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The Ultimate Guide to Pricing Strategies & Models

Discover how to properly price your products, services, or events so you can drive both revenue and profit.

FREE SALES PRICING CALCULATOR

Determine the best pricing strategy for your business with this free calculator and template.

Updated: 08/16/23

Published: 08/16/23

Pricing your products and services can be tough. Set prices too high, and you miss out on valuable sales. Set them too low, and you miss out on valuable revenue.

Thankfully, pricing doesn’t have to be a sacrifice or a shot in the dark. There are dozens of pricing models and strategies that can help you better understand how to set the right prices for your audience and revenue goals.

That’s why we’ve created this guide.

Whether you’re a business beginner or a pricing pro, the tactics and strategies in this guide will get you comfortable with pricing your products. Bookmark this guide for later and use the chapter links to jump around to sections of interest.

Pricing Strategy

Types of pricing strategies, how to create a pricing strategy, pricing models based on industry or business.

Conducting a Pricing Analysis

Pricing Strategy Examples

A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand.

If only pricing was as simple as its definition — there’s a lot that goes into the process.

Pricing strategies account for many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends.

It’s not uncommon for entrepreneurs and business owners to skim over pricing. They often look at the cost of their products (COGS) , consider their competitor’s rates, and tweak their own selling price by a few dollars. While your COGS and competitors are important, they shouldn’t be at the center of your pricing strategy.

The best pricing strategy maximizes your profit and revenue.

Before we talk about pricing strategies, let’s review an important pricing concept that will apply regardless of what strategies you use.

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Determine the Best Pricing Strategy For Your Business

Fill out this form to access the free template., price elasticity of demand.

Price elasticity of demand is used to determine how a change in price affects consumer demand.

If consumers still purchase a product despite a price increase (such as cigarettes and fuel) that product is considered inelastic .

On the other hand, elastic products suffer from pricing fluctuations (such as cable TV and movie tickets).

You can calculate price elasticity using the formula:

% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand

The concept of price elasticity helps you understand whether your product or service is sensitive to price fluctuations. Ideally, you want your product to be inelastic — so that demand remains stable if prices do fluctuate.

Cost, Margin, & Markup in Pricing

To choose a pricing strategy, it’s also essential to understand the role of cost, margin, and markup — especially if you’d like your pricing to be cost-based . Let’s dive into the definition for each.

Cost refers to the fees you incur from manufacturing, sourcing, or creating the product you sell. That includes the materials themselves, the cost of labor, the fees paid to suppliers, and even the losses. Cost doesn’t include overhead and operational expenses such as marketing, advertising, maintenance, or bills.

Margin (in this case, gross margin) refers to the amount your business earns after you subtract manufacturing costs.

Markup refers to the additional amount you charge for your product over the production and manufacturing fees.

Now, let’s cover some common pricing strategies. As we do so, it’s important to note that these aren’t necessarily standalone strategies — many can be combined when setting prices for your products and services.

• Competition-Based Pricing
• Dynamic Pricing
• High-Low Pricing
• Penetration Pricing
• Skimming Pricing
• Psychological Pricing
• Geographic Pricing

Now, let's dive into the descriptions of each pricing strategy — many of which are included in the template below — so you can learn about what makes each of them unique.

Discover how much your business can earn using different pricing strategies with HubSpot's free sales pricing calculator so you can choose the best pricing model for your business.

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1. competition-based pricing strategy.

Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate (or going rate ) for a company’s product or service; it doesn’t take into account the cost of their product or consumer demand.

Instead, a competition-based pricing strategy uses the competitors’ prices as a benchmark. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers.

With competition-based pricing , you can price your products slightly below your competition, the same as your competition, or slightly above your competition. For example, if you sold marketing automation software , and your competitors’ prices ranged from $19.99 per month to $39.99 per month, you’d choose a price between those two numbers.

Whichever price you choose, competitive pricing is one way to stay on top of the competition and keep your pricing dynamic.

Competition-Based Pricing Strategy in Marketing

Consumers are primarily looking for the best value which isn’t always the same as the lowest price. Pricing your products and services competitively in the market can put your brand in a better position to win a customer’s business. Competitive pricing works especially well when your business offers something the competition doesn’t — like exceptional customer service, a generous return policy, or access to exclusive loyalty benefits .

2. Cost-Plus Pricing Strategy

A cost-plus pricing strategy focuses solely on the cost of producing your product or service, or your COGS . It’s also known as markup pricing since businesses who use this strategy “markup” their products based on how much they’d like to profit.

To apply the cost-plus method, add a fixed percentage to your product production cost. For example, let’s say you sold shoes. The shoes cost $25 to make, and you want to make a $25 profit on each sale. You’d set a price of $50, which is a markup of 100%.

Cost-plus pricing is typically used by retailers who sell physical products. This strategy isn’t the best fit for service-based or SaaS companies as their products typically offer far greater value than the cost to create them.

Cost-Plus Pricing Strategy in Marketing

Cost-plus pricing works well when the competition is pricing using the same model. It won’t help you attract new customers if your competition is working to acquire customers rather than growing profits. Before executing this strategy, complete a pricing analysis that includes your closest competitors to make sure this strategy will help you meet your goals.

3. Dynamic Pricing Strategy

Dynamic pricing is also known as surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices fluctuate based on market and customer demand.

Hotels, airlines, event venues, and utility companies use dynamic pricing by applying algorithms that consider competitor pricing, demand, and other factors. These algorithms allow companies to shift prices to match when and what the customer is willing to pay at the exact moment they’re ready to make a purchase.

Dynamic Pricing Strategy in Marketing

Dynamic pricing can help keep your marketing plans on track. Your team can plan for promotions in advance and configure the pricing algorithm you use to launch the promotion price at the perfect time. You can even A/B test dynamic pricing in real-time to maximize your profits.

4. High-Low Pricing Strategy

A high-low pricing strategy is when a company initially sells a product at a high price but lowers that price when the product drops in novelty or relevance. Discounts, clearance sections, and year-end sales are examples of high-low pricing in action — hence the reason why this strategy may also be called a discount pricing strategy.

High-low pricing is commonly used by retail firms that sell seasonal items or products that change often, such as clothing, decor, and furniture. What makes a high/low pricing strategy appealing to sellers? Consumers enjoy anticipating sales and discounts, hence why Black Friday and other universal discount days are so popular.

High-Low Pricing Strategy in Marketing

If you want to keep the foot traffic steady in your stores year-round, a high-low pricing strategy can help. By evaluating the popularity of your products during particular periods throughout the year, you can leverage low pricing to increase sales during traditionally slow months.

5. Penetration Pricing Strategy

Contrasted with skimming pricing, a penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing attention (and revenue) away from higher-priced competitors. Penetration pricing isn’t sustainable in the long run, however, and is typically applied for a short time.

This pricing method works best for brand new businesses looking for customers or for businesses that are breaking into an existing, competitive market. The strategy is all about disruption and temporary loss … and hoping that your initial customers stick around as you eventually raise prices.

(Another tangential strategy is loss leader pricing , where retailers attract customers with intentionally low-priced items in hopes that they’ll buy other, higher-priced products, too. This is precisely how stores like Target get you — and me.)

Penetration Pricing Strategy in Marketing

Penetration pricing has similar implications as freemium pricing — the money won’t come in overnight. But with enough value and a great product or service, you could continue to make money and scale your business as you increase prices. One tip for this pricing strategy is to market the value of the products you sell and let price be a secondary point.

6. Skimming Pricing Strategy

A skimming pricing strategy is when companies charge the highest possible price for a new product and then lower the price over time as the product becomes less and less popular. Skimming is different from high-low pricing in that prices are lowered gradually over time.

Technology products, such as DVD players, video game consoles, and smartphones, are typically priced using this strategy as they become less relevant over time. A skimming pricing strategy helps recover sunk costs and sell products well beyond their novelty, but the strategy can also annoy consumers who bought at full price and attract competitors who recognize the “fake” pricing margin as prices are lowered.

Skimming Pricing Strategy in Marketing

Skimming pricing strategy can work well if you sell products that have products with varying life cycle lengths. One product may come in and out of popularity quickly so you have a short time to skim your profits in the beginning stages of the life cycle. On the flip side, a product that has a longer life cycle can stay at a higher price for more time. You’ll be able to maintain your marketing efforts for each product more effectively without constantly adjusting your pricing across every product you sell.

7. Value-Based Pricing Strategy

A value-based pricing strategy is when companies price their products or services based on what the customer is willing to pay. Even if it can charge more for a product, the company decides to set its prices based on customer interest and data.

If used accurately, value-based pricing can boost your customer sentiment and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.

On the flip side, value-based pricing requires you to constantly be in tune with your various customer profiles and buyer personas and possibly vary your prices based on those differences.

Value-Based Pricing Strategy in Marketing

Marketing to your customers should always lead with value, so having a value-based pricing model should help strengthen the demand for your products and services. Just be sure that your audiences are distinct enough in what they’re willing to pay for — you don’t want to run into trouble by charging more or less based on off-limits criteria .

8. Psychological Pricing Strategy

Psychological pricing is what it sounds like — it targets human psychology to boost your sales.

For example, according to the " 9-digit effect ", even though a product that costs $99.99 is essentially $100, customers may see this as a good deal simply because of the "9" in the price.

Another way to use psychological pricing would be to place a more expensive item directly next to (either, in-store or online) the one you're most focused on selling . Or offer a "buy one, get one 50% off (or free)" deal that makes customers feel as though the circumstances are too good to pass up on.

And lastly, changing the font, size, and color of your pricing information on and around your products has also been proven, in various instances, to boost sales.

Psychological Pricing Strategy in Marketing

Psychological pricing strategy requires an intimate understanding of your target market to yield the best results. If your customers are inclined to discounts and coupons, appealing to this desire through your marketing can help this product meet their psychological need to save money. If paying for quality is important to your audience, having the lowest price on the shelf might not help you reach your sales goals. Regardless of the motivations your customers have for paying a certain price for a product, your pricing and marketing should appeal to those motivations.

9. Geographic Pricing Strategy

Geographic pricing is when products or services are priced differently depending on geographical location or market.

This strategy may be used if a customer from another country is making a purchase or if there are disparities in factors like the economy or wages (from the location in which you're selling a good to the location of the person it is being sold to).

Geographic Pricing Strategy in Marketing

Marketing a geographically priced product or service is easy thanks to paid social media advertising. Segmenting by zip code, city, or even region can be accomplished at a low cost with accurate results. Even as specific customers travel or permanently move, your pricing model will remain the same which helps you maintain your marketing costs.

Download our free guide to creating buyer personas to easily organize your audience segments and make your marketing stronger.

Like we said above, these strategies aren’t necessarily meant to stand alone. We encourage you to mix and match these methods as needed.

Below, we cover more specific pricing models for individual products.

Pricing Models

While your pricing strategy may determine how your company sets fees for its offerings overall , the below pricing models can help you set prices for specific product lines. Let's take a look.

1. Freemium

A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product hoping that users will eventually pay to upgrade or access more features.

Unlike cost-plus, freemium is a pricing model commonly used by SaaS and other software companies. They choose this model because free trials and limited memberships offer a peek into a software’s full functionality — and also build trust with a potential customer before purchase.

With freemium, a company’s prices must be a function of the perceived value of their products. For example, companies that offer a free version of their software can’t ask users to pay $100 to transition to the paid version. Prices must present a low barrier to entry and grow incrementally as customers are offered more features and benefits.

Freemium Pricing in Marketing

Freemium pricing may not make your business a lot of money on the initial acquisition of a customer, but it gives you access to the customer which is just as valuable. With access to their email inboxes, phone number, and any other contact information you gather in exchange for the free product, you can nurture the customer into a brand loyal advocate with a worthwhile LTV .

2. Premium Pricing

Also known as prestige pricing and luxury pricing, a premium pricing model is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.

Prestige pricing is a direct function of brand awareness and brand perception. Brands that apply this pricing method are known for providing value and status through their products — which is why they’re priced higher than other competitors. Fashion and technology are often priced using this model because they can be marketed as luxurious, exclusive, and rare.

Premium Pricing in Marketing

Premium pricing is quite dependent upon the perception of your product within the market. There are a few ways to market your product in order to influence a premium perception of it including using influencers, controlling supply, and driving up demand.

3. Hourly Pricing

Hourly pricing, also known as rate-based pricing, is commonly used by consultants, freelancers, contractors, and other individuals or laborers who provide business services. Hourly pricing is essentially trading time for money. Some clients are hesitant to honor this pricing strategy as it can reward labor instead of efficiency.

Hourly Pricing in Marketing

If your business thrives on quick, high-volume projects, hourly pricing can be just the incentive for customers to work with you. By breaking down your prices into hourly chunks, customers can make the decision to work with you based on a low price point rather than finding room in their budget for an expensive project-based commitment.

4. Bundle Pricing

Bundle pricing is when you offer (or "bundle") two or more complementary products or services together and sell them for a single price. You may choose to sell your bundled products or services only as part of a bundle, or sell them as both components of bundles and individual products.

This is a great way to add value through your offerings to customers who are willing to pay extra upfront for more than one product. It can also help you get your customers hooked on more than one of your products faster.

Bundle Pricing in Marketing

Marketing bundle deals can help you sell more products than you would otherwise sell individually. It’s a smart way to upsell and cross-sell your offerings in a way that is beneficial for the customer and your revenue goals.

5. Project-Based Pricing

Project-based pricing is the opposite of hourly pricing — this approach charges a flat fee per project instead of a direct exchange of money for time. It is also used by consultants, freelancers, contractors, and other individuals or laborers who provide business services.

Project-based pricing may be estimated based on the value of the project deliverables. Those who choose this pricing model may also create a flat fee from the estimated time of the project.

Project-Based Pricing in Marketing

Leading with the benefits a customer will derive from working with your business on a project can make project-based pricing more appealing. Although the cost of the project may be steep, the one-time investment can be worth it. Your clients will know that they’ll be able to work with you until the project is completed rather than until their allotted hours are depleted.

6. Subscription Pricing

Subscription pricing is a common pricing model at SaaS companies, online retailers, and even agencies who offer subscription packages for their services.

Whether you offer flat rate subscriptions or tiered subscriptions, the benefits of this model are endless. For one, you have all but guaranteed monthly recurring revenue (MRR) and yearly recurring revenue. That makes it simpler to calculate your profits on a monthly basis. It also often leads to higher customer lifetime values .

The one thing to be wary of when it comes to subscription pricing is the high potential for customer churn . People cancel subscriptions all the time, so it's essential to have a customer retention strategy in place to ensure clients keep their subscriptions active.

Subscription Pricing in Marketing

When marketing your subscription products, it's essential to create buyer personas for each tier. That way, you know which features to include and what will appeal to each buyer. A general subscription that appeals to everyone won't pull in anyone.

Even Amazon, which offers flat-rate pricing for its Prime subscription, includes a membership for students. That allows them to market the original Prime more effectively by creating a sense of differentiation.

Now, let’s discuss how to build a pricing strategy of your own liking.

1. Evaluate pricing potential.

You want to make a strategy that is optimal for your unique business. To begin, you need to evaluate your pricing potential. This is the approximate product or service pricing your business can potentially achieve in regard to cost, demand, and more.

Some factors that can affect your pricing potential include:

• Geographical market specifics
• Operating costs
• Inventories
• Demand fluctuations
• Competitive advantages and concerns
• Demographic data

We’ll dive deeper into demographic data in the next step.

2. Determine your buyer personas.

You have to price your product on the type of buyer persona that’s looking for it. When you look at your ideal customer, you’ll have to look at their:

• Customer Lifetime Value
• Willingness to Pay
• Customer Pain Points

To aid in this process, interview customers and prospects to see what they do and like, and ask for your sales team’s feedback on the best leads and their characteristics.

3. Analyze historical data.

Take a look at your previous pricing strategies. You can calculate the difference in closed deals, churn data , or sold product on different pricing strategies that your business has worked with before and look at which were the most successful.

4. Strike a balance between value and business goals.

When developing your pricing strategy, you want to make sure the price is good to your bottom line and your buyer personas. This compromise will better help your business and customer pool, with the intentions of:

• Increasing profitability
• Improving cash flow
• Market penetration
• Expanding market share

5. Look at competitor pricing.

You can’t make a pricing strategy without conducting research on your competitors’ offerings. You’ll have to decide between two main choices when you see the price difference for your same product or service:

• Beat your competitors’ price - If a competitor is charging more for the same offering as your brand, then make the price more affordable.
• Beat your competitors’ value - Also known as value-based pricing , you can potentially price your offering higher than your competitors if the value provided to the customer is greater.

To see the competition’s full product or service offering, conduct a full competitive analysis so you can see their strengths and weaknesses, and make your pricing strategy accordingly.

So we’ve gone over how to create a pricing strategy, now let’s discuss how to apply these steps to different businesses and industries.

Not every pricing strategy is applicable to every business. Some strategies are better suited for physical products whereas others work best for SaaS companies. Here are examples of some common pricing models based on industry and business.

Product Pricing Model

Unlike digital products or services, physical products incur hard costs (like shipping, production, and storage) that can influence pricing. A product pricing strategy should consider these costs and set a price that maximizes profit, supports research and development, and stands up against competitors.

👉🏼 We recommend these pricing strategies when pricing physical products : cost-plus pricing, competitive pricing, prestige pricing, and value-based pricing.

Digital Product Pricing Model

Digital products, like software, online courses, and digital books, require a different approach to pricing because there’s no tangible offering or unit economics (production cost) involved. Instead, prices should reflect your brand, industry, and overall value of your product.

👉🏼 We recommend using these pricing strategies when pricing digital products: competition-based pricing, freemium pricing, and value-based pricing.

Restaurant Pricing Model

Restaurant pricing is unique in that physical costs, overhead costs, and service costs are all involved. You must also consider your customer base, overall market trends for your location and cuisine, and the cost of food — as all of these can fluctuate.

👉🏼 We recommend using these pricing strategies when pricing at restaurants: cost-plus pricing, premium pricing, and value-based pricing.

Event Pricing Model

Events can’t be accurately measured by production cost (not unlike the digital products we discussed above). Instead, event value is determined by the cost of marketing and organizing the event as well as the speakers, entertainers, networking, and the overall experience — and the ticket prices should reflect these factors.

👉🏼 We recommend using these pricing strategies when pricing live events: competition-based pricing, dynamic pricing, and value-based pricing.

Services Pricing Model

Business services can be hard to price due to their intangibility and lack of direct production cost. Much of the service value comes from the service provider’s ability to deliver and the assumed caliber of their work. Freelancers and contractors , in particular, must adhere to a services pricing strategy.

👉🏼 We recommend using these pricing strategies when pricing services: hourly pricing, project-based pricing, and value-based pricing.

Nonprofit Pricing Model

Nonprofits need pricing strategies, too — a pricing strategy can help nonprofits optimize all processes so they’re successful over an extended period of time.

A nonprofit pricing strategy should consider current spending and expenses, the breakeven number for their operation, ideal profit margin, and how the strategy will be communicated to volunteers, licensees, and anyone else who needs to be informed. A nonprofit pricing strategy is unique because it often calls for a combination of elements that come from a few pricing strategies.

👉🏼 We recommend using these pricing strategies when pricing nonprofits: competitive pricing, cost-plus pricing, demand pricing, and hourly pricing.

Education Pricing Model

Education encompasses a wide range of costs that are important to consider depending on the level of education, private or public education, and education program/ discipline.

Specific costs to consider in an education pricing strategy are tuition, scholarships, additional fees (labs, books, housing, meals, etc.). Other important factors to note are competition among similar schools, demand (number of student applications), number and costs of professors/ teachers, and attendance rates.

👉🏼 We recommend using these pricing strategies when pricing education: competitive pricing, cost-based pricing, and premium pricing.

Real Estate Pricing Model

Real estate encompasses home value estimates, market competition, housing demand, and cost of living. There are other factors that play a role in real estate pricing models including potential bidding wars, housing estimates and benchmarks (which are available through real estate agents but also through free online resources like Zillow ), and seasonal shifts in the real estate market.

👉🏼 We recommend using these pricing strategies when pricing real estate: competitive pricing, dynamic pricing, premium pricing, and value-based pricing.

Agency Pricing Model

Agency pricing models impact your profitability, retention rates, customer happiness, and how you market and sell your agency. When developing and evolving your agency’s pricing model, it’s important to take into consideration different ways to optimize it so you can determine the best way to boost the business's profits.

👉🏼 We recommend using these pricing strategies when pricing agencies: hourly pricing, project-based pricing, and value-based pricing.

Manufacturing Pricing Model

The manufacturing industry is complex — there are a number of moving parts and your manufacturing pricing model is no different. Consider product evolution, demand, production cost, sale price, unit sales volume, and any other costs related to your process and product. Another key part to a manufacturing pricing strategy is understanding the maximum amount the market will pay for your specific product to allow for the greatest profit.

👉🏼 We recommend using these pricing strategies when pricing manufacturing: competitive pricing, cost-plus pricing, and value-based pricing.

Ecommerce Pricing Model

Ecommerce pricing models are how you determine the price at which you’ll sell your online products and what it'll cost you to do so. Meaning, you must think about what your customers are willing to pay for your online products and what those products cost you to purchase and/or create. You might also factor in your online campaigns to promote these products as well as how easy it is for your customers to find similar products to yours on the ecommerce sites of your competitors.

👉🏼 We recommend using these pricing strategies when pricing ecommerce: competitive pricing, cost-based pricing, dynamic pricing, freemium pricing, penetration pricing, and value-based pricing.

Pricing Analysis

Pricing analysis is a process of evaluating your current pricing strategy against market demand. Generally, pricing analysis examines price independently of cost. The goal of a pricing analysis is to identify opportunities for pricing changes and improvements.

You typically conduct a pricing analysis when considering new product ideas, developing your positioning strategy, or running marketing tests. It's also wise to run a price analysis once every year or two to evaluate your pricing against competitors and consumer expectations — doing so preemptively avoids having to wait for poor product performance.

How to Conduct a Pricing Analysis

1. determine the true cost of your product or service..

To calculate the true cost of a product or service that you sell, you’ll want to recognize all of your expenses including both fixed and variable costs. Once you’ve determined these costs, subtract them from the price you’ve already set or plan to set for your product or service.

2. Understand how your target market and customer base respond to the pricing structure.

Surveys, focus groups, or questionnaires can be helpful in determining how the market responds to your pricing model. You’ll get a glimpse into what your target customers value and how much they’re willing to pay for the value your product or service provides.

3. Analyze the prices set by your competitors.

There are two types of competitors to consider when conducting a pricing analysis: direct and indirect.

Direct competitors are those who sell the exact same product that you sell. These types of competitors are likely to compete on price so they should be a priority to review in your pricing analysis.

Indirect competitors are those who sell alternative products that are comparable to what you sell. If a customer is looking for your product, but it’s out of stock or it’s out of their price range, they may go to an indirect competitor to get a similar product.

4. Review any legal or ethical constraints to cost and price.

There’s a fine line between competing on price and falling into legal and ethical trouble. You’ll want to have a firm understanding of price-fixing and predatory pricing while doing your pricing analysis in order to steer clear of these practices.

Analyzing your current pricing model is necessary to determine a new (and better!) pricing strategy. This applies whether you're developing a new product, upgrading your current one, or simply repositioning your marketing strategy.

Next, let’s look at some examples of pricing strategies that you can use for your own business.

Dynamic Pricing Strategy: Chicago Cubs Freemium Pricing Strategy: HubSpot Penetration Pricing Strategy: Netflix Premium Pricing: AWAY Competitive Pricing Strategy: Shopify Project-Based Pricing Strategy: Courtney Samuel Events Value-Based Pricing Strategy: INBOUND Bundle Pricing: State Farm Geographic Pricing: Gasoline

Pricing models can be hard to visualize. Below, we’ve pulled together a list of examples of pricing strategies as they’ve been applied to everyday situations or businesses.

1. Dynamic Pricing Strategy: Chicago Cubs

I live in Chicago five blocks away from Wrigley Field, and my friends and I love going to Cubs games. Finding tickets is always interesting, though, because every time we check prices, they’ve fluctuated a bit from the last time. Purchasing tickets six weeks in advance is always a different process than purchasing them six days prior — and even more sox pricing at the gate.

This is an example of dynamic pricing — pricing that varies based on market and customer demand. Prices for Cubs games are always more expensive on holidays, too, when more people are visiting the city and are likely to go to a game.

(Another prime example of dynamic pricing is INBOUND , for which tickets get more expensive as the event nears.)

