Finding the right price for your products or services is one of the most important career decisions a business owner will ever make. For small businesses, startups, and entrepreneurs, establishing a pricing strategy that works can make the difference between success or struggle for your business. This pricing strategy will directly impact on profitability, competitive position in the market and customer perception.

This article discusses 20 of the most effective pricing strategies that can help maximize the profits of a business. We will take a deep dive into these strategies, exploring their mechanisms, benefits, and drawbacks, along with case studies of their application.

We will also discuss how you can implement these strategies effectively by obtaining small business loans, startup business loans, or a small business line of credit.

Why is Pricing So Important for Small Businesses?

Setting prices is not just about covering costs, it’s a strategic lever that impacts every area of your business. Your pricing decides everything whether you are selling a product online or providing services.

Profitability: The price you charge for your product or service directly impacts your profitability. A well-designed pricing strategy allows your business to thrive instead of just survive.

Market Positioning: Price also determines the positioning of your brand. Is your brand luxury? Are you catering to frugal customers? Determining a price helps customers discern the value of your product.

Attracting Customers: A well-thought-out pricing will enable you to draw more customers and stay away from competition.

Financial Viability: These will lead to loss for poor pricing and if pricing is done strategically and systematically, you will be able to scale-up and meet the need for sustainable growth.

The importance of proper pricing strategies, particularly for small businesses and startups, cannot be overstated. If you choose the right pricing methods, survival, growth, and profitability are assured for your small businesses.

Types of Pricing Strategies for Small Businesses

Now, let’s jump into the 20 best pricing strategies for small businesses. We’ll take you through each strategy, explaining how it works and how businesses can implement it.

1. Cost-Plus Pricing

Cost-plus pricing is a pricing strategy in which a business determines the total cost of producing a product and then adds a percentage markup on top of this cost to set the selling price.

The markup is intended to pay for business costs and to provide a profit margin. It is a popular pricing model due to its simplicity to calculate and provides guaranteed profit margin as long as you have accurately calculated costs. But it does not take market competition or customer willingness to pay into account.

How It Works:

• Determine COGS: COGS consists of all costs associated with production, labor, and overhead.
• To find the selling price, add a percentage to the cost.
• For instance, say it costs you $10 to make a product and you mark it up 50% that gives you a price of $15.

Pros:

• Simple and easy to implement.
• Ensures that costs are covered and profits are put into your pocket.

Cons:

• Disregards competitors’ prices and market requirement
• May lead to overpriced or underpriced

Ideal for: Small businesses in little competition or those selling essential goods.

2. Value-Based Pricing

With value-based pricing, the price of the product or service is set based on the perceived value it offers to the customer instead of, for example, the cost of production. With this methodology, companies price according to what customers are willing to pay for the benefits and features the product or service offers.

Rather than being restricted to the actual cost of the good or service, it is driven more by customer expectations and the value provided to them, making this type of pricing more versatile than cost-based pricing and often generating a higher profit margin.

It needs strong understanding of customer behavior, their preferences, market demand.

How It Works:

• Research which price are customers ready to pay for the value they receive.
• This value to be used to set the price.
• Example: If a software company provides features which none of the competitors have, they can demand a higher price than competitors even if the cost of production is equal.

Pros:

• Align you strategy for maximum profit with customer expectations.
• Enables businesses to price their products at a premium with high perceived value.

Cons:

• In-depth market research is needed for this.
• Overvaluation risk as value is not displayed properly

Good for: Brands with high-end products or services.

3. Penetration Pricing

Penetration pricing is a strategy where an initial low price is set by a business in order to gain market share and attract customers as quickly as possible, often during the launch phase of a product or service.

This price is usually low than the competitors price so that customers can test the offering. After establishing a significant clientele, businesses can progressively raise the price.

However, it is common practice for new entrants in competitive marketplaces or when trying to build brand awareness. It can produce fantastic sales volumes, but revenue does not always equal profit, and without prudent cost management, it can be a hard path to follow for the long-term.

How It Works:

• Offer your product at a ticket argument first.
• Once you have the customer base, increase the price.
• For example, a new online subscription service will provide the first month for free or for a minimal charge to lure customers and then raise the price after the initial period.

