selling price in business plan

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How to Write Pricing Strategy for Your Business Plan

Product and Service Description Workbook

• May 16, 2024

15 Min Read

You have finally created that awesome product. It’s now time to sell.

At what cost?

This is the question that troubles most businesses.

Price your products too high and you see low sales. Price it too low and you struggle to make profits.

What’s the sweet spot to finding a balance between profitability and business sustenance?

The answer is a smart pricing strategy in your business plan . But how to decide on a pricing strategy for your products?

This article is your answer.

In this guide to creating the right pricing strategy, we cover everything you need to know about a pricing strategy from A to Z.

Let’s decode the recipe to a pricing strategy that brings in both: great profit margins and happy customers.

What is a pricing strategy?

A pricing strategy is a model you use to decide the price of your products or services.

It is a critical component of your business plan, as it decides on how you:

• Make profits
• Compete against competitors
• Optimize conversion and lead generation

Creating the right pricing strategy means taking into account various factors such as market conditions, competition, production costs, perceived value to the customer, and so much more.

We agree it’s the hard part.

The main objective: Establish a price point that’s good enough to attract customers while also maintaining profitability for effective financial planning.

Why is pricing strategy critical to a business plan

A recent survey by Bain and Company found that roughly 85% of businesses are seeking an improvement in their pricing decision-making process. On the other hand, McKinsey contends that even a mere 1% increase in prices can result in an impressive 8% boost in profits.

Your business plan is a document that contains the goals of your company and how you plan to achieve them. A pricing strategy highlights how you will be making actual profits from your product offerings to achieve those goals.

The price you set reflects not only the value you assign to your brand’s products and customers but also serves as a pivotal factor that can either attract or deter potential buyers.

Let’s delve deeper into the benefits of the right pricing strategy in a business plan:

Establishes the road to profitability: Your pricing strategy determines your profit margins. By understanding your costs and competitors’ pricing, you can set a price that ensures profitability and sustainability for your business.

Enables better market positioning: An optimized pricing strategy helps you put your products and services in the correct price bracket. It guides your business and helps you decide which market position to occupy for the best chances of success.

Helps project demand: With a good pricing strategy, you can project and satisfy the demand for your product or service. Choosing the optimal pricing strategy (such as skimming, penetration, or value-based pricing) will help you manage demand fluctuations and optimize sales volume. This makes your business plan stronger.

Helps project ROI: You also get a rough idea regarding your sales goals with a strong pricing strategy based on competitor and marketing analysis.

Enhances chances for funding: If you’re a startup seeking funding, a strong and thoroughly analyzed pricing can highly strengthen to secure funding.

With an understanding of the criticality behind integrating a pricing strategy into your business plan, it’s now time to explore some real-world pricing strategies before you come to designing your own.

Choosing the best pricing strategy for your business

“You know you’re priced right when your customers complain—but buy anyway.” — John Harrison

You know what it is, and you know why you need it. But which strategy should you implement? What’s the best one for you?

Let’s get you out of all these conundrums with our comprehensive list of best pricing plan strategy examples.

Competitive pricing

The competitive pricing strategy involves setting your prices based on what your competitors are charging for similar products and services.

As such, it’s ideal for businesses venturing into markets that sell similar products such as groceries or retail stores.

Think of how airline prices for a particular destination all rise up together during holidays.

A competitive pricing strategy is used both in B2B and B2C sectors like communication services, retail stores, grocery, telecom market, and more.

Essentially, you can implement this strategy by:

• Setting your prices below competitors’
• Setting your prices similar to your competitors’
• Setting your prices a little above your competitors

What approach you choose depends on how well you know your market or customer. For instance, if you price your goods a bit lower, you may attract more customers. However, you must make sure not to attract big losses.

If you decide to set your product prices higher than your competitors, you’ll want to draw on some ideas from value-based pricing strategies that help clarify why you are charging more for your products. Are you offering better quality? Are you treating customers better?

Marketing efforts like a refund scheme, better customer experience, and more will play a crucial role in justifying the higher cost to customers.

Best for: Both B2B and B2C sectors like communication services, retail stores, grocery, telecom market, and others with stiff competition . Works best if your product offers more value than the competition.

Value-based pricing

The value-based pricing method works based on what your customers think the value of your product should be.

Thus, the price is dependent on what the customer is willing to pay (WTP price) for your product.

Depending on the value that you bring to your customers’ business or life, you get a chance to price your products much higher than the actual production cost.

Think of how a fine-dining restaurant sets its price. While it may seem exorbitant to some, patrons willing to throw in that amount happily visit such a place.

This technique is well used by B2C or B2B service providers, freelancers, and experts who teach a specific skill.

Best for: This technique is well used by B2C or B2B service providers, freelancers, and experts who teach a specific skill.

Apple, in particular, is notorious for using this strategy to demand excessive prices for products that are either only slightly better or equivalent to their counterparts.

Cost-plus pricing

The cost-plus pricing strategy pulls us away from a “willing to pay” towards a more business-centric approach. This strategy, aptly named markup pricing, involves taking into account the production cost and simply adding an extra dollar value to it.

Cost-plus pricing, in a nutshell:

My production costs + Markup price = My selling price.

If you plan to sell a product that costs you $100 to produce. Simply speaking, you now need to sell the product at a higher price to earn a profit.

If you want a 20% profit margin, you have to sell at $120. If you want a 15% profit margin, you sell at $115. Pretty easy, right?

With the cost-plus strategy, it becomes easy for you to get a rough draft regarding the profits you can generate depending on the volume of your sales.

So, let’s say you have a profit goal of $10000 and a profit margin of 20% with each product costing $100 to make.

Thus, your sales goal should be

$10000/$20 = 500

You need to sell 500 units to reach that goal.

Best for: Cost-plus pricing strategies are commonly employed in B2C retail settings such as grocery stores, big-box stores, and convenience stores.

Economy pricing

In the economy pricing strategy, you sell products at a bargain price, i.e. at the lowest price to get your potential customers to start buying your products.

While this method might seem quite similar to competitive pricing, there is a hidden catch.

Unlike competitive pricing, economy pricing targets those customers who may be okay with a slightly lower product quality or those who don’t care about brand image.

By sourcing cheaper supplies and streamlining features, you can offer extremely low prices for your goods while remaining profitable.

Best for: This strategy is usually employed in the B2C industry. For instance, large retail stores and food delivery services often use this method.

You might have noticed a retail chain’s cheaper alternative sugar packet stocked right beside the branded ones. Another great example includes generic drugs—they are priced lower because they come with lower production costs.

Premium pricing

The premium strategy is exactly the opposite of the economy pricing strategy. Instead of selling products at their cheapest, you hike up the price to give customers the essence of a luxury product.

Of course, companies do add some additional value to their products but the bulk of the pricing comes from the perception of the product as high-end by the customer.

Best for: This pricing approach is generally employed by companies that manufacture upscale B2C goods, such as luxury cars, cosmetics, and devices. B2B companies also use it.

Psychological pricing

The psychological pricing strategy plays with the psyche of your customers to make them want to buy your stuff.

For instance, one of the most popular and widely used techniques in this strategy is the 9-digit effect. It suggests that even though a product priced at $9.99 is essentially $10, customers perceive it as a better deal due to the presence of the “9” in the price.

Placing the target product next to an expensive alternative, giving good deals, tweaking your typography, and inducing FOMO (fear of missing out) are some other basic ways to subtly manipulate buyer psychology.

Best for: This strategy is suitable both for B2B and B2C products. You must understand your customers.

Dynamic pricing

Dynamic pricing goes by many names—surge pricing, demand pricing, or time-based pricing. And as the names suggest, it is a pricing strategy that is flexible in nature and is catered to adjust to the fluctuating market and customer demands.

Dynamic pricing lives and dies with your monitoring and analysis capabilities. You need to stay on top of various metrics like supply and demand, spatio-temporality, customer preferences, and more.

Best for: This strategy suits both B2B and B2C customers. Travel prices are one of the most dynamically priced as you might have noticed airlines or cab services changing their prices depending on your time, location, and demand.

Penetration pricing

In this strategy, you enter the market with a low baseline price for your products. That attracts customers and you set up your market presence. This helps you pull customers away from competitors who demand higher prices for similar products. That’s what the penetration strategy is all about.

Do note that this strategy may not be always sustainable in the long run. This requires you to have a suitable plan in place once you establish a suitable foothold in the market.

Best for: Both B2B and B2C companies can make ample use of this service. We see it in use in telecom services, bulk retailers, and mostly by other market newbies who are trying to establish a presence.

Uber made great use of this strategy. They started with a customer-centric strategy where rides were cheaper than the competing taxi service.

Price skimming strategy

As a complete opposite to the penetration strategy, we have price skimming, where you start off with a high price and slowly bring it down.

Price skimming works best when you are stepping into a market where there’s not a lot of competition, focusing on a specific bunch of customers, and really highlighting the value of your product or service.

Of course, this comes with a hefty upfront investment in marketing and promotional campaigns.

Once more players start popping up in your market, you’ve got a chance to drop your prices a bit and snag a larger slice of the customer pie.

Best for: This strategy should be reserved for innovative products and sectors, both B2B and B2C.

Take the Apple iPhone, for instance. They frequently employ a price-skimming strategy when they first release a new model. But once competitors like the Samsung Galaxy hit the market or they release newer models, Apple adjusts the price downward to maintain a competitive edge

Steps to design an ideal business pricing strategy

We covered a whole lot of potential pricing strategies that can make way into your business plan. However, you still need to decide which one is the most suitable for your business and how you can implement it. Let’s help you with that with some easy-to-follow steps:

Step 1: Secure your business goals

The first and most important step is to understand what your business needs. You need to discern what your pricing should depend on.

Is it increasing profitability, improving cash flow, extending your market share, beating a competitor, reaching out to a new audience, or introducing a new product?

Your entire pricing strategy will depend on these factors. Choose wisely.

Step 2: Undertake a thorough analysis of the market pricing

Ensure that your pricing strategy is suitable for both internal affairs and market conditions.

For instance, if the market you choose is saturated, you must gear up for competition and go for something on the lines of a competitive pricing approach. On the flip side, if it’s a new market, you can go for a value-based pricing approach.

Step 3: Understand your target audience

Why should your customers purchase your products? What will they buy and how should you provide it to them? Is it a premium customer base? Or are you targeting price-sensitive customers?

These are essential questions you need to find the answer to. It is only by knowing your target audience and your Ideal Customer persona that you can initiate and maintain your sales.

Opening a fine-dine restaurant in a Tier-2 city? Value-based or premium pricing can work. Opening another cafe in a metro city? You’re in for competitive or economy pricing.

Step 4: Analyze your competitors

Identify at least three direct competitors and analyze how they structure their pricing. Take a look at whether they break down their pricing into components and offer significant discounts. This gives you a solid idea of how to price your own products.

Check if they bundle products or solutions with others. Look into value-based pricing, where clients pay a percentage of the perceived return on investment. When considering substitutes, think about what options customers might use and their costs.

Remember, sometimes the best solution is the decision to do nothing. Consider self-solutions or choosing not to address the issue, along with alternatives from indirect vendors.

