lower price than competitors

Pros: 

• Increases
the value perception in the eyes of your
customers

• An effective way to reduce inventory

• Lowers marketing and selling costs

Cons: 

• Mayaffect products that may be selling better than the

other if they’re bundled (product cannibalization) 
:
 • Somecustomers may not want all products offered in the
bundle, resulting in an unwanted or unused product 

• May cause a negative perception of the brand due to

customers assuming the product is of lower quality since
it’s bundled

Bundle pricing examples

An example of bundle pricing occurs at your local fast food

restaurant where it’s cheaper to buy a meal than it is to buy
each item individually.

Internet service providers will also use this strategy and take
advantage of cable TV packages and bundled mobile plans.

7. Geographical pricing
Geographical pricing involves setting a price point based on
the location where a product or service is sold. Factors for the
changes in prices include: 

• Taxes

• Tariffs

• Shipping costs 

• Location-specific rent 

• Supply and demand 

If you expand your business across state or international lines,

you’ll need to consider geographical pricing. 
:
 Best for: Small businesses that have markets in many different
locations 

Pros: 

• Allows you to gain local appeal 

• Can boost perceived value in certain locations 

Cons: 

• Local regulations need to be considered, such as pricing

laws

• Accountingand bookkeeping can become more

complicated since there are different regions to be
accounted for 

Geographical pricing example

Geographical pricing applies to retailers or service providers

who charge different prices in different states. For example, a
gym may charge a higher price for membership in California
than they would at the same location in Louisiana. 

8. Promotional pricing
Promotional pricing is another competitive pricing strategy
that involves offering discounts on a particular product. These
strategies are often run during a holiday, like Memorial Day
weekend. By offering these deals as short-term offers, business
owners can generate buzz and excitement about a product.

Promotional pricing campaigns often consist of short-term

:
 efforts and incentivizes customers to act now before it’s too
late. This pricing strategy plays to a consumer’s fear of missing
out. 

Best for: Small businesses that want to generate quick

demand for their products or services 

Pros: 

• Increases sales volume in the short term 

• Increased inventory turnover

• Promotions can build customer loyalty

Cons: 

• More
calculations are required to ensure the sales volume
compensates for the discounted prices

• Lowered perception by customers due to “cheaper”

prices 

• Customers may be reluctant to purchase again if you don’t

keep offering promotions 

Promotional pricing examples

An example of promotional pricing can apply to a retail store

that implements a “Buy One Get One” campaign during a
holiday weekend, like Black Friday or Cyber Monday. Loyalty
programs also apply here as well—retailers will offer rewards to
their loyal customers for a limited time. 
:
 9. Value pricing
Value pricing is a way of setting your prices based on your
customer’s perceived value of what you’re offering. This occurs
when external factors, like a sharp increase in competition or a
recession, encourage the small business to further provide
additional value to its customers to maintain sales.

This pricing strategy works because customers feel as though

they are receiving an excellent value for the good or service.
The approach recognizes that customers don’t care how much
a product costs a company to make, so long as the consumer
feels they’re getting an excellent value by purchasing it.

Best for: Small businesses that specialize in SaaS or

subscriptions 

Pros: 

• Potential for high profit margins

• Increased perceived value in your brand and services

• Increased customer loyalty

Cons: 

• Requires additional market research to determine what is

of value to your audience 

• Markets that work well with this strategy tend to be very

niche since they’re high-end 

• Goods will cost more to produce

:
 Value pricing examples

An example of value pricing can be seen in the fashion

industry. A company may produce a product line of high-end
dresses that they sell for $1,000. They then make umbrellas
that they sell for $100.

The umbrellas may cost more than the dresses to make.

However, the dresses are set at a higher price point because
customers feel as though they are receiving much more value
for the product. Would you pay $1,000 for an umbrella?
Probably not. Thus, external factors like customer perceptions
guide the value pricing strategy. 

10. Captive pricing

Captive pricing is a strategy used to attract a high volume of
customers to a product intended for a one-time purchase. The
method behind captive pricing is to generate profits from
added accessories that go along with the core product you’re
selling. Small businesses can implement price increases so
long as the cost of the secondary product does not exceed the
cost that customers would pay a competitor.