Pros:

• Builds customer base quickly.
• May increase market share and brand visibility.

Cons:

• Low introductory prices can be detrimental to profits.
• Danger of customers refusing to accept future price rises.

Best for: Emerging businesses entering competitive spaces.

4. Skimming Pricing

A strategy when an organization sets a high price for a new product to skim maximum revenue layer by layer from segments willing to pay a high price with target customers for new technology, innovative product, etc. As demand from early adopters peaks after a period of time, the price is reduced step by step to generate demand from the more price sensitive consumer segment.

This particular strategy is frequently employed to introduce new technology, electronics, or higher-priced items that contain a unique feature or innovation. This means that businesses will earn the most amount of their profit when the product is new but it can also result in unhappy customer if their prices drop too quickly.

How It Works:

• The objective is to establish a barrier to lower prices for early adopters whilst extracting maximum value from those that are prepared to pay a premium, hence begin at a high price.
• When the product becomes common or is outmoded, drop the price.

For example, skimming pricing is often used for high-tech products, such as smartphones companies charge high prices when their products are first launched, and then the cost of older models is lowered when newer models are released.

Pros:

• Maximizes early profits.
• Aims to attract clients who are prepared to spend more for novel items.

Cons:

• Isolate pricing customers.
• Potential to be copied by competitors, selling a similar product for less.

Best for: Products or technologies that are relatively new or unique.

5. Psychological Pricing

Psychological pricing is a strategy that uses pricing techniques to bias consumer behavior based on perceived value. Some common tricks are putting a price slightly below a round figure, say $9.99 instead of 10, to make products look relatively cheaper and to create a sense of urgency or value.

This strategy aims at attracting customers to see it as a better deal where the price difference is only by a few digits. This price strategy leverages the consumer’s subconscious due to its common usage in retail and through online business, in an effort to boost sales and improve conversion.

How It Works:

• For example, set prices just below a round number like $9.99 instead of $10. That makes the product feel less expensive.
• Create bundling products or discounts that sound like a better deal.

For the example, a clothing store sells a jacket for $49.99 instead of $50, to entice the purchase.

Pros:

• Increases sales volume.
• Nothing complex but very successful at shaping consumer behaviors.

Cons:

• Can appear manipulative
• This is not applicable in all the sectors.

Best for: Price-sensitive customers and for retailers and other businesses.

6. Dynamic Pricing

The dynamic pricing or surge pricing is a tactic where the cost of a product or service varies based on supply and demand, the rivaling company, time, or the buyer behavior.

Such a pricing structure enables companies to set prices dynamically in real time to optimize revenue. For instance, airlines and hotels, along with ride-sharing companies, leverage dynamic pricing to raise prices during peak seasons or periods of demand and lower them during off-peak periods.

Dynamic pricing works to maximize revenue at peak times, but can also be a controversial strategy if some customers perceive prices as unfair or that their prices are inconsistent.

How It Works:

• Leverage data to dynamically adjust prices based on market conditions.
• That is, increase prices when demand is high and decrease them when demand is low.
• Airlines, hotels, and other service industries often practice dynamic pricing based on seasonality, location, and previous booking time.

Pros:

• Maximize revenue by aligning with the market.
• Can be automated with pricing software

Cons:

• Customers may feel that prices themselves are unfair.
• Requires advanced technology to execute.

Best for: Companies in industries with variable demand, including travel and hospitality.

7. Freemium Pricing

A freemium pricing model involves giving customers a basic version of your product or service for free, while charging them for premium features or more advanced functionality.

This is a common approach in products, especially digital services such as software, apps, and online tools. As the business provides a free version, a considerable number of users acquire it, and then they can turn into paying customers as soon as they notice the worth of other features.

Although this model can help businesses reach a wide user base, it ultimately relies on a successful conversion strategy for sustainable revenue.

How It Works:

• Offer a limited-functionality free version of your product or service.
• Add-ons or premium services available for a charge.

Example: A cloud-storage provider gives users 5GB free, before users have to pay for extra storage.

Pros:

• This draws a huge volume of users.
• High Conversion Rates to Paid Plans

Cons:

• Heavily depends on user base for profitability
• Conversion from free to paid can take time.
• SaaS businesses and tech startups.