2. Freemium Pricing Strategy: HubSpot

HubSpot is an example of freemium pricing at work. There's a free version of the CRM for scaling businesses as well as paid plans for the businesses using the CRM platform that need a wider range of features .

Moreover, within those marketing tools, HubSpot provides limited access to specific features. This type of pricing strategy allows customers to acquaint themselves with HubSpot and for HubSpot to establish trust with customers before asking them to pay for additional access.

3. Penetration Pricing Strategy: Netflix

Netflix is a classic example of penetration pricing : entering the market at a low price (does anyone remember when it was $7.99?) and increasing prices over time. Since I joined a couple of years ago, I’ve seen a few price increase notices come through my own inbox.

Despite their increases, Netflix continues to retain — and gain — customers. Sure, Netflix only increases their subscription fee by $1 or $2 each time, but they do so consistently. Who knows what the fees will be in five or ten years?

4. Premium Pricing: AWAY

There are lots of examples of premium pricing strategies … Rolex, Tesla, Nike — you name it. One that I thought of immediately was AWAY luggage .

Does luggage need to be almost $500? I’d say no, especially since I recently purchased a two-piece Samsonite set for one-third the cost. However, AWAY has still been very successful even though they charge a high price for their luggage. This is because when you purchase AWAY, you’re purchasing an experience. The unique branding and the image AWAY portrays for customers make the value of the luggage match the purchase price.

5. Competitive Pricing Strategy: Shopify

Shopify is an ecommerce platform that helps businesses manage their stores and sell their products online. Shopify — which integrates with HubSpot — has a competitive pricing strategy.

There are a number of ecommerce software options on the market today — Shopify differentiates itself by the features they provide users and the price at which they offer them. They have three thoughtfully-priced versions of their product for customers to choose from with a number of customizable and flexible features.

With these extensive options tailored to any ecommerce business' needs, the cost of Shopify is highly competitive and is often the same as or lower than other ecommerce platforms on the market today.

6. Project-Based Pricing Strategy: Courtney Samuel Events

Anyone who's planned a wedding knows how costly they can be. I'm in the midst of planning my own, and I've found that the bundled, project-based fees are the easiest to manage. For example, my wedding coordinator Courtney charges one flat fee for her services. This pricing approach focuses on the value of the outcome (e.g., an organized and stressless wedding day) instead of the value of the time spent on calls, projects, or meetings.

Because vendors like Courtney typically deliver a variety of services — wedding planning, day-of coordination, physical meetings, etc. — in addition to spending time answering questions and providing thoughtful suggestions, a project-based fee better captures the value of her work. Project-based pricing is also helpful for clients and companies who'd rather pay a flat fee or monthly retainer than deal with tracked hours or weekly invoices.

7. Value-Based Pricing Strategy: INBOUND

While INBOUND doesn't leave the ultimate ticket price up to its attendees, it does provide a range of tickets from which customers can choose. By offering multiple ticket "levels," customers can choose what experience they want to have based on how they value the event.

INBOUND tickets change with time, however, meaning this pricing strategy could also be considered dynamic (like the Cubs example above). As the INBOUND event gets closer, tickets tend to rise in price.

8. Bundle Pricing: State Farm

State Farm is known for its tongue-in-cheek advertisements and its bundle deals for home and auto insurance. You can receive a quote on one or the other, but getting a quote on both can save you money on your premiums.

State Farm benefits from bundle pricing by selling more policies, and consumers benefit by paying less than they normally would if they used two different insurance providers for home and auto coverage.

9. Geographic Pricing: Gasoline

Gasoline is notorious for having a wide range of prices around the world, but even within the United States, prices can vary by several dollars depending on the state you live in. In California for example, gas prices have consistently hovered around $3 in the summer months for the past 10 years. On the other hand, gas prices in Indiana have been in the $2 range during the same time period. Laws, environmental factors, and production cost all influence the price of gasoline in California which causes the geographic disparity in the cost of the fuel.

Get Your Pricing Strategy Right

Thinking about everything that goes into pricing can make your head spin: competitors, production costs, customer demand, industry needs, profit margins … the list is endless. Thankfully, you don’t have to master all of these factors at once.

Simply sit down, calculate some numbers (like your COGS and profit goals), and figure out what’s most important for your business. Start with what you need, and this will help you pinpoint the right kind of pricing strategy to use.

More than anything, though, remember pricing is an iterative process. It’s highly unlikely that you’ll set the right prices right away — it might take a couple of tries (and lots of research), and that’s OK.

Editor's note: This post was originally published in March 2019 and has been updated for comprehensiveness.

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What Is the Pricing Process? 6-Step Pricing Strategy Guide

From sole proprietorships to global conglomerates and every kind of company in between, one of the hardest questions many businesses face is also one of the most basic: How much should we charge for our products and services? Adhering to a disciplined pricing process — where goals are clarified and appropriate methods are selected — can help allay uncertainty and improve outcomes, which, in turn, leads to higher profits, larger market share and business longevity.

What Is the Pricing Process?

The pricing process is the series of steps a business takes to figure out how much to charge for its products and/or services. The process is both an art and a science. In some cases, each individual product or SKU will have its own pricing process; in other cases, pricing is considered at the portfolio level, such as when separate products are bundled together at one price.

Key Takeaways

• Before making any pricing decisions, it’s important for the business to clarify its objectives and know as much as possible about its customers and competitors.
• Setting a specific, primary pricing objective can help the business narrow down which strategy or strategies might work best.
• Pricing products and services is not a set-it-and-forget-it task. Businesses must constantly monitor their customers, competitors, market trends and the economy.

Pricing Process Explained

Pricing is one of the “4 Ps” of the marketing mix, the other three being the product to be sold, the places (sales channels) where the product will be sold, and the promotion of the product to potential customers. The pricing process is a customizable method that companies use to determine how to price their goods and services, and it’s considered in the context of the other three factors.

For example, the quality of a product relative to its competitive offerings can help determine whether a premium pricing strategy is sustainable, while the place it’s sold can dictate whether a dynamic pricing strategy is even possible. Many pricing strategies also go hand in hand with promotional strategies. In fact, some pricing strategies, such as high-low pricing, specifically require integration with promotions to offer regular discounts. (More on these pricing strategies soon.)

Price Elasticity of Demand

Before diving into the pricing process, it’s essential to understand the implications of price changes — a concept known as the elasticity of demand . Price elasticity is a way of measuring how sensitive a product’s sales are to its price. Demand is said to be elastic when small changes in price produce big changes in the quantity purchased. Conversely, demand is considered inelastic when the quantity of a product sold remains about the same, regardless of its price.

Demand elasticities are measured using the aggregate demand curve for a product. If a business is one of hundreds making a functionally interchangeable product, its pricing power is constrained by market conditions. However, if the product is well differentiated, to the point where the business can consider its loyal customers to represent a market of their own, then the elasticity of demand concept comes into play, as the business debates the trade-offs that come with raising or lowering prices.

For products with highly elastic demand, it’s possible that the business could make more money by lowering the price, because the increase in sales would more than make up for lost margin per sale. But raising prices could be a better move for a product with highly inelastic demand, because, in addition to making more money per sale, about the same number of units will likely be sold.

The more differentiated the product, the more the business can tap into these concepts. Keep in mind, though, that short-term and long-term elasticities don’t necessarily align. For example, people who drive to work have a fairly inelastic short-term demand for gasoline. They might take fewer discretionary trips, but they’re still going to drive to and from work every day. But if prices are persistently and uncomfortably high, they may start to carpool. And if those high prices are a concern at the time of their next vehicle purchase, cars with better mileage, hybrid models or fully electric vehicles are likely to become more appealing.

Pricing Process Steps

Before a business can affix a price tag to any of its offerings, it must do its due diligence to ensure that the price is right, for both its customers and its bottom line. The following six steps outline the pricing process, with greater details about steps 4-6 to come in subsequent sections.

Know Your Business

In the first step of the pricing process, the business digs deep to determine its needs and — equally important — its constraints. At what point is a price too low, causing the business to lose money on each transaction? What are the business’s fixed and variable costs, and how much would it need to sell to break even at different price points ? What is the maximum capacity of production before the business needs substantial investment in order to sell more?

These answers and numbers are critical to selecting the right pricing strategy (step 5). A strategy that cuts prices while doubling sales in a year won’t do much good if it takes two years to build the capacity to meet that kind of demand. In the meantime, promotions that aim to expand market share could put the business at risk if the deals are too good and the business can’t afford to fulfill them. Keeping in tune with the current state of affairs, studying next-step options, and understanding the business’s costs and operations provide essential information for sound decision-making. Put another way, the business must understand its needs inside and out and use those details as the foundation on which it builds everything else.

Assess the Target Market’s Demands

Once the business has assessed its own needs, it’s time to learn everything it can about its current and potential customers. What do they think about the business’s product or service? What problem does that product/service solve for them? How many noncustomers share that same problem? What do those people do about the problem? How eager or hesitant are the business’s target customers to find a better solution or try something new? What’s most important to them, and where does price fall on their priority lists? How big is the total market? What could grow or shrink that number?

The answers to these questions are central to picking the right pricing strategies later on. For example, the business couldn’t charge a premium over its competition if its customers think its offering is a good, but lower-quality alternative to the bigger names in the same industry. The business also needs to recognize whether it’s fighting with competitors over existing customers or in a race to tap new markets and customer segments. Each involves different mindsets and strategies that will inform many marketing decisions, including price.

Evaluate Competitor Pricing

Now, it’s time for the business to evaluate its competitors and other next-best alternatives. For example, a startup ride-sharing service should, of course, see what Uber and Lyft charge, but also review taxi, bus and car rental prices. Underpricing a close competitor can be a huge advantage. (Imagine cutting margins by 20% but doubling sales, which would more than make up for any loss.) On the other hand, charging a little more than the competition could signal that the product is superior.

Regardless of the strategy, monitoring the competition is essential. If the business is out of sync with like businesses, it could also wind up doing serious damage to its reputation, on top of the more immediate loss of short-term sales.

Choose a Pricing Objective

Before establishing a pricing strategy, the business must be clear about what the strategy needs to accomplish and ensure that teams are aligned. Is the objective to maximize profits? Market share? Is it looking to build the brand or just get through some tough times? The objective will ultimately drive the strategy.

Select a Pricing Strategy

…or a mix of strategies. The goal is to make sure the chosen strategy is appropriate for the product, will be well received by customers, can be executed by staff, and will lead to progress toward the main pricing objective.

Determine Your Prices

Strategy in hand, prices can now be set. The information gathered about the business can inform realistic prices and sales forecasts. Customer information can be used to make sure the prices will be attractive to them. Competitive information can determine prices in terms of market positioning. Pricing decisions are the big culmination of a long process of research and analysis, but remember, it’s also somewhat forgiving: If the business misses the right price by a little bit, it can usually change it promptly. Much can be learned along the way, and the best companies incorporate that kind of new information quickly.

6 Types of Pricing Objectives

A key step in the pricing process is determining the primary pricing objective. This will steer the business’s strategy and price-setting going forward. These examples cover the most common focuses of companies going through the pricing process.

Profit-Oriented

Nonprofit companies aside, financial gain is one of the primary — if not the default— objectives among businesses. It entails devising a pricing strategy that, at least for some businesses, builds in a decent profit margin , which is often defined by the business’s industry.

An important consideration is whether the business is after short-term or long-term profit. Companies going into short-term profit maximization mode will often make shortsighted decisions that generate a lot of money up front but could erode customer loyalty and invite competition. Be clear about your time horizons and risks when looking for profit-maximizing pricing strategies.

Survival-Oriented

Sometimes a company’s main objective is simply to stay in business. These companies aren’t trying to expand or squeeze extra margin out of their customers. Rather, they are facing tough times — whether due to a disruption in their business model, a major event (such as a pandemic) or a short-term emergency, such as a sudden problem with cash flow — and are fighting to survive. Any of these reasons, and plenty more, could necessitate an immediate pricing strategy pivot. Survival mode is going to look a little different depending on the threat, but it’s important for businesses to align their pricing strategy with their most immediate and urgent needs, while also working to ensure a more successful future.

Sales-Oriented

Usually, a sales goal is to “increase sales,” but a sales-oriented pricing strategy can also seek to change a company’s sales pattern in other meaningful ways. For example, when a company launches a new sales channel — perhaps selling through a new partner, introducing a mobile app or opening a new store — it may initially want to funnel more business through the new option, as a way to test the waters regarding a potential future direction for the business, even if it means sacrificing some profit in the short run.

Whatever the reason, a pricing objective that targets sales will aim to generate more sales, either in general or of specific types (within a new target market, through a particular channel, in a particular geography, etc.). The details of the intended push will help determine an appropriate pricing strategy to steer customers in the desired direction.

Market Share–Oriented

Choosing market share as an objective is similar to selecting sales but with a more straightforward end in sight: Companies with this goal want to capture a larger percentage of the market’s customers . This isn’t always compatible with profit-maximizing, as the most successful way to attract new customers is often to offer great promotions and deals that lure them in. But plenty of businesses see market share as the best path to success and longevity: Being the dominant, more recognizable and beloved brand can be turned into profit later on.

Image-Oriented

Some companies use their pricing strategies to help cement a particular image. For example, makers of luxury goods typically choose to keep their prices high and would rather have inventory go unsold than sold at a discount, out of fear that doing so would erode the long-term image of their brand. By the same token, some companies do everything they can to keep the prices of certain items low, wanting to be known as customer-friendly and reliable. Sometimes companies will even use pricing as part of a gimmick or theme, like selling items for $17.76 on the Fourth of July to reinforce the holiday’s theme.

Status Quo–Oriented

Don’t. Rock. The. Boat. This is excellent advice for businesses that don’t know what they’re doing when they start out running a pricing process, and there’s no urgent need for immediate change. Staying the course is just fine in advance of thoughtful deliberation and preparation for the opportunity being right. Change for the sake of change can confuse or annoy customers.

However, status quo pricing doesn’t mean that a business should never change its prices. The status quo can also be thought of in relation to where the business wants to position itself in terms of the competition. If the business wants to keep its prices 3% lower than its competitors’ at all times, if competitors increase their prices, then the business will need to do so, too, to maintain the 3% gap.

17 Types of Pricing Strategies

With objectives and consumer and competitive information in hand, a business is ready to select a specific pricing strategy. The following list includes some of the most common and useful pricing strategies (alone or in combination) found in the business world today.

Competition-Based Pricing

Competition-based pricing is a strategy in which a company sets its prices based on its competitors’ prices. This strategy is often used in markets where competitors offer similar products or services and where price is a major consideration for customers.

Setting prices based on competitors’ pricing typically means matching or slightly beating them. If companies sell functionally identical products that are interchangeable in the eyes of customers, then they’ll probably wind up converging on almost identical, if not identical, prices. Think about how gas stations adjust their prices together. While certain differentiating factors, such as a convenient location, may matter, gas is gas, and a station selling wildly overpriced gasoline will soon see cars passing it by.

If products are not interchangeable, competition-based pricing might mean making sure prices aren’t too out of sync, while still maintaining a gap. If a premium seller in a market is lowering its prices, a low-cost provider in the same market will have to stay below it to retain its customers. Likewise, the high-end seller may still be able to command a revenue premium with its better products — but only to a point, lest the gap become too wide between its competitors’ prices and its own.

Cost-Plus Pricing

With cost-plus pricing, a company adds a markup to the cost of providing a good or service to determine final pricing. The markup can be a percentage (most common), a fixed amount or both. Cost-plus pricing requires a comprehensive understanding of a product’s or service’s costs; if the business is missing a key component — for example, hours spent by employees to prepare the product — it could wind up losing money on every transaction. Implemented well, cost-plus pricing offers a simple way to ensure that transactions are profitable and prices reflect costs.

Cost-plus pricing requires frequent monitoring of the relevant costs, as well as what competitors are doing. Cost-plus pricing can quickly turn into competition-based pricing if competitors are competing over who can trim their costs and/or markups the most.

Dynamic Pricing

Dynamic pricing is a strategy in which a company sets prices based on real-time market conditions. Dynamic pricing means that the price of a product or service can change frequently, depending on such factors as current inventory levels, how quickly inventory is selling, competitors’ prices, customer behavior and even current events.

Dynamic pricing offers several advantages, including the ability to respond quickly and to maximize profits. Once in place, dynamic pricing can be handled by, or with the assistance of, automation technologies, taking a lot of work out of human hands. It also prevents companies from getting left behind when competitors are moving quickly, as well as enabling them to respond to internal needs — such as clearing out slow-moving inventory — before they become bigger problems.

However, not every customer segment is going to respond well to dynamic pricing, especially when more predictable alternatives are available. Dynamic pricing also requires monitoring. For example, without human oversight, a hotel could wind up selling out at very low prices on busy nights, when dates for a nearby event are announced. It’s also important to implement safeguards, in case an algorithm accidentally gouges customers to the point of reputational harm, or it exploits a tragedy, causing the business to be seen as predatory.

Freemium Pricing

“Freemium” pricing is a portmanteau of “free” and “premium,” and that’s exactly what this pricing strategy is: a free version plus a premium version presented to the customer at the same time. Anyone can sign up for the free version, but a premium version that’s better in some way is also available. The idea is that a percentage of customers will love or have high enough needs for the product or service that they’ll upgrade to the paid premium version.

Freemium models are common with software. The paid version could unlock additional and more sophisticated features, eliminate unwanted features (such as ads) or allow for heavier usage, such as increased file storage space.

For freemium pricing to work, the following has to be true:

• The freebies have to be inexpensive, since they’ll be subsidized by a smaller group of paying customers. When talking about a few gigs of storage space, that’s easy enough, but any hands-on services that require regular human interaction could send labor costs spiraling out of control.
• The free version has to be an excellent experience for customers. After all, the free version is a form of marketing for the paid version. If the free experience is subpar, customers will be less likely to upgrade.
• The paid version has to offer meaningful upgrades that are both valuable and easy to communicate to target customers.

Freemium pricing requires more advanced thought and commitment than most other types of pricing, in that the business has to split its offering into at least two versions. That’s a bigger lift for most companies than just changing the price tag on existing items and seeing what happens.

High-Low Pricing

Most common in retail, high-low pricing is a pricing strategy in which a company sets a high price for a product or service and then offers fairly frequent discounts, sales or other promotions. High-low pricing allows the company to attract both price-sensitive customers through frequent bargains and less price-sensitive customers who are willing to pay full price, rather than wait for sales or search clearance racks.

Sometimes, companies use high-low pricing to offer quasi-dynamic pricing without changing the sticker price. Other times, it’s a form of price discrimination: letting more price-sensitive customers monetize their flexibility and patience, while more affluent customers don’t have to wait for a sale. In some cases, it’s a form of psychological marketing that operates on the idea that customers will be more likely to buy if they feel like they’re getting a great deal. (More on this strategy soon.)

The risk of high-low pricing? Sometimes a company can cannibalize its own business, if it makes it too easy to get a low price, because the discounted price loses its allure.

Hourly Pricing

As its name implies, hourly pricing means a company charges its customers based on the number of hours that employees and subcontractors work for that customer. This pricing model is often used for services that are specialized or labor-intensive — such as consulting, legal services and cleaning — marked up to cover overhead and other expenses. It works especially well for projects where the goals and/or obstacles aren’t well known at the outset.

It’s important to remember that agreeing on hourly pricing and a certain rate is not the same as agreeing on a total price. Transparent documentation and communication are helpful here, so that all parties feel charged and paid appropriately.

Skimming Pricing

Skimming pricing is a pricing strategy designed for introducing new products into a market. With skimming pricing, companies charge a high price for a new product or service, then lower the price over time as more competitors enter the market and/or as demand for the product or service decreases.

The idea behind skimming is that when a new product comes out, some people will value it very highly. Therefore, sellers start the initial price high for the most enthusiastic (and most willing to pay) customers. Later on, the price can be lowered to capture the portion of the market that didn’t want the product right away.

A major risk of skimming pricing is that a competitor or substitute could enter the market before the business captures enough of it, and its initial high-priced sales don’t make up for the volume lost by not lowering prices faster.

Penetration Pricing

Penetration pricing is the flip side of skimming pricing. Here, a company sets its initial price very low for a new product and service, then raises it over time. Low initial prices can help companies capture new customers quickly, allowing them to build market share (and hopefully loyalty) ahead of competitors poised to enter the market. Penetration pricing also gives customers a chance to try the new product or service with less risk; future price increases will reflect increased confidence in the new offering as it becomes a trusted brand. The goal of penetration pricing is to give up some short-run profits at the outset in exchange for faster growth and/or a more defensible position later on, when the business is faced with more competition.

Premium Pricing

Premium pricing is exactly what it sounds like: setting prices higher than a business otherwise would or, more commonly, higher than the competition’s prices. Companies that do this profitably — making more from the markup than they lose in sales to price-sensitive consumers — are said to be able to command a revenue premium.

Premium pricing is a solid strategy for businesses whose customers are willing to pay more for higher quality products. Sometimes, “higher quality” isn’t about durability or features but, rather, perception. If a brand is well known and consumers get some kind of psychological or social benefit from being seen as a customer, such as with sports cars or designer handbags, that alone can sustain a revenue premium over less well-known competitors’ products of otherwise identical quality.

Product or service reliability is another justification for premium pricing. Airlines, for example, have been able to maintain revenue premiums just by being on time more often than their competition, even if they have an identical in-flight product and a worse loyalty program. It’s also the reason a big-name consultancy might get hired over a less-expensive alternative that could do just as good a job.

Project-Based Pricing

Project-based pricing is a strategy in which companies charge for the end result of a completed project, regardless of how many hours it takes to complete. This works well when the end result is known, can be described in detail, and the company has a good idea of what it will take to complete. Project-based pricing is common in construction (“build me X”), marketing (designing and executing an ad campaign, for example) and artistic commissions.

Sometimes, more complicated contracts will be a hybrid of project-based and hourly pricing, when, for example, some items are included in the project price — or included up until a well-defined point — but others are not.

Value-Based Pricing

With a value-based pricing strategy , a company sets prices based on the perceived value of its products or services in the eyes of the customer. In other words, the price is based on what customers are willing to pay, rather than on the cost of production/delivery or the market price.

Value-based pricing can be explicit. Hedge funds, for example, often go with a “2 and 20” pricing structure, where investors are charged 2% of their assets under management as a flat fee, but then 20% of the gains the hedge fund earns go to the investment management company, representing a 4:1 split of the profits. One advantage of this kind of built-in value-based pricing is that incentives are aligned — the hedge fund makes more money when its customers make more money.

Companies also use this kind of pricing structure to tackle large societal problems. For example, homeowners may know that installing solar panels will save them money, but the up-front costs are substantial. A company might say, “We’ll pay for all or most of the panels and installation, and you pay us back when you pay your electric bill — some or all of the savings will go to us for a predetermined period.” The customer winds up paying the company in proportion to how much value the company was able to add to the home’s energy efficiency, and, at the end of the relationship, the home is now greener and cheaper to operate.

Bundle Pricing

Bundle pricing (sometimes just called “bundling”) is a pricing strategy that allows a company to sell several products or services together as a unit — such as with television packages. The thought is that customers will value a subset of items within the bundle as being worth as much as or more than the price, which would be higher if all the items were sold separately.

Think of a simple cable package with two channels: Channel 1 and Channel 2. One customer thinks Channel 1 is worth $80 per month and Channel 2 $10 per month. Another customer thinks the opposite is true. If these customers purchase only their most highly valued channels, the most the cable company will make is $160. But if the company bundles the channels and sells them as a package for $89, then it would make $178.

Bundle pricing is a natural fit for physical products where customization is difficult. It may be a way to provide curation services — gift baskets, for example, are a form of bundled pricing. Bundling is also increasingly common in service industries beyond telecom. For example, event-hosting venues often have bundled meal and entertainment packages from which to choose, while travel providers are increasingly bundling a variety of experiences, such as lodging, food and transportation.

Be aware that although bundling can add value for both business and consumers alike, it can also annoy customers who resent having to pay for things they don’t want. But the biggest danger is that bundling may be illegal if it forces customers to use a secondary product or service they might otherwise get from another company, if it comes as a condition of purchasing a primary product.

Psychological Pricing

Psychological pricing is a broad term covering pricing strategies that leverage what is known about human psychology to influence consumers’ purchasing decisions. Psychological pricing techniques can be used alone or in conjunction with other strategies.

The most common technique is called “price ending,” which tries to make a price seem smaller by setting it just below a rounder, larger number — for example, an item is priced at $3.99 or $3.95 instead of $4. The extra penny or nickel doesn’t matter very much, compared to the benefits of the price feeling lower to consumers. It’s especially impactful when the left-most digit changes as a result of the tiny markdown. In other words, $19.99 is better than $20. This works with whole-dollar prices, too, like a $29 restaurant menu item that might otherwise cost $30. It’s also used for items that are among the most expensive and time-consuming purchases buyers may make in their entire lives, such as for real estate.

