13 Pricing Strategies Every Business Must Know

by | Jan 27, 2018 | Startups, Business Model | 2 comments

Most Startups we meet have very similar pricing strategies. Here, I will attempt to detail the basic to advanced strategies used by some of the best Startups in Southeast Asia. Different strategies have different effects, so do use this as a guide to handling your sales & marketing challenges!

I will split these strategies into two main categories – one for Marketplace startups (supply and demand based) and one for SaaS Startups (Software as a Service). While these strategies are likely used by the respective business models, it does not mean that a Marketplace cannot use a SaaS pricing strategy and vice versa. I will not be covering any pricing strategies for traditional businesses like retail or service businesses.

Pricing strategies chart - every pricing strategy there is to know
https://www.marketingtutor.net/10-types-of-pricing-strategies/

Marketplace Pricing Strategies

Example Marketplace companies include Uber, Lazada, Foodpanda etc. These are companies that have a platform that caters to a Supply-side and a Demand-side – hence the term ‘marketplace’. These pricing strategy used by platform businesses are covered below:

Decoy Pricing + Psychological Pricing Strategy

The Psychological pricing strategy is pricing similar or the same products differently to drive sales for the cheaper product. McDonald’s does this with Value Meals in order to capture high margins with Coke and Fries (rumoured to be about 90% margins) as well as to reduce the ordering decision time to keep queues short and profits high. This pricing strategy works if you have multiple products that complement each other.

Time-Sensitive Pricing + Psychological Pricing Strategy

Psychological pricing that depends on the time a product or service may expire. This is often for event-based services or perishable goods where the price may be discounted closer to the end of the product or service life. For example, Lazada offers price cuts during festivities to create urgency in purchasing behaviour to drive sales up.  This pricing strategy works well when you can pressure customers using a limited time offer.

Dynamic Pricing + Profit Maximisation Strategy

Dynamic pricing is pricing that changes according to demand and supply principles. Dynamic pricing is used by platforms like airlines or Startups like Uber to encourage or discourage transactions at different times. It should be noted, however, that Uber caps the lower end of dynamic pricing so that they can earn a minimum fee.  This pricing strategy works well if you are in multiple geographies or have barriers between different segments of customers.  This pricing strategy also works well if the supply and demand conditions are fluctuating variables.

Loss Leader Pricing Strategy

Selling key products at a very low price (even below cost) to stimulate sales of other products. Some Startups like Dropbox or Google offer products like Gmail at a loss in order to tie in customers on other products like Google G Suite or other premium services.  This pricing strategy works well if you have multiple products, and a low cost or high margin product that has high demand.

SaaS Pricing Strategies

Example SaaS companies include Google, Zenefits, Spotify, etc. These are companies that sell subscription software services. These pricing strategies are listed below:

Skimming Pricing Strategy + Fixed Costs Coverage Strategy

Starting with a high price for early customers and lowering the price as you cover your investment costs. Often, Startups that could target higher-end clients early on would charge higher prices to cover development costs and then use that same software to sell to smaller players at a lower price.

Freemium Pricing + Switching Costs Strategy

Providing a product or service for free, and then charging for advanced features. A good example is Google G Suite which starts free until you want to upgrade the space & feature limitations. Users may find it hard to switch to another competitor due to high switching costs like having to move data and re-training. Pricing strategies like that work well with very high margin products.

High-Low Pricing + Psychological Pricing Strategy

Offering products at higher prices vs. competitors but offering discounts on key items to ensure the price is lower. Often, SaaS startups price similarly to competitors but apply a discount on yearly plans to compete in price and to secure stable cash flows and upfront cash-in-bank. Pricing strategies like that work well if you are in a highly competitive market and need to nudge the customers.

Limit Pricing + Barriers to Entry Strategy

Limit pricing the product below the competitors’ cost to enter the market to discourage their entry into the market. Usually only executed by successful Startups, costs would be optimised by the economics of scale and scope. Then, they would have additional margins to lower the price below the competitors’ costs and yet still make money for themselves. Pricing strategies like that work well if you are in an extremely competitive market with low barriers to entry – and if there is also cost savings on higher volumes.

Penetration Pricing + Branding Strategy

Mostly done by early-stage Startups, penetration pricing means to start off at a heavy discount. These Startups would start off with pilot programs or heavy early-bird discounts to build up the trust of customers until they have a few big brand logos to show other customers. Pricing strategies like that work well if you are new, but is not very sustainable in the longer term.