Step 5: Draft a pricing strategy and a plan to implement it

Now that you have gathered enough info to design and draft your pricing strategy, this is the stage where you finalize everything and move on to the implementation stage. Depending on the above metrics, you can choose one of the aforementioned strategies.

We have already discussed the different pricing strategies. Pick one after you have thoroughly analyzed your market, competitors, production costs, and overarching business goals.

Here’s a quick cheat sheet for choosing and implementing the right strategy for you:

• Value pricing: Understand the value for your customers and their willingness to pay. Also, understand what alternatives they have.
• Competitive pricing: Set the price equal to what your competitors are charging and win the service game.
• Psychological pricing: Price products or services in a way that triggers action. For example, charging .99 instead of $1.00.
• Promotional pricing: Discounts over a period of time or one-time deals.
• Price skimming: Enter the market with a high price, but once your competitors follow, lower your cost and implement other pricing strategies.
• Economy pricing: Everyday low price with a focus on low manufacturing/delivery costs.
• Penetration pricing: Set a price artificially low to break into the market.

Step 6: Keep refining and be flexible with your approach

Don’t stress over finding the absolute perfect price. Instead, come up with a few options and give them a test run with your customers. You might be surprised to find that you can actually sell at a higher price than you thought with the right strategy.

But you won’t know until you try it out with potential customers. If the price doesn’t seem to work, take a look at any feedback you receive, tweak your pricing, and give it another shot

Tips to keep in mind:

• Try to Communicate with and understand your target customers. Know how much they can pay, what they are interested in, and how you can give them the best value. A good way is to use feedback forms.
• Always be flexible. If your pricing strategy doesn’t work, it’s time to research, experiment with different prices and adapt.

Bain and Company’s original research on pricing strategies also suggests useful tips. Make sure your sales staff is a part of your pricing and marketing strategy. If your pricing strategy is truly flexible that must also translate to better incentives for your sales team so they can sell more and sell better.

Get Started With Your Own Business Plan With Upmetrics

We just covered everything about pricing strategies. They are so critical to business planning as they help formulate your business goals, organize inventory plans, and increase your chances of achieving business goals.

However, there is so much more to a business plan than just pricing. If you want help creating a business plan from scratch, consider Upmetrics. It offers a collection of 400+ sample business plans for ideas and inspiration. Furthermore, AI assistance and automated financials make the process even easier for new users.

Interested? Try Upmetrics today!

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Frequently Asked Questions

A pricing strategy is a method used to determine the price of products or services, taking into account factors like market conditions, competition, production costs, and perceived value to customers.

How does a pricing strategy benefit you?

A pricing strategy helps in making profits, competing against competitors, optimizing conversion, and lead generation. It also draws in more customers, balances pricing, determines profitability, and assists in meeting customer expectations.

How should you choose the best strategy for your company?

To choose the best pricing strategy for your company, you should secure your business goals, analyze market pricing, understand your target audience, analyze competitors, draft a pricing strategy, and plan to implement it based on factors like value, competition, product positioning, and customer behavior.

About the Author

Upmetrics Team

Upmetrics is the #1 business planning software that helps entrepreneurs and business owners create investment-ready business plans using AI. We regularly share business planning insights on our blog. Check out the Upmetrics blog for such interesting reads. Read more

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How to price a product: your complete guide

A suitable product selling price is key to your success. If you’re underpriced, not only will you lose money, but your product could also be viewed as cheap and unreliable. On the other hand, overpricing your product means you run the risk of pricing yourself out of the market.

So, what’s the solution?

You need to price your product in such a way that’ll secure your place in the market, satisfy your customers, and give your business scope to thrive and develop.

In this guide to calculating product price, we’ll focus on topics such as:

Differences between cost-plus pricing and target costing

Pricing strategy advice.

• What to consider when pricing your product

How to generate profit

• Resources to develop your pricing knowledge

What is a product selling price?

A product selling price is how much a customer pays for a product/service. Prices vary depending on how much customers are prepared to pay, the amount of money the seller is prepared to accept, and how competitive the price is when compared to other businesses.

How to calculate the price of a product: Important pricing formulas

Product selling price formula.

To calculate your product selling price, use the formula:

The cost price is the price a retailer paid for the product, while the profit margin is a percentage of the cost price.

How to calculate the average selling price

Before calculating your selling price, it’s important to understand the average selling price of existing products already available in the market.

The average selling price can be calculated using the formula:

If your company is in the process of releasing a new game console and wants to position it as a high-end product, the average selling price of $500 for existing game consoles can be used to guide your pricing strategy .

You may price yourself at $550-$600, a higher price than your competitors, to stand out as a luxury (albeit more expensive) alternative.

How to calculate product selling price by unit

If your business stocks up on inventory in bulk, it may be worth calculating your product selling price by unit.

To calculate your product selling price by unit, follow these three steps:

• Calculate the total cost of all units purchased.
• Divide the total cost by the total number of units purchased - this will provide you with the cost price.
• Use the selling price formula to calculate the final selling price.

How to calculate the perfect product selling price: 5 key models

There are multiple pricing models you use for your product. Here are the most common models on offer - and how to select the right one to price your product.

What is a freemium pricing model?

The freemium pricing model involves offering a free version of your product to your customer, with the aim of steering your customers towards upgrading to a paid version. In some cases, freemium services incentivize customers to encourage them to sign up for the paid version.

Music streaming service Spotify is the perfect example of a freemium pricing strategy, offering its users an option to use the platform for free, with the caveat of advertisements between songs and limited song skipping.

Oftentimes, this'll prompt users to bite the bullet, put their hands in their pockets, and sign up for the paid version.

When should a freemium pricing model be used?

The freemium model's primary purpose is to attract new customers and is mainly used for digital products, not physical products.

It's essential for your product to appeal to large-scale, mass markets, and needs to provide an exemplary user experience.

Moreover, it's vital that you don't give too much away in your freemium plan; if you give too much away, then users won't have the motivation or drive to spend money on the paid version. You also must be able to balance your resources until your initial freemium customers upgrade.

Before you give anything away, take the time to analyze your data, so you can assess which features you ought to be dishing out free of charge. After all, you don't want to give your prized assets away for nothing!

What is tiered pricing?

Tiered pricing models offer customers the option to select a cost option to suit their needs.

The tiered pricing models are often broken down as follows:

• Family account

When should a tiered pricing model be used?

Tiered pricing models are used by companies to generate appeal amongst a broader and more diverse customer base.

This model is ordinarily used for digital services as it helps orgs fulfill the requirements of a range of target markets.

What is a flat-rate subscription?

When a customer signs up for a flat-rate subscription, they pay a fixed price, regularly, in exchange for a particular set of features and services.

For example, when a customer signs up for a mobile phone tariff, they pay X amount per month, in exchange for their data allowance, minutes, and text messages. If they cross their allocated threshold, they're then charged a surplus fee to cover additional costs.

When should a flat-rate subscription be used?

A flat-rate subscription is best suited to products that have limited features and are targeted towards one buyer persona .

What is bulk pricing?

When bulk pricing is applied, the price of a product decreases, as the amount of products or services increases.

Otherwise known as volume pricing, bulk pricing incentivizes customers to purchase more, as it proves to be more cost-effective - the more they buy, the more they save.

For example, a clothing company may charge $10 for one pair of socks, but reduce the cost to $8 a pair if a customer buys five pairs. This is appealing to the buyer and can generate more sales, as it represents a saving of $10.

When should bulk pricing be used?

More often than not, bulk pricing is used by companies operating in B2B and wholesale.

What is market pricing?

When companies use market pricing, the price of their product alters in line with supply and demand.

Taking this into account, it's essential to conduct competitive intelligence and understand exactly the pricepoints being applied by market rivals.

In this case, the customer isn't a contributing factor at all. The price you set is guided exclusively by competitor activity and market saturation.

There are multiple market pricing examples you're sure to have encountered in practice, with the model commonly used by car manufacturers, smartphone companies, and streaming companies such as Spotify and Netflix.

When should market pricing be used?

Market pricing should be used when your product is similar to that of your competitors’.

Implementing this approach gives you a specific, clear-cut price point to work with. However, to be successful when using this method, you have to nail your positioning , refine your messaging , and ensure your product's viewed as the superior option within the marketplace.

Types of pricing strategies

Product marketers have several pricing strategies to consider, including:

• Competitor-based pricing
• Cost-plus pricing
• Value-based pricing
• Dynamic pricing
• Penetration pricing
• Price skimming
• Target costing

Cost-plus pricing is often considered one of the most simple methods on offer, but target costing is another method used by PMMs when mapping out their pricing strategy.

Before we move on to look at the difference between cost-plus pricing and target costing, let’s define target costing and cost-plus pricing.

What is target costing?

Target costing is defined by the Chartered Institute of Management Accountants as: “a product cost estimate derived from a competitive market price.”

Target costing is categorized as a management technique, as well as a pricing method, in which price points are influenced by the condition of the market, and other key factors, such as homogeneous products, the volume of competition, and no/low switching costs for the end customer.

Example: How to price your product using target costing

Imagine you have a business selling customized soccer jerseys, and the average market price is $200. Here’s how to calculate your target cost:

Average market price: $200

Target margin: 50%

Target cost: $100

Because your target margin is 50%, the maximum amount you can use to produce each product is $100. If it costs more than $100 to manufacture each customized soccer jersey, this will reduce your margin.

You may be asking yourself: “How do I determine the appropriate margin?”

While there’s no quick fix to determine an appropriate margin for your product, the standard margin is 40-50%.

Alternatively, you can use the price multiplier method to calculate your margin. Simply multiply the total costs by 2 (100% markup or 50% margin) or by 3 (200% markup or 67% margin). This will help you establish a suitable markup to put on your product.

If your product is unique, you’ll be able to charge a higher margin.

What is cost-plus pricing?

The cost-plus model is when companies add a percentage of profit to costs.

For example, if the total cost for a pair of trainers is $60 and a company wants to make a 30% profit on each pair, the cost per item would be $78, with an $18 profit.

This model is more commonly used among physical products because their material costs can be easily identified; the same can’t necessarily be said for SaaS products. Nonetheless, if you’re a SaaS business trying to follow this model, look at costs like people’s salaries and the number of hours spent building your product.

Pricing based on these costs will more than likely rely on a level of assumption. So, why do orgs lean towards this approach?

Cost-plus pricing pros:

Cost-plus pricing is simple and generates profits.

However, if you apply this model and your costs increase, there’s a direct correlation to your customers’ price increase too.

Cost-plus pricing cons:

The key disadvantage of cost-plus pricing is it doesn’t factor your competitors into the equation. By ignoring competitor pricing, there’s a good chance you could end up charging considerably more and achieving small profits, or considerably less, and giving away potential profits.

Another problem with this model is it doesn’t encourage the people who are building your product to be prudent. If your costs become too high, your retail price will also increase, and you could drive away your target personas .

Cost-plus pricing also doesn’t consider the customer, what their perceived value of your product is, or how much they’re willing to spend - it’s very company-centric.

Finally, although price increases might be easier to justify if the price of materials etc. rises, you have no control over how often and by how much these costs will go up.

