Your complete guide to pricing strategies for small businesses

Wondering how to price your small business products or services? 

Your prices determine the cash you keep from each sale, making them a defining factor in your small business’s profitability. But pricing says so much more to the buyer. It reflects the value you offer customers and your investment in quality. 

But the price tag can affect how people view your business and impact their buying decisions. If you can measure your value well, you can create rates that people are willing to swipe their cards for. 

So, it’s important to choose a pricing strategy that works for your target audience and enhances your products and services. Now, you might wonder what pricing strategies you could use and which is the right fit. Well, you’ve come to the right place. 

This guide offers a comprehensive look into different pricing strategies for business, including: 

• Penetration pricing 
• Competitive pricing 
• Premium pricing 
• Bundle pricing
• Dynamic pricing
• Price anchoring
• Psychology pricing 
• Price skimming

Pricing is the cash value you attach to your business’ products or services. It offers an exchange rate for customers to take hold of what you offer. 

But if you set just any price, you could lose out on the opportunity to optimise your earnings and win over more customers. That’s where a pricing strategy comes into play. 

Your prices impact how the market perceives your products or services. The numbers say everything about worth, quality, demand, and affordability. 

Money isn’t limitless, so people often think before buying. If the price is too high, people will likely look elsewhere. If it’s too low, they’ll be wary of its reliability or longevity. 

Like Goldilocks and the porridge, a pricing strategy lets you find the number that feels just right. With a strong pricing strategy, you can help customers make positive purchasing decisions.  

The business world is competitive, with comparable products and services fighting against each other to earn sales. A pricing strategy is a great way to win over a buyer and grow your value. 

You could drop your rates in a pricing war to defeat a competing business. With this in mind, you’ll need to be careful you don’t drop your prices too low as a small business. Doing so could lessen or even eliminate your profit margin. 

On top of this, cheap prices can offer a negative idea of your business’s worth. Affordability is one thing, but cheapness is another. 

If your business is affordable, it offers substantial value at a bargain. But, cheapness suggests poor value with equally reflected prices. People might instead look for something that will last. 

Dropping your prices may not be a long term tactic. When you’ve developed a loyal customer base, you can start to raise them to increase your profitability. With that said, be sure to do so transparently and put the customer experience first. 

You may worry about setting too high prices because it might alienate customers and lose sales. While that is true, higher prices can also help you build a brand status that draws in customers. 

If you wish to take this approach, it’s essential to ensure you offer premium quality products or services. The prices must be worth it. 

A big price tag with an average product can feel like a trick and lead to unsatisfied customers. Customers might complain about your business or leave poor reviews. This negativity can poorly impact your reputation. 

How might you improve the worth of your products or services, both in reality and perception? First, focus on the highest quality production and offerings, so try not to cut corners. 

On top of this, you might offer a uniquely personal experience with great customer service and extra perks. For example, if you provide personal training, you could offer free healthy snacks, bottled water, and the best equipment.

Additionally, think about building expertise in your field to better serve customers and improve the quality of your business. 

You might think that the best path towards profitability is to sell as many products or services as possible. Though this can help you earn more, it may not always be the case. 

In truth, strategising your prices well will help those numbers drive your profitability. 

As a one-person show, you don’t have to worry about corporate barriers or red tape. You can adapt to shifts in the market efficiently and adjust to make your business competitive. 

A pricing strategy lets you measure your customers’ values more easily. This information lets you alter your approach to more efficiently turn a profit.  

With a clear idea of the changing market value, or average price people will pay for your products or services, you can better shift or increase prices. Your new prices will reflect what works best for your business and strengthen your profits.

All businesses should consider ethics when it comes to setting prices. It’s crucial to prioritise fairness and transparency so you don’t accidentally trick or take advantage of your customers. 

If sellers could pick their prices randomly, the market would fall into unstable chaos. Because of this, laws require businesses to set prices responsibly and ethically. 