Another psychological strategy is the “loss leader” — a product priced so aggressively the seller loses money on it, but it’s designed to grab the attention of customers, get them through the physical or digital door, and build a brand.

Geographic Pricing

Geographic pricing is a straightforward technique that many companies use as they expand. As its name implies, geographic pricing means charging different prices in different geographic locations. While sometimes it’s a clever way to make more money, more often than not it is used out of necessity: Different localities have different taxes to pay and regulations to follow, faraway locations have higher transportation costs, international borders may require dealing with customs and tariffs, rents on similarly sized storefronts can be wildly different depending on location and the same is true of labor costs. What’s more, customers are likely to have vastly different needs and incomes.

Even companies that pride themselves on consistent low pricing across geographies, such as fast-food restaurants, still find the need to charge different prices in different countries. In fact, The Economist created the Big Mac Index (opens in a new tab) to track the cost of a McDonald’s Big Mac across borders and currencies, and learn about purchasing power and cost of living in different areas of the world.

Subscription Pricing

Subscription pricing centers on the business providing access to its product or service on an ongoing basis in return for recurring revenue, often monthly. Newspaper and magazine publishers have long abided by this pricing model. But it has also become increasingly popular among software vendors, which charge customers a monthly or annual fee for access to their applications via the internet. The software company typically earns more in total revenue, and customers appreciate not having to buy new software when an updated version comes out, as updates are included in their subscriptions. And if customers’ needs change, they also get the benefit of being able to cancel at a low cost.

Subscription pricing pairs well with some of the other pricing strategies on this list. For example, freemium pricing is common with subscriptions, and all the thinking behind choosing between penetration or skimming pricing can easily apply to subscriptions as well. Sub-strategies within subscription pricing , such as tiered pricing, are also worthy of consideration.

Captive Pricing

Captive pricing is a strategy that involves a core product alongside “accessory” products that are often required to realize the full value of the core product — for example, a printer purchase also requires the purchase of ink cartridges. With captive pricing, the core product (the printer) is often priced very reasonably, with most of the profit margin built into the accessory products (the ink).

Accessory products don’t have to interact directly with the core product or even be sold by the same company. Captive pricing is the reason food is so expensive at sporting events and concerts in large arenas: There’s a captive audience that has no good alternatives.

In either case, once the core product is in use, the costs to switch are high — another reason customers become “captive.” Unsurprisingly, customers tend to dislike this approach, so businesses should consider the impact on their brands and customer acquisition costs before committing to it.

Free Trials/Samples

Free trials are similar to freemium pricing in that the idea is to let prospective customers sample products and services for free before they decide whether to buy them, but with one exception: The free trial ends. The reasoning is that it’s much easier to sell something when the customer has had personal experience with it. This can take the form of giving away single-ounce servings of a snack or beverage that the business is trying to sell, offering access to its website for a predetermined length of time before access is revoked or a credit card is charged, or giving out free months or more of membership, in hopes that customers will grow to depend on the product or service and not want to give it up.

The size and/or duration of the free-sample offering will likely involve some optimization to determine how to get the most paying customers for the least investment. One way companies are increasingly looking to improve returns on free trials is by marketing those trials to a select group of customers, rather than to the general public, in hopes that they’ll get better conversion rates.

How to Determine the Best Pricing Strategy

The best pricing strategy is typically guided by an individual business’s situation. Some strategies will be easy to rule in or out — for example, geographic pricing is all but mandatory for a global B2B services company, whereas it wouldn’t make sense for a single-location restaurant. Likewise, some of these strategies target newly introduced products, whereas others are appropriate for established products.

The business’s pricing power is also an important factor. If the business is the only provider of a product or service, with no competitors or close substitutes, it has a monopoly, so the only limits on its pricing power are legal and political ones. If the business sells a completely fungible product, it probably has little choice but to charge the market price for what’s essentially a commodity product.

Additional considerations: How competitive is the market? The more competitive it is, the less the business can deviate from prevailing prices, so competition-based pricing becomes more important. How differentiated is the product? If it’s unlike anything else on the market, the business may be able to break from competitors and decide its own markup in cost-plus pricing. How customized and complicated are the orders? Hourly or project-based pricing could fit the bill, perhaps in conjunction with value-based pricing. (Keep in mind that mixing these strategies is often desirable.)

It’s also a good idea for businesses to examine their competitors’ prices and pricing strategies to see whether they’re bundling, using dynamic pricing, varying their prices based on geographies and so on. Finally, businesses should also be open to a bit of experimentation to see what pricing works best for them and their customers.

Pricing Process Examples

Pricing is anything but static. Let’s consider the journey of MCR T-Designs, a hypothetical T-shirt company, from startup to established player, and how its pricing strategy transforms along the way.

Example 1: MCR emerges as an immediately popular company that sells T-shirts with clever phrases at popular vacation destinations. As a new entrant to the market, the owners know that their unique style and sense of humor are going to be easy to copy, so they adopt a penetration pricing strategy to support their objective of growing market share by undercutting competitors and trying to build a brand while, at the same time, generating as many sales as possible to get the business rolling.

Example 2: Curse you, Mother Nature. A hurricane closes some of MCR’s best locations during the peak of this year’s vacation season. The company had purchased a lot of inventory in anticipation of sales that never came, and now bills are coming due without income coming in. As a result, MCR’s focus changes from growing market share to surviving, which calls for the complementary strategy of selling off inventory at reduced prices and investing more in online sales and social media — whatever it takes — to make up the sales gap.

Example 3: MCR weathers the storm and emerges more stable than before. Going forward, the owners want more consistent pricing and profits, so they reorient their key objective to seeking profit. They decide the best way to achieve this is with a cost-plus model, ensuring that every sale generates a healthy profit without prices ever getting too far away from their costs. This allows them to remain competitive in a market where many customers are not brand-conscious. They keep a close eye on competitors’ prices, however, and will adjust their margins if their prices ever get too high relative to their closest competition.

Industry-Based Pricing Processes

Some industries are natural fits for a specific pricing process. Occasionally, a company will try to disrupt a pricing model and gain market share from consumers who don’t like the status quo. For example, until the advent of streaming services, bundling was the only way for cable and satellite TV providers to reliably make a profit, so every provider in the industry used it (with few exceptions for premium-channel add-ons).

But, for the most part, pricing strategies around which an industry’s big players have unanimously converged are the standard for a reason. The travel industry, for example, has found dynamic pricing indispensable to being able to account for the wild fluctuations in demand — sometimes daily — for the services provided.

The Price Is Right With NetSuite

Growing businesses often find it hard to keep pace with their increasing diversity of customers and the numbers surrounding their expanding operations, while large businesses operate at a scale where no human can retain all the relevant information in their head. This is where good software comes in — and the best for making pricing decisions is a suite, such as NetSuite ERP , which manages real-time data from all parts of the business in a single, unified database. Such comprehensive visibility and access to easily digestible summaries and analyses turn what could be a pricing guessing game into a science. In addition, NetSuite ERP’s modular design means that the system can easily expand (and scale) as the business’s requirements increase. And, because the solution was designed specifically for the cloud, business users have anytime, anywhere access to their applications through a simple internet connection.

A thoughtful, replicable and well-informed pricing process is essential for companies looking to implement an integrated marketing strategy for their products or services. Reliably setting effective prices that make customers happy, and turn a profit, requires a business to know itself, its customers and its competition, in addition to aligning its pricing strategy with clearly defined goals. A business whose pricing processes can handle that will have a much easier time figuring out how much to charge and how to position its brand in the marketplace.

Optimize Your Pricing With NetSuite

Pricing Process FAQs

What is a pricing analysis?

Pricing analysis is a process of evaluating the prices of your products or services to determine if they are competitive and profitable. This can be a complex process, as it involves considering a variety of factors, such as the cost of production, the cost of distribution, the cost of marketing, the level of demand, the prices of your competitors, and your company’s long- and short-term goals.

How important is pricing?

Pricing is extremely important and often determines whether a company succeeds or fails. The process, however, is more forgiving than some other make-or-break factors, as many pricing strategies can be attempted, learned from and abandoned, especially in the early days of a company or product.

How does the pricing process play into marketing?

Pricing is one of the “4 Ps of marketing,” also referred to as the “marketing mix.” The four critical elements of that mix are product, price, place and promotion — in other words, what you sell, how much you sell it for, where you sell it and how you interact with potential customers about it.

What are the six steps in the pricing process?

Generally speaking, there are six steps in pricing a product or service. First, a business must assess its own needs. The next two steps involve looking externally at what its target market wants and what competitors are charging. Then, the business is ready to choose a pricing objective, select a pricing strategy and, finally, set a price.

What are the 4 types of pricing methods?

Businesses have many types of pricing methods available to them. Strategies include, but are not limited to, cost-plus pricing, high-low pricing, skim pricing and psychological pricing.

Business Strategy

5 Psychological Pricing Tactics That Attract Customers, With Examples

In short: Psychological pricing, a subset of pricing strategies, is commonly used to impact customer behavior. Research has shown that certain ways of formatting prices can spark a subconscious response…

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Blogs & articles, how to write a pricing strategy for my business plan.

In this blog you will learn about the importance of choosing the right pricing strategy for a successful business plan.

Why is a pricing strategy important for a business plan?

A business plan is a written document outlining a company’s core business practices – from products and services offered to marketing, financial planning and budget, but also pricing strategy. This business plan can be very lengthy, outlining every aspect of the business in detail. Or it can be very short and lean for start ups that want to be as agile as possible.

This plan can be used for external investors and relations or for internal purposes. A business plan can be useful for internal purposes because it can make sure that all the decision makers are on the same page about the most important aspects of the business.

A 1% price increase can lead to an 8% increase in profit margin.

A business plan could be very lengthy and detailed or short and lean, but in all instances, it should have a clear vision for how pricing is tackled. A pricing strategy ultimately greatly determines the profit margin of your product or service and how much revenue the company will make. Thorough research of consultancy agencies also show that pricing is very important. McKinsey even argues that a 1% prices increase can lead up to an 8% increase in profits. That is a real example of how small adjustments can have a huge impact!

It is clear that each business plan should have a section about pricing strategies. How detailed and complicated this pricing strategy should be depends for each individual business and challenges in the business environment. However, businesses should at least take some factors into account when thinking about their pricing strategy.

What factors to take into account?

The pricing strategy can best be explained in the marketing section of your business plan. In this section you should describe what price you will charge for your product or service to customers and your argumentation for why you ask this. However, businesses always balance the challenging scale of charging too much or too little. Ideally you want to find the middle, the optimal price point.

The following questions need to be answered for writing a well-structured pricing strategy in your business plan:

What is the cost of your product or service?

Most companies need to be profitable. They need to pay their expenses, their employees and return a reasonable profit. Unless you are a well-funded-winner-takes-all-growth-company such as Uber or Gorillas, you will need to earn more than you spend on your products. In order to be profitable you need to know how much your expenses are, to remain profitable overall.

How does your price compare to other alternatives in the market?

Most companies have competitors for their products or services, only few companies can act as a monopoly. Therefore, you need to know how your price compares to the other prices in the market. Are you one of the cheapest, the most expensive or somewhere in the middle?

Why is your price competitive?

When you know the prices of your competitors, you need to be able to explain why your price is better or different than that of your competitions. Do you offer more value for the same price? Do you offer less, but are you the cheapest? Or does your company offer something so unique that a premium pricing strategy sounds fair to your customer? You need to be able to stand out from the competition and price is an efficient differentiator.

What is the expected ROI (Return On Investment)?

When you set your price, you need to be able to explain how much you are expeciting to make. Will the price you offer attract enough customers to make your business operate profitable? Let’s say your expenses are 10.000 euros per month, what return will your price get you for your expected amount of sales?

Top pricing strategies for a business plan

Now you know why pricing is important for your business plan, “but what strategies are best for me?” you may ask. Well, let’s talk pricing strategies. There are plenty of pricing strategies and which ones are best for which business depends on various factors and the industry. However, here is a list of 9 pricing strategies that you can use for your business plan.

• Cost-plus pricing
• Competitive pricing
• Key-Value item pricing
• Dynamic pricing
• Premium pricing
• Hourly based pricing
• Customer-value based pricing
• Psychological pricing
• Geographical pricing

Most of the time, businesses do not use a single pricing strategy in their business but rather a combination of pricing strategies. Cost-plus pricing or competitor based pricing can be good starting points for pricing, but if you make these dynamic or take geographical regions into account, then your pricing becomes even more advanced!

Pricing strategies should not be left out of your business plan. Having a clear vision on how you are going to price your product(s) and service(s) helps you to achieve the best possible profit margins and revenue. If you are able to answer thoughtfully on the questions asked in this blog then you know that you have a rather clear vision on your pricing strategy.

If there are still some things unclear or vague, then it would be adviceable to learn more about all the possible pricing strategies . You can always look for inspiration to our business cases. Do you want to know more about pricing or about SYMSON? Do not hesitate to contact us!

Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!

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Frequently asked questions, related blogs.

4 Tips for keeping your pricing manageable

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6 pricing objectives & how to choose the best for growth

Jul 10, 2022

Your pricing objective sets the course for your business’s pricing strategy and can mean the difference between the success and failure of your SaaS business. Here’s how to get started.

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The price you choose affects more than just how much profit you’ll make or whether customers will pick your product over your competitor's. Yes, profit and market share are both valid pricing objectives, but they aren’t the only options, and they certainly aren’t always  the best  options.

Instead of thinking about pricing as a one-and-done process, your pricing should be another tool in your belt for reaching your business goals, whether that’s maximizing profit,  boosting growth , or simply making ends meet. When setting prices, companies can (and should) have specific objectives in mind.

What are pricing objectives?

Pricing objectives are the goals that drive how your business sets prices for your product or service. These objectives can and  should  apply to pricing for both new and existing customers. The direction provided by pricing objectives is crucial to adjusting prices over time in order to meet your objectives. 

Each pricing objective requires a different pricing strategy to meet business goals. Certain pricing methods work well for meeting a particular objective, while other combinations can contradict one another - it’s important to make sure your pricing objectives and strategies are closely matched.

Examples of pricing objectives

Turning a profit is obviously the most common pricing objective for every business—after all, you can’t run a sustainable business without making money. That said, there is more nuance to it and pricing objectives can go beyond pure profit. Here are some pricing objectives examples:

• Maximize short-term or long-term profit
• Maximize long-term sustainability
• Penetrate new markets
• Increase sales volume
• Steal market share from competitors
• Generate interest around new products
• Survive a slow period of business

Why prioritize pricing objectives?

Say you’re thinking about going on a vacation. If you’re like most people (that is, not entirely crazy), you wouldn’t just hop in your car and start driving or head to the airport and buy a ticket to the first random location you see listed on the departures board.

For most of us, vacations take planning. You’d first consider things like the kind of vacation you prefer. Would you rather spend time relaxing on the beach, or do you enjoy getting off the beaten path and exploring new places? Are you willing to spend lavishly on those experiences, or are you holding the purse strings tightly? Do you prefer hot or cold climates? How much vacation time do you have available?

There are dozens of factors that might factor into your decision. And while some people might enjoy the uncertainty of a loosely planned vacation, when it comes to your business, planning is essential. You need to consider what goals you’re trying to hit with your SaaS business before forming your pricing strategy.

You can't just pull a number out of your hat and call it a day. The  optimum price point  is the price where companies can best meet their objectives—but you first need to get clear on what those objectives are.

Your chosen pricing objective should guide your strategic pricing decisions—certain pricing strategies tend to work better or worse when seeking a specific pricing objective. For example, aiming to penetrate a new market might mean choosing prices that undercut your competitors, even though those prices might cut into your overall profits. Similarly, you might build interest in new products by offering them in a  discounted  bundle alongside existing products. Sometimes you don’t even have a choice—fighting to keep your business above water requires an entirely different pricing strategy.

Establishing your pricing objectives in advance makes choosing your pricing approach much more straightforward.

6 pricing objectives your SaaS business should consider

Pricing objectives come in all shapes and sizes, but most SaaS companies stick to a handful of different objectives, including revenue, adoption or retention, free trial signups, contract length, and competitors’ prices.

Let’s go through each in more detail, to help you understand which pricing objective is best for your SaaS business.

1. Maximize profit

Profit-oriented pricing objectives are defined to maximize the profit margin of each sale and the long-term profitability of the business. Put simply, profit-oriented pricing objectives are about making as much money as possible.

Most businesses take a twofold approach to  profit maximization : they go for a price increase to juice their top-line revenue, and they reduce costs to increase their bottom-line profit. Both numbers play into each other to provide a superior return on investment—increasing pricing might lower the number of sales (without reducing revenue), which lowers per-account costs like support and hosting.

However, hitting numbers purely for the sake of hitting numbers does nothing unless you’re making a profit and retaining users. Getting the high-end buyers to buy your product may be a less profitable objective than having many middle-class buyers buy your product. You might find that you are spending more to acquire customers at the higher  price point  or that your  churn rate  increases after changing your prices.

2. Maximize retention

I’ve said before that  retention  is far more important for SaaS companies than  acquisition , and your pricing can be designed to reflect that. Creating a retention-first pricing strategy can be a great objective for SaaS companies. Your prices should be set high enough that customers value your product and continue using it, but low enough that you’re not turning off your target customers with high sticker prices.

Putting retention first can be a great option for subscription companies, but you need to balance that against acquisition costs. Make sure that your CAC is low enough that you’re able to retain users at a profit and keep them from churning; the value you provide needs to be greater than the price so that they won’t churn.

3. Increase adoption and trial sign-ups

Another way you can optimize your pricing is for maximum trial sign-ups. Set your initial pricing low—or even offer a freemium option—to encourage more prospective customers to sign up for your platform. Then, monetize them later through upsells and expansion revenue.

Since the dollar cost of a free trial isn’t part of the equation, solving for trial subscriptions often means making decisions outside of the actual cost of your product. You can play with pricing elements such as free trial lengths, money-back guarantees, and free value-add services, like installation or configuration, to help maximize adoption.

Remember, though, while  freemium is a great acquisition model , you shouldn’t make freemium your only pricing strategy.

4. Extend contract length

Another great pricing objective for subscription companies is to extend the lifecycle of their product line and maximize the length of customer contracts.  Longer contracts correlate directly to greatly reduced churn  while also keeping your acquisition costs in check.

The  optimal contract length  for SaaS startups varies, according to  Tomasz Tunguz , but annual (or longer) contracts bring stability and predictability. They also give customer success teams more opportunity to create meaningful relationships with new customers and help them achieve their goals.

Ask yourself: Is your contract as long as it should be? Are you retaining users for a year and then letting them go or keeping them for a decade? Can lengthening your contract help minimize costs down the road?

5. Beat the competition

Yes, beating the competition might sound obvious, but your prices can be a powerful tool for maintaining or increasing your market share. Competitor objectives are not the most important thing to consider, but they have their relevance.

Pricing your product low can deter competition from entering a target market—some companies even choose to sell their products at a loss to prevent new players from entering a market. On the flip side, a high price can signal to potential customers that your product is of high quality, increasing the likelihood that they’ll choose your solution over those of your competitors.

6. Mix and match

Pricing objectives are like ice cream flavors: you don’t have to pick just one. In fact, mixing and matching multiple pricing objectives can be a great option for SaaS startups.

Say you want to maximize both adoption and revenue. Generally, you want a careful balance of the two to make the most revenue without losing market share. That “sweet spot” is your ideal price—it’s the inflection point where 50% of the people think it’s not too expensive, but 50% of the market thinks it’s not too cheap.

How to choose the best pricing objectives for your business

Your chosen pricing objectives can—and should—change over time as market conditions and your business change. What works today might not work in a year or two, so it’s important to understand how to choose the best pricing objectives for your business—and when to reassess.

What do your customers value?

Knowing what defines your product sets you up for having realistic pricing objectives. Your product—and what makes it valuable to your customers—should influence the pricing objectives you choose:

• Are you building a brand-new product or a luxury product, or are you a new competitor in a large market?
• Is your product defined as “the cheap alternative to XYZ” or “the best product in the business”?

Remember,  your customers decide the value of your product . Higher-value products command higher prices and are generally more successful with profit-oriented pricing objectives. If your goal is to beat your competitors, pricing low is perfectly acceptable, but realize that getting into a price war affects the long-term sustainability of your company.

Which customer cohorts are more willing to purchase?

Every market and every customer persona is willing to pay a different amount for the value your product provides, and this needs to factored into your decision process when choosing a pricing objective.

Ask the following questions:

• How willing are customers to pay high versus low prices for the value you provide?
• Does that vary across different customer cohorts and personas?
• Which cohort is best to aim for with your product pricing?

You can create different  pricing tiers  with different price sensitivities that focus on different cohorts.

Where is your business headed?

Your pricing objectives depend heavily on your business’s goals for the future.

If you’re a startup looking for growth, you may have to be far more modest with your pricing objectives until you build an established customer base. On the other hand, if you’re running an industry-leading company, you can afford to be more bullish once you have time-tested methods for pricing new products.

Who are your competitors?

Knowing the other players in the market—what they charge, how much value they provide, and what advantages you offer over your rivals—is key to choosing the right pricing objectives.

Setting a lower price than your competitors might increase adoption with customers who shop on price alone, but are those really the kinds of customers you want? Likewise, setting a higher price gives customers the message that your product is higher quality and worth the additional cost, but will the higher cost outstrip customers’  willingness to pay ?

How healthy is your business?

Sometimes, the pricing objective you choose is outside of your control.

Are you struggling to get by or raking in profits from lots of subscribers? If your business is healthy, you can look into pricing objectives around profitability or taking market share from competitors. But if you’re bootstrapping a startup and just scraping by, you’ll need to be very conservative and be in survival pricing mode.

Have your pricing reflect value

The truth is, you have a lot on your plate when it comes to subscription growth, but setting the right pricing objectives and pricing policies is one of a small handful of fundamentals you  need  to get right.

Pricing is one of the biggest factors that can help or hurt a business. Your pricing can be a strategic tool for reaching your objectives, or it can stifle your growth and lower your profitability.

It takes both a solid understanding of value and the data to back up your decisions to grow sustainably and reach your objectives. Luckily, we’ve got your back—our goal is to take care of everything else when it comes to subscription growth. We provide free reporting and analytics to help you set the right pricing objective for your business.  Sign up for your free ProfitWell account today  to get started.

You know your business, we know pricing

Price Intelligently's team of monetization experts work with you to combine strategy and data to solve complex business problems and accelerate your growth.

Pricing Objectives FAQs

What are some of the most important examples of pricing objectives.

The most important pricing objective is to maximize the profitability of your business, either in the short or long-term (but preferably both). Your pricing should also take into account a desire to retain customers, increase the number of customers, extend the customer lifecycle, and beat out the competition.

What are some pricing objectives strategies?

Some common strategies for setting prices include competitive pricing (setting prices according to your competitors),  market-based pricing  (setting prices according to the market environment),  penetration pricing  (offering lower prices at first to attract new customers) and  price skimming  (setting higher prices at first for luxury brands or items).

Why are pricing objectives important?

Pricing objectives form the underlying framework that determine how you should set your prices. Each business has different goals and objectives, so there’s no one-size-fits-all approach to pricing. Setting pricing objectives ensures that your prices are calibrated to meet your specific business goals.

What are some of the different types of pricing objectives?

There are several types of pricing objectives, the most common ones including:

• Profit-oriented pricing objectives
• Achieving price stability
• Prevention of competition
• Market penetration

What are profit-oriented pricing objectives?

A profit-oriented pricing objective means that a company seeks to earn maximum profit with every sale or service provided, and achieve long-term business profitability.

Related reading

Pricing Strategies and Models Explained

4 min. read

Updated January 18, 2024

What’s the right price for your product or service?

What price will make you profitable and attract customers?

Not sure? Keep reading to learn the basics of pricing strategy and setting the right price.

• What is a pricing strategy?

A pricing strategy is the overarching approach or plan a business uses to determine the price of its products or services. 

It considers various factors such as market conditions, competition, production costs, and the perceived value to the customer. The ultimate goal of a pricing strategy is to maximize profitability, maintain or grow market share, and ensure long-term sustainability while meeting the company’s other objectives.

• What is a pricing model?

A pricing model is the specific method used to set the price of a product or service. It provides a structure to implement your chosen pricing strategy.

What’s the difference?

The distinction between a pricing strategy and a pricing model lies in their scope, purpose, and application.