There are only so many times you can increase your price before customers start to complain, and if you don’t reflect the difference in your price, it’ll eat into your profits. It also doesn’t account for unknown costs that come as you grow like marketing, sales, and new hires.

Target costing operates completely differently from cost-plus pricing. When using this model, you start with the market prices to decipher the limit of the cost you can use to create your product.

To determine the market price, base this on an average. Conduct some competitive intelligence and use the information on the pricing pages of other companies to establish the price range customers are willing to pay for your product.

In some cases, your product won’t be a brand-new product, and there will be similar alternatives that have already been released. However, when companies release a pioneering product that’s not been released before, this puts them in a position to dictate the price in the market.

How to calculate gross profit margin

To calculate your company's gross profit margin percentage, subtract the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts).

Then, divide this figure by net sales and this will calculate the gross profit margin as a percentage.

Why is profit margin important to investors?

Investors are interested in your net profit margin because this allows them to assess if your company is generating enough profit from your sales.

When you’re calculating your net profit margin, it’s important to consider overhead costs and fixed costs. These cover raw materials, salaries, insurance, utilities, etc. have been factored into the equation.

Business owners need to take into account that irrespective of whether you’re a small business/startup or an established enterprise corporation, the net profit margin is one of the key cogs in your overall financial well-being.

Things to consider when pricing your product

There are multiple factors that will influence the pricing model you choose to apply when deciding on the selling price of a product.

For example, if you’re holding an end-of-season sale to clear stock, you’ll likely use a discount price model to introduce a lower price.

Similarly, factors such as sales volume and labor costs will also influence your product’s price, and different prices are often used depending on geographical location.

Taxes, cost structures, market needs, and exchange rates are likely to have a say in the price of your product in international markets. This often means the exact same product will have a higher price in location A than in location B.

Whether you’re a solo entrepreneur, an e-commerce business, or part of a large-scale company, you need a pricing strategy that’ll give you the right price for your product.

Don’t forget to factor in variable costs when deciding on the price of your product; it’s a simple way to ensure you don’t alienate some segments of your audience.

If you’re unsure whether you’re priced excessively when compared to similar products, don’t be afraid to use a pricing calculator.

Pricing calculators are a great resource for helping business owners establish if their sales price is fair and meets the expectations of the clientele.

Silvia Kiely Frucci, Senior Product Marketing Manager at Castor , shared five lessons she’s learned when pricing products during her career:

1. Follow the process but don’t be bound to it

Pricing is a complex matter and it cannot be driven just by qualitative insights. Creating a framework around the various pricing work streams is essential to get things done.

For the past two years, I have used the model below as a guideline:

Even if it looks like a linear process, milestones, and decisions are not always linked to the stage that the process suggests they should be dealt with.

For example:

• Relevant competitor information can be found after price testing with customers.
• The initial customer segmentation must be re-evaluated when new qualitative insights have emerged during a pricing workshop.

It’s important to always keep an open mind during the process to make sure your pricing output reflects the market needs.

2. Pricing is a team effort

Product marketers are often responsible for pricing but the process doesn’t have to be a single-handed decision.

Pricing workshops are the perfect ground to involve all the key influencers to discuss around the table. Product, sales, marketing, customer engagement, project management, and Business Unit Directors are all stakeholders in the success of the pricing strategy: they all hold a unique perspective on products, customers, and markets, and they all have very different KPIs around success.

Creating an open dialogue is the best way to hear everyone’s point of view and find a common strategy.

3. The perfect pricing structure is a myth

In the past I have built different pricing models: some were cost-plus only, others heavily relied on competitor pricing insights, and some were value-based.

There is no doubt to me that value-based pricing is the most successful way to price products, both in the physical and SaaS space.

Value-based pricing best practices often show a 3-tier option with tick boxes for product features/benefits. Although this output is very clear and simple for customers it cannot be applied to every product: some products are so complex and/or so customizable they cannot be easily deconstructed to create different versions.

It is more the case of displaying value to the customers using a complementary pricing model where the final price is built by attributing a monetary rate to each customer-recognized value.

This model could be used as a guideline for discounting by asking the simple question to your customers: “Which value do you want to drop for a cheaper price?”

4. Negative price testing is the best ground to re-evaluate your product value proposition

I find price testing one of the most complicated processes to plan. Is it best just to live test and look for customers’ behavior in response? How about creating customer panels before roll-out? Will you test on renewals or new business? The questions are infinite.

Whichever strategy you select for the product you are selling, make sure you create a clear way to capture customer feedback: define 1-3 items that will help you define customer product perception in response to your pricing and align it with your product value proposition.

Great pricing means the customers have understood your product the way you and your company see it.

5. Pricing is not just a number

Making plans to roll out the price to the rest of the company is as important as deciding the price itself. One of the never-to-be-missed actions from the pricing workshop is agreeing on a clear strategy around sales enablement: In my experience, partnering with your marketing team at this stage is paramount, they will help you shape the message internally and to the customer.

Companies have one thing in common: they all want to achieve their desired profit - without introducing a low price!

There’s no doubt a suitable product selling price plays a crucial role in helping them achieve these objectives.

In his presentation, How to Price for Growth and Profitability , Yannick Kpodar, Global Director of Product Marketing at PayFit , outlined his step-by-step process to identify the best pricing strategy for company growth and profitability.

Ultimately, there’s no definitive answer on how to price a product, and as Phill Agnew, Senior Product Marketing Manager at Hotjar suggests, it’s a complex area where many companies make mistakes.

You need to utilize a pricing strategy to drive cash flow. To do so, you’ve got to be clear on:

• The cost of producing your product
• The value of your services to your clients
• How much your customers have and want to spend
• The overall running costs of your business
• What critical costs need to be covered short-term (e.g. loan repayments)
• How your competitors price their products

Pricing needs to take every one of these principles into account to drive optimum profit. You may have to go through your business plan with a fine-tooth comb and consider factors such as brand development, team restructuring, etc. before you can draw a definitive conclusion.

Remember, your pricing strategies and product selling price are by no means definitive. You should continually assess your plan and make changes whenever something isn’t working as you anticipate. Your decision-making process can be dictated by simple metrics such as sales figures and churn rates.

Resources to develop pricing knowledge

Product Marketing Certified: Core , PMA’s certification program, features 11 modules and 10+ hours of learning, with an in-depth section focusing on the essentials of pricing including:

• Pricing basics
• Calculating your baseline
• Price sensitivity surveys & conjoint analysis
• Pricing and packaging roadmaps

With on-demand , live and online , and team courses available, there’s an option to suit your preference, whatever your requirements. You’ll also get access to templates that’ll help you ensure the price of the product is suitable.

For more information, sign up for a live demo , discover what’s on offer, and ask any questions you may have.

Alternatively, register now , get certified, and enhance your practice with your newfound pricing knowledge.

There are many stages involved from the inception of an idea to a product launch, and pricing can dictate the success of your product.

Ashley Murphy, Toast 's Senior Director of Market Insights and Pricing, shared her specialist insights , including her preferred pricing strategy, and the role of product marketing in the pricing process.

Q: What sort of pricing strategy do you use? And how (and how often) do you go about validating whether or not it's working?

A: “I typically encourage a value-based pricing strategy. This type of strategy is centered around customers’ value drivers and willingness to pay. Competitive dynamics and unit economics are the other two levers I consider to ultimately set price metrics and price levels.

“In terms of validating pricing, different tactics are depending on how much time/resources you have and the level of rigor you are looking to achieve.

"For major price changes, I recommend forming pricing based on historical trends and primary research with customers followed by in-market testing (i.e. regional tests with sales or A/B tests on the web). I recommend companies revisit their pricing bi-annually or annually, at a minimum, to stay relevant.”

Q: How big of a role does product marketing play when it comes to pricing at Toast?

A: “Big! I lead a dedicated team within the product marketing organization focused on pricing and packaging.

Pricing itself is very cross-functional, but my team is responsible for setting our pricing strategy, executing pricing experiments, and continuously evolving our pricing, packaging, and promotion approach. We work closely with core product marketing, product, finance, and sales.

“I’ve seen pricing live on many different teams (or sometimes nowhere/everywhere). I am a proponent of product marketing championing pricing as it will be deeply rooted in customer needs. Typically product marketing has the deepest sense of why you win/lose, competitor dynamics, and insight into the ‘voice of the customer.’

“If you work at a multi-product company, it is especially paramount that you form a dedicated pricing team so that the pricing of individual products are coordinated and work together to hit your goals.”

Q: I'm very new to the world of pricing and am starting a new PMM job in a B2B SaaS org in a few weeks where I know pricing will be a part of my role. What would be your best advice to a complete newbie?

A: “My #1 piece of advice is to build pricing processes (as opposed to tackling it one-off). Many organizations let pricing be based on gut or just debates between teammates. Establishing formal processes of how/when pricing decisions are made will set you up for long-term success!

“A few ideas that have worked well for me: I recommend creating a new product pricing playbook. Similar to how PMM will traditionally have a product launch playbook/process, you should also establish how pricing analyses and decisions will be made throughout the development process. Many companies wait until GA to make pricing decisions, but you should be considering pricing from the initial inception of a product.

“I also would recommend creating a pricing committee if you work for a mid/large size company. Pricing impacts many departments and therefore many folks will want to weigh in.

"Creating a formal pricing committee that helps prioritize the pricing roadmap and approve pricing decisions will help drive transparency and help you get things done more efficiently!”

Q: What are some strategies to start converting my B2B computer hardware business model from cost-plus to value-added pricing?

Some management and customers are set in this pricing model and we can't seem to get out of this cost-plus approach. If anything, I think everyone believes MSRP will increase due to value-added pricing, but some of it may decrease.

A: “Many companies go through this transition. The best way to get buy-in is to prove the business impact through data. I recommend doing in-market testing when shifting to value-based pricing. I typically suggest testing new pricing strategies with prospects to gauge demand and impact on unit economics before changing pricing for existing customers.

“Also, with value-based pricing, it is often beneficial to have a portfolio approach to pricing. If your company has many SKUs/products, the MSRP will likely both increase and decrease. The important thing to test is that as a portfolio, you are increasing your KPIs (revenue, margin, location acquisition).”

Q: What are some trends in pricing transparency on your website? And related —as someone moving to a global/enterprise offering— how might I think about the strategies for this differently from SMB strategies?

A: “In general, I recommend price transparency for lower complexity offerings. Buying habits have certainly shifted over the past few years and consumers (B2C and B2B) prefer to do their research online and I believe expect a certain amount of transparency and autonomy. That said, for enterprise/robust offerings that are often customized based on the customer’s needs, it is often difficult to display pricing on a website that applies to everyone.

“Using these principles, we publish pricing and offer the ability to buy online for SMB buyers. For SMB buyers we publish a starting rate, but still encourage prospects to meet with a consultant for a custom quote and price based on their needs. Lastly, for enterprise buyers, we do not publish pricing on our website given the high degree of variability and customization required for that segment.

“In short, price transparency will depend on the buyer and the complexity of their needs!"

👀 Want to learn more?

Making informed pricing decisions can not only give your offering a competitive edge but also help you convert more users for your business.

Enroll in our Pricing Certified: Masters course to learn how to choose the right pricing models, understand customer segmentation, and identify the ideal price point for your product or service.