8. Subscription-Based Pricing

Subscription-based pricing is when customers pay an ongoing fee (usually monthly or annually) for access to a product or service. Such model establishes a consistent and predictable revenue stream, thereby making it a perfect choice for businesses that provide digital services, media content, or SaaS (Software as a Service).

A business could provide multiple ties of subscription to fit different segments of customers the basic plan vs the premium plan, limited vs enhanced features, etc. Like any other business, you need to continue providing value to keep your customers coming back.

How It Works:

• There is a subscription-based payment with a period: Users pay a monthly and/or annual fixed fee to access the service or product.
• Can provide several subscription levels depending on functionality.

Example: Subscription services- e.g., Netflix, Spotify charge a monthly fee.

Pros:

• Predictable revenue stream.
• Fosters long-term customer relationships

Cons:

• Difficult to gain customers in the early stages.
• Needs sustained value to keep users subscribed.

Best for: Online services, SaaS, and companies producing recurring services.

9. Tiered Pricing

Tiered Pricing is a business strategy that gives customers different levels of service, product features to choose from at different price points. All these regions target different portions of customers depending on their needs and ability to pay.

A software company can offer a basic, standard and premium version of its product for example, with increasing levels of functionality.

This business model enables a variety of customers, from penny-pinchers to those ready to shell out for bells and whistles. However, for this strategy to work, you need to clearly differentiate the tiers so customers are not confused with the offering.

How It Works:

• Create basic, standard and premium versions of your product or service at different price points.
• All tiers offer different features or benefits.
• For instance, a software company might have a $10 basic version, a $25 professional version and a $50 enterprise version.

Pros:

• Target different customer segments.
• Enables companies to reach a vast array of customers.

Cons:

• Can overwhelm customers if the distinctions between tiers are unclear.
• Josh: Risk of customers think they’re missing out on some important features.

Ideal for: Businesses with several different customer segments and tiers of products/services.

10. Bundling Pricing

Bundling pricing refers to the practice of a business offering a package of products or services together at a lower price than that when purchased separately. It is primerally employed to up-sell (to raise the average transaction value), to cross-sell (to add more items to the basket) or to clear stock.

Among the other benefits of bundling, it is worth mentioning that it can make a product seem like a better option for customers, especially when it comes to selling complementary items together.

Though it can increase sales and establish a false value, companies need to make sure the bundle is enticing and that it does not decrease the perceived quality of the individual products.

How It Works:

• Group together related products or services and sell them as a single package at a discount compared to purchasing at individual prices.
• For example, a phone company packages a smartphone along with a charger, case, and headphones at a reduced price.

Pros:

• Boosts the average order value
• Makes customers buy more.

Cons:

• Might have negative effect on valuation of single items.
• Hard to bundle if your products don’t super-align.

Great for: Retail businesses and companies with complementary products.

11. Geographic Pricing

A pricing tactic, geographic pricing is a pricing model wherein companies apply different price points depending on customers’ geographic locations. This may consider factors like local demand, cost of living, shipping costs or regional market conditions. For example, a company may charge more in high cost-of-living urban areas or in markets with particularly strong demand for its product.

What you need to isolate is that the geographic pricing strategy can build revenue in different markets; however, this practice must be carefully monitored so that customers in places with less revenue are not alienated or the perception of unfair pricing is created.

How It Works:

• Set prices are determined regionally depending on market conditions, taxes or shipping costs.
• For example, a company might charge more in cities where demand is higher or living costs are higher.

Pros:

• Takes into account regional differences in demand and cost.

For instance, a business could raise rates in cities with more demand or higher cost of living.

Cons:

• If you do this, it could cause confusion or resentment from customers in other regions.
• Must be familiar with regional market conditions.

Best for: Businesses that provide goods or services across multiple geographies.

12. Competitive Pricing

Competitive pricing is when businesses base their prices on their competition within a market. This method sets a company’s prices to be competitive and in keeping with the industry standard but prevents overpricing or underpricing in comparison to others.

Carters can track what competitors are charging and adjust their own prices up or down, meeting a price or going a little lower to drive sales.