Predatory Pricing + Monopolisation Strategy

This aggressive pricing strategy aims to drive out competitors and is illegal in some countries. A good example is Uber, which tried to drive out traditional Taxis and other competitors by offering services at a loss on each transaction. It is an unethical act from a Startup that aims to monopolise the market. In addition, it is also a dangerous act, as it requires a lot of cash to execute – and can cause complete business failure. See what I mean here: Uber Charity Business Model. Pricing strategies like that are rarely sustainable in the long-term and should be used if you have no other choice.

Premium Pricing + Branding Strategy

An artificially high price that encourages positive brand perceptions from buyers. Often done by premium services, it tries to create a perception of a higher reputation, prestige, quality, and desirability. Pricing strategies like that work well when customers’ perceptions are affected positively by high prices. An example is Tiffany who sells jewellery at higher than usual prices so that the customers can enjoy a higher social status that comes with the brand.

Discrimination Pricing + Profit Maximisation Strategy

Price discrimination is to have different prices in different market segments or countries. This is to maximise profits in different segments. A good example is Spotify that sells the same subscription at different prices in different countries to ensure each country pays the most possible. Pricing strategies like that work well if you have different customers segments in different geographies.

Value-based Pricing + Profit Maximisation Strategy

A pricing based on the value it creates for the customer. Some of the best Startups maximise value by charging less than the value they create for the customer, to ensure their pricing makes sense for their customers. For example, if your service saves or creates for your customer $100,000 a year, it is fair to charge $50k to $70k to justify them switching over including their switching costs.

Variable Pricing + Fixed Costs Coverage Strategy

Variable pricing based on unit economics like the number of users, usage time, transactions, etc. Often, this is coupled with a floor price to cover fixed costs like installation costs. For example, many SaaS Startups may charge something like $20 base fee plus $5 per user. 

Which Pricing Strategy is best?

Pricing strategies table - how to determine the right pricing strategy. Which pricing strategy is best?
https://www.pinterest.co.uk/pin/645070346600991784/

To determine the best pricing strategy for your business requires serious thought. An important factor is to align your pricing model with the value your customers see. You can’t sell it too cheap and make a good profit, and selling at a high price won’t bring in business. Figuring out your customer’s journies and how they perceive the value of your product will help you figure out what they are willing to pay, and how they want to pay.

A great factor to decide which pricing strategy is best is to figure out your business goals. Are you going for market share? Or are you going for high-profit margins? Figuring that out will help you figure out the level of gross profits you want to maintain. Low margins allow higher growth, but higher profit margins require higher margins. You also want to think about how this affects price hikes in the future, and if you get any volume-based cost savings at all that can support higher margins.

It is important to know that each company can have a unique pricing model. Markets are highly dynamic and can change business models almost overnight. Adapting to the right pricing model is crucial for business continuity. A strong company can adjust strategies as they go.

Pricing strategies can also vary by product or service so that your competitive advantage and profitability can be optimised in greater detail as well. Not one pricing strategy fits every customer, so you may even see custom pricing models for very important clients, large clients, or even customers who normally cannot afford to use your service/product.

What’s Next? Figure Out Your Pricing Strategy!

These pricing strategies are among those that I have observed serving over 2,000 Startups at NEXEA, our Startup Fund (SEA), Startup Accelerator (Malaysia), and Angel Investor Network. With these pricing strategies, I hope you can conquer your market and keep the competition at bay. If you found this interesting, do share so that others can learn too!

Rate it if you enjoyed it!

<a href="https://www.nexea.co/author/nexea/" target="_self">Ben Lim</a>

Ben Lim

I am the Founder/Partner at NEXEA, a startup investment group in Southeast Asia. We have invested in idea stage to early stage investments around the region.We fund the best Founders and provide them with a certain edge via mentoring by the best investors (look them up!).

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2 Comments

  1. Kenny Wk Chin

    How about giving it free (freemium) and put advertisement when you have enough traffic or selling the data. What strategy is that? Also, please explain how does company like WhatsApp or (Instagram) get a $19 Billion valuation despite having 0 revenue and 0 ads

    Reply
    • Ben Lim

      Hi Kenny, excellent & challenging question!

      Ads are part of the advertising business model. There is no price for customers technically, so that’s why it’s not in this article.

      What Instagram does is also part of the advertising model. See more here: https://www.feedough.com/how-does-instagram-make-money-instagram-revenue-model/

      As for Whatsapp, there is no business model currently unless Facebook ( who bought them) is using the user data to target their ads more effectively.

      Advertising platforms are worth a lot because they own the space where millions or billions of people can view those ads. For whatsapp, they were not valued based on advertising potential, but rather on a “what is it worth to Facebook” basis. How much would it cost Facebook to get the same data or userbase Whatsapp has on its own without buying Whatsapp? Apparently, about $19 billion or more. As long as Facebook can make more money with that information, it makes sense.

      Reply

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