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Selling Price Formula – How To Find the Right Sales Price?

Regardless of the product, every company must have the best possible pricing strategy set up to ensure success. Even the best companies can find themselves in difficult financial situations with a bad pricing strategy. In this post, we take a look at how to reach an informed sales price.

Table of Contents

What is the selling price?

The selling price is the amount of money that a company charges for its product. It goes beyond the total cost of the product, also known as the cost price, to also include a profit margin which is usually added as a markup percentage. The selling price is also called the sales price or standard, list, or market price. While these are used in slightly different cases, all of them designate the price that a company sells its goods for.

For example, the standard price usually marks the baseline rate at which a product is offered to customers, serving as a reference point for discounts or special offers. Market price, on the other hand, reflects the prevailing industry rate of a type of good and is often influenced by supply and demand dynamics. These terms help businesses establish competitive and sustainable pricing strategies.

The selling price may be static or dynamic. It may fluctuate based on seasonality, spikes and dips in demand, or direct pressure from competitors. Different goods are sold through different distribution channels, too – some manufacturers sell direct-to-consumer (D2C) , others to retailers and wholesalers, and others still to both. Because of this, consumers may find the same product, or close versions of it, available at different prices.

What is the average selling price?

The average selling price (or ASP) is a key performance indicator (KPI) that denotes the average price a product was sold at over a period of time. ASP can be found using the sale price of an item. It’s simply calculated by dividing the total revenue of a product (or the sum of the selling price of sold units) by the number of units sold.

Business owners often track this KPI meticulously to capture price fluctuations and ensure that sales remain at profitable levels. ASP is a crucial metric to gauge competitor pricing, determine the perfect market entry point, or identify market pricing trends. It offers easy insight into what customers have been willing to pay for a product over time and what a competitive price point may be.

How to calculate the selling price?

Product pricing fluctuates across classes of goods and also differs by industry. For example, commodified goods often operate using fractions of a penny in their costing and sell at shallow margins. This is because the product is mass-produced so efficiently that it’s easier to measure profits in the volume of product sold, rather than units sold. Other industries produce high-end make-to-order (MTO ) or engineer-to-order (ETO) goods that are complex in design and command a higher price per individual unit.

Put simply, different circumstances demand different pricing strategies to reach profit targets. There are many methods available for calculating selling prices, ranging from simple formulas like cost-plus pricing to more nuanced ones that guard against fluctuations in variable and fixed costs, such as contribution margin pricing. Let’s delve deeper into the different methods and look at some examples.

Cost-plus pricing and simple markup price

Cost-plus pricing is one of the most common methods for price calculation and is also the simplest. In cost-plus pricing, a company tallies all costs associated with manufacturing a product from materials and labor costs to overheads, and then adds a fixed amount of cash on top as profit. Markup pricing is essentially the same thing except here, the desired profit margin is added as a percentage.

Selling price = cost + (cost x markup percentage)

Example:   After tallying up the cost price of its product – $300, a make-to-order battery system manufacturer looks at the price of its main competitors. The three most directly competing products cost $400, $380, and $450. To attempt a competitive entry into the segment, the company settles on a fixed $90 profit margin to arrive at a selling price of $390.

Planned-profit pricing

This pricing model has the same logic as cost-plus pricing but also takes into account variable costs, i.e. cost changes relative to the manufacturing volume. It might be that producing more units in a production run is more effective than producing few, or maybe a supplier offers better prices when components are purchased in bulk. Whatever the case, to determine the planned profit price, a company will first conduct a break-even analysis which uncovers the number of units that should sell at a given volume to cover the cost. Next, a markup is added similar to the above method.

Understand and control your costs with MRPeasy

Example: The battery manufacturer has a deal with one of its vendors – for bulk purchases of 20 or more battery elements, they offer a 20% discount on the order. However, this saving is largely offset by increased storage costs. This lowers the cost price per unit for the battery packs to $270 but only for larger orders. To boost competitiveness while retaining the same profit margin, the manufacturer settles on a discounted price of $360 for large orders. By utilizing the volume break in the components’ direct cost, both pricing tiers deliver the same margin.

Gross Profit Margin Target (GPMT)

This pricing method aims to retain a preset profit margin across the company’s whole product mix. The Gross Profit Margin Target (or GPMT) is defined as the sales revenue percentage left after subtracting the cost of sales and production. This KPI can be used to find the optimal sales price for all products to maintain a gross margin. It is a good strategy for companies that carry several classes of different products and seek to hold a specific margin across each category or class.

First, the cost of goods sold (COGS) for a fiscal period is subtracted from the total revenue. This will return the gross profit. Gross profit is then divided by revenue to return the gross profit margin percentage.

Gross profit = revenue – COGS

Gross profit margin = (gross profit/revenue) x 100

Example: The battery manufacturer has three distinct products on the market. Last year’s revenue across all products amounted to $140,000 while the cost of goods sold was $109,000. This makes the gross profit for the period $31,000. The gross profit margin is therefore 31,000/109,000 x 100, or 28.4%. If the company wants to match last year’s gross profit, it must either sell as many goods with a 28.4% profit margin or increase the margin in case sales numbers dwindle.

Whatever the Market Will Bear (WMWB)

This pricing calculation relies on a couple of critical points for sales. In one case, there may be no competition or the competition may be scarce. On the other, the demand or brand reputation may have such a lure to consumers that the company can charge much higher prices than other goods classes. Either way, the profit margin is set as high as demand allows. Aiming too high may encourage competition to enter the space at much lower pricing to “buy the business” and shift market share away. However, many products are so sought after that consumers are willing to bear the burden of higher prices.

WMWB is scarcely a sustainable long-term strategy. If a product can be hugely capitalized on, it’s usually just a matter of time before a competitor steps in. Sky-high prices of the product may then undermine a company’s reputation as consumers realize the true item cost.

Example: The battery company has one product in its product mix that always sells out fast. Since there are no direct competitors in the segment, the company has steadily increased the sales price of the product, carefully keeping an eye on sales numbers.

Competition and customer-based pricing

Competition-based pricing takes into account the pricing strategies of other similar products on the market. A comprehensive analysis of competitors and their pricing is paramount. Markers to look out for include the number, size, and even perceived financial situation of competitors, the number of competing products and their pricing methods, the status of substitutive products or indirect competitors in the market, etc.

Customer-based pricing, a.k.a value-based pricing, aims to determine the ideal profit margin by analyzing the demand and sales numbers of a target market in an attempt to gauge the perceived value of a product. Here, customers’ buying habits, purchasing decisions, and sales volumes need to be analyzed to reach informed decisions. Various tactics may additionally be employed to affect perceived value such as rebranding, upselling, bundling, customer segmentation, promotions, etc.

Example: As we saw in the cost-plus pricing method, an example of competition-based pricing is to determine a viable profit margin by analyzing the prices of a product’s top competitors and settling on a good middle ground.

For value-based pricing, suppose our battery company has a well-selling battery bank but also wants to boost the sales of a new product, a rapid charger. Instead of lowering the sales price of the charger, the company decides to bundle it with the battery bank, boosting the perceived value of the products through a deal.

Best practices for a successful pricing strategy

Establishing a pricing strategy that aligns with a company’s business goals and customer expectations is essential for long-term success. Finally, let’s look at four tips to help you develop an effective pricing strategy.

1. Understand your costs

Before setting prices, it’s crucial to have a deep understanding of your costs. This includes not only the direct costs of production but also indirect costs such as overhead, marketing, and distribution expenses. By accurately gauging the cost structure, you can ensure that your pricing covers all expenses while allowing for a reasonable profit margin. This is particularly important for businesses using cost-plus or contribution margin pricing methods.

Implementing an ERP or MRP system can be a game-changer in understanding costs. These systems provide real-time visibility into various cost components, including raw materials, labor, overhead, and operational expenses. By automating data collection and analysis, businesses can accurately track costs, identify cost-saving opportunities, and make data-driven pricing decisions. All of this can contribute hugely to developing a more informed pricing strategy.

2. Analyze your market and competition

Even if you’re employing mostly a value-based pricing strategy, thoroughly analyzing the market and competitors is still essential. Identify similar products or services in your industry and examine their pricing strategies. Are they using cost-based pricing, value-based pricing, or something else?

Consider the size and financial situation of your competitors, as well as any unique selling points they might have. Understanding your market and competition will help determine where your product or service best fits in and how to position it more effectively. Furthermore, delve into the historical financial reports to gauge long-term trends.

3. Know your customer

Conversely, even if focused on perfectly positioning your products amid competitors, understanding the target audience is critical for successful pricing. Analyze customers’ buying habits, preferences, and the value they place on your and similar products. Conduct market research to gather insights into customer perceptions and expectations. By aligning the pricing with the perceived value to your customers, you can maximize revenue while meeting their needs.

Utilizing a Customer Relationship Management (CRM) tool can be instrumental in both competition and customer-based pricing. A CRM system allows for gathering and managing customer data, their buying trends, and preferences by tracking customer interactions. This valuable information can inform future pricing decisions, enabling you to align your prices with what your customers value most. Furthermore, a CRM tool can support targeted marketing efforts, promotions, and customer segmentation to enhance the perceived value of products, thus contributing to your pricing strategy’s success.

4. Flexibility and testing

A successful pricing strategy is not static but should constantly evolve. Be open to adjusting prices based on market changes, customer feedback, and performance data. Consider running pricing experiments or A/B tests to gauge the impact of different pricing strategies on sales and profitability. Regularly review and refine your pricing to stay competitive and responsive to market dynamics.

In conclusion, developing a successful pricing strategy involves a combination of understanding your costs, analyzing the market and competition, knowing your customers, and maintaining flexibility. It’s an ongoing process that requires continuous monitoring and adjustment, much of which can be largely simplified by utilizing modern productivity software.

Key Takeaways

• The selling price is the price at which a company is willing to sell its product to a customer. It encompasses more than just the cost of a product and includes a profit margin which is added as a markup.
• Monitoring the average sales price (ASP) is essential in gauging customer willingness to pay and competitive pricing trends. ASP is calculated by dividing the total revenue by the number of units sold.
• Different products and industries demand diverse pricing strategies. From cost-plus pricing to planned-profit pricing, companies must choose the method(s) that best aligns with their business model and profit goals.
• A successful pricing strategy requires a deep understanding of the market, competition, and customer preferences. Pricing should never be static because markets, trends, and economies constantly shift.
• Implementing a manufacturing ERP system is a pivotal step for producers in understanding and managing costs effectively. These systems offer real-time visibility into cost components and automate data collection and analysis. With ERPs, companies can make more informed decisions, identify cost-saving opportunities, and optimize their pricing strategies to enhance profitability and competitiveness.

Frequently asked questions

The basic calculation for finding a good sale price is to first tally up the total costs of production and then add a profit margin. In turn, there are numerous methods available for finding a good profit margin like planned-profit pricing or gross profit margin target.

Normal selling price refers to the average selling price of a product over time. It is calculated by taking the total revenue of a product or product line and dividing it by the number of units sold.

Cost price refers to the total cost of producing an item. It includes the total costs of manufacturing the item as well as its distribution and marketing costs. The selling price, however, is the price at which the product is sold to customers. The selling price is essentially the sum of the cost price and profit margin.