Best for: Small businesses that have a product that customers

will continually renew or update

Pros: 

• Increases flow of traffic to the core product 

• Boosts sales each time the upgraded accessory is released

• Customer loyalty increases

:
 Cons:

• Customers may begin to feel unsatisfied with having to

update their products repeatedly 

• High-priced accessories can lead to a loss of sales 

• You’llneed to continuously offer new and improved

products each time to maintain revenue and customer
interest

Captive pricing examples

A perfect example of a captive pricing strategy is seen with a

company like Dollar Shave Club. With Dollar Shave Club,
customers make a one-time purchase for a razor. Then, every
month, they purchase new razor blades to replace the existing
one on the head of the razor.

Because the customer purchased a DSC razor handle, they

have no choice but to buy blades from the company as well.
The company holds customers “captive” until they decide to
break away and buy a razor handle from another company. 

11. Dynamic pricing 

Dynamic pricing is when you charge different prices
depending on who is buying your product or service or when
they buy it. It’s a flexible pricing strategy that takes many
factors into account—particularly changes in supply and
demand.

You might have heard dynamic pricing referred to as: 

:
 • Demand pricing 

• Surge pricing 

• Time-based pricing

While dynamic pricing is relatively common in e-commerce

and the transportation industry, it doesn’t work for every type
of business. The greatest risks can come when variable prices
are applied to products or services that are typically bought by
price-sensitive customers. 

Best for: Small businesses looking to maximize their profit

margins and boost declining sales

Pros: 

• Allows
for pricing to reflect the market demand for the
product or service 

• Provides
more insight into customer demand and
purchase patterns 

• Enables you to maximize your profits by matching your

price to the demand

Cons:

• Customers may be scared off by prices that are always

fluctuating

• Higher risk of price wars

• Increases competition within the industry

:
 Dynamic pricing example

A good example of dynamic pricing comes from the airline

industry. If you’ve ever noticed how much flight prices can
change depending on when you book, you’ve experienced
dynamic pricing firsthand.

12. Competitive pricing

Competitive pricing is when your prices either match or beat
those of similar products that are sold by competitors.
Oftentimes this simply means selling your products or services
at a better price, but you could choose to offer better payment
terms instead.

To determine if this strategy is right for you, gather as much

information as possible about your target market and what
your competition is doing. If you combine this with the
assistance of advanced pricing software solutions, you can
analyze and update price data continuously. 

Best for: Small businesses that are just starting out

Pros: 

• Simple implementation 

• Can be combined with other strategies such as cost-plus

pricing to make efforts more rewarding 

Cons:

• Notgood to use long-term since competitors will catch on

and modify their strategy 
:
 • Not
a strategy to use if you want to stand out since your
competitors are likely using the same methods

Competitive pricing examples

An example of a company that takes advantage of competitive

pricing is Amazon. Amazon will compare the prices of products
sold on their platform and utilize that information to offer the
lowest price in the market. 

This can also be seen in the tech industry with Apple and
Samsung using competitive pricing for their phones. 

13. Cost-plus pricing

Cost-plus pricing is a strategy of marking up (adding a fixed
percentage) the cost of services and goods to arrive at your
selling price. 

As a seller, you would use a calculation that includes fixed and

variable costs that will be incurred in manufacturing your
product and then apply the markup percentage to that cost.
This strategy is widely used since it’s easy to justify and is
typically fair and nondiscriminatory. 

Best for: Small businesses with a cost advantage or an interest

in using price transparency as a differentiator 

Pros: 

• May lead to positive differentiation and customer trust

• Reduced risk of price wars

:
 • Can provide predictable profits

• Simple to implement

Cons:

• Discourages efficiency and cost containment

• Potential for customers to perceive the product negatively

• Notguaranteed to cover all costs since much of the

calculation is a guesstimation

• Can be difficult to change prices when needed

Cost-plus pricing example

Grocery stores and supermarkets work on a cost-plus basis to

determine the prices of items such as eggs and milk.
Oftentimes, these businesses will purchase from a wholesaler
or producer and then apply a markup price for the product
sold at their store. 