This approach allows the companies to remain competitive but does not represent necessarily the real worth of the product by making the price war, which has a negative effect on the profit margin.

How It Works:

• Keep track of competitor pricing, and modify your prices accordingly to stay competitive.

For example, a fresh online store may set product pricing similar to that of established competition in the same niche.

Pros:

• It enables businesses to remain competitive in saturated markets.
• Little market research needed to implement

Cons:

• Risk of a price war.
• I may end up charging less or more than what I am really worth.

Best for: More competitive industries.

13. Pay What You Want Pricing

Pay What You Want (PWYW) pricing is a pricing model where businesses allow customers to pay whatever they want for a product or service, usually with a suggested price or a minimum price.

The premise to create a goodwill and empowerment is worth it because the consumer can pay what they feel is appropriate for a product. While this model helps a company construct strong customer loyalty and involvement, it also comes with an inherent danger that customers will perceive the faith as being “worth” less cash than it is, which could lead to a company losing cash if not monitored appropriately. It is mostly used in creative industries, artistic, or special experiences.

How It Works:

• List a product without a set price and allow customers to decide how much they wish to pay.

For example, a restaurant that offers pay-what-you-want on certain dishes in order to find what customers are willing to pay.

Pros:

• Builds up some customer good will and engagement.
• May do better in a creative or service-based industry

Cons:

• Difficult to predict revenue.
• Can cause underpayment if not properly managed.

Best for: Unique or niche businesses with a risk appetite.

14. Loss Leader Pricing

Loss leader pricing refers to a strategy in which one or more products are sold at a loss in the hope that consumers will buy additional items after entering the store or accessing the website.

The concept is to create an offer, that is so irresistible and attracts the traffic and after all will lead to more sales in long term. Retailers commonly employ such tactics on popular or high-traffic items, such as staples in grocery stores, while anticipating the profits from other goods will make up for the shortfall.

This model can be effective, but a business has to make sure its overall profits aren’t impacted in a negative way.

How It Works:

• Price one item at or below cost to attract customers who then purchase other, more profitable products.
• And they practice this in corners of the real world supermarkets may sell some popular items (think milk or bread) at a loss in the hopes of the customer coming through the door to buy other, pricier goods.

Pros:

• To help drive foot traffic or website visits
• This increases the overall volume of sales.

Cons:

• It will not last long if not managed properly.
• Threat to profit margins.

Ideal for: Retailers who have a wide range of complementary products.

15. Affiliate or Commission-Based Pricing

Affiliate or commission-based pricing refers to a model where businesses collaborate with affiliates or influencers to promote their products or services and provide them with a commission for each sale they make.

This model that revolves around how well a liability sells is quite common in businesses on the internet (e-commerce especially) where an affiliate or an influencer is able to reach a large audience.

The greatest advantage of this approach is there is not a risk of spending on useless advertising; they are paid for real sales. Nonetheless, it needs a great affiliate program, tracking system, as well as a well-defined commission structure for it to succeed.

How It Works:

• To help your company grow, establish a price for goods or services and a commission for affiliates on each sale they make.
• For example, an e-commerce store may partner with influencers to showcase products and earn a commission based on sales.

Pros:

• Low risk and cost-effective.
• Expands your products reach.

Cons:

• Inferring sales that depend on affiliates.
• Can lead to shrinking trims as payouts must be made to the commissions.

Ideal for: Businesses with affiliate marketing programs and digital storefronts.

16. Time-Based Pricing

Time-based pricing is a pricing strategy in which businesses create different prices for a product or service based on the time of day, week, or season. This is commonly employed in industries with greatest sales and demand variation, like ride-sharing, airlines, and hotels.

Businesses may choose to charge more during peak hours or holidays, while charging less during off-peak hours. In the case of time-based pricing, businesses can optimize income but only if they can forecast demand, manage customer expectations, and reduce strain on available resources.

How It Works:

• Set rates higher at peak times and lower when demand is softer.

Example: Companies such as Uber use time-based pricing on their ride-sharing applications, charging higher prices for their services during rush hour.

Pros:

• Leverage high demand periods for maximum profit.
• Assists to balance between demand and capacity.