You may also like: What Is Cost of Quality and How to Calculate It?

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Mattias Turovski

Mattias is a content specialist with years of experience writing editorials, opinion pieces, and essays on a variety of topics. He is especially interested in environmental themes and his writing is often motivated by a passion to help entrepreneurs/manufacturers reduce waste and increase operational efficiencies. He has a highly informative writing style that does not sacrifice readability. Working closely with manufacturers on case studies and peering deeply into a plethora of manufacturing topics, Mattias always makes sure his writing is insightful and well-informed.

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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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16 pricing strategies and examples (and how to set yours)

Hopefully, you enjoy what you do, and that's why you do it. But if you're running a business, I'd guess that part of why you love doing it is because it allows you to make a living. And making money means pricing your products or services correctly.

For your business to be sustainable, you'll need a pricing strategy that generates adequate income while also being attractive to customers. A good pricing strategy can keep your customers coming back for more, while a poor or nonexistent strategy can send them running for the hills.

Here's a guide to creating a pricing strategy that will keep your profits moving up and to the right.

Table of contents:

Why is it important to pick a pricing strategy?

A pricing strategy is a plan for setting the best price for your products or services. The goal is to set a price that will entice customers to buy but that isn't so low that you're not making a profit.

An effective pricing strategy is an extension of your marketing. It affects customers' perception of your product and contributes to their willingness to buy. Savvy businesses know that pricing is just as important as the product itself, and an effective strategy can boost revenue, increase customer loyalty, and help your business stand out in the marketplace.

An ineffective pricing strategy makes your customers confused at best and offended at worst. If you went to the Porsche dealership and saw the brand-new 911 priced at $25,000, your first thought might be, "What's wrong with it?" Similarly, if you went to the Toyota dealership and saw the new Corolla priced at $90,000, you'd probably laugh your way out of the building. Poor pricing strategies can hurt your brand reputation, lower profit margins, reduce overall sales volume, and increase customer churn.

Sure, you could just trial-and-error a bunch of prices until you find the price that maximizes profit without deterring potential customers—and there will probably still be some of that even after you choose a pricing strategy for your business. But you'll spend a lot less time and money starting with a pricing analysis than you will taking a complete shot in the dark.

16 common pricing strategies

Your core pricing strategy has to do with what you're selling: a luxury, a bargain, or just a good product for a good price. Once you have that figured out, you'll move on to choosing a pricing method, which is the how of your pricing strategy.

Pricing methods are sort of like plays in a playbook. Your product probably isn't going to switch from being a luxury to a bargain and back again, but you can (and, in some cases, should) switch up the pricing method you're using to better meet your market demands.

Here, we'll look at 16 of the most common pricing methods, plus how and when to use them.

1. Value-based pricing

The first pricing method is probably the one you're most familiar with: value-based pricing. You might think of it as the "default" pricing method since it consists of finding what the customer is willing to pay (the WTP price), making sure it's higher than the cost of production, and setting your price somewhere in between.

If you need to make a price adjustment, you can do so as long as the new price falls within the WTP range. If the new price surpasses this range, you'll need to explore avenues to expand the WTP range. You can do this by incorporating additional value into your product or service to increase the customer's willingness to pay the new price.

Take Rolex, for example. While they also fall into a premium pricing model—a concept we'll touch on later—they absolutely utilize value-based pricing. It doesn't cost $10,000 (or more) to make a watch, but the business knows that's what their customers are willing to pay.

Takeaway: Charge what you can without turning off the customer to your product. 

2. Cost-plus pricing

A very similar method to value-based pricing is cost-plus pricing. Instead of basing prices on what the customer is willing to pay, businesses set prices by determining the cost of production and their ideal profit margin. For example, if a product costs $100 to make and a company's target margin is 15%, then the product will sell for $115. 

Cost-plus prices still need to fall within the WTP range, but they're not chosen based specifically on what the customer is willing to pay. If the cost-plus price falls outside the WTP range, the company either needs to adjust its target margin or find a way to lower production costs.

Takeaway: Ensure all costs are covered and don't keep you from reaching your desired profit margin.

3. Competitive pricing

One of the things he tried early on was offering the first 15 minutes of work free of charge—if he solved the issue within that first quarter of an hour, the job would be completely free. It worked. Clients told him they wanted to pay even if he solved the issue in under 15 minutes because they didn't feel good about paying nothing for a service that involved someone coming to their home. It was an attractive offer that increased his competitive edge without negatively impacting his bottom line.

Takeaway: Maintain or gain market share from your competitors.  

4. Economy pricing

Similar to competitive pricing, economy pricing involves setting the lowest prices among your competitors to attract bargain buyers. But unlike competitive pricing, economy pricing specifically targets people who will consciously sacrifice quality in exchange for a cheaper price. Knowing this, you can source cheaper supplies, eliminate extra features, and make other changes to lower your production costs so that you can offer extremely low prices while continuing to make a profit. 

Takeaway: Attract price-sensitive customers while achieving high sales volume and cost efficiencies.

5. Penetration pricing

Takeaway: Gain market share and attract customers quickly with low initial prices, then raise prices once you've established a strong customer base. 

6. Dynamic pricing

Have you ever pulled out your phone intending to grab a rideshare on a busy weekend night or (I wince just thinking about it) a holiday? Those jaw-dropping price surges are the result of what's called dynamic pricing, or pricing that changes fluidly according to availability and demand.

Truly dynamic pricing requires an algorithm that can automatically adjust prices according to purchasing activity. Uber's CEO isn't sitting behind a Wizard of Oz curtain declaring price surges; the app automatically increases prices when demand is higher than the number of drivers on the road. A less immediate version of dynamic pricing can be seen at the gas pump, where prices change frequently in response to demand but aren't automatic (in some states, like New Jersey, they can't change more than once per day). 

For small businesses, dynamic pricing works best with services or custom products that require a price quote, since customers expect prices to be different depending on the project and circumstances. If your prices are listed on your site and you change them constantly, you'll drive away potential customers who perceive you as unpredictable or unreliable.

7. Price skimming

Price skimming is the opposite of penetration pricing, where you start by setting the maximum price and gradually lower it over time. This strategy works best with products that have major releases, like laptops or cars. By price skimming, you'll be able to capture early buyers willing to pay top dollar for the latest and greatest; then, as you gradually lower the price, you'll be able to sell the maximum number of products at each price before dropping it again. 

One of the most well-known price skimmers is Apple, which has made its product launches into full events with tickets and fans to build as much hype as humanly possible. Mega-fans buy the newly unveiled products the moment they're available, even waiting in lines overnight outside Apple Stores to do so. As each new product is released, the older models get shunted down the pricing ladder to capture buyers with lower WTP points. 

Takeaway: Capture early adopters and maximize revenue with high initial prices before gradually reducing prices to attract more price-sensitive customers.

8. Hourly pricing

Often used in service-based industries, hourly pricing establishes prices based on the time spent on a particular task or service. This aligns the price directly with the effort or resources dedicated to the project. It's a straightforward method for you and the client to understand and agree upon the service's value.

Having said that, if your projects' complexity or required resources vary quite a bit, a flat hourly rate may not be best for your business.

Takeaway:   Ensure customers are billed fairly based on the actual hours worked.

9. Project-based pricing

This pricing model is common for architects. When a client approaches an architecture firm with a request to design and construct a building, the firm will assess the project's scale, complexity, materials, and other specific requirements to provide a project-based quote. Obviously, the process and requirements for designing a public bathroom vs. a skyscraper will be very different, beyond just time discrepancies. 

Takeaway: Make sure profitability and effort are accounted for in your pricing structure.  

10. High-low pricing

I've taught all my loved ones that we don't walk into Michael's without a coupon or buy anything at JOANN that hasn't been marked down to at least 40% off.

These stores use high-low pricing, where they offer products or services at a higher price initially and periodically discount them. This approach attracts price-sensitive customers who are motivated by discounts (me) while also maximizing revenue from customers willing to pay higher prices to get their hands on the product before it starts flying off the shelves once it's been discounted.

Companies can maintain a balance between profitability and reaching a larger range of customers by driving traffic to their stores or websites during promotional periods.

Takeaway: Create a perception of value to encourage customer purchases. 

11. Bundle pricing

You've probably seen the Progressive commercials practically begging you to bundle your car and home insurance for a better deal. Or maybe you bundled your cable and phone services back in the day. 

Bundle pricing is when a company combines multiple products or services and offers them at a lower overall price than what each item would individually cost. This creates a perception of added value, convenience, and savings for customers. If you sell a lot of small items or are trying to spread the love to an overlooked service, this pricing strategy may help you increase your sales.

Takeaway: Sell items together in a package deal that's slightly cheaper than if you were to sell the items individually to increase sales and customer satisfaction.

12. Geographic pricing

I follow a candy shop on TikTok with the most delicious-looking candy I've ever seen. They're located in the U.K. and I'm in the U.S., which means I'd have to pay outrageous prices to account for the shipping costs.

Geographic pricing involves setting prices based on different geographic regions or markets, considering factors like local market conditions, competitive landscape, and transportation costs like shipping. While this strategy makes it harder for a candy lover like me to get their hands on some delectable sweets, if you want to expand outside of your own geographic region, this strategy may be inevitable to keep your profits stable.

Takeaway: Maintain profitability across all your geographic markets by adjusting for variable factors.

13. Psychological pricing

A book priced at $20? I'll pass. A book for $19.99? I'll take 10. This common phenomenon that we all fall for time and time again is called psychological pricing. Also known as charm pricing, this strategy leverages consumers' perceptions and emotions to make them think they're getting a better deal than they actually are. 

Making the price seem more appealing or affordable to customers effectively influences customer behavior and increases sales, even if the price difference is negligible (and even if the customer knows in their heart of hearts that it's negligible). You can combine this strategy with another method since it's a common standard in many industries.

Takeaway: Create the illusion of a lower price so customers perceive your price as fairer.  

14. Freemium pricing

If you're like me, you started out with the free version of Spotify until the ads were so grating on your soul that you gave in and shelled out the cash for the paid ad-free version. This method of offering a basic version of a product or service for free and charging for additional premium features or advanced functionality is called freemium pricing. 

By offering a free version, companies can give customers a taste of the value their product or service offers, build brand awareness, and create a larger user base. They then monetize their user base with an enhanced experience for a subscription fee or one-time purchase. If you're new to the market, this is a great way to get buy-in from people who would otherwise be unwilling to convert.

Takeaway: Attract a large user base and convert some into paying customers. 

15. Premium pricing

Some people enjoy the prestigious vibe and social appearance of luxury brands. For example, luxury car companies, like BMW or Mercedes-Benz, position their vehicles as high-end, offering advanced technology, luxurious interiors, and superior performance. (Although I'd love to see what they have that my Honda CR-V doesn't.) 

With those high-end features comes a high-end price tag, otherwise known as premium pricing. This strategy positions the company as exclusive and superior in value in comparison to lower-priced competitors. It appeals to a target market willing to pay a premium for the perceived benefits. If that's your target market, then this is your ticket.

Takeaway: Target affluent customers and generate higher profit margins.