Here are a few unethical and often illegal pricing tactics to avoid: 

• Price fixing – when companies within the same market agree to price their products at a certain level to control the market because they operate without competitors. 
• Price collusion – when businesses work together to influence the market in their favour.
• Price gouging – when companies spike their prices excessively to take advantage of rapid increases in demand.
• Price discrimination – when businesses set different prices for the same product or services depending on the customer. 

Luckily, pricing strategies for business can help you maintain ethical numbers. Still, there are some unethical strategies, like predatory pricing, a poor version of penetration pricing (which we’ll get into later). 

Predatory pricing is when businesses set such low rates that they drive competition from the market. These prices poach most of the customers. As a result, other companies won’t earn a profit and will eventually fail. 

Setting ethical prices allows you to prioritise the customer and show that you care about them individually. As a result, you can build trust that promotes repeat purchases and overall customer retention. 

So, what pricing strategies are there for your business? Let’s go over the main ones to consider. 

Penetration pricing is when businesses attempt to draw in customers to a new product or service by offering a lower price at the beginning. 

With this strategy, you set a lower price to ‘penetrate the market’ and draw customers away from your competitors. It’ll turn heads because you provide a bargain in comparison.   

The purpose of these low prices is to increase awareness of your offerings and tempt people to give them a try. 

With that said, it’s not a long term strategy. Once you earn enough demand and prove your worth, you can increase the prices to normal levels.  

Pros: 

• Customers are more likely to try the new product right away
• Deal hunting customers will flock to you
• Less competition because you can catch competitors off-guard

Cons: 

• You may only attract people looking for a bargain, resulting in less customer loyalty
• Low prices put pressure on sales and overall reduce profitability
• Setting prices too low could make customers suspicious

Learn more about penetration pricing

A competitive pricing strategy is when you determine your price based on the market value or average cost of similar products. You can create a competitive edge by comparing your prices to others on the market. 

It’s easier to set competitive pricing if a product has a steady market price or the typical price an item sells for. 

You can either:

• Set your prices lower than similar products
• Price your products higher than competitors
• Set the same prices as other brands
• Offer to price match other companies

Pros:

• Simplifies your pricing approach
• Your pricing will be as accurate as your competitors’
• It’s a low-risk strategy that’s easily adjustable 

Cons: 

• Solely basing your prices on competitors could reduce your profit margin 
• This strategy works best in combination with other pricing strategies
• If you choose the wrong competitive approach for your target audience, it may not help sales 

Learn more about competitive pricing

This strategy involves intentionally pricing your products or services higher than the market value, or the average price point of similar products. 

The higher price can represent the extra time, high-quality materials, and unique elements of what you sell. Though your products or services might look similar to other products, the pricing sets it apart and catches people’s attention. 

Pros:

• You can obtain higher profit margins
• It improves your brand value and status 
• It can suggest exclusivity and pull in customers with more available cash

Cons:

• The marketing and branding can be expensive
• Failing to live up to expectations can lose you customers
• Your prices might be unreachable or unrealistic for certain customers 

Learn more about premium pricing

The bundle pricing strategy is when businesses combine several products or services and offer them at an often discounted price. 

These packages simplify the shopping experience and help businesses sell more with each transaction. They can also allow buyers to save in the long run if you reduce the individual price of items within the total cost.  

There are three main types of bundle pricing, including: 

• Leader bundling – matches a leading or primary product alongside relevant products of lesser value.
• Pure bundling – exclusively offers certain products or services as part of a bundle. If people want one piece, they need to buy them all. 
• Joint bundling – combines two or more products or services, selling them for one price.

Pros:

• You can earn more from a single transaction when people choose a bundle
• The approach lets you boost sales of less popular items
• It simplifies the purchasing process by doing some of the shopping for customers

Cons: 

• Some customers prefer buying items separately, so exclusive bundles could lose sales opportunities
• People may not need some of the items and turn to individual products
• Some customers may want to pay for the bundle

Learn more about bundle pricing

The dynamic pricing strategy scales the price tag to match shifting demand in the market. In other words, the price is flexible depending on fluctuating potential worth. 