14. Freemium pricing

Freemium pricing is a strategy in which a service or product is
given to a customer free of charge unless they want to access
premium features or services within that product. 

Best for: Small businesses that intend to offer both free and
paid versions of their product and those that offer free trials 

Pros: 

• Potential to unlock viral growth

:
 • Createsa no-risk environment that attracts customers who
want to try something for free

• Opportunity to monetize on advertising 

Cons:

• A higher percentage of free users may never convert

• Cash
reserves can be depleted quickly due to a large
number of non-paying users

• Mayrequire additional customer service support for

freemium users, which can be costly

Freemium pricing examples

Freemium pricing examples include free apps that require

customers to pay a premium price if they want an ad-free
experience. 

This also includes online magazine and newspaper

subscriptions that only give you a certain amount of free
articles until you have to pay to receive unlimited access.

Pricing strategy best practices

After learning about the 14 pricing strategy options, consider
these best practices before you implement one into your
business’s process: 

• Ensureyour pricing manager is experienced: For the

most success, it’s important that whoever is driving this
:
 strategy is experienced and skilled enough to handle a
large pricing strategy roadmap. 

• Define KPIs ahead of time: Setting your KPIs before

implementing will help you have a more clear vision and
will allow you to easily monitor progress. 

• Startsmall: Change doesn’t happen in a day — as you roll

out your new strategy, be sure to start small so you can
easily pivot if you make mistakes. Then, gradually ramp up
your strategy.

Pricing strategy FAQ

Below are several important considerations to know when

choosing the right pricing strategy for your small business. 

What is the most effective pricing

strategy?
The most important factors influencing your pricing strategy
are rooted in your business’s unique financial data and external
conditions. This includes: 

• Knowing what it costs to produce your products or

provide your services
:
 • Continuously monitoring these costs so you can quickly
react to changes and maintain long-term profitability

• Knowingyour market, your competition, and your

customers 

• Staying
on top of emerging trends, supply chain threats,
and consumers’ perceptions of your brand 

Finally, if you are selling premium goods and want to drive up

demand, consider your longer-term revenue goals, such as: 

• Whether
discounts will do more harm than good by
damaging the perceived value of your product

• The amount of time you can sustain your chosen pricing

strategy before cash flow becomes too stretched

Should I charge more or less than my

competitors?
This depends on what you’re selling and your target market.
You have to think about all factors before setting a price. For
example, if you want your business to expand into a new
market, then you may want to charge lower prices to attract
new customers. 

If your competitors end up increasingly charging more, then

you may want to consider increasing your own prices. It all
comes down to what your competitors are doing and the goals
your business is trying to obtain.

How often should I review my pricing

:
 strategy?
You should review your strategy at least once a year. However,
you may want to review earlier in the case of: 

• A new competitor 

• Changes in legislation or laws that affect your product or

service

• A need to quickly boost dropping sales

It’s also wise to keep an eye on your competitors’ pricing to

avoid any overlooked changes in the market.

What is a pricing curve?

A pricing curve is a graph that shows you the number of
people who are willing to pay a certain price for a service or
product. This can help you determine how to price your
product.

What is the most simple pricing strategy?

The most simple pricing model is cost-plus pricing due to the
fact that you only need to take the cost and add a marked-up
percentage to it.

What is keystone pricing?

Keystone pricing is a method that businesses use that marks
up all merchandise by twice what the wholesale cost was. If a
business isn’t quite sure what kind of pricing strategy to use,
:
 keystone pricing can be an easy starting point that can drive
some profits.

Keep track of business revenues

Once you determine the best pricing strategy for your
business model, your profit margins could increase. You’ll want
to make sure you’re using reliable accounting software to keep
track of relevant data. 

QuickBooks makes it easy for you to monitor relevant sales

data and manage cash flow in one place. This allows you to
continually evaluate your pricing method so that you can make
price changes in real time, grow your business, and improve
customer success. 

To further fast-track and simplify your business growth, be sure

to utilize tools such as QuickBooks to help you organize and
run your business.
:
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