16. Subscription pricing

Every month, I find a surprising number of fees hitting my credit card statement. They range from streaming services I may or may not watch and other charges I recognize to the things I've completely forgotten about or failed to cancel—like that domain fee for my failed dogsitting business.

You can think of subscription pricing as a monthly access fee, whether that's access to a virtual space like Hulu or Adobe or a physical space like a gym. Businesses that wish to take advantage of this pricing strategy first need to build something people want to use regularly. Once they have a product or service that will garner demand, all that's left is to charge a monthly fee.

Companies lean toward this pricing strategy whenever possible because it gives them a fairly predictable revenue stream. For example, if you have 500 customers who pay $19.99 per month, your monthly revenue will be $9,995, barring any drastic changes in your customer base. This strategy is growing massively in popularity not just for pure subscription services like SaaS licenses or streaming services but also for physical product sales. One-off product sales often turn into continual sales, and an initial product can be a way to get a foot in the door for forever payments on one single sale, which is a huge win for sellers.

Takeaway: Create something consumers want—then charge them for access.

4 pricing strategy examples that work

Now that you're familiar with some of the most common pricing strategies at a high level, here's a deeper dive into how real businesses are using them to their advantage.

For example, Zapier's workflow automation capabilities are free for basic use. In this plan, users can automate simple workflows with 100 tasks per month. But businesses that want expanded functions (or premium integrations) can upgrade or start with a higher-tier plan that fits their unique workflows and tech stacks.

Zapier set their pricing this way because they're confident that once users get a taste of the power of Zapier with a free plan, they'll see the value of expanding it with paid pricing tiers. After all, if 400 AI-automated activities are good, then 1,500 AI-automated activities are even better. And if the free tier gives users all the automation they need, it's still a win-win: they get the efficiency they need, but they might find there's a paid tier of another Zapier product that helps them optimize their workflows even better.

As with many products, Apple was the tech that launched a thousand ships—and in 2014, it was wearable fitness gear. Fast forward to today—many companies have joined the space and are trying to stand out. One example is Oura.

The wearable fitness ring is one of many in the industry that utilizes subscription pricing . First, the company emphasizes the design and quality of its ring and the accuracy of its fitness readings, thus building demand. Once consumers are fully bought into the product, they're met with a $300 initial price—combining a premium pricing strategy—and $5.99 per month thereafter. This subscription approach keeps customers on the Oura books long after the initial purchase.

Ask your average American what they know about Sweden, and they'll likely reply with some variation of meatballs, furniture, and fish (Swedish Fish, that is)—and they can thank retail goliath IKEA for the first two. Since the brand's inception, consumers have been captivated by its shopping experience and hypnotized by its expert pricing structure.

While the brand deploys several different pricing strategies, one of the most impactful is economy pricing . While some economy brands cut costs in the product itself, IKEA cuts costs in everything but the product. The company follows a repeatable design process, has world-renowned supply chain management, and operates with a self-service shopping experience—all things that save money. The result is decent-quality furniture at affordable prices. 

When most people think of dynamic pricing , they relive memories of paying for a $167 Uber to get home from the bar or a $2,500 plane ticket they had to book at the last minute. But dynamic pricing is present in the B2B world, too, and you don't need to look further than Google Ads.

Factors to consider when pricing a product

I know I just said cost wasn't the only factor to consider, but it is the most important one to start with. If your prices aren't higher than your costs, you'll be out of business before you even get your company off the ground.

When calculating costs, make sure you include:

Product materials

Employee wages (that includes what you pay yourself!)

Overhead costs (rent, insurance, utilities, taxes, etc.)

Software and services for things like accounting, marketing, and legal

Shipping and transportation

Economic factors

Competitor pricing, positioning.

It's a common misconception that businesses have to sell good-quality products to be successful. There are buyers at every price and quality level; what matters is how your product quality and price are positioned with respect to each other.

One of the easiest industries for demonstrating this concept is the airline industry, because there's no way to mistake the difference between a high- and low-quality purchase when there's a literal curtain dividing them. Normally, price and quality will align with one another. First-class tickets offer high quality at a high price, economy tickets offer low quality at a low price, and everyone else gets piled into coach. 

Value prices occur when quality is higher than price—when you fly during off-peak times or get upgraded to first class for free. When demand is high and seats are limited, the airlines can afford to charge higher prices for lower-quality seats, counting on the fact that you'll pay full price for a terrible seat if it's your only option.

Customer profiles

For example, let's say you’re starting a business that sells running shoes. After intensive research, you may find that your customer profile is a middle-class woman in her 30s who lives in California and mostly finds time to run in the evenings after work. In that case, your pricing strategy should best appeal to middle-class women in their 30s who live—well, you get the idea. The more specific you can get with these profiles, the more effective your pricing will be because you'll gain insights into what they can afford and what they're willing and able to pay for a product.

Tips for setting a pricing strategy that sells

You can have all the information in the world, but without the right action plan, you run the risk of falling flat. Here are some tips to guarantee you get off on the right foot when setting your pricing strategy.

Review your historical data

Start your pricing strategy methodology by analyzing historical sales data to identify patterns in sales volumes and pricing figures. If you've experimented with pricing in the past, take note of how that related to revenue over that period. Or, maybe you can glean information from that surge of sales in April 2019 that your staff tells campfire stories about to this day. When you review past data, you can gain insight into what caused increases or decreases in sales—and what prices correlate with those figures.

Consult your customers

Customers are the lifeblood of your organization—if you don't appeal to them, you're out of business. So, be sure to make every move with your customer profiles in mind. Would that middle-class woman in her 30s be able to afford $299 running shoes? If not, be sure to adjust pricing to match her expectations (so long as it falls within the WTP price range).

Another technique to understand optimal pricing is to conduct surveys, focus groups, or other ways to gather customer feedback. You can ask them questions related to how much they're willing to pay, what factors influence their purchasing decisions, their perceived value of your product, and more. This can not only improve your pricing strategy but show your customers that you value their thoughts.

Nail your value proposition

Gordon Ramsay could cook the most perfect beef Wellington in history, but if he's serving it to a lunchroom full of first graders, they're going to want chicken nuggets instead. The takeaway is that you need to appeal to your audience, and you can do that by developing an expert value proposition.

In all marketing materials, highlight your unique benefits, features, and why your product is perfect for your customers and their budgets. Maybe your running shoes are the most comfortable on the market—transforming that middle-class California woman's after-work run from a workout to a relaxing meditation session. Once you catch your customers' eye, your pricing strategy will be that much more effective.

Experiment with different models

Don't be afraid to experiment with different pricing models to find what works best for your business. For example, you might start with a cost-plus pricing model and then pivot to a value-based model. Or, you may decide to experiment with limited-time promotions and sales or delve into tiered pricing. By testing different approaches, you can gain useful insights into what resonates with your audience. 

Sell more with automation

Businesses need to nail their pricing strategy to win more business and drive revenue. But it's not as simple as throwing a dart and hoping it sticks—you need to be methodical to ensure you resonate with your customers. Once you perfect that approach, you can supercharge it with Zapier.

Pricing strategy FAQ

What are the major pricing strategies.

Successful businesses may use several different pricing strategies, but some of the most popular include:

Value-based pricing

Cost-plus pricing

Economy pricing

Premium pricing

Freemium pricing

If you skipped this entire article just to get to the FAQs, scroll up for 11 more.

How do you set your product pricing?

You should set your product pricing based on factors like how much it costs to make your product, what your competitors are charging, your brand positioning, your customer profile, and any economic or marketplace trends. You also want to align your pricing strategy with your goals to help your business grow and achieve profitability.

What makes a pricing strategy successful?

There are too many factors to name for successful pricing strategies, but two of the most important are understanding your customers and revenue goals. If you're in tune with your customers' expectations and their perceived value of your product, you're more likely to develop an effective pricing method.

Keeping your revenue goals in mind can also help guide you on what you should be charging. If your customer expectations and revenue goals aren't aligned, you'll want to assess the discrepancy—maybe that means engaging in different product marketing or cutting production costs.

Related reading:

This article was originally published in December 2020 by Norm Mclaughlin and has also had contributions from Ben Lyso. It was most recently updated in July 2024.

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Cecilia Gillen

Cecilia is a content marketer with a degree in Media and Journalism from the University of South Dakota. After graduating, Cecilia moved to Omaha, Nebraska where she enjoys reading (almost as much as book buying), decor hunting at garage sales, and spending time with her two cats.

• Small business
• Sales & business development

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How to Calculate Your Product's Actual (and Average) Selling Price

Published: May 09, 2024

Why would a company purposefully sell items at the same (or different prices) only to average the selling prices later for reporting purposes? Well, the average selling price can reveal a lot about the health of a company.

Read further to get a better understanding of the average selling price and how to calculate it for your business.

Table of Contents

What is a selling price?

What is an average selling price, how can i use an average selling price, how to calculate average selling price, is the average selling price right for your business.

The selling price is how much a buyer pays for a product or service. The selling price can also be known as market, list, or standard price.

The following factors help organizations determine the selling price of their products:

• The price a buyer is willing to pay.
• The price a seller is willing to accept.
• The price that’s competitive in the market.
• The price of COGs (Cost of Goods).

Depending on the type of business you own and the offerings you sell, you might prioritize one of these factors over the others.

Business executives and investors pay close attention to the average selling price because it is a reliable indicator of a company’s financial performance. In most cases, the higher the average selling price of a product, the better. But in some cases, like start-ups or businesses making a comeback, a low average selling price can be a smart, short-term strategy to penetrate the market.

The average selling price can also summarize these factors and help you determine the price you should assign your product.

Remember, your average selling price and “the interplay between demand and supply serves as a barometer of economic health,” as ecommerce author Neeraj Singh says.

Your pricing model determines your customers, positioning, packaging, channels, and margins.

Ash Maurya , pricing expert and founder of LeanStack, warns, “If you don’t choose your pricing, the market pushes you towards the average. If you chase average pricing, you become average. Don’t leave your pricing for others to determine.”

Pro tip: Creating high demand for a product can greatly influence its selling price. Check out this blog on creating high demand.

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Average selling price (ASP) is the amount of money a product in a specific category is sold for across different markets and channels. This metric is typically affected by the type of product and its life cycle.

For example, electronics have a higher average selling price than books. Alternatively, electronics typically have a shorter product life cycle than books. Take the first generation iPhone and the J.K. Rowling novel, “Harry Potter and the Deathly Hallows.” Both products came out in 2007.

The iPhone and the seventh Harry Potter novel have different life cycles. The 2007 iPhone’s product life cycle immediately shortened with the release of the 2008 iPhone 3G. While it could be considered a collector’s item, its function is effectively useless after years of new devices and software updates.

The novel, however, has an infinite life cycle. As long as people are reading, its product life cycle continues.

Pro tip: It’s important to remember that if you’re running promotions on your ecommerce website, you will want to let retail partners know so they can competitively price the product because you wouldn’t want to hurt your partners’ bottom line in the meantime.

Create a market entry strategy.

If you’re entering a new market, you need to determine the price of your products or services. Using the average selling price facilitates this process.