The pricing strategy aligns prices with business objectives, market conditions, and customer perceptions. A pricing strategy considers market entry tactics, customer psychology, brand positioning, and long-term market objectives. 

The pricing model is the mathematical method you use to create a specific price. It usually involves manufacturing costs, customer demand, and competitor pricing. 

Think of the strategy as the roadmap guiding where a company wants to go with its pricing and the model as the vehicle it uses to get there.

• Types of pricing strategies

1. Penetration pricing

Setting an initial low price to quickly attract customers and establish a market presence. Ideal for new entrants wanting rapid market share. 

Example: Streaming services offering discounted rates for the first three months.

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2. Price skimming

Starting with a high price and then reducing it over time. Suitable for innovative products. 

Example: New tech gadgets like smartphones often use this strategy.

3. Value-based pricing

Pricing based on the perceived value to the customer rather than production costs. Works best for unique products or services. 

Example: Luxury brands like Rolex or Louis Vuitton.

4. Competitive pricing

Setting prices based on competitor rates. Ideal for industries with many competitors offering similar products. 

Example: Supermarkets pricing staple goods.

5. Premium pricing

Charging a higher price to reflect a product’s premium status and quality. 

Example: Brands like Apple or Tesla.

6. Economy pricing

Offering no-frills products at a low price. Common in mass markets. 

Example: Budget airlines like Ryanair.

7. Bundle pricing

Grouping multiple products together at a discounted rate. Useful for increasing sales volume. 

Example: Cable TV packages.

8. Price leadership

Price leadership occurs when one dominant company, usually the largest or most influential in an industry, sets the price of a product or service, and other competitors in the market follow suit.

Example:  

OPEC often influences global oil prices by adjusting its production levels. 

9. Preemptive pricing

Intended to drive away competition or deter others from entering the marketplace by deliberately selling at below market prices (temporarily, of course).

Amazon launching the Kindle with e-books priced below typical hardcover prices. 

• Types of pricing models

1. Cost-plus pricing

Calculating the cost of production and adding a fixed gross margin. Common in retail. 

Example: A shirt that costs $20 to make might be sold for $40.

2. Geographic pricing

Adjusting prices based on location or region. 

Example: A software product priced differently for the U.S. versus India.

3. Dynamic pricing model

Prices change based on real-time factors. 

Example: Uber’s surge pricing during high demand.

4. Tiered pricing model

Different prices for varying levels of product features. See an example of how tiers and introductory pricing can be used to introduce and grow your business.

Example: Software packages with Basic, Pro, and Premium tiers.

5. Freemium model

Basic services are free, with charges for advanced features. 

Example: Spotify offers free music streaming but charges for an ad-free experience.

6. Subscription model

Recurring fee for product or service access. 

Example: Monthly Netflix subscriptions.

7. Pay-what-you-want model

Customers choose their price. Often seen in indie industries. 

Example: Some indie video games or music albums.

8. Volume-based pricing

Decreased price per unit with increased quantity. 

Example: Wholesale retailers like Costco.

9. License pricing model

One-time fee for product usage over a period. 

Example: Microsoft Office’s one-time purchase option.

10. High-low pricing model 

Products have a higher standard price but are frequently discounted. 

Example: Department stores having frequent sales.

• How to choose your pricing strategy

Selecting a pricing strategy comes down to cost, goals, and customer perception. Here’s how:

1. Set business objectives

Define clear goals, such as maximizing profit, penetrating the market, establishing a premium brand image, or achieving specific revenue targets. Your pricing should align with these objectives.

2. Understand your costs

Consider both direct costs (like raw materials and labor) and expenses (such as rent and marketing). Factor in variable costs that change with production volume and expenses that remain constant. Determine the break-even point to identify the minimum price needed to cover all expenses.

3. Analyze the competition

Research competitor prices and understand their value propositions. Identify their market positioning, whether premium or budget and observe any historical pricing trends or changes to gauge market reactions.

4. Know your audience

Understand your target audience’s demographics and what they value in a product. Gauge their price sensitivity and gather feedback on pricing preferences to ensure your price resonates with them.

5. Test and adjust

Before a broad rollout, test the new pricing on a segment of your audience. Refine your pricing based on customer input.

• More on pricing products and services

Check out our other startup pricing resources to turn your pricing strategy into profitable steps for your business.

• How to price your products
• How to price your services
• Mistakes to avoid when setting prices

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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The Power of Pricing: How to Create a Pricing Strategy that Drives Profits (+Examples)

Pricing is one of the most important aspects of any business. After all, you won't make a profit if you don't charge enough for your product or service. On the other hand, if you charge too much, you may struggle to find customers. Enter: pricing strategies .

Finding the right pricing strategy is essential for every business. A thoughtful, well-constructed pricing strategy allows you to remain competitive while still being able to cover all of the costs that are involved with running your business.

There are several different pricing strategies--and no one-size-fits-all solution. Your pricing strategy can even become an integral part of your marketing strategy and contribute to bolstering your competitive advantage.

In this guide, we’ll explain 11 different pricing strategies and provide examples of how they work. This way, you’ll have a better understanding of the intricacies involved with pricing—and can determine which strategy makes the most sense for your business.

What is a Pricing Strategy (+ Why is it Important?)

A pricing strategy is a strategic plan for how you will price your products or services and earn a profit. The right pricing strategy considers costs, the perceived value of your offering, market research, and a competitive analysis

Let's say you're selling a unique product or service that has a high perceived value, like an enterprise software suite, you might be able to charge a premium price. If you're selling a commodity product that is more price-sensitive and can easily be replaced by competitors' offerings, you might need to focus on competitive effective pricing to win market share.

Businesses should continually monitor and adapt their pricing strategy as economic and competitive landscapes evolve. In fact, according to Profitwell , most successful companies review their prices quarterly and make adjustments every six months .

Why does pricing strategy matter? It's not just about profits. (Though that is part of it!) Here's a few other reasons why pricing strategy matters:

• Gain a Competitive Advantage : In a highly competitive market, your pricing strategy can be key to gaining a competitive advantage. Companies can use a strategic pricing strategy to attract a new customer base or retain current customers.
• Attract Your Target Audience : Pricing strategy can impact consumer behavior. For example, a low price might attract price-sensitive customers in SMBs, while a higher pricing plan can signal quality and attract enterprise customers .
• Support Brand Image : The right pricing strategy can also bolster your brand image. For example, Rolex’s higher pricing strategy supports its image as a luxury brand.

Whatever pricing strategy you choose, it's important to have a clear plan backed by market research. But be ready to adapt if needed.

11 Types of Pricing Strategies with Real Examples

Now that we've covered the importance of having a pricing strategy in place, let's go over 11 common pricing strategy examples you can use as inspiration for your own pricing strategy.

1. Competitive Pricing Strategy

Many business owners use the competitive pricing strategy to attract customers and increase market share. Essentially, this involves doing a comprehensive competitive landscape analysis and setting prices at or below the level of their competitors’ prices.

This can be a useful strategy if the competitor is a large company with significant overhead and cannot reduce its prices much further. By offering a lower price, small businesses can compete without sacrificing profitability.

However, there are also risks associated with this strategy. If the competitor can lower its prices, the smaller company may be forced to follow suit and risk losing money.

In addition, if customers perceive the quality of a lower-priced offering is also lower, they may be reluctant to purchase it even at a lower price.

Competitive Pricing Strategy Example

Competitive pricing is often be seen in e-commerce. Take, for example, Apple’s AirPods vs a competitor’s “Earbuds.” As you can see below, AirPods cost $329, which Apple can justify thanks to their brand recognition and the quality of their products.

If you go to Amazon and find a similar product from a smaller competitor, you’ll see that these earbuds are just $39.99. They’re similar in style, and they may or may not be similar in quality, but they’re definitely cheaper.

Although nobody knows this brand, they can still compete with big players. This is thanks to the massive discount they’re offering for a product that does more or less the same thing.

Other examples of competitive pricing include bundle pricing, where companies group similar items together and offer a discount.

With competitive pricing, a company may rely more on sales volume than profit margin. With a high enough sales volume, a company can make up for low profit margins with sheer numbers.

2. Price Skimming

Price skimming is a strategy in which a company charges a high price for a new product or service at first, and then gradually lowers the price over time. The goal of price skimming is to generate the highest possible revenue in the shortest amount of time.

To do this, companies typically target early adopters willing to pay a premium for new products or services. The high price also helps to recoup the costs of developing and marketing the new product or service.

Once the early adopters have been captured, the company lowers the price to appeal to a wider range of consumers. This pricing strategy can be very effective in market conditions where there is a lot of consumer demand for new products or services. However, it can also backfire if the company cannot sustain high prices for long enough to make a profit.

Price Skimming Pricing Strategy Example

Gaming consoles are the perfect example of price skimming. Every time a new gaming console hits the market, the price is much higher than what it will be a few years later.

For example, take the Xbox 360. When it was launched in 2005, Microsoft was charging $400 for the console . Now, you can get an Xbox 360 from Walmart for just $183.59.

Due to the novelty of a brand-new product, Microsoft was able to take advantage of the price skimming strategy and maximize its profits in the beginning.

3. Penetration Pricing Strategy

Penetration pricing can be a great way to quickly gain market share. The basic idea is to set the initial price of a product or service low to entice customers. Once customers are hooked, the price increases to a more profitable level.

Of course, this strategy only works if the quality of the product is high enough to justify the higher price. But when done correctly, penetration pricing can be a powerful tool for driving growth.

Penetration Pricing Strategy Example

Jasper.ai is an AI writing software that uses machine learning to produce content. However, now they’re extending their feature set and introducing a new product called Jasper Art.

This tool uses AI and can produce art based on the inputs you give it. It’s a brand-new product, and they’re using penetration pricing to quickly onboard new customers. Here is a screenshot from their product launch post on Facebook.

The post states that their pricing will start at $20/user/month but will likely change (i.e. increase) in the future. A brand new feature combined with an enticing initial price is the perfect combination to get their target audience excited about using their new product, and simultaneously helps them test market demand.

4. Premium Pricing

Premium pricing involves setting a high price for a product or service to convey quality and prestige. This strategy can be particularly effective for luxury goods or products that are higher quality.

There are a few potential drawbacks to premium pricing, however. For one thing, it can alienate potential customers who don't perceive the product as worth the high price tag. In addition, it leaves little room for discounts or promotions, which can be important tools for boosting conversions.

Premium Pricing Example

What better example is there to use for premium pricing than Rolex? Although made with superior craftsmanship, Rolex watches are the epitome of premium pricing. Rolex as a company doesn’t want everyone to own a Rolex. They want to make customers feel like they are purchasing something rare and valuable.

Rolex watches often cost multiple 5-figures and sometimes even 6-figures.

Although the Rolex watches are priced at a premium, it gives their customers a sense of status. This pricing method certainly doesn’t work for everyone (especially new businesses), but it can be a powerful pricing strategy with the right business model, sales strategies , and product offering.

5. Cost-Plus Pricing Strategy

Cost-plus pricing is a popular pricing strategy in which a company sets its prices by adding a fixed markup to the total production costs of its goods or services.

Because cost-plus pricing takes all costs into account, it can help to ensure that a company is making a profit on each sale. However, it can also lead to higher prices for consumers, which can limit demand. In addition, cost-plus pricing can encourage companies to cut corners to provide lower-cost products, which can subsequently lead to lower-quality products.

Cost-Plus Pricing Strategy Example

Cost-Plus pricing is difficult to show as an example as it’s merely a formula:

Cost of goods sold x fixed markup percentage = final price

Cost-Plus pricing is oftentimes used with the sale of alcohol . If a bar is charged on a per liter basis from their supplier, they can then set a markup percentage and pass that fee onto their final customer to make their profit margin.

6. Economy Pricing

Economy pricing is a strategy in which products are priced at a low, competitive rate. The goal of economy pricing is to attract customers looking for a good deal in a competitive market .

This pricing strategy is often used for essential items in high demand, such as food and clothing. Economy pricing can also be used as a loss leader, to attract customers to a store with the hope that they will purchase other, more profitable items as well.

While economy pricing can be an effective way to attract customers, it is important to make sure the low price does not come at the expense of quality. Otherwise, customers may not return in the future.

Economy Pricing Example

For an example of economy pricing, just check your local grocery store’s flyer every week. Grocery stores typically add their best-priced items on the first page to entice people to come shop at their store.

Take, for example, the Big Y flyer below. The weekly sales items are prominently featured, using larger images and attractive pricing.

Grocery stores aren’t worried about making a small margin on their sale items because they know, more often than not, you’ll pick up additional (larger margin) items while you're shopping.

7. Discovery Call Pricing

Discovery call pricing is used by businesses to provide potential customers with an estimate for services. Under this pricing model, customers are required to book a consultation with the business to discuss their needs.

Based on the information gathered during the consultation, the business will provide the customer with a price for their services.

While discovery call pricing can be beneficial for businesses, it is important to note that it can also be frustrating for customers who are not given a clear price upfront.

Discovery Call Pricing Example

Parakeeto for example, a company that helps agencies become more profitable, requires that you fill out an application form and jumping on a call before pricing is disclosed.

This type of strategy can work well for businesses that offer more custom services because it allows you to better understand the customer’s needs before putting together a proposal.

8. Value-Based Pricing Strategies

Value-based pricing is an ideal pricing strategy for SaaS companies that takes into account the perceived value of your offering. This can be based on factors like brand recognition, quality, or even customer service .

When setting prices using this method, businesses typically start with their costs and then add a markup that reflects the perceived value of their product or service. While this approach can help you to attract customers who are willing to pay more for a high-quality product, it's important to remember that perception is often subjective.

Value-based pricing is not an exact science, and there is always some risk involved. Nevertheless, when done correctly, value-based pricing can be an effective way to boost your profits.

Value-Based Pricing Strategy Example

Starbucks is a great example of value-based pricing. They can charge a large markup mainly due to the perceived value of their brand. Even more shocking is that lower-priced competitors, like Dunkin’ Donuts, scored higher in a blind taste test .

A small Dunkin’ Donuts coffee (10 oz) is priced at $1.69. Compare that to a Short Starbucks coffee (8 oz), and you’re paying $2.55, that’s a whopping 41 percent price increase (for less coffee.)

Are you curious about value-based selling and how it can improve your sales performance? Check out this article to discover the benefits and best practices.

9. Dynamic Pricing Strategies

The basic idea of dynamic pricing is to charge customers different prices based on factors, such as time of day, demand, and even the weather.

For example, a business might charge higher prices during peak times, or when demand is high, and lower prices when demand is low. Dynamic pricing can be a very effective way to increase revenue, but it can also be controversial. Some customers feel like they are being charged more than others, based on factors that they cannot control.

As a result, businesses need to be careful when implementing dynamic pricing strategies. But when done correctly, dynamic pricing can be a very effective tool for increasing profits.

Dynamic Pricing Example

Ride-sharing companies like Uber and Lyft take advantage of dynamic pricing. This allows their prices to fluctuate based on the current demand.

Try to find an Uber after a stadium concert, while it’s raining. You’ll pay a lot more for that ride than you would on a sunny Sunday morning when half of local businesses are closed.

10. Psychological Pricing Strategies

Have you ever noticed that some prices end in .99? That’s because businesses are using a pricing strategy called psychological pricing.

Studies show consumers perceive prices ending in .99 as being significantly lower than prices that round up to the next dollar. Businesses can increase their profits by using this seemingly small change in pricing. In addition to prices ending in .99, businesses also use a variety of other pricing strategies to manipulate consumer behavior.

For example, SaaS companies may use anchoring to make a high-priced package seem more reasonable by offering a premium package that costs even more. Or they may use loss aversion to encourage people to buy now by stressing the potential loss of a sale price.

Whether we realize it or not, businesses constantly use pricing strategies to influence our behavior.

Psychological Pricing Strategy Example

You’re likely very aware of what psychological pricing looks like. We see it daily, both online and in physical stores. Just do a quick search on Amazon for any product, and you’ll probably see some form of psychological pricing at play.

Take the example above. Whether products are priced at .99 or .95, they’re all using psychology to trick our brains into thinking prices are lower than they are.

11. Freemium Pricing Strategy

With freemium pricing, businesses offer a basic version of their product for free, with the option to upgrade to a premium version for a fee. This can be an appealing option for customers who are undecided about whether they want to commit to a paid subscription. And it can be a great way for businesses to generate interest in their products.

If you're considering using freemium pricing for your business, you should keep a few things in mind. First, make sure the free version of your product is still useful and enjoyable to use. Otherwise, customers will have no incentive to upgrade to the paid version.

Second, consider what features you will include in the premium version. You want to strike a balance between offering enough value to justify the price tag, but not so much that there are no compelling reasons for customers to continue using the free version.

Finally, be prepared for an influx of users when you launch your freemium pricing strategy. If your dedicated servers can't handle the increased demand, customers will be turned off and may never come back. If you can manage the pitfalls successfully, freemium pricing can be a great way to grow your business.

Freemium Pricing Strategy Example

Dropbox and Google Drive are great examples of the freemium model at work.

Dropbox, for example, offers a free basic account with 2GB of storage. If you need more storage, you can upgrade to a paid plan.

This provides new users with the ability to try out a service, and as they find more value in it, they can upgrade to a paid account. Freemium pricing is typically found in software service-based businesses due to the low marginal costs of providing additional service to customers.

How to Create a Pricing Strategy for Your Business in 5 Steps

Every business needs to have a pricing strategy to remain competitive and profitable. But how do you create a pricing strategy? It's not as difficult as it might seem. Here are five steps to follow.

1. Determine Your Pricing Objectives

The first step is to determine your pricing objectives. What are you trying to achieve with your pricing? Do you want to maximize profits? Or are you more focused on getting market share? Once you know your objectives , you can start to develop a pricing strategy that will help you achieve them.

2. Understand Your Customers

The second step is to understand your customers. Who are they, and what are they willing to pay for your product or service? If you don't understand your customers, it will be very difficult to price your products correctly. Take the time to create your ideal customer profile and get to know what they want.

3. Research Your Competition

Third, research your competition. How are they pricing their products or services? What strategies are they using? You need to be aware of what other businesses in your industry are doing so that you can stay competitive.

4. Find Your Value Proposition

The fourth step is finding your value proposition . What makes your product or service better than the competition? Why should someone pay more for what you're offering? What’s the customer value? If you can't answer these questions, then it's going to be difficult to justify a higher price point. An effective pricing strategy starts with knowing the real value of your product.

5. Collect Data and Modify If Necessary

The fifth and final step is collecting data and modifying it if necessary. Once you've launched your pricing strategy, it's important to monitor how it's working and make changes if necessary. Don't be afraid to experiment a bit and see what works best for your business.

Pricing Strategy FAQs (Frequently Asked Questions)

What are the best pricing strategies for a new product.

When it comes to pricing a new product, there are several different strategies that businesses can use. However, two strategies that work well for new products are price skimming and penetration pricing .

With price skimming, businesses charge a high price for the initial release of the product to capitalize on early adopters who are willing to pay a premium. This strategy is typically used for products with no close substitutes.

Penetration pricing, on the other hand, involves setting a low introductory price to attract customers and gain market share. This strategy is often used for products that face intense competition.

What is the best pricing strategy for SaaS companies?

While many factors can impact the right pricing strategy for a company, most SaaS companies use either freemium pricing or psychological pricing strategies to drive user adoption and target customers in their ideal customer market.

How can pricing strategies be improved?

There are a few general tips that can help to improve your pricing strategy. First, make sure that your selling prices are in line with the competition. If you are too high, you will lose customers; if you are too low, you will struggle to make a profit.

Second, don't be afraid to experiment. Try different price points and see how your customers respond. Finally, keep an eye on your bottom line. At the end of the day, your goal should be to maximize profits, not just sales. These are simple ways to find the right price for your product without decreasing the customer life cycle.

Final Thoughts on Developing Pricing Strategies

Pricing is a critical part of your business and, if done correctly, can be the deciding factor between you and your competition.

By understanding the different pricing strategies and how to create your own strategy amongst the sea of advice floating around, you'll be able to put yourself in a much better position to increase profits, grow your business, and keep your customers happy.

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4 Pricing Objectives & Which One Is Best For Your Business

• August 4, 2021

Your pricing objective sets the foundation for your pricing strategy and can be a deciding factor between business failure and success.

The price you choose impacts more than just how much money you make or whether are competitive with the market. Rather than thinking about pricing as a sporadic, one-off process, ensure your prices are set iteratively to help you reach your changing goals.

What are Pricing Objectives?

Pricing objectives  are the goals that drive how you price your offerings. For every business goal you have, there should be a pricing objective and strategy to help you achieve it. Remember that incorrectly mixing pricing objectives and strategies may cause contradictions that prevent you from achieving your business goals, so always ensure they are closely matched.

While profit is the most common pricing objective (and rightly so), there are more nuanced objectives that every business should consider. At Revenue Management Labs, we emphasize using the  Balanced Revenue Management Framework  when setting your pricing objectives. The Framework helps to establish objectives that consider the perspectives and needs of your entire organization. More specifically, The Framework calls for the balance between Sales, Finance, and Marketing.

Based on the three pillars of The Framework, some potential sales-oriented pricing and marketing price objectives include:

1.   Gaining volume:  Sales Oriented Pricing

2. Growing market share:  Sales Oriented Pricing

3.   Increasing revenue/margin dollars:  Financial Price Objective

4. Capturing value:  Marketing Price Objective

Let’s go through each in more detail to help you understand which pricing objective is best for your business.

Sales Oriented Pricing Objectives

How to gain volume with your pricing strategy.

Some companies base their  pricing strategy  on maximizing sales by strategically setting prices to promote immediate growth. This is most common for established companies who already have a piece of the market. Their focus is primarily centered around improving overall sales, which directly impacts profit. As such, they utilize volume pricing to achieve such goals. Volume pricing at its core is a strategy that accounts for discounts when large quantities are purchased. The larger the order, the larger the discount. The rationale is that the company expects the lower price to make up the difference with a higher sales volume.

Volume pricing can be beneficial because it requires companies to establish large-scale infrastructure to support the large purchase sizes, which can help reinforce a company’s brand and strengthen customer loyalty. Therefore, volume pricing tends to work better for larger incumbents in the market because they have the scale and operational capacity to fulfill large orders. These traits also help offset the company’s fixed costs. For example, if a company can produce one million widgets but only sell 500,000, they can drive efficiency in fixed costs by selling another 500,000 widgets.

Grow Your Market Share With Sales Oriented Pricing Objectives

A market penetration strategy focuses on getting a foothold in a competitive market by maximizing product adoption. Companies usually set a lower initial price (or if you are a XaaS business, offer a freemium option) to encourage more customers to try their offering. Then, once customers become loyal users, they increase monetization opportunities later through upsells or expansion revenue. You can experiment with many pricing elements, such as money-back guarantees or free value-add services to help maximize adoption.

However, this strategy can be risky for businesses if customers get accustomed to the lower price. Any mention of price increases will be met with heavy pushback. To overcome this, ensure your products offer quality or uniqueness that your competitors do not. Doing so will make it easier to convince customers to buy from you – even if at a higher price point.  Check out our article on overcoming customer objections to learn more!

Note that with these sales-related pricing objectives, you need to consider the industry you are in before choosing between growing market share/volume. For industries that are declining (e.g. Beer, Tobacco), lowering your price will not drive volume since the size of the pie is shrinking. What lowering price will do, however, is allow you to fight for the remaining market share. In contrast, if your business is in a trending market (e.g. organic or natural products), lowering the price can move lots of volume. Why? Because the market is still growing and new customers are entering the market, looking to find the best deal. In this situation, pricing has greater leverage in convincing people to try your offering.

Unfortunately, lowering prices only work if you can afford to live on margin, so I recommend exhausting every other option before using this strategy. Further, extended periods of low prices may eventually result in a price war between competitors where no one is able to make money, so utilize low prices at your own risk.

Profit-Oriented Pricing Objective

Increase revenue & margin with pricing objectives.

The goal of profit-oriented pricing is to maximize the margin of each sale as well as the long-term profitability of the business. That is, make as much money as possible for as long as possible. Most businesses take two paths to maximize profit – they either raise prices to increase their top-line revenue or reduce costs to increase bottom-line profit.

Before choosing your path, make sure you understand who your customers are. For example, if you are a software company, increasing your price to attract high-end buyers may not be a worthwhile endeavor if you find the cost of acquisition and churn rates are greater compared to middle-class buyers.

Further, understand that maximizing profit and maximizing revenue are two completely different things depending on what you want to accomplish. Returning to the software company example, say your platform scales with every new customer. In this situation, focusing on revenue rather than profit is better because there are no variable costs associated with additional customers. Compare this to a company selling cereal, where there is an added variable cost every time you sell your product. In this case, you should focus on the bottom line. All this to say, be sure to consider all the fixed and variable costs within your business before determining which financial objective to pursue.

