7 steps to build an effective pricing strategy for your products

When starting out in business it can be difficult to find that price point which balances profit against affordability. The key to this is focusing on your target market, and not taking a scattergun approach to pricing. A scattergun approach can be counter-productive because you can’t please all of the people all of the time. It is therefore important to put together an effective pricing strategy for your products. One which highlights your strengths, while also recognising your shortcomings, compared to competitors.   When you look at each of these seven steps they look fairly straightforward, nothing special but the cumulative impact can be huge.  

Know the value of your products

  The first thing to do is take a step back and look at the situation from a distance. You need to have confidence in your product, your business and your customer services. If you don’t believe in your products then why should a customer?   Whether a small, medium or large size business, there will no doubt be a major competitor in your area of the market. Customers will compare and contrast prices, product quality and customer services. If you compare favourably to your competitors this should be reflected in your pricing. Alternatively, if your competitors are stronger in some areas, then reduce your price to undercut them. There is no point in going toe to toe on pricing with a competitor with a superior product - you are effectively comparing apples and pears.   So, do your research, compare and contrast your products against your competitors and reflect the pros and cons in your pricing. It is also very important to know your market, where your products will be appreciated and the price point which will be effective.  

Factor in your shortcomings

  As we touched on above, businesses will live and die by comparisons to their peers. Pricing your product in a similar fashion to a competitor who has deeper pockets, more experience and a better product, will put you on a hiding to nothing. You need to be honest, what are your shortcomings and how do these compare to the market.    Let’s assume that you have a product which is not as powerful as the leading product in the marketplace. Maybe there are customers who can’t afford the leading product, but will readily pay a little less for a little less powerful machine. You will very quickly find there is more than one pricing point when it comes to products. Just because you aren’t the leader doesn’t mean you can’t build a successful business around your products.   When marketing your products you should obviously focus on the positives, reaffirming value for money. It is important not to hide any details in the product description and specifications. Potential customers will compare and contrast competing products in their own time.   

Remember, you get what you pay for

  There’s an old saying in business:-   “You get what you pay for”   There are two main types of customer, those looking for the cheapest product and those looking for the best product. Never undersell your product, never refer to the lowest common denominator, pricing, as this will ruin your business. You may find competitors selling “quality products” at rock bottom prices which are in reality unsustainable. This may create a short-term surge in sales and cash flow but this is not a viable business in the longer term.   The Internet is awash with review websites, forums where products are discussed and extremely blunt opinions are exchanged. While everybody is looking for a balance between price and quality, the majority of consumers appreciate that you get what you pay for. Your product may compare favourably with others which have a relatively short shelf life. Spending a little extra on a quality durable product often pays huge dividends in the longer term. Make sure your customers know this!  

It’s not a race to the bottom

  When business is tough, when competitors are undercutting you and the short-term outlook is challenging, there is a temptation to compete in a race to the bottom. This approach can be catastrophic in the longer term with two major issues to consider:-  

Cheapening your brand 

  The moment you begin to cheapen your brand is the moment that your whole business model will change. Yes, you need to be realistic with pricing and competition, but once you cheapen your brand it is difficult to regain that lost premium. Attempts to increase your pricing in the medium to long-term, when cheaper competitors have fallen by the wayside, can often prove near impossible. You have switched from a premium product provider to a cheap, volume driven business.   

Turnover is vanity, profit is sanity

  Many people naturally focus on turnover before profitability. The idea is simple, if the turnover is there, eventually the profits will come. But will they?   Competing with those offering rock bottom prices may attract new customers, but profits may be hard to come by. As soon as you increase your prices, those looking for rock bottom prices will disappear. You will be left in no man’s land. You have cheapened your brand and will find it very difficult, if not impossible, to upscale additional products and services. We see many businesses boasting huge turnover but little in the way of profits. A fledging start-up will take time to become profitable, but this will be factored into the initial business plan. Turnover doesn’t pay the bills, profits do.  