Once you calculate this metric, your company can use this information to set itself apart as a luxury or value retailer . Based on the ASP, increasing your prices can give your company the appearance of premium products; however, this higher cost can lead to fewer sales. Alternatively, if you set your cost below the ASP, your company might sell more but deal with smaller profit margins.

Pro tip: You will want to keep track of your average selling price and margins over the calendar year. The boundary you have on how often you discount a product and how low it can be is known as your MAP (Minimum Advertised Price) policy.

Identify trends.

Using an average selling price will help your company identify trends in the market. Let’s use headphones to demonstrate this. Say a company like Bose released a set of headphones for $300 last year, and they made 150,000 sales. This year, they released their newest pair at $250 and sold 250,000 units. Although the company dropped the cost of their product, this decrease incentivized more customers to make a purchase and led to a $17.5 million increase.

If a new or existing company was preparing to launch a new product in this industry, identifying this trend could expedite settling on a market price.

Pro tip: Check out this free template to help you conduct market research and identify the best price.

Make conclusions about products and services.

Do you keep a product, or do you scrap it? The average selling price helps your company decide. If you increase your selling price due to ASP and notice a drop in sales, that is not necessarily surprising. Alternatively, if a decrease in your price still leads to a fall in sales, it is time to pay attention. While multiple factors could be at play, ASP will ultimately help you decide if you need to work on a strategy for the product or remove it from your catalog.

Supply and demand also play a key role in determining product quality. Assistant Manager of EU Finance Mohamed Hagag describes this as “supply and demand are fundamental principles in economics that describe the relationship between the quantity of a good or service supplied by producers and the quantity demanded by consumers.”

Pro tip: Marketing and sales should attend any meetings that discuss a product’s end-of-life cycle. Sometimes, a product just isn’t getting the push it needs to succeed rather than needing to be retired.

Average selling price (ASP) is the amount of money a product in a specific category is sold for across different markets and channels. To calculate the average selling price of a product, take the total revenue earned from the product or service and divide it by the number of products or services sold.

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If your business purchases inventory in bulk and sells it, you’ll want your selling price per unit to be higher than what you paid to turn a profit. Otherwise, you’ll break even on revenue. While that’s not as bad as losing money, it’s certainly not as good as making it.

For example, Hot Pie’s Bakery Supply needs to calculate the selling price for its product line of bread machines. The business purchased 20 bread machines for $3,000.

• Total cost of units purchased : $3,000
• Number of units purchased : 20
• Cost price : $150 ($3,000/20)

Now, it’s time to plug the numbers into the selling price formula. The cost price for each bread machine is $150, and the business hopes to earn a 40% profit margin. Here is what the selling price formula would look like in action:

Selling Price = $150 + (40% x $150)

Selling Price = $150 + (0.4 x $150)

Selling Price = $150 + $60

Selling Price = $210

Based on the formula, Hot Pie's Bakery Supply has a selling price. Each bread machine will be sold to buyers for $210.

Let’s fast-forward one quarter. Hot Pie finished the quarter with $4,000 in revenue. The business leaders want to know the average selling price of Hot Pie’s bread machines.

Total revenue: $4,000

Number of products sold: 20

Here’s the formula for the average selling price in action:

Average Selling Price = $4,000 ÷ 20

Average Selling Price = $200

This is an example where the actual selling price and the average selling price don’t match exactly. It happens for several reasons, like introducing a lower-priced sale item to sell inventory faster or an unplanned discount to smooth over a customer interaction. It might also occur if you don’t account for selling price factors.

Pro tip: Selling a product for very little margin or profit is not unheard of and could still be a good strategy. Consider Costco, which sells rotisserie chickens for no or hardly any profit yet gets customers into its store with these sales. Sometimes, margins need to be sacrificed to get the results you want.

Both actual and average selling prices are critical to telling the financial story of a business. If the pricing is not based on what a buyer is willing to pay or competition in the market, you may end up with a pricing strategy that doesn’t make you money.

With the correct selling price in place, your business can earn a profit and win over loyal customers along the way.

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

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Blogs & articles, pricing strategies: how to determine the selling or sale price of a product.

In this blog, we will look at some of the most important factors to consider when setting a product's selling or sale price.

There are many factors to consider when setting a product's selling or sale price. This article will explore some of the most important factors to consider when making this decision. We'll also provide some helpful tips on how to set a competitive price that will help you maximize your profits.

What is the Selling Price?

The selling price of a product is the amount of money you will receive from selling that product. The selling price is determined by several factors, including the cost of the product, the perceived value, and the demand for the product.

Factors that determine the selling price

When setting a selling price for a product, there are several factors to consider.

• The most important factor is likely to be the cost of the product itself. If it costs more to produce the item, you'll need to charge more to make a profit.
• Other essential factors include shipping and handling costs , as well as any taxes that may be applicable.
• You'll also want to consider the competition - what are other similar products selling for?

By taking all of these factors into account, you can arrive at a selling price that is fair and reasonable.

Average Selling Price

When setting a selling or sale price for a product, the average selling price (ASP) is often used as a benchmark. ASP is the average of all the prices at which a particular product has been sold over time.

While ASP can be a helpful guide, it's essential to remember that many factors can affect a product's selling or sale prices, such as market conditions, supply and demand, and even the time of year.

Uses of Average Selling Prices

As a business owner, you may find average selling prices (ASPs) useful for a variety of purposes, including:

-Determining the markup on your products

-Comparing your prices to competitors

-Setting minimum advertised prices (MAPs)

-Calculating cost of goods sold (COGS)

-Creating pricing strategies

Average selling prices can be calculated using data from various sources, including sales receipts, POS systems, and eCommerce platforms. Wholesale ASPs are also available from some manufacturers and distributors.

Selling Price Formula

There is one key formula that you can use to help determine the selling price of a product.

The selling price formula is:

Selling Price = Cost of Production + Shipping and Handling + Marketing + Profit

By understanding this formula, you can begin to break down the costs associated with selling a product and determine what price point will be most profitable for your business.

Calculate the Selling Price Per Unit

When you're ready to start selling your product, the first step is to calculate your selling price per unit. This will help you determine how much profit you'll make on each sale and your overall profit margin.

There are a few different ways to calculate your selling price per unit, but the most important thing is to use a method that accurately reflects the cost of goods sold (COGS). To calculate your COGS, simply add the cost of all the materials used to make your product plus any direct labour costs associated with manufacturing it.

Once you have your COGS, you can choose from various pricing strategies. The most common is adding a desired profit margin on top of your COGS. For example, if your COGS are $10 and you want to earn a 50% profit margin, you would price your product at $15.

Another popular pricing strategy is known as "value-based pricing." With this approach, you first determine how much value your product offers customers, then set your price based on that estimate. For example, if you believe your product is worth $100 to customers, you would price it at $100 regardless of the cost price.

If you're still looking for more clarity, a pricing software like SYMSON can make all the difference by tracking all the variables for you. You can also automate these price changes based on market factors, seasonality, competitor prices etc.

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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Understanding pricing strategies, price points and maximizing revenue.

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Ashley Deland is an award-winning business consultant & owner of Deland Marketing, recognized as winning Business Elite’s 40 Under 40.

Pricing can be challenging for entrepreneurs. As a marketing and business consultant, I've seen that a pricing strategy that’s too low can diminish profit margins, but pricing that’s too high can deter customers.

Finding the ideal price requires a precise strategy that’s appropriate for your brand. The pricing for a product or service needs to consider costs and what the market will bear. The market, or consumers, decide what a product is worth and will only pay so much.

Pricing Strategy Vs. Price Point

A "pricing strategy" is the approach you use to set the ideal price for your product. Your strategy must consider factors such as your revenue goals, product features and audience, as well as competitors' prices, economic trends and consumer demand.

Price points are derived by observing the interaction between the demand and supply curve, which helps brands determine the possible profit margin for a product or service. Several factors contribute to the price points, but the demand and supply of the product or service must remain proportional to the price.

Pricing strategy and price points are often used synonymously with price, but they are different concepts, and it’s important to understand the differences.

Common Pricing Strategies

1. Cost-Plus Pricing: Entrepreneurs and consumers often believe that cost-plus pricing, or markups, is the only way to price products and services. This strategy uses the contributing costs to sell the products with a fixed percentage added to the total. Essentially, you’re choosing the margin. Cost-plus pricing is simple and straightforward, especially for brands with numerous products or services. It’s more efficient to analyze only the most critical products for the bottom line, rather than every individual product.

The disadvantage of cost-plus pricing is that the customer isn’t part of the calculation. With market saturation and stockouts, it could drive consumers to select the bargain option.

2. Competitive Pricing: Competitor pricing means you're considering the prices of similar products or services from competitors and using it to determine your product's price. There are a few types of competitive pricing strategies:

• Cooperative pricing: This matches the prices of competitors down to the dollar to maintain the status quo. Gas stations often use this type of pricing.

• Aggressive pricing: This strategy involves keeping a price “distance” between yourself and your competitors. Regardless of what competitors do, your prices will remain the same or go lower.

• Dismissive pricing: Leaders in the market with premium products or services are in a position to use dismissive pricing. This strategy allows brands to price as they wish without considering the competitors’ prices.

3. Price Skimming: Price skimming is a strategy that is often used for introducing new products with little to no competition. These products charge a premium initially, but then the price is lowered over time. I've seen that this strategy is common in technology. The company launching the first technology solution of its kind has the advantage of being able to set the price and attract early adopters, thus recouping some of the development costs. Once the market becomes saturated, the company lowers the prices to reach the price-sensitive segments of the market. This is sustainable if the product is in demand long enough to execute a full skimming strategy.

But keep in mind that the risks of this strategy include copycat products, which might be introduced at a lower price to start. These competitors can take the sales potential at the end of the skimming strategy. Companies must also demonstrate the value of the product immediately and build anticipation; otherwise, it might not appeal to the crucial early adopters.

4. Penetration Pricing: Penetration pricing is a valuable strategy for a market with numerous similar products and price-sensitive customers. By entering the market with a low price to start, you can build a customer base and motivate customers to switch brands. As demand increases, the increase in sales volume can facilitate economies of scale and reduce the per-unit cost to widen the profit margin.

Video game system companies often use penetration pricing to establish a standard, knowing that they’ll recoup their profits elsewhere. The game system itself might be inexpensive, but the company makes money from the purchase of games that are designed for that system.

There are disadvantages to penetration pricing, however, as consumers could come to expect low prices, and price-sensitive consumers might seek out competitors. This can launch a pricing war between yourself and your competitors.

5. Value-Based Pricing: Value-based pricing relies on perceived value to the customer. Typically, this strategy has a higher profit margin and aligns with the customer’s perspective. If the price isn’t ideal, it can be adjusted to better suit the market. However, commodity-like products and services in a saturated market are more likely to compete for low prices and can’t leverage value-based pricing.

Determining Price Points

Price points are determined using a hypothetical demand curve that illustrates the relationship between the demand of a product at a particular price. According to economic theory, when the price of a product rises, the demand for said product should decrease. Pricing is fluid, however, and sellers often test different price points on the curve to determine what the outcome would be.

Keep in mind that having the lowest prices might not result in the highest profits. In fact, it could drive you out of business. Conversely, setting prices that are too high for the perceived value will ensure that few customers make a purchase.