Marketing Based Price Objective

How to capture value with pricing objectives.

Customers should be central to every business decision and pricing is no exception. Your prices should be set high enough that customers value your product and continue using it, but low enough that you are not turning off your target customers with high and sticky prices. To hit this sweet spot, utilize value-based pricing, a strategy of setting prices based on how much the customer believes your offering is worth.

Value-based pricing requires customer data as well as an understanding of the relative value of your offerings. You will also need to analyze the competition because once you have the data, you want to know the other options customers have open to them. At RML, we help companies succeed in value pricing by building the following organizational capabilities:

• Customer Data and Insights:  Understanding what customers really want and how much they are willing to pay for what they want
• Economics:  Understanding both the internal economics of the company and the economics of the market
• Pricing Management:  Setting the right price and making sure that your discounting policy makes sense
• Pricing Psychology:  Understanding that it is the customer’s perception of the price that drives the behavior

Contact RML to Learn More About Pricing Strategies

With so many pricing objectives to choose from, what is the optimal number? Every business is different, so the number of pricing objectives will vary. However, I suggest having more than one objective. Ideally, you want a mix of objectives that address each pillar of the Balanced Revenue Management Framework (Sales, Marketing, Finance) discussed earlier.

If you would like Revenue Management Labs to help you determine which pricing objectives to pursue and how to achieve our business goals, get in touch today!

ABOUT THE AUTHOR  Michael Stanisz is a Partner at  Revenue Management Labs . Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Michael at  [email protected]

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Why Pricing Objectives are Fundamental to Business Success

What are Pricing Objectives?

Pricing objectives are the goals that guide your business in setting the cost of a product or service to your existing or potential consumers.

A pricing objective underpins the pricing process for a product and it should reflect your company's marketing, financial, strategic and product goals, as well as consumer price expectations and the levels of your available stock and production resources.

Some examples of pricing objectives include maximising profits, increasing sales volume, matching competitors' prices, deterring competitors – or just pure survival. 

Each pricing objective requires a different price-setting strategy in order to successfully achieve your business goals. It requires you to have a firm understanding of both your product attributes and the market.

Your choice of a pricing objective does not have to last forever.  As business and market conditions change, adjusting your pricing objective may become necessary or appropriate.  

How to Choose a Pricing Objective

Pricing objectives are selected with your business and financial goals in mind. Elements of your business plan can guide your choice of a pricing objective and the strategies that go with it.

Give due consideration to your business’s mission statement and plans for the future. If one of your overall business goals is to become market leader then you’ll want to consider the quantity maximisation pricing objective as opposed to the survival pricing objective.

If your business mission is to be a leader in your industry, you may want to consider a quality leadership pricing objective. On the other hand, profit margin maximisation may be most appropriate if your business plan calls for growth in production in the near future, since you will need funding for facilities and labour .

Some objectives, such as survival and price stability will be used when market conditions are poor or shaky, when first entering a market, or when a business is experiencing hard times and needs to restructure.

Pricing for Profit

This objective is aimed, simply, at making as much money as possible for your business – and to maximise price for long-term profitability.

Price has both a direct and indirect effect on your profits - the direct effect relates to whether the price actually covers the cost of producing the product.  Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale, i.e. the relative benefit of selling more units.

• Profit margin maximisation:   seeks to maximise the per-unit profit margin of a product. This objective is typically applied when the total number of units sold is expected to be low.
• Profit maximisation:  seeks to earn the greatest pound amount in profits. This objective is not necessarily tied to the objective of profit margin maximisation.

A major camping supplier, worked with BlackCurve to ensure a minimum margin was set at the brand level. This meant that despite the business running a lowest competitor pricing strategy, on key brands, they did not always compete at the lowest level to ensure they maximised the margin on each sale of the associated products.

Sales-related Objectives

Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is measured against a company's own sales across specific time periods.

A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily activate a change in the other.

The main sales-related pricing objectives include:

• Sales growth:   It is assumed that sales growth has a direct positive impact on profits so pricing decisions are taken in way that sales volume can be raised. Setting a price, altering or modifying policies are targeted to improve sales.
• Targeting market share:  Pricing decisions are taken in such a way that enable your company to achieve targeted market share. Market share is a specific volume of sales determined in the light of total sales in an industry. For example, your company may try to achieve a 25% market share in the relevant industry.
• Increase in market share:  Sometimes, price and pricing are taken as the tools to increase market share. When you realise that your market share is lower than expected it can be raised by appropriate pricing; pricing is aimed at improving market share.

A leading appliance retailer adopted a lowest competitor pricing strategy to ensure they could grow their market share. The lowest competitor pricing strategy looked at rated sellers only, to ensure they benchmarked their prices against the market leaders, and undercut those prices, without falling into the trap of benchmarketing against very small players in the market, and competing unnecessarily with them. Market share needed to be won from the market leaders.

Competition-related Objectives

Every company tries to react to their competitors with appropriate business strategies. With reference to price they may wish:

• T o face up to the competition:  t oday’s markets are characterised by intense competition and companies set and modify their pricing policies so as to respond to their competitors.  Many companies use price as a powerful tool to react to the level and strength of competition.
• To deter competitors: to prevent the entry of competitors can be one of the main pricing objectives.  To achieve this objective, a company keeps its price as low as possible to minimise profit attractiveness of products. In some cases, a company reacts offensively to prevent entry of competitors by selling products at a loss.
• Signal quality:  buyers believe that a high price is related to high quality.  In order to create a positive image in customers' minds that your product is superior to that offered by close competitors you will design your prices accordingly. 

A leading gardening company set the price of their branded goods at just above the market average price to signal to their customers they were a premium brand. Their support and gardening advice is second to none, and therefore they could trade off this powerful brand to achieve higher prices.

Increasing prices doesn't automatically mean  losing customers.

- Peter Hill

Customer-related Objectives

Customers should be central to every marketing decision so, in order to keep customers on your side you need suitable pricing policies and practices  to win the confidence of customers:

C ustomers are your "targets".  Your company should be setting its pricing policies to win over the confidence of your target market.  By appropriate pricing, you can establish, maintain or even strengthen the confidence of customers that the price charged for your product(s) is fair and that they are not being cheated.

To increase customer satisfaction: t o satisfy customers should be the prime objective of all marketing efforts and pricing is no exception. Your company should set, adjust, and readjust its pricing to satisfy its target customers. In short,  design pricing in such a way that results in maximum customer satisfaction.

Market Penetration

This objective is concerned with entering deep into the market to attract the maximum number of customers. This objective calls for charging the lowest possible price to win price-sensitive buyers. A penetration strategy might be right for you if you are in a position to rapidly gain market share, bring down unit costs and purposefully price low to create barriers to entry: think Amazon, Uber, Facebook.  

You will make a grab for market share and then expand but must appreciate that a penetration strategy is most risky from a profit and revenue standpoint.  You will need to be able to gain huge market share rapidly and follow through on future price increases.  If you gain customers early in such markets you are better positioned to maximise customers' lifetime value from future sales and upsells.

This expression comes from the farming practice of milking cows - the cream rises to the top and you skim it off.

From a business perspective, this pricing objective is concerned with skimming maximum profit in the initial stage of a product's life cycle. Because the product is new, offering new and superior advantages, your company can charge a relatively high price because you are catering to customers with a higher willingness to pay, i.e. the early adopters.  

Certain customer segments will buy a product even at a premium price in order to be ahead of the game.   Later you can aim at more price-sensitive consumers with a lower price.  Some prime examples are purchasers of movies, music, online games, gaming consoles (Microsoft Xbox), smartphones (iPhone) and luxury vehicles.

The advantage of using a Skimming pricing policy is that you can theoretically get the maximum profit from each level of customer.  You need to bear in mind however that you can only charge the high price for your product when there are no close substitutes.

Stabilising

This objective seeks to keep your product prices in line with the same or similar products offered by your competitors to maintain a stable level of profit generated from a particular product – or to avoid starting a price war where no one wins.  It's a tactical goal that encourages competition on factors other than price and focuses on maintaining market share.

Stability in price makes a good impression on your buyers - frequent changes in pricing can adversely affect the prestige of your company.

This is perhaps the most fundamental of all pricing objectives.  Pricing is aimed at survival with a hope for growth in the (not too far distant) future.  Your company may use a survival-based pricing objective when it's willing to accept short-term losses for the sake of long-term viability.

Under this objective, pricing can be flexible – prices are lowered in order to increase sales enough to keep the business going, i.e. cover essential costs. For a short term, on a temporary basis, the goal of making a profit is set aside for the objective of survival.   Once the situation that initiated the survival pricing has passed, product prices should be returned to previous or more appropriate levels.

What are examples of pricing objectives?

Example pricing objectives include ensuring that the minimum margin is protected and does not go below an expected level. Alternatively in might require a particular competitor price position to always be maintained, such as, always being the cheapest advertised price, or always ensuring your prices are the market average.

Why are pricing objectives important?

Because they provide a north star focus of the actions needed throughout the year to achieve the objective. They provide guidance to the pricing strategy, pricing tooling, pricing process, and pricing personnel selected. Without them, you will have no idea on the effectiveness of your pricing operation within the business.

How do you set pricing objectives?

Pricing objectives are set after fully understanding the overarching business objective. This is to ensure that the pricing objective supports the delivery of the business objective. It should be done in conjunction with the senior leadership team.

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29.21: Pricing Objectives

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Learning Objectives

• Describe the objectives businesses hope to achieve with product pricing

Companies set the prices of their products in order to achieve specific objectives. Consider the following examples.

In 2014 Nike initiated a new pricing strategy. The company determined from a market analysis that its customers appreciated the value that the brand provided, which meant that it could charge a higher price for its products. Nike began to raise its prices 4–5 percent a year. Footwear News reported on the impact of their strategy:

Nike’s understanding of customer value enabled it to raise prices and achieve company growth objectives, increasing U.S. athletic footwear sales by $168 million in one year.

Southwest Airlines

In 2015 the U.S. airline industry lost $12 billion in value in one day because of concerns about potential price wars. When Southwest Airlines announced that it was increasing its capacity by 1 percent, the CEO of American Airlines—the world’s largest airline—responded that American would not lose customers to price competition and would match lower fares. Forbes magazine reported on the consequences:

Common Pricing Objectives

Not surprising, product pricing has a big effect on company objectives. (You’ll recall that objectives are essentially a company’s business goals.) Pricing can be used strategically to adjust performance to meet revenue or profit objectives, as in the Nike example above. Or, as the airline-industry example shows, pricing can also have unintended or adverse effects on a company’s objectives. Product pricing will impact each of the objectives below:

• Profit objective: For example, “Increase net profit in 2016 by 5 percent”
• Competitive objective: For example, “Capture 30 percent market share in the product category”
• Customer objective: For example, “Increase customer retention”

Of course, over the long run, no company can really say, “We don’t care about profits. We are pricing to beat competitors.” Nor can the company focus only on profits and ignore how it delivers customer value. For this reason, marketers talk about a company’s “orientation” in pricing. Orientation describes the relative importance of one factor compared to the others. All companies must consider customer value in pricing, but some have an orientation toward profit. We would call this profit-oriented pricing.

Profit-Oriented Pricing

Profit-oriented pricing places an emphasis on the finances of the product and business. A business’s profit is the money left after all costs are covered. In other words, profit = revenue – costs. In profit-oriented pricing, the price per product is set higher than the total cost of producing and selling each product to ensure that the company makes a profit on each sale.

The benefit of profit-oriented pricing is obvious: the company is guaranteed a profit on every sale. There are real risks to this strategy, though. If a competitor has lower costs, then it can easily undercut the pricing and steal market share. Even if a competitor does not have lower costs, it might choose a more aggressive pricing strategy to gain momentum in the market.

Also, customers don’t really care about the company’s costs. Price is a component of the value equation, but if the product fails to deliver value, it will be difficult to generate sales.

Finally, profit-oriented pricing is often a difficult strategy for marketers to succeed with, because it limits flexibility. If the price is too high, then the marketer has to adjust other aspects of the marketing mix to create more value. If the marketer invests in the other three Ps—by, say, making improvements to the product, increasing promotion, or adding distribution channels—that investment will probably require additional budget, which will further raise the price.

It’s fairly standard for retailers to use some profit-oriented pricing—applying a standard mark-up over wholesale prices for products, for instance—but that’s rarely their only strategy. Successful retailers will also adjust pricing for some or all products in order to increase the value they provide to customers.

Competitor-Oriented Pricing

Sometimes prices are set almost completely according to competitor prices. A company simply copies the competitor’s pricing strategy or seeks to use price as one of the features that differentiates the product. That could mean either pricing the product higher than competitive products, to indicate that the firm believes it to provide greater value, or lower than competitive products in order to be a low-price solution.

This is a fairly simple way to price, especially with products whose pricing information is easily collected and compared. Like profit-oriented pricing, it carries some risks, though. Competitor-oriented pricing doesn’t fully take into account the value of the product to the customer vis-à-vis the value of competitive products. As a result, the product might be priced too low for the value it provides, or too high.

As the airline example illustrates, competitor-oriented pricing can contribute to a difficult market dynamic. If players in a market compete exclusively on price, they will erode their profits and, over time, limit their ability to add value to products.

Customer-Oriented Pricing

Customer-oriented pricing is also referred to as value-oriented pricing. Given the centrality of the customer in a marketing orientation (and this marketing course!), it will come as no surprise that customer-oriented pricing is the recommended pricing approach because its focus is on providing value to the customer. Customer-oriented pricing looks at the full price-value equation (Figure 1, above; discussed earlier in the module in “Demonstrating Customer Value”) and establishes the price that balances the value. The company seeks to charge the highest price that supports the value received by the customer.

Customer-oriented pricing requires an analysis of the customer and the market. The company must understand the buyer persona, the value that the buyer is seeking, and the degree to which the product meets the customer need. The market analysis shows competitive pricing but also pricing for substitutes.

In an attempt to bring the customer voice into pricing decisions, many companies conduct primary market research with target customers. Crafting questions to get at the value perceptions of the customer is difficult, though, so marketers often turn to something called the Van Westerndorp price-sensitivity meter. This method uses the following four questions to understand customer perceptions of pricing:

• At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
• At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
• At what price would you consider the product starting to get expensive, such that it’s not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
• At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)

Each of these questions asks about the customer’s perspective on the product value, with price as one component of the value equation.

Practice Question

https://assessments.lumenlearning.co...essments/14507

• Jordan. "Nike Price Hikes Drive U.S. Sneaker Growth." Footwear News. July 14, 2014. Accessed June 25, 2019. http://footwearnews.com/2014/business/news/nike-price-hikes-drive-u-s-sneaker-growth-144128/ . ↵
• Trefis Team, and Great Speculations. "Airlines' Stocks Drop As Fear Of Price War Clouds The Industry." Forbes. June 11, 2015. Accessed June 25, 2019. http://www.forbes.com/sites/greatspeculations/2015/06/11/airlines-stocks-drop-as-fear-of-price-war-clouds-the-industry/ . ↵

Contributors and Attributions

• Pricing Objectives. Provided by : Lumen Learning. License : CC BY: Attribution
• Practice Question. Authored by : Robert Danielson. Provided by : Lumen Learning. License : CC BY: Attribution

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Pricing Objectives

Table of Contents

What are pricing objectives.

Pricing objectives are the goals that guide a company in setting the price of a product or service. These objectives are fundamental to a firm’s overall business and marketing strategy, influencing how products are positioned in the market and compete with others.

The pricing objectives of a company directly impact its market presence and profitability. They determine the pricing tactics, influencing the product’s perceived value and the revenue generated.

• Pricing goals
• Pricing targets

Key Types of Pricing Objectives

Pricing objectives are fundamental to a company’s strategic planning, influencing its pricing policies and market positioning. Common objectives include:

Profit Maximization

This objective focuses on setting prices to maximize the company’s profitability . It involves understanding the market’s price elasticity and determining the optimal price point where profits are highest. Profit maximization is ideal in markets with low price sensitivity , where customers are willing to pay premium prices for perceived value.

Specific Profit Margin Targeting

The goal is to achieve a specific profit margin per unit sold. It is suited for products with well-defined cost structures and established market presence. This approach often requires a thorough understanding of cost structures and market expectations.

Market Share Leadership

Companies aiming for market share leadership set prices to outcompete rivals and dominate market share. This could involve aggressive pricing strategies to capture and maintain a larger market segment. This pricing objective is often pursued in competitive sectors where long-term dominance is more valuable than short-term profits.

Customer Retention

The focus of a customer retention pricing objective is on retaining existing customers and building loyalty by setting prices that are attractive to repeat buyers. This objective is often associated with long-term customer relationships.

Survival becomes a priority in turbulent markets or during economic downturns, focusing on staying afloat rather than profitability. Pricing decisions in this context focus on covering costs and maintaining viability, often leading to lower profit margins. 

Market Penetration

This involves setting lower initial prices to attract new customers and gain market entry. The long-term goal is to establish a customer base and increase market share, often followed by gradual price increases as brand loyalty builds. Market penetration is typically adopted by new entrants or for launching new products, aiming to quickly establish a market presence based on their go-to-market strategy .

Importance of Pricing Objectives in Business

Pricing objectives are crucial in shaping a company’s market performance and strategic direction.

Impact on Market Share and Sales Volume

A company’s pricing objectives can significantly impact its market share and sales volume. For example, a strategy focused on market penetration , which often involves lower pricing, can increase sales volume but might reduce profit margins. Conversely, profit maximization objectives might lead to higher prices, potentially decreasing sales volume but increasing profit per unit. This delicate balance between price, volume, and profit is crucial for maintaining competitiveness and market presence.

Alignment with Overall Business Strategy

Pricing objectives must be in sync with a company’s overarching business strategy. For instance, if a company aims to position itself as a premium brand, its pricing objectives should reflect this, favoring higher price points to align with the perceived value of its products or services. In contrast, a business seeking rapid market expansion might prioritize lower pricing strategies to attract a broader customer base.

Crucial for Achieving Business Goals

Effective pricing objectives are instrumental in achieving broader business goals. They are a key factor in brand positioning, determining market entry strategies, and setting and meeting revenue targets. The ability to set and adjust pricing objectives in response to market dynamics, competitor actions, and internal financial goals is essential for long-term business success. In essence, well-defined and strategically aligned pricing objectives are not just about setting the right price – they are about steering the entire business toward its desired future state.

Pricing Objectives vs. Pricing Strategies

Understanding the distinction between pricing objectives and pricing strategies is crucial for effective business planning and market positioning. These concepts, while interconnected, serve different roles in a company’s pricing model.

Distinction Between Objectives and Strategies

Pricing Objectives are the goals a company aims to achieve through its pricing. They reflect the broader ambitions of the business, such as maximizing profits, expanding market share, or establishing a brand position. Objectives are the “what” in pricing – what the company hopes to accomplish.

Pricing Strategies , on the other hand, are the specific methods and tactics a company employs to meet these objectives. They are the “how” the company plans to achieve its pricing goals. Pricing strategies include decisions on pricing models, discount structures, and price adjustments in response to market changes.

Guide for Choosing Pricing Strategies

The company’s pricing objectives directly influence the selection of appropriate pricing strategies. Each objective necessitates a different approach:

• Profit Maximization : Companies aiming for maximum profits might adopt premium pricing strategies. This involves setting higher prices based on the perceived value of the product or service, targeting less price-sensitive consumers.
• Market Penetration : Contrastingly, a market penetration objective often leads to economy pricing strategies. In penetration pricing , prices are set lower to attract a broader customer base, particularly in a crowded market or when introducing new products.

The alignment between objectives and strategies is vital. A mismatch can lead to ineffective pricing and suboptimal market performance. For example, premium pricing would be counterproductive for a market penetration objective, just as economy pricing might undermine a profit maximization goal. The key is to develop a coherent pricing approach that seamlessly integrates the company’s objectives with its strategic actions.

Factors Influencing Pricing Objectives

A blend of external and internal factors influences the determination of pricing objectives. These factors are crucial in shaping how a company positions its products or services in the market through pricing.

Role of External Factors

Competition.

The level of competition in the market significantly influences pricing objectives. In a highly competitive market, a company may need to adopt more aggressive pricing strategies, such as economy pricing , to gain a foothold or maintain its market share.

Customer Demand

Understanding customer demand is pivotal. Pricing objectives must reflect what customers are willing to pay, which depends on factors like perceived value, customer income levels, and price sensitivity.

Market Conditions

Broader market conditions, including economic trends and industry shifts, also dictate pricing objectives. For example, a company might lower its prices in a recession to maintain sales volume.

Importance of Internal Factors

Cost considerations.

The cost of producing or sourcing a product or service sets the baseline for pricing. Pricing must cover costs to ensure sustainability, making cost analysis a fundamental aspect of setting pricing objectives.

Quality of Offerings

The quality of what a company offers directly impacts its pricing power. Higher quality often justifies higher prices, but the pricing must align with the perceived quality in the eyes of the customers.

Brand Image

A brand’s position in the market influences its pricing objectives. Luxury brands, for instance, typically aim for premium pricing to align with their high-end image.

Balancing these external and internal factors is key to establishing pricing objectives that are competitive and responsive to the market and realistic and aligned with the company’s overall strategic goals.

Setting and Implementing Pricing Objectives

Setting and implementing pricing objectives is a critical process that directly influences a company’s success. This process involves analyzing market conditions, understanding customer perceptions of value, and aligning objectives with the company’s financial goals.

Setting Pricing Objectives

The first step in this process is to determine the pricing objectives. This includes assessing the competitive landscape, market demand, and cost considerations. For instance, if a company operates in a highly competitive market, its pricing objectives may revolve around gaining a competitive edge or achieving market penetration. Simultaneously, it’s crucial to consider the financial objectives, such as maximizing profits or maintaining profitability during sales slumps and economic downturns.

Understanding Customer Value Perception

A deep understanding of customer value perception is essential to set effective pricing objectives. Companies must identify what customers are willing to pay for their products or services. This involves considering factors like product quality, brand image, and the unique benefits offered. Pricing objectives should align with the perceived value, ensuring that customers feel they are getting a fair deal.

Alignment with Business Direction

Pricing objectives should harmonize with the broader business direction. For instance, if a company aims to position itself as a premium brand, its pricing objectives should favor higher price points to align with the perceived value of its products. Conversely, if the goal is rapid market expansion, lower pricing strategies may be necessary to attract a wider customer base. The alignment between pricing objectives and business direction ensures a cohesive strategy that supports long-term growth.

Implementation and Reassessment

Once pricing objectives are defined, they need to be translated into actionable strategies. This includes setting specific prices, discount structures, and pricing models . Additionally, it’s vital to periodically reassess pricing objectives and strategies to remain responsive to changing market dynamics, customer preferences, and competitive pressures.

Best Practices for Effective Pricing Objectives

Several best practices should be followed to harness the power of pricing objectives effectively. First and foremost, pricing objectives must be realistic. They should reflect the current market conditions, considering factors like competition, customer demand, and cost considerations. Unrealistic objectives can lead to pricing strategies that are disconnected from market realities and ultimately hinder a company’s performance.

Furthermore, effective pricing objectives are adaptable and flexible. Business environments are dynamic, and pricing objectives should be capable of adjusting to changes in the market, shifts in customer preferences, or the emergence of new competitors. Flexibility ensures that pricing remains responsive and relevant.

Pricing objectives are not to be underestimated in their significance in guiding a company through the complex waters of pricing strategy development. Companies should make objectives realistic, aligned with market conditions, and adaptable to a changing business environment.

People Also Ask

How do businesses choose the best pricing objectives.

Businesses choose pricing objectives based on market analysis, competitive positioning, customer value perception, and financial goals.

What is the relationship between pricing objectives and customer value?

The relationship lies in setting prices that reflect the value perceived by the customer , thereby aligning pricing objectives with customer expectations and satisfaction.

What are some common challenges in implementing pricing objectives?

Challenges include accurately gauging market response, balancing cost and quality, and adapting to dynamic market conditions. Pricing objectives evolve as the market changes and the business grows, necessitating continuous reassessment and adaptation to new market realities.

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• Glossary: B2B Pricing

9.2 Pricing objectives

   learning objectives.