With this approach, you can earn more from a product or service when the market is strong, and people will pay more. Then, when the market slows and fewer people are shopping, it lowers your prices to promote sales. 

You can change your prices based on time, competition, or value. For example, you could have higher prices at peak times, like Uber does. Alternatively, you might change your prices when the perceived value changes. 

Pros: 

• You can increase your profit margin when the market is in demand
• It lets you maintain a competitive edge that scales with the current market
• With automatic pricing tools, it’s efficient and time-saving

Cons: 

• Frequently changing your prices makes you less reliable to customers
• When you shift prices, it could lead to a price war with competitors
• If prices increase while a customer is considering a purchase, you could lose sales

Learn more about dynamic pricing

Price anchoring is when regular price points are attached to the current offer to help buyers make a more informed decision. Ever seen a discount with “£100 £75”? In this case, the £100 is the price anchor for the £75 sales price.

Price anchoring understands that buyers see pricing relatively. Something looks cheap or expensive compared to an original price or another item. Customers feel more informed if they can compare the current price with what it typically is. 

TK Maxx uses this approach by showing shoppers the original price of the item on the price tag beside their discounted price. 

There are a few types of price anchoring you can try, such as:

• Strike-through pricing – Like the example above, where you cross out the higher price
• Comparative package pricing – Where you lead buyers to their preferred products, often by offering three choices
• Competitive comparisons – Using competitors’ prices as anchors to show your options are bargains

Pros:

• An anchor price makes the sales price seem like a good deal to customers
• This strategy helps buyers make a quick decision
• It can promote immediate action if the deal is temporary

Cons:

• If customers find out that your set a fake original price, they might see you as dishonest
• It only works for a short period of time
• If your price is too far under the anchor price, it might make your products look suspicious or cheap 

Psychological pricing encourages customers to think about the price in a certain way. By using techniques to influence the appearance of the price, you can change how people perceive it.

Here are a few techniques you might use:

• Placing a time restriction on a price or sale
• Listing your item or service for a penny less (instead of charging £2, you would charge £1.99)
• Offering ‘buy one, get one free’

Because this practice is psychological, think about how you want people to react to it. It’s important to make sure that your pricing follows the identity of your business’ brand. 

Plus, consider your target audience. If you understand these people’s thoughts and behaviours, you can set your prices in a way they respond to positively.

Pros:

• When done effectively, it helps you generate more sales
• Psychological pricing is a fast and easy tool to incorporate into your business
• It focuses buyers’ attention on specific products, services, or categories

Cons:

• Some may see and perceive this approach as taking advantage of customers
• It can negatively impact your brand’s reputation
• It’s not a long-term pricing solution

Learn more about psychological pricing

With the price skimming strategy, the prices are set high at the beginning, only to lower them when customers become more familiar with the offerings. 

This method targets early adopters or people who will pay more for a cutting edge product marketed as ‘must-haves’. They’ll pay more regardless of whether the price accurately reflects the value. 

This strategy is on the other side of the coin to the previously mentioned penetration pricing, which sets prices low at the start to win over a market.

Pros:

• This approach can help your company boost initial profits to pay off research and development costs or promotional expenses
• It builds the image that a product is a high quality “must-have” for early adopters
• It’s an effective way to differentiate and define your customer base

Cons:

• The strategy only works for high-demand or innovative products
• If your business is in a busy market, it’s not a viable strategy
• It may slow initial sales despite earning more from each sale, giving potential competition time to improve upon your product

Learn more about price skimming

Now that you know the different pricing strategies for business, you might wonder which strategy is best for yours. Let’s go over a few business types and which approaches are most effective. 

When you sell physical products, they come with concrete production costs, unlike digital products or services. For example, you might have shipping, production, and storage costs. These factors can influence pricing. 

So, when you choose a pricing strategy for products, you’ll need to consider these costs and create prices that optimise profits, offer room for development, and compete against similar businesses. 