Cons:

• May turn off customers who like fixed pricing.
• Customer expectations are hard to manage.

Best for: Seasonality service businesses.

17. Subscription Box Pricing

Subscription box pricing is a method of selling where companies deliver a selected set of goods to their customers on a recurring basis normally monthly or quarterly — for a set subscription price.

This method is popular in industries such as beauty, food, and fashion, where customers are delighted to have a box of goodies and a curated idea sent straight to their doorstep. Pricing structure might depend on the number of items П, exclusivity of products Α or tier level Α.

It’s a common pricing strategy, allowing for predictable revenue but needing continual value to ensure customer retention.

How It Works:

• Subscribe and save: Provide customers with a subscription option to receive products on a regular basis, often at a discounted rate.
• For example, a beauty brand could have monthly subscription boxes filled with skincare products.

Pros:

• Builds customer loyalty.
• Regular, recurring revenue.

Cons:

• High turnover for customers when products do not meet their expectations.
• Requires excellent customer service.

Best for: Businesses with a subscription model.

18. Auction Pricing

Auction pricing refers to a pricing strategy in which the price of a product is set by bids from potential customers, with these customers bidding on what they would be willing to pay for the good. Each auction is run for a defined length of time, and by the end of the auction, the highest bidder wins the product.

Such a pricing model is employed in the case of rare, unique, or collectible items and is common for online auction places like eBay.

While prices can exceed expectations with auction pricing, significantly lower prices are also possible if demand is weak, leading to revenue for businesses that can be variable.

How It Works:

• Create a bidding platform where buyers can bid on items.
• For example, electronic marketplace websites such as eBay utilize auction pricing for numerous items.

Pros:

• Can create higher sales prices.
• It creates excitement and engagement.

Cons:

• Unpredictable revenue.
• Not Ideal for all Product Types.

Best for: Merchants with unique or collectible items.

19. Discount Pricing

Discount pricing refers to a strategy used by businesses where they sell a product or service at a price lower than the normal range, usually in a promotion or sale packaged as such.

Discounts may be expressed as a percentage (like 20% off) or as an amount (like $10 off). This approach is commonly applied in retail to drive sales volume, clear out inventory, or acquire new customers.

How It Works:

• Get rid of more stock with seasonal or clearance discounts
• E.g. A clothing store may have 20% off for the holidays.

Pros:

• It is an approach that easily scales to volume.
• Can attract new customers.

Cons:

• Will destroy perceived value of product.
• Heavy use of discounts can undermine profitability.

Good for: Businesses are seasonal or have excess stock.

Custom Pricing

Custom pricing is a pricing strategy that sets prices based on customer needs, typically based on customization, order size, or service level. This method is prevalent in businesses that provide customized or tailored products or services like personalized software solutions, bespoke furniture making, or consulting services.

Custom pricing is a business greased with great communication with the customer along with a greater understanding of the end customer requirements, custom pricing helps a business pocket the most value for priorities on the end customer. But it can be difficult to scale, and manage for businesses with high customer demand.

How It Works:

• Custom orders or bespoke services can tailor prices to a customer’s needs.

For example, a custom jewelry maker might charge per the complexity of a design.

Pros:

• Can maximize profitability for high demand, specialist products.
• Tailored to each customer.

Cons:

• Difficult to manage at scale.
• Time-consuming.

Best for: Businesses that sell made-to-order products or services.

Conclusion

Your pricing strategy is crucial to your small business or startup long-term success, because the correct decision will keep you alive on the market. The 20 pricing strategies discussed above offer a wide range, from as simple as cost-plus to complex value-based or dynamic pricing models.

There are advantages and disadvantages to each of these strategies, so you want to be sure to understand your own target market, costs, and competition before selecting what is most appropriate for your business.

Moreover, getting the right funding, whether in the form of small business loans, startup business loans, a small business line of credit, and more can provide you with the cash flow you need to ensure your pricing strategy is executed properly, enabling you to spend on your marketing, product development and customer acquisition.

Fortunately, their tried-and-true principles provide us with a robust toolkit for maintaining profitability, ensuring that you a cash flow positive throughout your growth journey.