Consider a tiered pricing strategy

  While it is important not to overcomplicate your product and pricing structure, very often tiered pricing strategies are ignored at an entrepreneur’s peril. Perhaps the best example of this pricing strategy is a café or restaurant. On the menu you will see prices for small, medium or large servings, covering all potential customer requirements. Is this something which can be rolled over into pricing strategies for your products?   If we look at replacement tires for your vehicle, this is a prime example of tiered pricing. When you go to get your tyre replaced you will likely be offered a cheap, medium or expensive tyre option. In a perfect world, we would all likely prefer to go for the more expensive, better performing and more durable tyre. As a consequence of finances this is not always possible. So, in the blink of an eye you are covering three potential groups of customers. Your products are instantly applicable to those where money is no problem, those looking for the best within their budget and those looking for the cheapest option. If you had focused on expensive, middle-of-the-road or cheap tyres exclusively this would have slashed your potential market. As your client base continues to grow there may be opportunities to cross sell or offer promotions to existing customers.   There are businesses which focus on one particular area of the market, and type of clientele. However, by offering the same service but integrating products at different prices this reduces your exposure to one type of client. In the challenging economic times, those who may have bought middle-of-the-road or expensive tyres could downgrade. There is every chance that you will retain their custom.  

Package deals are difficult to compare

  You tend to find a significant number of package deals in very competitive markets. These are used to ensure that individual companies stand out from their competitors with “exceptional deals”. The beauty with package deals is the difficulty in comparing and contrasting with your competitors. If none of your competitors are selling the same package, this could make you look like a market leader and attract new custom. The best way to compare and contrast what is out there is to create a pricing survey template. See which areas are covered, where package deals may be well received and then go for it.   Courtesy of Unsplash: https://unsplash.com/photos/s19SLYuhAiQ   For example, if you sold bicycles you would probably find yourself in a very competitive market. You may therefore consider selling a package which included a bicycle, safety helmet, bicycle insurance and perhaps cycling lessons for children. Choose something that your competitors are not offering - your potential customers won’t be able to compare and contrast the value. It may be that the insurance and cycling lessons are included at “cost value” while maximising your profit on the bicycle and safety helmet. This is just one example of how packaging different products and services together can lift you head and shoulders above your competitors.  

Keep an eye on the long-term picture

  It is also very important to keep an eye on the long-term picture with regard to products, prices and changing trends. If trends are changing, the lasting you want is to get left with products from yesterday’s trend. This changeover period can be challenging but it can also allow you to convert existing stock into cash - building your warchest for the new products and new trends. These are situations where it can become a race to the bottom. While you don’t want to “giveaway” any products, you don’t want to be left with stock which may be difficult to sell.  

Conclusion

  The foundation of any effective pricing strategy is to appreciate the strengths as well as the weaknesses of your offering. Never forget, turnover is vanity, profit is sanity. As trends change there may come a point when you need to sell off old stock. In the main, it is important to price your products in terms of quality as opposed to becoming involved in a race to the bottom. When competing with low-cost less durable products, you are cheapening your brand and consumers are effectively comparing apples and pears. Once your company gets dragged down towards the bottom end of the market, price is king and quality/durability often a poor second. It is difficult to claw your way back up to the premium pricing levels of yesterday.  

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The short version: A strong pricing strategy starts with knowing your costs, your customer, and your competition, then finding the sweet spot where value meets profit. Price too low and you cheave your brand; price too high without justification and you lose buyers before they even consider you. Test, measure, and adjust your prices regularly because the market never stays still.

Frequently asked questions

What is the first step in building a pricing strategy?

Start with a full cost analysis so you know your floor price, the minimum you must charge to cover costs and stay profitable. From there you layer in market research, competitor pricing, and the perceived value your product offers to customers.

How do I know if my price is too high or too low?

Watch your conversion rates, cart abandonment data, and customer feedback closely. A high abandonment rate at checkout often signals price resistance, while a very high conversion rate paired with thin margins can signal you are leaving money on the table.

Should I use the same pricing strategy for every product?

Not necessarily. Different products in your range may serve different customer segments or solve different problems, so a one-size-fits-all approach can hurt your overall revenue. Mix strategies such as value-based pricing for premium items and competitive pricing for entry-level products to cover more ground.

How often should I review my pricing?

Review your prices at least once a quarter and any time costs shift, a major competitor changes their rates, or you launch into a new market. Consistent reviews keep your strategy aligned with real-world conditions rather than assumptions you made at launch.