The objectives of this section is to help students …

• Understand the sellers’ objectives in making pricing decisions

Pricing objectives

Firms rely on price to cover the cost of production, to pay expenses, and to provide the profit incentive necessary to continue to operate the business. We might think of these factors as helping organizations to: (a) survive, (b) earn a profit, (c) generate sales, (d) secure an adequate share of the market, and (e) gain an appropriate image

• Survival: It is apparent that most managers wish to pursue strategies that enable their organizations to continue in operation for the long term. So survival is one major objective pursued by most executives. For a commercial firm, the price paid by the buyer generates the firm’s revenue. If revenue falls below cost for a long period of time, the firm cannot survive.
• Profit: Survival is closely linked to profitability. Making a USD 500,000 profit during the next year might be a pricing objective for a firm. Anything less will ensure failure. All business enterprises must earn a longterm profit. For many businesses, long-term profitability also allows the business to satisfy their most important constituents–stockholders. Lower-than-expected or no profits will drive down stock prices and may prove disastrous for the company.
• Sales: Just as survival requires a long-term profit for a business enterprise, profit requires sales. As you will recall from earlier in the text, the task of marketing management relates to managing demand. Demand must be managed in order to regulate exchanges or sales. Thus marketing management’s aim is to alter sales patterns in some desirable way.
• Market share: If the sales of Safeway Supermarkets in the Dallas-Fort Worth metropolitan area of Texas, USA, account for 30 per cent of all food sales in that area, we say that Safeway has a 30 per cent market share. Management of all firms, large and small, are concerned with maintaining an adequate share of the market so that their sales volume will enable the firm to survive and prosper. Again, pricing strategy is one of the tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market segment in significant numbers.
• Image: Price policies play an important role in affecting a firm’s position of respect and esteem in its community. Price is a highly visible communicator. It must convey the message to the community that the firm offers good value, that it is fair in its dealings with the public, that it is a reliable place to patronize, and that it stands behind its products and services.

Developing a pricing strategy

While pricing a product or service may seem to be a simple process, it is not. As an illustration of the typical pricing process, consider the following quote: “Pricing is guesswork. It is usually assumed that marketers use scientific methods to determine the price of their products. Nothing could be further from the truth. In almost every case, the process of decision is one of guesswork.” (2)

Good pricing strategy is usually based on sound assumptions made by marketers. It is also based on an understanding of the two other perspectives discussed earlier. Clearly, sale pricing may prove unsuccessful unless the marketer adopts the consumer’s perspective toward price. Similarly, a company should not charge high prices if it hurts society’s health. Hertz illustrates how this can be done in “Integrated marketing” below.

A pricing decision that must be made by all organizations concerns their competitive position within their industry. This concern manifests itself in either a competitive pricing strategy or a nonprice competitive strategy. Let us look at the latter first.

Nonprice competition

Nonprice competition means that organizations use strategies other than price to attract customers. Advertising, credit, delivery, displays, private brands, and convenience are all example of tools used in nonprice competition. Businesspeople prefer to use nonprice competition rather than price competition, because it is more difficult to match nonprice characteristics.

Figure 9.3: An example of nonprice competition.

Competing on the basis of price may also have a deleterious impact on company profitability. Unfortunately, when most businesses think about price competition, they view it as matching the lower price of a competitor, rather than pricing smarter. In fact, it may be wiser not to engage in price competition for other reasons. Price may simply not offer the business a competitive advantage (employing the value equation).

Competitive pricing

Once a business decides to use price as a primary competitive strategy, there are many well established tools and techniques that can be employed. The pricing process normally begins with a decision about the company’s pricing approach to the market.

Approaches to the market

Price is a very important decision criteria that customers use to compare alternatives. It also contributes to the company’s position. In general, a business can price itself to match its competition, price higher, or price lower. Each has its pros and cons.

Pricing to meet competition

Many organizations attempt to establish prices that, on average, are the same as those set by their more important competitors. Automobiles of the same size and having equivalent equipment tend to have similar prices. This strategy means that the organization uses price as an indicator or baseline. Quality in production, better service, creativity in advertising, or some other element of the marketing mix are used to attract customers who are interested in products in a particular price category.

The keys to implementing a strategy of meeting competitive prices are an accurate definition of competition and a knowledge of competitor’s prices. A maker of hand-crafted leather shoes is not in competition with mass producers. If he/she attempts to compete with mass producers on price, higher production costs will make the business unprofitable. A more realistic definition of competition for this purpose would be other makers of handcrafted leather shoes. Such a definition along with a knowledge of their prices would allow a manager to put the strategy into effect. Banks shop competitive banks every day to check their prices.

 Pricing above competitors

Pricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood and that the marketing mix is used to develop a strategy to enable management to implement the policy successfully.

Pricing above competition generally requires a clear advantage on some nonprice element of the marketing mix. In some cases, it is possible due to a high price-quality association on the part of potential buyers. Such an assumption is increasingly dangerous in today’s information-rich environment. Consumer Reports and other similar publications make objective product comparisons much simpler for the consumer. There are also hundreds of dot.com companies that provide objective price comparisons. The key is to prove to customers that your product justifies a premium price.

Pricing below competitors

While some firms are positioned to price above competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price and profit margins. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less.

Such a strategy can be effective if a significant segment of the market is price-sensitive and/or the organization’s cost structure is lower than competitors. Costs can be reduced by increased efficiency, economics of scale, or by reducing or eliminating such things as credit, delivery, and advertising. For example, if a firm could replace its field sales force with telemarketing or online access, this function might be performed at lower cost. Such reductions often involve some loss in effectiveness, so the tradeoff must be considered carefully.

Historically, one of the worst outcomes that can result from pricing lower than a competitor is a “price war”. Price wars usually occur when a business believes that price-cutting produces increased market share, but does not have a true cost advantage. Price wars are often caused by companies misreading or misunderstanding competitors. Typically, price wars are over reactions to threats that either are not there at all or are not as big as they seem.

Another possible drawback when pricing below competition is the company’s inability to raise price or image. A retailer such as K-mart, known as a discount chain, found it impossible to reposition itself as a provider of designer women’s clothiers. Can you imagine Swatch selling a USD 3,000 watch?

How can companies cope with the pressure created by reduced prices? Some are redesigning products for ease and speed of manufacturing or reducing costly features that their customers do not value. Other companies are reducing rebates and discounts in favor of stable, everyday low prices (ELP). In all cases, these companies are seeking shelter from pricing pressures that come from the discount mania that has been common in the US for the last two decades.

New product pricing

A somewhat different pricing situation relates to new product pricing. With a totally new product, competition does not exist or is minimal. What price level should be set in such cases? Two general strategies are most common: penetration and skimming. Penetration pricing in the introductory stage of a new product’s life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin and sales are limited to those buyers willing to pay a premium to get the new product (see Figure 9.4).

Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales.

Figure 9.4 : Penetration and skimming: pricing strategies as they relate to the demand curve.

A skimming strategy is most appropriate when the opposite conditions exist. A premium product generally supports a skimming strategy. In this case, “premium” does not just denote high cost of production and materials; it also suggests that the product may be rare or that the demand is unusually high. An example would be a USD 500 ticket for the World Series or an USD 80,000 price tag for a limited-production sports car. Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.

Integrated marketing

How to select the best price

The Hertz Corporation knows when its rental cars will be gone and it knows when the lots will be full. How? By tracking demand throughout past six years. “We know, based on past performance and seasonal changes, what times of year there is a weak demand, and when there is too much demand for our supply of cars,” says Wayne Meserue, director of pricing and yield management at Hertz. To help strike a balance, the company uses a pricing strategy called “yield management” that keeps supply and demand in check. The strategy looks at two aspects of Hertz’s pricing: the rate that is charged and the length of the rental.

“Price is a legitimate rationing device,”says Meserue. “What we’re really talking about is efficient distribution, pricing, and response in the marketplace.” For example, there are times when cars are in great demand. “It’s always a gamble, but it’s definitely a calculated gamble. With yield management, we monitor demand day by day, and adjust (prices as necessary),” Meserue says. Hertz also uses length of rental as a yield management device. For instance, in the US they established a three-night minimum for car rentals during President’s Day weekend in February. “We didn’t want to be turning away business for someone who wanted the car for five nights just because we had given our cars to people who came in first for one night,” says Meserue, who adds that it is often better for Hertz to mandate a minimum number of days for a rental, because it ensures that cars will be rented for more days.

A smart pricing strategy is essential for increasing profit margins and reducing supply. Yet at last count, only 15 per cent of large corporations were conducting any sort of pricing research, reports Robert Dolan, professor at Harvard Business School. “People don’t realize that if you can raise your prices by just 1 percent, that’s a big increase in your profit margin,” he says. For example, if a supermarket is operating with a 2 per cent net margin, raising the prices by 1 per cent will increase profitability by 33 per cent. “The key is not taking one percent across the board, but raising it 10 per cent for 10 per cent of your customers,” says Dolan, “Find those segments of the market that are willing to take the increase.” That doesn’t mean that companies can automatically pass their cost increases on the customer, notes Dolan. If the costs are affecting an entire industry, then those costs can be passed through easily to the consumer, because competitors will likely follow the lead.

A fundamental point in smart pricing, according to Dolan: base prices on the value to the customer. As much as people talk about customer focus, they often price according to their own costs, companies can profit from customizing prices to different customers. The value of a product can vary widely depending on factors such as age and location. (33)

 Price lines

You are already familiar with price lines. Ties may be priced at USD 15, USD 17, USD 20, and USD 22.50; bluejeans may be priced at USD 30, USD 32.95, USD 37.95, and USD 45. Each price must be far enough apart so that buyers can see definite quality differences among products. Price lines tend to be associated with consumer shopping goods such as apparel, appliances, and carpeting rather than product lines such as groceries. Customers do very little comparison-shopping on the latter.

Price lining serves several purposes that benefit both buyers and sellers. Customers want and expect a wide assortment of goods, particularly shopping goods. Many small price differences for a given item can be confusing. If ties were priced at USD 15, USD 15.35, USD 15.75, and so on, selection would be more difficult; the customer could not judge quality differences as reflected by such small increments in price. So, having relatively few prices reduces the confusion.

From the seller’s point of view, price lining holds several benefits. First, it is simpler and more efficient to use relatively fewer prices. The product/service mix can then be tailored to selected price points. Price points are simply the different prices that make up the line. Second, it can result in a smaller inventory than would otherwise be the case. It might increase stock turnover and make inventory control simpler. Third, as costs change, either increasing or decreasing the prices can remain the same, but the quality in the line can be changed. For example, you may have bought a USD 20 tie 15 years ago. You can buy a USD 20 tie today, but it is unlikely that today’s USD 20 tie is of the same fine quality as it was in the past. While customers are likely to be aware of the differences, they are nevertheless still able to purchase a USD 20 tie. During inflationary periods the quality/price point relationship changes. From the point of view of salespeople, offering price lines will make selling easier. Salespeople can easily learn a small number of prices. This reduces the likelihood that they will misquote prices or make other pricing errors. Their selling effort is therefore more relaxed, and this atmosphere will influence customers positively. It also gives the salesperson flexibility. If a customer cannot afford a USD 2,800 Gateway system, the USD 2,200 system is suggested.

Price flexibility

Another pricing decision relates to the extent of price flexibility. A flexible pricing policy means that the price is bid or negotiated separately for each exchange. This is a common practice when selling to organizational markets where each transaction is typically quite large. In such cases, the buyer may initiate the process by asking for bidding on a product or service that meets certain specifications. Alternatively, a buyer may select a supplier and attempt to negotiate the best possible price. Marketing effectiveness in many industrial markets requires a certain amount of price flexibility.

Discounts and allowances

In addition to decisions related to the base price of products and services, marketing managers must also set policies related to the use of discounts and allowances. There are many different types of price reductions–each designed to accomplish a specific purpose.

Quantity discounts are reductions in base price given as the result of a buyer purchasing some predetermined quantity of merchandise. A noncumulative quantity discount applies to each purchase and is intended to encourage buyers to make larger purchases. This means that the buyer holds the excess merchandise until it is used, possibly cutting the inventory cost of the seller and preventing the buyer from switching to a competitor at least until the stock is used. A cumulative quantity discount applies to the total bought over a period of time. The buyer adds to the potential discount with each additional purchase. Such a policy helps to build repeat purchases. Building material dealers, for example, find such a policy quite useful in encouraging builders to concentrate their purchase with one dealer and to continue with the same dealer over time. It should be noted that such cumulative quantity discounts are extremely difficult to defend if attacked in the courts.

Figure 9.5: A rebate can be a very effective price discount.

Seasonal discounts are price reductions given or out-of-season merchandise. An example would be a discount on snowmobiles during the summer. The intention of such discounts is to spread demand over the year. This can allow fuller use of production facilities and improved cash flow during the year. Electric power companies use the logic of seasonal discounts to encourage customers to shift consumption to off-peak periods. Since these companies must have production capacity to meet peak demands, the lowering of the peak can lessen the generating capacity required.

Cash discounts are reductions on base price given to customers for paying cash or within some short time period. For example, a 2 per cent discount on bills paid within 10 days is a cash discount. The purpose is generally to accelerate the cash flow of the organization.

Trade discounts are price reductions given to middlemen (e.g. wholesalers, industrial distributors, retailers) to encourage them to stock and give preferred treatment to an organization’s products. For example, a consumer goods company may give a retailer a 20 per cent discount to place a larger order for soap. Such a discount might also be used to gain shelf space or a preferred position in the store.

Personal allowances are similar devices aimed at middlemen. Their purpose is to encourage middlemen to aggressively promote the organization’s products. For example, a furniture manufacturer may offer to pay some specified amount toward a retailer’s advertising expenses if the retailer agrees to include the manufacturer’s brand name in the ads.

Beam me up, Scotty!

You remember William Shatner, a.k.a. Captain James T Kirk. As Kirk, he represented the epitome of integrity and professionalism. Death was better than compromise. Yet, here he is doing rather strange TV ads for Priceline.com Inc. Why? Probably because he is being paid a ton of money, and he is having fun. Working for an apparent winner is also exciting.

We say “apparent” because transferring Priceline’s patented “name your own price” system of selling airline tickets, groceries, cars, gasoline, telephone minutes, and a raft of other products is proving quite difficult. Complicating matters, several airlines and hotels are studying whether to launch Web services that could cut the legs out from under Priceline’s established travel businesses. Priceline could soon face stiff competition from its own suppliers. Hyatt, Marriott, Starwood, and Cendant–most of which sell excess hotel rooms through Priceline–are having serious discussions about starting their own company to distribute over the Internet. Essentially, these chains worry that by handing sales to Priceline, they could lose control of their customers. Several airlines have the same concerns.

To stay one step ahead, Priceline has decided to introduce 18 new products. Initially, Priceline generated 90 per cent of its revenues from airline tickets, rental cars, and hotel rooms. By 2003, Priceline estimates that only 50 per cent of revenues will come from these sources.

By June 2000, users were able to name their price for long distance phone service, gasoline, and cruises. At the end of 2000, Priceline.com started selling blocks of long-distance phone time to small companies. Later, it will offer them ad space, freight services, and office equipment. New joint ventures are in the works with companies in Hong Kong, Australia, Japan, Europe, and Latin America.

Executives at Priceline say they are on the right track and that they are building a broad-based discounting powerhouse. (35)

Some manufacturers or wholesalers also give prize money called spiffs for retailers to pass on to the retailer’s sales clerks for aggressively selling certain items. This is especially common in the electronics and clothing industries, where it is used primarily with new products, slow movers, or high margin items.

Trade-in allowances also reduce the base price of a product or service. These are often used to allow the seller to negotiate the best price with a buyer. The trade-in may, of course, be of value if it can be resold. Accepting trade-ins is necessary in marketing many types of products. A construction company with a used grader worth USD 70,000 would not likely buy a new model from an equipment company that did not accept trade-ins, particularly when other companies do accept them.

Price bundling

A very popular pricing strategy, price bundling, is to group similar or complementary products and to charge a total price that is lower if they were sold separately. Comcast, Direct TV, and Telstra all follow this strategy by combining different products and services for a set price. Customers assume that these computer experts are putting together an effective product package and they are paying less. The underlying assumption of this pricing strategy is that the increased sales generated will more than compensate for a lower profit margin. It may also be a way of selling a less popular product by combining it with popular ones. Clearly, industries such as financial services and telecommunications are big users of this.

Psychological aspects of pricing

Price, as is the case with certain other elements in the marketing mix, appears to have meaning to many buyers that goes beyond a simple utilitarian statement. Such meaning is often referred to as the psychological aspect of pricing. Inferring quality from price is a common example of the psychological aspect. A buyer may assume that a suit priced at USD 500 is of higher quality than one priced at USD 300. From a cost-of-production, raw material, or workmanship perspective, this may or may not be the case. The seller may be able to secure the higher price by nonprice means such as offering alterations and credit or the benefit to the buyer may be in meeting some psychological need such as ego enhancement. In some situations, the higher price may be paid simply due to lack of information or lack of comparative shopping skills. For some products or services, the quantity demanded may actually rise to some extent as price is increased. This might be the case with an item such as a fur coat. Such a pricing strategy is called prestige pricing.

Products and services frequently have customary prices in the minds of consumers. A customary price is one that customers identify with particular items. For example, for many decades a five-stick package of chewing gum cost USD 0.05 and a six-ounce bottle of Coca-Cola cost USD 0.05. Candy bars now cost 60 cents or more, a customary price for a standard-sized bar. Manufacturers tend to adjust their wholesale prices to permit retailers in using customary pricing. However, as we have witnessed during the past decade, prices have changed so often that customary prices are weakened.

Figure 9.6: Winning an award is a psychological aspect of price

Another manifestation of the psychological aspects of pricing is the use of odd prices 3 We call prices that end in such digits as 5, 7, 8, and 9 “odd prices” (e.g. USD 2.95, USD 15.98, or USD 299.99). Even prices are USD 3, USD 16, or USD 300. For a long time marketing people have attempted to explain why odd prices are used. It seems to make little difference whether one pays USD 29.95 or USD 30 for an item. Perhaps one of the most often heard explanations concerns the psychological impact of odd prices on customers. The explanation is that customers perceive even prices such as USD 5 or USD 10 as regular prices. Odd prices, on the other hand, appear to represent bargains or savings and therefore encourage buying. There seems to be some movement toward even pricing; however, odd pricing is still very common. A somewhat related pricing strategy is combination pricing. Examples are two-for-one, buy-one-get-one-free. Consumers tend to react very positively to these pricing techniques.

• market share
• nonprice competition
• competitive pricing
• penetration
• Price lining means a number of sequential price points are offered within a product category.
• Price flexibility allows for different prices charged for different customers and/or under different situations.
• Price bundling groups similar or complementary products and charges a total price that is lower than if they were sold separately.
• Certain pricing strategies, such as prestige pricing, customary pricing, or odd pricing, play on the psychological perspectives of the consumer.

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Goals and Objectives for Business Plan with Examples

Published Nov.05, 2023

Updated Apr.23, 2024

By: Jakub Babkins

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Table of Content

Every business needs a clear vision of what it wants to achieve and how it plans to get there. A business plan is a document that outlines the goals and objectives of a business, as well as the strategies and actions to achieve them. A well-written business plan from business plan specialists can help a business attract investors, secure funding, and guide its growth.

Understanding Business Objectives

Business objectives are S pecific, M easurable, A chievable, R elevant, and T ime-bound (SMART) statements that describe what a business wants to accomplish in a given period. They are derived from the overall vision and mission of the business, and they support its strategic direction.

Business plan objectives can be categorized into different types, depending on their purpose and scope. Some common types of business objectives are:

• Financial objectives
• Operational objectives
• Marketing objectives
• Social objectives

For example, a sample of business goals and objectives for a business plan for a bakery could be:

• To increase its annual revenue by 20% in the next year.
• To reduce its production costs by 10% in the next six months.
• To launch a new product line of gluten-free cakes in the next quarter.
• To improve its customer satisfaction rating by 15% in the next month.

The Significance of Business Objectives

Business objectives are important for several reasons. They help to:

• Clarify and direct the company and stakeholders
• Align the company’s efforts and resources to a common goal
• Motivate and inspire employees to perform better
• Measure and evaluate the company’s progress and performance
• Communicate the company’s value and advantage to customers and the market

For example, by setting a revenue objective, a bakery can focus on increasing its sales and marketing efforts, monitor its sales data and customer feedback, motivate its staff to deliver quality products and service, communicate its unique selling points and benefits to its customers, and adjust its pricing and product mix according to market demand.

Advantages of Outlining Business Objectives

Outlining business objectives is a crucial step in creating a business plan. It serves as a roadmap for the company’s growth and development. Outlining business objectives has several advantages, such as:

• Clarifies the company’s vision, direction, scope, and boundaries
• Break down the company’s goals into smaller tasks and milestones
• Assigns roles and responsibilities and delegates tasks
• Establishes standards and criteria for success and performance
• Anticipates risks and challenges and devises contingency plans

For example, by outlining its business objective for increasing the average revenue per customer in its business plan, a bakery can:

• Attract investors with its viable business plan for investors
• Secure funding from banks or others with its realistic financial plan
• Partner with businesses or organizations that complement or enhance its products or services
• Choose the best marketing, pricing, product, staff, location, etc. for its target market and customers

Setting Goals and Objectives for a Business Plan

Setting goals and objectives for a business plan is not a one-time task. It requires careful planning, research, analysis, and evaluation. To set effective goals and objectives for a business plan, one should follow some best practices, such as:

OPTION 1: Use the SMART framework. A SMART goal or objective is clear, quantifiable, realistic, aligned with the company’s mission and vision, and has a deadline. SMART stands for:

• Specific – The goal or objective should be clear, concise, and well-defined.
• Measurable – The goal or objective should be quantifiable or verifiable.
• Achievable – The goal or objective should be realistic and attainable.
• Relevant – The goal or objective should be aligned with the company’s vision, mission, and values.
• Time-bound – The goal or objective should have a deadline or timeframe.

For example, using the SMART criteria, a bakery can refine its business objective for increasing the average revenue per customer as follows:

• Specific – Increase revenue with new products and services from $5 to $5.50.
• Measurable – Track customer revenue monthly with sales reports.
• Achievable – Research the market, develop new products and services, and train staff to upsell and cross-sell.
• Relevant – Improve customer satisfaction and loyalty, profitability and cash flow, and market competitiveness.
• Time-bound – Achieve this objective in six months, from January 1st to June 30th.

OPTION 2: Use the OKR framework. OKR stands for O bjectives and K ey R esults. An OKR is a goal-setting technique that links the company’s objectives with measurable outcomes. An objective is a qualitative statement of what the company wants to achieve. A key result is a quantitative metric that shows how the objective will be achieved.

OPTION 3: Use the SWOT analysis. SWOT stands for S trengths, W eaknesses, O pportunities, and T hreats. A SWOT analysis is a strategic tool that helps the company assess the internal and external factors that affect its goals and objectives.

• Strengths – Internal factors that give the company an advantage over others. 
• Weaknesses – Internal factors that limit the company’s performance or growth. 
• Opportunities – External factors that allow the company to improve or expand. 
• Threats – External factors that pose a risk or challenge to the company.

For example, using these frameworks, a bakery might set the following goals and objectives for its SBA business plan :

Objective – To launch a new product line of gluten-free cakes in the next quarter.

Key Results:

• Research gluten-free cake market demand and preferences by month-end.
• Create and test 10 gluten-free cake recipes by next month-end.
• Make and sell 100 gluten-free cakes weekly online or in-store by quarter-end.

SWOT Analysis:

• Expertise and experience in baking and cake decorating.
• Loyal and satisfied customer base.
• Strong online presence and reputation.

Weaknesses:

• Limited production capacity and equipment.
• High production costs and low-profit margins.
• Lack of knowledge and skills in gluten-free baking.

Opportunities:

• Growing demand and awareness for gluten-free products.
• Competitive advantage and differentiation in the market.
• Potential partnerships and collaborations with health-conscious customers and organizations.
• Increasing competition from other bakeries and gluten-free brands.
• Changing customer tastes and preferences.
• Regulatory and legal issues related to gluten-free labeling and certification.

Examples of Business Goals and Objectives

To illustrate how to write business goals and objectives for a business plan, let’s use a hypothetical example of a bakery business called Sweet Treats. Sweet Treats is a small bakery specializing in custom-made cakes, cupcakes, cookies, and other baked goods for various occasions.

Here are some examples of possible startup business goals and objectives for Sweet Treats:

Earning and Preserving Profitability

Profitability is the ability of a company to generate more revenue than expenses. It indicates the financial health and performance of the company. Profitability is essential for a business to sustain its operations, grow its market share, and reward its stakeholders.