Here are some of the best pricing strategies for product businesses: 

• Competitive pricing
• Premium pricing
• Price anchoring
• Bundle pricing

Do you offer digital products for your business or things people can’t hold in their hand? This might include software, online courses, or e-books. 

If so, you’ll need to take a slightly different pricing approach because there’s no set production cost. In this case, you can use your brand, market, and perceived value to inform pricing. It also means there’s more flexibility. 

Here are some strategies that might work best for pricing digital products:

• Competitive pricing 
• Psychology pricing 
• Price anchoring 
• Dynamic pricing

When you run an events business, you can measure value with what you spend on planning, organising, and marketing. Plus, you may hire others to entertain or speak and provide an experience for the guests. 

The ticket price needs to reflect the many factors that go into creating the event. You might add up everything you spend and compare this to the value you offer guests and the number of tickets you aim to sell. 

To support your pricing, here are a few pricing strategies that might work best for events: 

• Competitive pricing 
• Dynamic pricing 
• Premium pricing 
• Bundle pricing 

If you offer services, they can be challenging to price because of the lack of concrete production costs. Services businesses, such as freelancers and contractors, should consider perceived value first. 

You can improve the value of your services by focusing on growing expertise and skill in the market. Plus, you’ll need to provide the best quality services to satisfy the client.  

For example, if you’re a freelance graphic designer, you could earn a competitive degree or provide a special technique. 

Here are some of the most effective pricing strategies for services businesses: 

• Dynamic pricing
• Competitive pricing 
• Premium pricing 
• Bundle pricing 

Though nonprofits are just as they sound – not for profit – they still need a pricing strategy. This strategy can help them maintain their operations to continue helping others or achieving their mission. 

When you strategise as a nonprofit, you’ll need to think about expenses. This can help you find price points that keep you afloat. 

Most importantly, you’ll need to make your strategy transparent to those involved in your business, such as volunteers and regulators. 

When choosing a strategy for a nonprofit, you might want to mix a few approaches at once to create something practical for the situation. 

Here are a few pricing strategies for businesses of this type you might try combining: 

• Competitive pricing 
• Dynamic pricing 
• Price anchoring 
• Psychology pricing

With eCommerce, you’ll need to choose a pricing model that sets your prices competitively and considers your cost of sale. To do this, you’ll need to understand what people are willing to pay as well as the production costs. 

While measuring potential costs, look at how common your products are online. If there’s a lot of similar stuff on the market, you’ll need to strategise how to stand out. 

Additionally, how much do you spend on promoting your eCommerce products? Factor these costs to ensure you maintain a profit with each sale. 

Here are a few pricing strategies for eCommerce businesses to try:

• Penetration pricing – to start 
• Competitive pricing 
• Dynamic pricing 
• Price anchoring 
• Psychology pricing 

With all these pricing strategies for business, you might not know where to start. A lot of factors go into pricing a product, but it doesn’t need to be a complicated process. 

To start, try calculating the value of your products and services. Add up the money you spend on production alongside your regular business costs. Then, do some market research to better understand how consumers might perceive your goods or services. 

While comparing the options, ask yourself what you want out of a pricing strategy. This guide can help you determine the best approach to try. 

If you take on a strategy that doesn’t offer the effect you hoped, it’s not the end of the world. Pivot, and try a different one until you have the right plan. 

To recap: here are the pricing strategies you could use for your business: 

• Penetration pricing 
• Competitive pricing 
• Premium pricing 
• Bundle pricing
• Dynamic pricing
• Psychology pricing 
• Price skimming 

If you find the right price level for your goods, you should notice an increase in your sales revenue. 

Unfortunately, this also means having to do more financial admin. You can avoid spending hours on bookkeeping tasks by using accounting software like Countingup.

Countingup is the business current account and accounting software in one app. It automates complicated bookkeeping admin for thousands of self-employed people across the UK. 

Start your three-month free trial today.