Pricing a product or service can be a daunting prospect, especially if you’re at all unsure about how involved the subject of pricing can be.

Although there are plenty of strategies you can use to go about establishing a presence within your chosen industry, results will undoubtedly vary.

In this article, we’ll go over how to minimize costs and maximize revenue, by showing you seven of the most effective and strategic ways to price your products and services.

Understanding consumer psychology as it relates to pricing:

Pricing should be viewed as a practical process with the ultimate aim of keeping your business afloat. In order to do that, you will need to understand the psychology of pricing, as it underpins the success or failure of any and every available pricing strategy.

In the marketing mix, pricing is the only thing that brings revenue and as such, it is vitally important that you become familiar with the ways you can use it to your advantage. These methods include (but are not limited to) the following:

1. Penetration pricing

This is a pricing strategy that revolves around pricing a product or service low enough so that it attracts customers and captures market share. Once the product is established in the minds of the consumer, the price can then be raised.

The main reason you would want to employ this strategy is to boost the initial presence of your business early on, and set yourself up in a comfortable position to capitalize on later sales at the higher price.

Additionally, penetration pricing also helps consumers make the decision to switch between brands because of the lower price. This can be used to promote brand loyalty effectively.

2. Pre-emptive pricing

Also known as predatory pricing, this strategy is aggressive in nature and is intended to drive away competition or deter others from entering the marketplace by deliberately selling at below market prices (temporarily, of course). Preemptive pricing strategies typically exist in monopolies or other markets characterized by low levels of competition.

As such, it will not be as relevant to new business owners; however, it is an important and potentially useful strategy you may need to come to terms with.

3. Premium decoy pricing

This is a pricing structure that—as opposed to preemptive pricing—sets prices in conflict with one another internally. In other words, you will be pricing one of your products or services at a higher price to encourage sales of another product, the results of which are surprisingly consistent.

percent completing a purchase

“Adding Small Differences Can Increase Similarity and Choice” – Study by the Yale School of Management

By doing this, you can effectively implement price points and increase your overall sales volume. As long as you have more than one product or service on offer, and are able to set a price that maximizes conversion rates, you’ll have no trouble making use of this strategy.

4. Premium pricing

If you’re in possession of a quality product or service, premium pricing represents a way for you to set its value artificially high in an attempt to encourage a favorable public perception, something that you’ll have on your side as a new startup.

Additionally, if your products begin to establish a reputation for quality, this is a great pricing strategy to implement.

5. Psychological pricing

This is something that is talked about a lot in behavioral economics and is a point which Dan Ariely conveys amazingly well in his TED talk regarding the buyer decision process.

In effect, psychological pricing is something that we as consumers are exposed to every day. This is the reason why you’ll rarely find a product or service priced at irregular values that do not end in a 0, a 5 or a 9, as these are the amounts most customers are willing to buy at.


Image via Wikipedia

This plays upon the idea that $99 is substantially less than $100 to the mind of the buyer, even though the difference is only one dollar.

It is also often used to overinflate items such as confectionary at cinema stands. One thing is abundantly clear—this method can make a dramatic difference in sales.

6. Value-based pricing

The following pricing strategy is one which really only affects products and speaks to the relative value placed on an object. CDs and DVDs are the perfect example, as the cost of manufacturing the disk will be the same independent of the information it contains.

As such, the perceived value of something is what creates its value. If you can find out how much your customers are willing to spend before the price becomes a deal-breaker, you’ll be well-placed to maximize your profits.

Additionally, studies have been done to investigate value-based versus comparative pricing. A study at Stanford showed people become more cautious and make fewer purchases when presented with product comparisons as opposed to value propositions. Value-based pricing can be utilized with more range in a digital environment—such as eCommerce shops—where many UX factors are at play, such as features, sidebar displays, overlays, videos, testimonials, and more.

7. Price leadership

Lastly, we have price leadership. This is the point at which your business becomes self-sufficient and is able to dictate prices within the marketplace. As such, it is an ideal goal to aim for and will work best for businesses operating in industries where competition is scarce.

Hopefully you’ll have found this article useful and will be one step closer to optimizing the profits of your business. We hope you will find the confidence to harness the power of price to your advantage.

Which of these strategies did you find most effective? Let us know in the comments. 

AvatarJesse Aaron

Jesse is a Community Manager at WebpageFX and runs a blog and forums about social media marketing on Mashbout.