Some possible objectives for earning and preserving profitability for Sweet Treats are:

• To increase the gross profit margin by 5% in the next quarter by reducing the cost of goods sold
• To achieve a net income of $100,000 in the current fiscal year by increasing sales and reducing overhead costs

Ensuring Consistent Cash Flow

Cash flow is the amount of money that flows in and out of a company. A company needs to have enough cash to cover its operating expenses, pay its debts, invest in its growth, and reward its shareholders.

Some possible objectives for ensuring consistent cash flow for Sweet Treats are:

• Increase monthly operating cash inflow by 15% by the end of the year by improving the efficiency and productivity of the business processes
• Increase the cash flow from investing activities by selling or disposing of non-performing or obsolete assets

Creating and Maintaining Efficiency

Efficiency is the ratio of output to input. It measures how well a company uses its resources to produce its products or services. Efficiency can help a business improve its quality, productivity, customer satisfaction, and profitability.

Some possible objectives for creating and maintaining efficiency for Sweet Treats are:

• To reduce the production time by 10% in the next month by implementing lean manufacturing techniques
• To increase the customer service response rate by 20% in the next week by using chatbots or automated systems

Winning and Keeping Clients

Clients are the people or organizations that buy or use the products or services of a company. They are the source of revenue and growth for a company. Therefore, winning and keeping clients is vital to generating steady revenue, increasing customer loyalty, and enhancing word-of-mouth marketing.

Some possible objectives for winning and keeping clients for Sweet Treats are:

• To acquire 100 new clients in the next quarter by launching a referral program or a promotional campaign
• To retain 90% of existing clients in the current year by offering loyalty rewards or satisfaction guarantees

Building a Recognizable Brand

A brand is the name, logo, design, or other features distinguishing a company from its competitors. It represents the identity, reputation, and value proposition of a company. Building a recognizable brand is crucial for attracting and retaining clients and creating a loyal fan base.

Some possible objectives for building a recognizable brand for Sweet Treats are:

• To increase brand awareness by 50% in the next six months by creating and distributing engaging content on social media platforms
• To improve brand image by 30% in the next year by participating in social causes or sponsoring events that align with the company’s values

Expanding and Nurturing an Audience with Marketing

An audience is a group of people interested in or following a company’s products or services. They can be potential or existing clients, fans, influencers, or partners. Expanding and nurturing an audience with marketing is essential for increasing a company’s visibility, reach, and engagement.

Some possible objectives for expanding and nurturing an audience with marketing for Sweet Treats are:

• To grow the email list by 1,000 subscribers in the next month by offering a free ebook or a webinar
• To nurture leads by sending them relevant and valuable information through email newsletters or blog posts

Strategizing for Expansion

Expansion is the process of increasing a company’s size, scope, or scale. It can involve entering new markets, launching new products or services, opening new locations, or forming new alliances. Strategizing for expansion is important for diversifying revenue streams, reaching new audiences, and gaining competitive advantages.

Some possible objectives for strategizing for expansion for Sweet Treats are:

• To launch a new product or service line by developing and testing prototypes
• To open a new branch or franchise by securing funding and hiring staff

Template for Business Objectives

A template for writing business objectives is a format or structure that can be used as a guide or reference for creating your objectives. A template for writing business objectives can help you to ensure that your objectives are SMART, clear, concise, and consistent.

To use this template, fill in the blanks with your information. Here is an example of how you can use this template:

Example of Business Objectives

Our business is a _____________ (type of business) that provides _____________ (products or services) to _____________ (target market). Our vision is to _____________ (vision statement) and our mission is to _____________ (mission statement).

Our long-term business goals and objectives for the next _____________ (time period) are:

S pecific: We want to _____________ (specific goal) by _____________ (specific action).

M easurable: We will measure our progress by _____________ (quantifiable indicator).

A chievable: We have _____________ (resources, capabilities, constraints) that will enable us to achieve this goal.

R elevant: This goal supports our vision and mission by _____________ (benefit or impact).

T ime-bound: We will complete this goal by _____________ (deadline).

Repeat this process for each goal and objective for your business plan.

How to Monitor Your Business Objectives?

After setting goals and objectives for your business plan, you should check them regularly to see if you are achieving them. Monitoring your business objectives can help you to:

• Track your progress and performance
• Identify and overcome any challenges
• Adjust your actions and strategies as needed

Some of the tools and methods that you can use to monitor your business objectives are:

• Dashboards – Show key data and metrics for your objectives with tools like Google Data Studio, Databox, or DashThis.
• Reports – Get detailed information and analysis for your objectives with tools like Google Analytics, Google Search Console, or SEMrush.
• Feedback – Learn from your customers and their needs and expectations with tools like SurveyMonkey, Typeform, or Google Forms.

Strategies for Realizing Business Objectives

To achieve your business objectives, you need more than setting and monitoring them. You need strategies and actions that support them. Strategies are the general methods to reach your objectives. Actions are the specific steps to implement your strategies.

Different objectives require different strategies and actions. Some common types are:

• Marketing strategies
• Operational strategies
• Financial strategies
• Human resource strategies
• Growth strategies

To implement effective strategies and actions, consider these factors:

• Alignment – They should match your vision, mission, values, goals, and objectives
• Feasibility – They should be possible with your capabilities, resources, and constraints
• Suitability – They should fit the context and needs of your business

How OGSCapital Can Help You Achieve Your Business Objectives?

We at OGSCapital can help you with your business plan and related documents. We have over 15 years of experience writing high-quality business plans for various industries and regions. We have a team of business plan experts who can assist you with market research, financial analysis, strategy formulation, and presentation design. We can customize your business plan to suit your needs and objectives, whether you need funding, launching, expanding, or entering a new market. We can also help you with pitch decks, executive summaries, feasibility studies, and grant proposals. Contact us today for a free quote and start working on your business plan.

Frequently Asked Questions

What are the goals and objectives in business.

Goals and objectives in a business plan are the desired outcomes that a company works toward. To describe company goals and objectives for a business plan, start with your mission statement and then identify your strategic and operational objectives. To write company objectives, you must brainstorm, organize, prioritize, assign, track, and review them using the SMART framework and KPIs.

What are the examples of goals and objectives in a business plan?

Examples of goals and objectives in a business plan are: Goal: To increase revenue by 10% each year for the next five years. Objective: To launch a new product line and create a marketing campaign to reach new customers.

What are the 4 main objectives of a business?

The 4 main objectives of a business are economic, social, human, and organic. Economic objectives deal with financial performance, social objectives deal with social responsibility, human objectives deal with employee welfare, and organic objectives deal with business growth and development.

What are goals and objectives examples?

Setting goals and objectives for a business plan describes what a business or a team wants to achieve and how they will do it. For example: Goal: To provide excellent customer service. Objective: To increase customer satisfaction scores by 20% by the end of the quarter. 

At OGSCapital, our business planning services offer expert guidance and support to create a realistic and actionable plan that aligns with your vision and mission. Get in touch to discuss further!

OGSCapital’s team has assisted thousands of entrepreneurs with top-rate business plan development, consultancy and analysis. They’ve helped thousands of SME owners secure more than $1.5 billion in funding, and they can do the same for you.

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Understanding Pricing Objectives and Strategies for the Value-Added Ag Producer

Choosing a pricing objective and associated strategy is an important function of the business owner and an integral part of the business plan or planning process.

It is more than simply calculating your cost of production and tacking on a markup. Another article (see " What D o I Charge? ") discussed how to determine product prices. This publication will describe the many pricing objectives that business owners may use. Once a pricing objective has been chosen, a pricing strategy that meets the pricing objective must also be selected. Advantages and disadvantages of the objectives and strategies will also be discussed.

Pricing is one of the major components of your marketing plan, which is a component of a full business plan. Assigning product prices is a strategic activity. The price you assign will impact how consumers view your product and whether they will purchase it. Price also helps differentiate your product from those of your competitors. However, the price you assign must be in line with your other marketing strategies and the product attributes. Whether or not you develop a formal marketing plan, performing some of the research necessary for a marketing plan prior to determining the pricing strategies you will implement is important. The knowledge gained from the research will help in assigning appropriate prices to your products or services—prices that reflect the quality and attributes your product offers the consumer. Your marketing goals and knowledge of the industry, your competition, and the market are essential. Here are some questions you'll need to consider to help determine objectives and strategies that will contribute to the success of your business:

• What mix of products are you offering? The mix of products you have available will either limit or broaden the pricing strategies available for you to use. If you feel that a particular strategy would assist you in achieving your pricing objective, then you may want to consider making changes to your product mix.
• Who or what is your target market? The demographics of your target market will help you identify appropriate pricing objectives and strategies. Are target customers interested in value, quality, or low cost?
• Are you distributing your product wholesale or retail? Your method of product distribution can impact the pricing objectives and strategies you are able to use. Direct marketing gives you more control than wholesale marketing over how products are grouped, displayed, and priced.
• What is the estimated life cycle of your product/service? The life cycle of your product can impact your choice of pricing objectives and strategies. With a short estimated life cycle, it will be necessary to sell greater quantities of product or generate larger profit margins than with products where the life cycle is longer. Longer life cycles give you more time to achieve your pricing objective.
• What is the projected demand for the product? When demand for a product is expected to be high, you have more flexibility in choosing pricing strategies because customers are less likely to be concerned with price and packaging since they really want your product. For example, consider the prices people are willing to pay when new video game consoles debut.
• Are there other entities, such as the government, that may dictate the price range for your product? Some products, such as milk, have government-imposed regulations limiting the price that can be charged. Be familiar with any pricing regulations that apply to your industry or product.

Certain combinations of an objective and strategies work together while other combinations contradict each other. At the end of this publication you will find a diagram illustrating pricing objectives and the strategies that can be employed to meet each objective. You'll notice that some strategies can be employed with more than one objective.

Pricing Objectives

Many pricing objectives are available for careful consideration. The one you select will guide your choice of pricing strategy. You'll need to have a firm understanding of product attributes and the market to decide which pricing objective to employ. Your choice of an objective does not tie you to it for all time. As business and market conditions change, adjusting your pricing objective may be necessary or appropriate.

How do you choose a pricing objective? Pricing objectives are selected with the business and financial goals in mind. Elements of your business plan can guide your choices of a pricing objective and strategies. Consider your business's mission statement and plans for the future. If one of your overall business goals is to become a leader in terms of the market share that your product has, then you'll want to consider the quantity maximization pricing objective as opposed to the survival pricing objective. If your business mission is to be a leader in your industry, you may want to consider a quality leadership pricing objective. On the other hand, profit margin maximization may be the most appropriate pricing objective if your business plan calls for growth in production in the near future since you will need funding for facilities and labor. Some objectives, such as partial cost recovery, survival, and status quo, will be used when market conditions are poor or unstable, when first entering a market, or when the business is experiencing hard times (for example, bankruptcy or restructuring). Brief definitions of the pricing objectives are provided below.

Partial cost recovery— a company that has sources of income other than from the sale of products may decide to implement this pricing objective, which has the benefit of providing customers with a quality product at a cost lower than expected. Competitors without other revenue streams to offset lower prices will likely not appreciate using this objective for products in direct competition with one another. Therefore, this pricing objective is best reserved for special situations or products.

Profit margin maximization— seeks to maximize the per-unit profit margin of a product. This objective is typically applied when the total number of units sold is expected to be low. Profit maximization—seeks to garner the greatest dollar amount in profits. This objective is not necessarily tied to the objective of profit margin maximization.

Revenue maximization— seeks to maximize revenue from the sale of products without regard to profit. This objective can be useful when introducing a new product into the market with the goals of growing market share and establishing long-term customer base.

Quality leadership— used to signal product quality to the consumer by placing prices on products that convey their quality.

Quantity maximization— seeks to maximize the number of items sold. This objective may be chosen if you have an underlying goal of taking advantage of economies of scale that may be realized in the production or sales arenas.

Status quo— seeks to keep your product prices in line with the same or similar products offered by your competitors to avoid starting a price war or to maintain a stable level of profit generated from a particular product.

Survival— put into place in situations where a business needs to price at a level that will just allow it to stay in business and cover essential costs. For a short time, the goal of making a profit is set aside for the goal of survival. Survival pricing is meant only to be used on a short-term or temporary basis. Once the situation that initiated the survival pricing has passed, product prices are returned to previous or more appropriate levels.

Pricing Strategies

After selecting a pricing objective you will need to determine a pricing strategy. This will assist you when it comes time to actually price your products. As with the pricing objectives, numerous pricing strategies are available from which to choose. Certain strategies work well with certain objectives, so make sure you have taken your time selecting an objective. Careful selection of a pricing objective should lead you to the appropriate strategies. If the pricing strategy you choose seems to contradict your chosen pricing objective, then you should revisit the questions posed in the introduction and your marketing plan. As a reminder, the diagram at the end of this publication illustrates which pricing strategies work well with each of the pricing objectives previously discussed.

Additionally, different pricing strategies can be used at different times to fit with changes in marketing strategies, market conditions, and product life cycles. For example, if you're working under a status quo pricing objective with competitive pricing as your strategy due to poor market conditions, and a year later you feel that the market has improved, you may wish to change to a profit margin maximization objective using a premium pricing strategy. Brief definitions of some pricing strategies follow.

Competitive pricing— pricing your product(s) based on the prices your competitors have on the same product(s). This pricing strategy can be useful when differentiating your product from other products is difficult. So, let's say you produce fruit jams such as blueberry, strawberry, blackberry, and raspberry. You may consider using competitive pricing since there are many other jams on the market and you are unable to differentiate your jams to an extent that customers may be willing to pay more for yours. Thus, if the price range for jams currently on the market is $1.45 to $1.85 per jar, you may price your jams at $1.65 per jar to fall in line with the competition. The strategy of competitive pricing can be used when the pricing objective is either survival or status quo. When the objective for pricing products is to allow the business to either maintain status quo or simply survive a difficult period, competitive pricing will allow the business to maintain profit by avoiding price wars (from pricing below the competition) or falling sales (from pricing above the competition).

Good, better, best pricing— charges more for products that have received more attention (for example, in packaging or sorting). The same product is offered in three different formats, with the price for each level rising above that of the previous level. For example, the manager of a farm market that sells fresh apples may place some portion of apples available for sale in a large container through which the customers have to sort to choose the apples they wish to purchase. These apples would be priced at the “good" price. Another portion of apples could also be placed in a container from which customers can gather, but these apples would have been presorted to remove less desirable apples, such as those with soft spots. These would be priced at the “better" price. The “best" apples—those priced higher than the rest—may have been presorted, just as the “better" apples, but have also been prepackaged for customer convenience. As demonstrated in this example, the “better" and “best" levels require more attention by management or labor but, if priced appropriately, may be worth the extra effort.

This pricing strategy should be used when pursuing revenue maximization and quantity maximization objectives. Revenue maximization should occur as a result of quantity maximization. Quantity maximization should occur from the use of this pricing strategy because product is available to customers in three prices ranges.

Loss leader— refers to products having low prices placed on them in an attempt to lure customers to the business and to make further purchases. For example, grocery stores might use bread as a loss leader product. It you come to their store to purchase your bread, you are very likely to purchase other grocery items at their store rather than going to another store. The goal of using a loss leader pricing strategy is to lure customers to your business with a low price on one product with the expectation that the customer will purchase other products with larger profit margins.

The loss leader pricing strategy should be paired with either the quantity maximization or partial cost recovery pricing objectives. The low price placed on the product should result in greater quantities of the product being sold while still recovering a portion of the production cost.

Multiple pricing— seeks to get customers to purchase a product in greater quantities by offering a slight discount on the greater quantity. In the display of prices, a price for the purchase of just one item is displayed along with the price for a larger quantity. For example, a farm market may price one melon at $1.69 and two at $3.00. Pricing in this way offers the customer an apparent discount (in this example $0.38) for purchasing the greater quantity. Customers feel like they're getting a discount since $1.50 ($3.00 ÷ 2) is less than the $1.69 price for one melon. However, $1.50 is the price you would typically charge if you were not employing a multiple pricing strategy. If you think the majority of your customers will purchase the greater quantity, you will want to price the quantity so that your costs are covered and your profit margin is maintained. A customer purchasing just one item will pay more for the item than what you would typically charge if you were not using a multiple pricing strategy.

The multiple pricing strategy works well with the profit maximization and quantity maximization objectives. By enticing your customer to purchase more than one item you are generating more profit since you have set the price for just one item so that you receive a greater profit margin than for which you would typically price. Essentially, the customer is being penalized for purchasing just one item. In addition, multiple pricing should increase the quantity of items being sold, hopefully resulting in less product loss or fewer unsold items.

Optional product pricing— used to attempt to get customers to spend a little extra on the product by purchasing options or extra features. For example, some customers may be willing to spend a little extra to be assured that they receive product as soon as it becomes available. This can be an excellent strategy for custom operators. Let's say you are a custom operator providing forage harvesting services. Your base service option provides producers with basic harvesting. Available options that the producer could purchase in addition to the harvesting service could include trucking to the storage site, packing, preservative application, and serving as a member of the producer's advisory committee. The purchase of each of these options adds value to the service that the producer is receiving. With this strategy it is important that the extra fee for the option(s) is reasonable; otherwise, you may lose business to a competitor with a more appropriate pricing structure for the extra services offered.

Optional product pricing is best used when the pricing objective is revenue maximization or quality leadership. By enticing customers to purchase one or more of the options offered to them, you will be increasing your revenue since the customers may not have purchased the option if it were not offered or may have gone elsewhere to purchase it. By offering optional products to complement your base product or service, you are projecting an image of quality to your customers. They will likely recognize your offer of additional products or services as awareness of and sensitivity to their needs.

Penetration pricing— used to gain entry into a new market. The objective for employing penetration pricing is to attract and grow market share. Once desired levels for these objectives are reached, product prices are typically increased. Penetration prices will not garner the profit that you may want; therefore, this pricing strategy must be used strategically. Let's say you have created a new hot and spicy mustard product. Your market research indicates that the price range for competitors' mustards is $1.89 to $2.99. Since numerous mustards are already available and you are new to the mustard market, you decide to use penetration pricing to entice customers to purchase your mustard. Therefore, you price your mustard at $1.85 for the first six months because it covers your cost of production yet is lower than what you believe is a good price for your product and is below the lower end of the market range, which should entice people to purchase your mustard over the other higher-priced mustards.

The strategy of penetration pricing can be used when your pricing objective is either revenue or quantity maximization. The lower price set on products by using penetration pricing is done to entice the maximum number of customers possible to purchase your product. Large numbers of customers purchasing your product should maximize your revenue and the quantity of product sold. If the price were higher, you would expect fewer purchases, thus leading to lower revenues.

Premium pricing— employed when the product you are selling is unique and of very high quality, but you only expect to sell a small amount. These attributes demand that a high, or premium, price be attached to the product. Buyers of such products typically view them as luxuries and have little or no price sensitivity. The advantage of this pricing strategy is that you can price high to recoup a large profit to make up for the small number of items being sold. To demonstrate, let's say that you have a flock of sheep and you shear, dye, and spin your own yarn. Your yarn is known in the industry as being of extremely high quality. Some of that yarn you use to knit sweaters, blankets, and scarves. Since your yarn and knitting are very high quality and you know that you probably won't be making and selling a large quantity of your knitted items, you decide to employ premium pricing. Your customers already know of the fine quality of your yarns or they are in higher income brackets, so they will most likely pay a premium price for your premium knitted products.

Premium pricing can be employed with the profit margin maximization or quality leadership pricing objectives. The premium price charged for the uniqueness and quality of your product allows you to generate large profit margins on each item sold. Your product will also demonstrate your commitment to quality, and customers will think of you when they desire such quality.

Product bundle pricing— used to group several items together for sale. This is a useful pricing strategy for complementary, overstock, or older products. Customers purchase the product they really want, but for a little extra they also receive one or more additional items. The advantage of this pricing strategy is the ability to get rid of overstock items. On the other hand, customers not wanting the extra items may decide not to purchase the bundle. This strategy is similar to product line pricing, except that the items being grouped together do not need to be complementary. For example, you have remaining stock of Christmas-related items after the holidays. If you prefer not to store these items until next year, you could put a variety of items in a small bag and sell the bag at a discounted price.

Product bundle pricing can be employed with revenue maximization or quantity maximization objectives since bundling products may result in the sale of products that may have gone unsold. Quality leadership can be achieved since some customers will appreciate having the opportunity to purchase a group of items at a discount. The partial cost recovery or survival objectives can be fulfilled from a product bundling pricing strategy when products likely would have gone unsold otherwise and selling the products at a discount allows you to recover some portion of the production cost or generates enough of a profit to stay in business or keep from having to remove the product from market.

Product line pricing— used when a range of products or services complement each other and can be packaged together to reflect increasing value. This pricing strategy is similar to the multiple pricing strategy. However, rather than purchasing a greater quantity of one item, the customer is purchasing a different item or service at a higher price that is still perceived as a value when compared to the price for the individual product or service. Let's say that in your farm market you sell jams, syrups, and pancake mixes, among other items. These items can be considered complementary since people usually put jam and syrup on pancakes. In addition to selling each of these items individually, you could create a gift box that packages one of each item together. The price for this gift box would be slightly less than what a customer would pay in total when purchasing each of the same items individually.

The product line pricing works well with the profit maximization and quality leadership pricing objectives since you are increasing profit by encouraging the purchase of a greater number of products that may not have been purchased individually. Additionally, some customers will value the ability to purchase a group of complementary products.

Skim pricing— similar to premium pricing, calling for a high price to be placed on the product you are selling. However, with this strategy the price eventually will be lowered as competitors enter the market. This strategy is mostly used on products that are new and have few, if any, direct competitors when first entering the market. Let's say you develop a carbonated, flavored, milk-based beverage packaged in 10-ounce plastic bottles. Since there are few drinks of this sort on the market, you could use skim pricing until more products come to market. Knowing that other similar beverage products will likely enter the market within a year or two, you may decide to price at $1.95 per bottle when your product debuts. Assuming that other similar beverages have come to market after a year, you then lower the price of your drink to $1.55 to remain competitive.

The skim pricing strategy should be reserved for when your pricing objective is profit maximization, revenue maximization, or profit margin maximization. Employing this strategy when your product is new on the market and there is no competition generates greater revenue, profit, and profit margins since you are the only one selling the product— customers must buy from you if they want what you are selling. You must use caution, though, so as to not price so high though that customers aren't willing to buy your product even though there are no competitors.

Choosing a pricing objective and a related strategy requires you to carefully consider your business and financial goals, the state of the market (including its past and future), and the products and prices of your competition (and possibly their business goals). You want to select objectives and strategies that will position your product and business for success. Choosing an objective and strategies that are appropriate for your business at the current time does not prevent you from changing objectives or employing different strategies in the future as your business grows or changes.

Giddens, N., J. Parcell, and M. Brees. Selecting an Appropriate Pricing Strategy. Ames: Iowa State University Extension, 2005.

Marketing Teacher, Ltd. Pricing Strategies . Accessed July 27, 2006.

NetMBA. 2005. Pricing Strategy .  Accessed July 27, 2006.

Uva, Wen-fei L. Smart Pricing Strategies (PDF). Ithaca: Department of Applied Economics and Management, Cornell University, 2001.

Prepared by Sarah A. Cornelisse, senior extension associate in agricultural economics.

• Value-added agriculture
• Agricultural entrepreneurship
• Value-added dairy entrepreneurship
• Value-added dairy foods marketing
• Online marketing and sales
• Social media
• Direct marketing
• Farm and ag business management
• Business planning

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What is Pricing? Objectives, Importance, Factors Influencing

• Post last modified: 9 June 2023
• Reading time: 39 mins read
• Post category: Marketing Management / Marketing Essentials

What is Pricing?

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan.

Table of Content

• 1 What is Pricing?
• 2 Pricing Definition
• 3 Deciding Pricing Strategy
• 4.1 Maximisation of profits for the entire product line
• 4.2 Promotion of the long-range welfare of the firm
• 4.3 Adaptation of prices to fit the diverse competitive situations
• 4.4 Flexibility to vary prices in response to changing market condition
• 4.5 Stabilisation of prices and margins
• 4.6 Market Penetration
• 4.7 Market Skimming
• 4.8 Early Cash Recovery
• 4.9 Satisfying
• 5.1 Objectives of Business
• 5.2 Competitive Environment
• 5.3 Product and Promotional Policies of the Firm
• 5.4 Nature of Price Sensitivity
• 5.5 Conflicting Interests between Manufacture and Intermediaries
• 5.6 Routine Pricing Decision
• 5.7 Active Entry of Non-business Groups in Pricing Decisions
• 6.1 Maintain Appropriate Living Standard
• 6.2 Maintain Planning
• 6.3 Protection from Monetary Instability
• 6.4 Establishment of Balance in Demand and Supply
• 6.5 Well Adjusted for Distribution Management
• 6.6 Multi-faced Development of National Resources
• 7 Pricing Strategies
• 8 Methods of Pricing
• 9 Pricing of New Products
• 10 Reference
• 11 Marketing Management Topics

As can be noticed there are few important and fundamental aspects of pricing:

• Price brings in revenues
• Price is adjustable and controllable
• Price has an association with brand perception, utility consumer psychology and product differentiation as well.
• Price has an association with quality and quality perception from the side of the consumer as well as the marketer.
• Price influences demand
• Price is a tool to fight competition
• Price is associated with accounting markets like breakeven decided by the marketer.
• Price is associated with financial mark-ups like rate of return etc.,
• Price is the resultant of a marketer’s vision about his product/ services market association along with his desire for profits.

Pricing Definition

“ Price is the exchange value of goods or services in terms of money ” .

“ Price of a product or service is what the seller feels it is worth, in terms of money, to the buyer ” .

Deciding Pricing Strategy

Managers can set prices as an addition to what cost they have incurred in developing and marketing the product. In many instances price is the rupee equivalent of the value of the company’s product.

Pricing decision involves the following:

• Decide the price objectives
• Determine the demand
• Estimate the costs
• Analyse the competitors cost, prices and offers
• Select the final price

Pricing Objectives

Pricing decisions are usually considered a part of the general strategy for achieving a broadly defined goal. While setting the price, the firm may aim at one or more of the following pricing objectives :

Pricing Objectives are:

Maximisation of profits for the entire product line

Promotion of the long-range welfare of the firm, adaptation of prices to fit the diverse competitive situations, flexibility to vary prices in response to changing market condition, stabilisation of prices and margins, market penetration, market skimming, early cash recovery.

Firms set a price, which would enhance the sale of the entire product line rather than yield a profit for one product only. In this process it is possible to maximise the profit for the entire product line.

Example : Starbucks raised the price of the tall size brew exclusively in order to persuade customers to purchase larger sizes. The goal of the company is to use the price increases to guide the customer towards your most profitable product.

Promotion of the long-range welfare of the firm can also influence the pricing decisionThe firm may decide to set a price, which looks unattractive to competitors, and hence, the entry of competitors can be discouraged for a long period of time. In this way the firm can take a decision for the long-term welfare of the firm rather than the short-term profit maximisation.

Example : The introduction of Low-priced burgers by Mc Donald’s has restricted entry or success of many burger producers in India. There prolonged strategy to remain stable in market is not giving boost to any other player.

The Company may decide to go for different kinds of pricing strategies depending on the individual product’s product-market situation. The company will try to maximise the profit from a market where it has cash cows and invests in other markets where it has to stay put for long term benefits.

Example : HUL has launched its products at all the price points to cater to every market segment. It has its products catering to every strata of the market ranging from rural to urban and even for niches.

One cannot decide about prices in isolation, as the firm is only a member of the market. So it has to decide on prices in response to changing economic conditions. The macro economic conditions also influence the pricing decision.

Example : Many airlines slash their prices when a dip in the market is observed. They come up with low-frill packages for flyers and special packages for frequent fliers in the market. Airline companies focus upon gaining customers in their stride.

The firm may decide to stabilise the prices and margins for long term goals and price the products in a different way than they would have done with a profit maximisation objective.

Firms may pursue additional objectives as mentioned by Kotler. We present a small list of these objectives to augment the above list:

The firm may decide in favour of a lower price to penetrate deeper into the market and to stimulate market growth and capture a large market share.

Example : When telecom players like ‘Aircel’ and ‘MTS’ entered Indian market, they found market already saturated. Hence, they adopted strategy of low tariffs to attract the potential customer base.

The firm may decide to charge high initial price to take advantage of the fact that some buyers are willing to pay a much higher price than others as the product is of high value to them.

Example : When a new highway is constructed connecting twocities or states, during initial few years toll is charged to recover the cost of construction. Thereafter, either the tax or toll is slashed or removed when the invested amount is recovered.

This is an aggressive form of skimming pricing. Some firms try to set a price, which will enable them to recover the cash rapidly as they may be financially tight or may regard the future as too uncertain to justify a delayed and smooth cash recovery.

Example : Apple when ever comes up with a new launch of its products, it commands very high prices on its sales. By the time other mobile industry players when copy their introduced technology, Apple usually tires to recover the money it invested in the mobile’s R&D.

Companies may pursue a pricing strategy if it satisfies a satisfactory rate of return, although it is possible for another price level to give a higher return. The pricing decisions depend on the motives of the manager. The motives of managers can be of different types.

Factors Influencing Pricing Decision

Formulating price policies and setting the price are the most important aspects of managerial decision-making. Price is the source of revenue, which the firm seeks to maximise. It is the most important device a firm can use to expand its market share.

Factors influencing pricing decisions are:

Objectives of Business

Competitive environment, product and promotional policies of the firm, nature of price sensitivity, conflicting interests between manufacture and intermediaries, routine pricing decision, active entry of non-business groups in pricing decisions.

Pricing is not an end in itself but a means to an end. The fundamental guide to pricing, therefore, is the firm’s overall goals. The broadest of these is survival or assured continued existence. On a more specific level, objectives relate to rate of growth, market share, maintenance of control or ownership and finally profit.

Example : Nirma wanted to gain huge share of market at the time when HUL was an established player in the area of washing powders.Hence it came up with a very low priced detergent to woo the target market.

An effective solution to the pricing problem requires an understanding of the competitive environment. In perfect competition, sellers have no pricing problems because they have no pricing discretion. Pricing policy has practical significance only where there is a considerable degree of imperfection in competitive structures and where there is some room for managerial discretion.

Example : Samsung floated mobiles in low price segment as Nokia was generating good business from that segment. Samsung later launched android versions which had more features in less price and became an attractive option for customers, leaving Nokia behind in the competition.

Pricing is only one aspect of marketing strategy and a firm must consider it together with its product and promotional policies. Thus, before making a price change, the firm must be sure that the price is at fault and not its sales promotion program or the quality of the product or some other element.

Example : Luxury suites of plush hotels are priced high for ultra-rich class to attract them. This satiates their esteem and status needs and the pricing of suites is kept accordingly.

Businessmen often tend to exaggerate the importance of price sensitivity and ignore many identifiable factors at work that tend to minimise its role.

The various factors which may generate insensitivity to price changes are variability in consumer behaviour, variation in the effectiveness of marketing effort, nature of the product, importance of after sales service, the existence of highly differentiated products which are difficult to compare and multiple dimensions of product quality.

Example : Prices of essential drugs and basic food items such as sugar, salt, wheat etc. affect the pockets of consumers a lot if there is a slight change in prices. Whereas price of diamond and platinum doesn’t affect the pocket of consumer too much as only people who can afford it will buy it.

The interests of manufacturers and middlemen (through whom the former often sell) are sometimes in conflict. This is called vertical conflict.

For instance , the manufacturer would desire that the middleman should sell his product at a minimum mark-up, whereas the middleman would like his margin to be large enough to stimulate him to push up the product.

The manufacturer may like to control the middleman’s prices and even the retail prices; but the middlemen may seek to expand their sales through price-cuts or obtain larger margin than allowed by the suggested prices.

Pricing in practice is often routinised though its extent may differ from company to company and from product to product. For example, the management may prefer to depend on suggested prices, which is a mechanical formula for pricing decisions.

The degree of routinisation depends on the following factors:

• Number of Pricing Decisions : A firm may have to take thousands of pricing decisions on a wide range of products, none of which provides a substantial proportion of sales. In this case it will find that the costs of separate analyses on each product are too high. It would, therefore, find it economical to adopt relatively mechanical routine for pricing.
• Speed in Making a Pricing Decision : Mechanical formulae, such as a pre-determined mark-up on full cost, have the advantage of speed, though flexibility and adaptability to special conditions is lost.
• Quality of Available Information : If the data on demand and costs are highly conjectural, the best the firm may be able to do is to rely on some mechanical formula such as cost plus formulation.
• Competitive Market : If a firm is selling its product in a highly competitive market, it will have little scope for pricing discretion. This will pave the way for routinised pricing. Active Entry of Non-business Groups in Pricing Decisions

The government, acting on behalf of the public, seeks to prevent the abuse of monopolistic power and collusion among businessmen.

Pricing is not an exact science. There is no infallible formula for the determination of right price for a product. Every pricing situation is unique and should be explored in its own right.

The pricing decision should result from the balancing of a number of considerations. In fact, pricing is a matter of judgment. But to be effective, judgment should be based on sound principles and the fullest information possible.

Importance of Pricing

Price is an important element of the marketing mix of a company. It is the only element in the marketing mix that produces revenue, the other elements represent costs or expenses. It can be used as a strategic marketing variable to meet competition.

It is an important weapon in the marketing armoury of a company to fight with the competitors. Price is highly perceptible to consumers or customers and, therefore, significantly affects their decision to buy a product or service. It is a factor that directly determines the volume of sales.

Maintain Appropriate Living Standard

Maintain planning, protection from monetary instability, establishment of balance in demand and supply, well adjusted for distribution management, multi-faced development of national resources.

Price rise lets living standard of people fall and economic development of the country is obstructed. To maintain the proper living standard, price control is essential.

As price rises, the work of planning increases which results in obstruction in the prescribed aims and objectives of the planning. To maintain the planning process in a fine manner, prices should be controlled at all costs.

When price increase is more than investment and national income increases, monetary fluctuation defects are created. To remove them appropriate price control is required.

In a developing economy, due to changing circumstances, balance of demand and supply disrupts by which consumer, producer and investor have to take hardships. This shows that there is a need to balance the demand and supply in a proper way.

With the viewpoint of consumers for a quick supply of goods on less prices distribution management should be well adjusted. For this, it is necessary to control the consumer price.

The major objective of economic planning is multi-faced development of national resources. Thus, price policy should be quite independent as price regulation can adjust this motto.

Pricing Strategies

• Mark-up Pricing
• Full Cost Pricing
• Marginal Cost Pricing
• Break-Even Concept
• Skimming Pricing
• Penetration Pricing
• Charging What the Traffic Will Bear
• Discount Pricing
• Premium Pricing
• Going Rate Pricing
• Perceived Value Pricing Method
• Value Pricing Method
• Sealed Bid Pricing
• Psychological Pricing
• Odd Pricing
• Geographical Pricing
• Discriminatory Pricing

Methods of Pricing

Majorly there are three  methods of pricing  determination strategy

• Cost based Pricing
• Demand Based Pricing
• Competition-based pricing
• Other popular methods

Pricing of New Products

The introduction of a new product will pose a challenging problem for any firm. In the case of new product

• Product Acceptability : The manufacturer should ascertain whether the new product will be accepted by the consumers or whether the consumers are willing to buy the product. The willingness to buy depends upon a factor like whether it would meet their requirements.
• Range of Prices : It is very essential to assess the reactions of the consumers at different prices. For this, a market research will have to be undertaken. The core question that arises is at what prices different quantities of the product are demanded.
• Expected Volume of Sales : The next task is to determine the anticipated volume of sales at different prices. This depends upon demand elasticity and cross elasticity.
• Reaction to Price : The assessment of the reaction of the consumers to the price is a very tricky task. The company which introduces a new product will have to monitor the activities of the rivals in order to find out the marketing strategies that they are going to adopt.
• V. S. Ramaswamy, S. Namakumari; 2009; Marketing Management; MacMillan Publishers Pvt Ltd.
• Kotler, Keller, Koshy, Jha; 2009; 13th Edition; Marketing Management: A South Asian Perspective.

Marketing Management Topics

• Market Segmentation
• Marketing Mix
• Marketing Concept
• Marketing Management Process
• Marketing Environment

Consumer Behaviour

• Business Buyer Behaviour
• Segmentation, Targeting and Positioning

Marketing Management

• Advertising
• Marketing Planning
• Public Relations
• Sales Promotion
• Types of Sales Promotion
• Techniques of Sales Promotion
• New Product Development Process
• What is Pricing
• Methods of Pricing & Strategies
• Market Entry Strategy
• Demand Forecasting
• Brand Building Process
• Agricultural Cooperative Marketing
• Classification of Products
• Types of Logistics
• Marketing Control

Models of Communication

• Consumer Research
• DAGMAR Approach
• Consumer Behaviour Models
• Personal Selling
• Green Marketing
• Customer Relationship Management
• Electronic commerce
• Kotler Product Level
• Marketing Communication

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( Click on Topic to Read )

• What Is Market Segmentation?
• What Is Marketing Mix?
• What Is Marketing Environment?
• What Is Consumer Behaviour?
• 7 Stages Of New Product Development
• Methods Of Pricing
• What Is Public Relations?
• What Is Marketing Management?
• What Is Sales Promotion?
• Types Of Sales Promotion
• Techniques Of Sales Promotion
• What Is Personal Selling?
• What Is Advertising?
• What Is Marketing Planning?
• Segmentation Targeting And Positioning
• Kotler Five Product Level Model
• Classification Of Products
• Types Of Logistics
• What Is Consumer Research?
• What Is DAGMAR?
• What Is Green Marketing?
• What Is Electronic Commerce?
• What Is Marketing Control?
• What Is Marketing Communication?
• What Is Pricing?
• Models Of Communication

Sales Management

• What is Sales Management?
• Objectives of Sales Management
• Responsibilities and Skills of Sales Manager
• Theories of Personal Selling
• What is Sales Forecasting?
• Methods of Sales Forecasting
• Purpose of Sales Budgeting
• Methods of Sales Budgeting
• Types of Sales Budgeting
• Sales Budgeting Process
• What is Sales Quotas?
• What is Selling by Objectives (SBO) ?
• What is Sales Organisation?
• Types of Sales Force Structure
• Recruiting and Selecting Sales Personnel
• Training and Development of Salesforce
• Compensating the Sales Force
• Time and Territory Management
• What Is Logistics?
• What Is Logistics System?
• Technologies in Logistics
• What Is Distribution Management?
• What Is Marketing Intermediaries?
• Conventional Distribution System
• Functions of Distribution Channels
• What is Channel Design?
• Types of Wholesalers and Retailers
• What is Vertical Marketing Systems?

Marketing Essentials

• What i s Marketing?
• What i s A BCG Matrix?
• 5 M'S Of Advertising
• What i s Direct Marketing?
• Marketing Mix For Services
• What Market Intelligence System?
• What i s Trade Union?
• What Is International Marketing?
• World Trade Organization (WTO)
• What i s International Marketing Research?
• What is Exporting?
• What is Licensing?
• What is Franchising?
• What is Joint Venture?
• What is Turnkey Projects?
• What is Management Contracts?
• What is Foreign Direct Investment?
• Factors That Influence Entry Mode Choice In Foreign Markets
• What is Price Escalations?
• What is Transfer Pricing?
• Integrated Marketing Communication (IMC)
• What is Promotion Mix?
• Factors Affecting Promotion Mix
• Functions & Role Of Advertising
• What is Database Marketing?
• What is Advertising Budget?
• What is Advertising Agency?
• What is Market Intelligence?
• What is Industrial Marketing?
• What is Customer Value
• What is Consumer Behaviour?
• What Is Personality?
• What Is Perception?
• What Is Learning?
• What Is Attitude?
• What Is Motivation?
• Consumer Imagery
• Consumer Attitude Formation
• What Is Culture?
• Consumer Decision Making Process
• Applications of Consumer Behaviour in Marketing
• Motivational Research
• Theoretical Approaches to Study of Consumer Behaviour
• Consumer Involvement
• Consumer Lifestyle
• Theories of Personality
• Outlet Selection
• Organizational Buying Behaviour
• Reference Groups
• Consumer Protection Act, 1986
• Diffusion of Innovation
• Opinion Leaders

Business Communication

• What is Business Communication?
• What is Communication?
• Types of Communication
• 7 C of Communication
• Barriers To Business Communication
• Oral Communication
• Types Of Non Verbal Communication
• What is Written Communication?
• What are Soft Skills?
• Interpersonal vs Intrapersonal communication
• Barriers to Communication
• Importance of Communication Skills
• Listening in Communication
• Causes of Miscommunication
• What is Johari Window?
• What is Presentation?
• Communication Styles
• Channels of Communication
• Hofstede’s Dimensions of Cultural Differences and Benett’s Stages of Intercultural Sensitivity
• Organisational Communication
• Horizontal C ommunication
• Grapevine Communication
• Downward Communication
• Verbal Communication Skills
• Upward Communication
• Flow of Communication
• What is Emotional Intelligence?
• What is Public Speaking?
• Upward vs Downward Communication
• Internal vs External Communication
• What is Group Discussion?
• What is Interview?
• What is Negotiation?
• What is Digital Communication?
• What is Letter Writing?
• Resume and Covering Letter
• What is Report Writing?
• What is Business Meeting?
• What is Public Relations?

Business Law

• What is Business Law?
• Indian Contract Act 1872
• Essential Elements of a Valid Contract
• Types of Contract
• What is Discharge of Contract?
• Performance of Contract
• Sales of Goods Act 1930
• Goods & Price: Contract of Sale
• Conditions and Warranties
• Doctrine of Caveat Emptor
• Transfer of Property
• Rights of Unpaid Seller
• Negotiable Instruments Act 1881
• Types of Negotiable Instruments
• Types of Endorsement
• What is Promissory Note?
• What is Cheque?
• What is Crossing of Cheque?
• What is Bill of Exchange?
• What is Offer?
• Limited Liability Partnership Act 2008
• Memorandum of Association
• Articles of Association
• What is Director?
• Trade Unions Act, 1926
• Industrial Disputes Act 1947
• Employee State Insurance Act 1948
• Payment of Wages Act 1936
• Payment of Bonus Act 1965
• Labour Law in India

Brand Management

• What is Brand Management?
• 4 Steps of Strategic Brand Management Process
• Customer Based Brand Equity
• What is Brand Equity?

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Hochul Halts Congestion Pricing in a Stunning 11th-Hour Shift

Weeks before New York was to charge motorists to enter Manhattan’s business district, Gov. Kathy Hochul postponed the program, citing economic concerns.

By Grace Ashford

Reporting from the State Capitol in Albany, N.Y.

Gov. Kathy Hochul of New York announced on Wednesday that she was shelving the long-awaited tolling plan known as congestion pricing, just weeks before it was to go into effect.

“After careful consideration I have come to the difficult decision that implementing the planned congestion pricing system risks too many unintended consequences,” Ms. Hochul said, adding: “I have directed the M.T.A. to indefinitely pause the program.”

The move angered environmentalists, transit advocates and economists , with some accusing the governor of abandoning a plan that was decades in the making for political reasons in a critical election year.

The decision, Ms. Hochul acknowledged, was not an easy one, but she said it was nonetheless crucial in light of the lingering effects of the coronavirus pandemic on working families and New York City’s economy.

The congestion pricing plan , the first of its kind in the nation, was slated to start June 30 . Drivers using E-ZPass would have paid as much as $15 to enter Manhattan south of 60th Street.

The governor said she feared that instituting a toll to drive into the borough would “create another obstacle to our economic recovery.”

“Let’s be real: A $15 charge may not seem like a lot to someone who has the means, but it can break the budget of a hard-working middle-class household,” Ms. Hochul said.

In the days before her announcement, the governor notified the White House and the top House Democrat, Hakeem Jeffries, of her plans, according to two people familiar with the conversations.

They disputed reports that Mr. Jeffries had directed Ms. Hochul to delay the plan, saying that he had remained neutral on the issue.

“To the extent immediate implementation of congestion pricing is being reconsidered, Leader Jeffries supports a temporary pause of limited duration to better understand the financial impact on working-class New Yorkers,” said Andy Eichar, a spokesman for Mr. Jeffries.

Word of the governor’s last-minute misgivings began to circulate in Albany on Tuesday night, and quickly sent shock waves through the New York State Capitol by Wednesday morning, the penultimate day of the legislative session.

Few lawmakers could say they loved congestion pricing and the optics of taxing constituents. But the proposal was championed by economists and environmentalists alike as the solution not only to the financial woes of the Metropolitan Transportation Authority, the state agency that runs New York’s subways and buses, but also the city’s infamous gridlock.

The program was also being contested in court by eight separate lawsuits, with plaintiffs including the Trucking Association of New York and Gov. Philip D. Murphy of New Jersey .

Mr. Murphy’s case in particular, which is being argued in Federal District Court in Newark, was regarded as the most serious challenge to congestion pricing. State officials are seeking a more comprehensive environmental study of the program.

But in New York, most Democrats had made a grudging peace with the plan after decades of debate, hearings, studies and planning — none more publicly than Ms. Hochul, who had defended it as a necessary step toward rebuilding New York’s economy.

Just two weeks ago, the governor told attendees at the Global Economic Summit in Ireland that implementing congestion pricing was critical to “making cities more livable.”

Many key players in New York politics, from Albany to New York City, expressed dismay at the reversal, which cast the transportation authority’s finances into uncertainty.

“I’m very upset that suddenly, out of the blue, this would pop up,” State Senator Liz Krueger, a Manhattan Democrat, said on Wednesday, adding: “If we stop congestion pricing now we’re never going to get it.”

Kate Slevin of the Regional Plan Association, a nonprofit urban research and advocacy group that has championed the tolling program, called the move “a total betrayal of New Yorkers and our climate.”

The president of the Partnership for New York City, Kathryn Wylde, said the governor’s decision was a disappointment and that she hoped the pause would be temporary.

Yet an undercurrent of support for Ms. Hochul’s move was also evident among lawmakers, particularly those representing swing districts.

“Many see it as welcome news,” said James Skoufis, a Democrat who represents Orange County in the State Senate, adding that despite the plan’s approval five years earlier, opposition had been growing in the Legislature. “Some of it is outspoken, some of it is quieter, but it is widespread.”

Shortly after Ms. Hochul’s announcement, U.S. Representative Pat Ryan, a Democrat facing a tough re-election race in the northern exurbs of New York City, sent out a statement taking partial credit for defeating the plan.

“Since Day 1, I’ve fought alongside countless Hudson Valley families against this unfair, uninformed and unacceptable congestion pricing plan,” Mr. Ryan said. “Today, I’m proud to say we’ve stopped congestion pricing in its tracks.”

Indeed, the plan has been largely unpopular in suburban areas of the Hudson Valley and Long Island where Democrats are desperate to make gains this cycle.

A Siena poll from April found that 72 percent of New York suburbs opposed congestion pricing. Statewide, the number is lower, but still a majority — including 54 percent of Democrats.

Transit experts say that such opposition is common among communities acclimating to tolling plans, but not always lasting.

“We know from the experiences of other cities that have implemented congestion pricing that public support is at its nadir right before implementation,” said Nicholas Klein, an assistant professor of city and regional planning at Cornell University. “That is when the public, media and politicians panic. But time and again, we see that the sky does not fall.”

In her address, Ms. Hochul stressed her commitment to public transit, and ensuring that the transportation authority had the funding it needed to complete long overdue capital projects. But she said that the city’s outlook had changed since the plan was approved in 2019.

“Workers were in the office five days a week, crime was at record lows and tourism was at record highs,” she said. “Circumstances have changed and we must respond to the facts on the ground.”

The decision has the awkward effect of bringing Ms. Hochul, a centrist Democrat who has at times served as a surrogate for President Biden, into alignment with former President Donald J. Trump, who has derided the plan , as well as her predecessor, Andrew M. Cuomo, who championed the concept as governor but now questions its timing.

To halt implementation of the plan, Ms. Hochul needs only the approval of the authority’s board, which she controls. But without the projected $1 billion a year for the city’s buses and subways, the transit system could quickly fall into crisis.

Ms. Hochul could fill that gap, at least temporarily, with money from the state’s reserves. But she is also said to be looking at a more durable revenue source, possibly in the form of a tax on city businesses, which would require the approval of the State Legislature.

The transportation agency has already invested heavily in infrastructure to implement the pricing plan, including $507 million it paid to a Nashville company.

In New York City, Mayor Eric Adams endorsed Ms. Hochul’s move. “I think that if she’s looking at analyzing what other ways we can do it and how we do it correctly, I’m all for it,” Mr. Adams said Wednesday at an unrelated news conference on Staten Island.

Mr. Adams, who has not been a strong proponent of congestion pricing, said he was worried that charging vehicles to enter Lower Manhattan would be an undue burden for “everyday New Yorkers” and potentially affect the city’s economic recovery from the pandemic.

“We have to get it right,” the mayor said, noting that he had been communicating with the governor over the last few days. “This is a major shift in our city and it must be done correctly.”

Reporting was contributed by Nicholas Fandos , Jeffery C. Mays and Claire Fahy .

Grace Ashford covers New York government and politics for The Times. More about Grace Ashford