Price thresholds are also strongly linked to price points. The threshold price point implies the psychological linking of prices to entice shoppers up to a particular threshold, so they’ll pay the maximum acceptable price without compromising brand loyalty.

Setting Your Ideal Prices

Pricing is rarely a quick and simple process. Together, pricing strategies and price points can help you ascertain the ideal price for your brand positioning, market and perceived value to ensure the maximum profit margin with optimal customer loyalty.

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How to calculate selling price for your products

Discovering that sweet spot between calculating a selling price and making a decent profit can be quite daunting. This article will help you tackle this challenge and find the best pricing strategy for your manufacturing business.

James Humphreys

Calculating the right selling price is one of the hardest things to get right in any business.

You’ve worked hard manufacturing your goods, and your items are ready to hit the market. But, when it comes to the price you’ve set, are you undervaluing your goods? Or are you way overpricing them?

Failing to get your pricing right can drive away customers and conversions on your e-commerce site.

That’s why we’re sharing a selling price formula in this article so you can learn how to price a product.

The longer you leave this question unanswered, the longer you’ll be losing money. Setting the right price is essential since your efforts will be undone by not focusing on this. By the end of this article, you’ll be able to calculate your selling prices and know all the best techniques for implementing them.

1. What is the selling price?

The selling price, whether of a product or service, is what the customer or client is charged. It’s the price tag on an item you see in a store or the amount you pay when you purchase something online. Beyond just being a number, the selling price is a crucial aspect of the business world.

It’s extremely important to know how to calculate a selling price because if you don’t make a profit while also securing a position in the market, your business won’t survive.

In short, successfully utilizing the selling price formula is a win-win for you and your customer. If done correctly — they get a good deal, and you get a fair price.

For  direct-to-consumer brands , you may be able to charge more if your brand image is in high demand, which is what many brands dealing with apparel inventory do, like Adidas or Nike.

Still, you’ll need a solid portfolio of great quality products and a powerful marketing campaign to justify your prices. To ensure high-quality products, take a look at the production quality control checklist .

2. What is the average selling price?

The average selling price (ASP for short) is the price you charge your clients for goods or services.

It’s a key metric that businesses use to evaluate their pricing strategy and performance. It refers to the average price at which a product or service is sold over a specific period of time, usually calculated by dividing the total revenue generated from sales by the total number of units sold.

Understanding the average selling price is essential for businesses because it provides valuable insights into the effectiveness of their pricing decisions.

How to calculate average selling price?

It’s critical to calculate your ASP as it allows you to monitor trends and make predictions on the marketplace. If you’re a start-up manufacturer, it can be a great way to determine a pricing strategy .

To find the average selling price, follow this formula:

Average Selling Price = Total Revenue / Number of Units Sold

Total revenue — Add up the total amount of money generated from all sales of the product or service during a specific period. This figure represents the combined sales value.

Number of units sold — Count the total number of units (products or services) sold during the same period. This number represents the total quantity of items sold.

Divide the total revenue by the total number of units sold. The result will be the average selling price.

For example, let’s say you run an online store that sells T-shirts. During a month, you sold 200 T-shirts, generating a total revenue of $4,000. To calculate the average selling price we divide the total revenue of $4,000 by 200 T-shirts, getting an ASP of $20 per T-shirt.

The average selling price of the T-shirts for that month is $20. This means that, on average, each T-shirt was sold for $20 during that specific period.

Cost Price Vs. Selling Price

Cost Price:  The price 3rd party sellers pay and incur for purchasing items from a manufacturer.

Selling Price: The amount at which the 3rd party sells the item to their customers.

NOTE:  If you sell directly to consumers, you’ll be looking at the selling price too.

3. How to calculate the selling price of a product — the formula

To cut a long story short, you’re always aiming to make a profit. Otherwise, your business won’t grow.

Now, the longer version. As a manufacturer calculating selling price, you’re going to need first to calculate your cost price, otherwise known as manufacturing cost , using this formula:

Cost price =   Raw Materials  + Direct Labor +  Allocated Manufacturing Overhead

Let’s say the cost price of an item is $50.

You need to charge more than this figure to make a profit. However, a rule of thumb is to add a 25% mark-up — a technique known as cost-plus or mark-up pricing.  Your selling price formula will look something like this:

Selling price =  Cost price x 1.25 SP =  50 x 1.25 

In this case,  the selling price would be $62.50.  However, you need to consider other factors, such as:

• Competitors prices
• Are you selling premium or value products
• Your marketing tactics

Overall, balancing these elements will lead you to success and increased profitability.

Pro tip: There’s also an alternative way how to calculate the selling price using your profit margin.

Selling Price = Cost of Goods + (Margin Percentage x Cost of Goods)

With this formula, you can easily determine the selling price for your products while ensuring you achieve the desired profit margin on each sale.

4. Types of selling price calculations

1. Planned profit pricing

Planned profit pricing combines your cost per unit with the projected output for your business.

You can use it to work out if your business will be profitable at your current pricing strategy. If not, you can increase prices or increase output. The flexibility makes it suitable for all manufacturing businesses.

2. What the market will bear (WTMWB)

This pricing charges the maximum (or very close to the maximum) for what the market allows.

If an item costs $100 to manufacture, and the most a customer will pay for it is $500 — this is the market limit. This is a pricing strategy that can lead to the highest profit margins. But beware — this is not a sustainable strategy — charging at the upper limits of what the market can bear leaves the field open for a wily competitor to undercut your prices easily.

In short, it leaves you vulnerable to your competitors’ pricing strategy.

3. Gross profit margin target (GPMT)

After you know how to determine the selling price, you can work out the GPMT of your business.

Say a company has $10,000 in revenue, and the cost of goods sold (COGS) is $6,000. $10,000 minus $6,000 leaves you with a $4,000 gross profit. Dividing this with the original $10,000 leaves you with a gross profit margin of 0.4 or 40%.

Many manufacturing businesses aim for a GPMT of  at least 20% , but this depends on your industry and costs. You can use this metric to analyze progress to your ideal gross profit margin and adjust your pricing strategy accordingly.

Gross Profit =  Total Revenue – Cost of Goods Sold Gross Profit Margin =  Gross Profit / Revenue

4. Most significant digit pricing

This is why a retailer is more likely to price a product at $19.99 rather than $20.00.

Customers are more likely to make a purchase when it is $19.99 because our brains tell us — “Less than $20.00? It’s a bargain.” Other industries tend to use this technique, such as those in real estate. You can try it yourself.

Take the previous price of $62.50. Would $59.95 be the more enticing price that leads to higher profits?

5. How to find the best pricing strategy

If your pricing strategy is the same as your competitor’s, then it’s like missing out on utilizing a helpful tool.

Like it or not, customers infer a lot of information about your business from your prices. Another thing — the results of price changes are not always linear. For example, a company could raise its prices by 1% and see  overall profits increase  by far more than that, even if demand remained the same.

The best strategy you can apply is a flexible one.

For example,  WTMWB (What the Market Will Bear)  is better during short periods when you need to recoup costs quickly, such as releasing a new  SKU after a period of research and development. Cost-plus pricing is how to find the selling price per unit. In contrast, GPMT helps you decide if this approach can scale up.

Once you come up with a suitable price, you can apply the most significant digit pricing.

Commit to changing your price for a set minimum time and stick to that plan. Don’t keep changing prices, as this could reduce your customers’ trust in you.

6. Pricing strategy case study

Let’s use the example of furniture manufacturers to illustrate the steps to finding a pricing strategy.

You know your manufacturing costs and resources spent, but is this enough to add a markup and call it a day? Definitely not. Pricing is contingent on the current state of the marketplace and where your products fit into it.

First, you need to understand your market.

Do all the research you can on the criteria of furniture pricing. These could be:

• Direct-to-consumer prices
• Wholesale prices
• Consignment prices
• Any area that deals with selling furniture inventory

You need to figure out how your product fits into the current landscape.

It’s good to set a minimum price that you will not go below. If you think of boundaries like this, it helps you think clearly in the stressful tasks of pricing and negotiation. Don’t undersell yourself or go below your minimum price.

7. Pricing strategy quickfire tips

• Have a strategy, and stick to it
• Use pricing analytics to record manufacturing trends and predict future market changes
• Look at the whole picture, not just on a transaction-by-transaction basis
• Adopt a value-based approach to customer satisfaction
• Don’t use a one-size-fits-all approach to pricing. Be adaptable. Create pricing plans and product variations for customers with different needs

With these tips and some flexibility, you can steer your business straight to greater profits and customer satisfaction.

8. How to calculate the selling price with Excel

Now you know why finding the right pricing strategy for your business is so important.

But it’s just as important to find the best software to figure out how to determine the price of your products. Solutions like Excel can be an incredibly valuable tool for businesses when it comes to calculating the selling price. It offers various functions and features that make the process more efficient and accurate.

Here are some ways Excel can assist with calculating the selling price:

• Easy formulas — Basic arithmetic operations in Excel allow users to create custom formulas. It’s simple to set up a formula to calculate the selling price based on factors like COGS, overhead costs, and desired profit margin.
• Flexibility — Excel offers the flexibility to change input values quickly. Adjust your costs or profit margins and instantly see how it affects the selling price. This way, you can explore different pricing scenarios and find the most suitable option for your business.
• Time efficiency — Save time and effort compared to manual calculations with Excel’s automatic calculations. Once the formula is set, it can be applied to multiple products or services.
• What-If Analysis — Using Excel’s “What-If Analysis” tools allows you to project outcomes based on various input values. This helps assess how changes in costs or profit margins impact the selling price and overall business profitability.
• Data visualization — Excel offers charting and graphing options to visualize pricing data. These visuals help compare selling prices, track customer trends, or analyze the value of different products.
• Precision and accuracy — Excel handles large quantities of data and complex calculations, accurately determining selling prices.
• Trend and demand analysis — By organizing past selling prices and sales data, Excel facilitates analysis of historical trends and patterns, aiding data-driven pricing decisions.
• Availability — Excel is widely available and commonly used across industries, making it a convenient choice for selling price calculations for any business.

9. Combine a great selling price strategy with manufacturing software

Performing audits manually or in a spreadsheet that needs regular updating can slow down your business or even reveal that you’ve been pricing your items incorrectly. The best solution to determining how to calculate the selling price is to adopt a cloud-based manufacturing system with real-time monitoring and automatic cost price calculations, such as Katana.

Katana helps manufacturers take control over their production,  carrying costs , and  work-in-progress costs , but also helps with calculating selling prices by looking into:

• Your material costs
• Production operation costs

This will allow you to quickly get a better overview of your costs and make better pricing decisions.

You can check out the video below for a better understanding of how to track the costs of materials and products in Katana.

Surely, by now, you’ve figured out a few tips and tricks on how to skyrocket your business and profits. So go, grab that calculator, and put the formulas to good use. Just don’t forget us when you’re a hot-shot enterprise with billboards around the world.

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The pricing strategy guide: Choosing pricing strategies that grow (not sink) your business

Choosing the pricing strategy for your business requires research, calculation, and a good amount of thought. Simply guessing may put you out of business. Here's what you need to know.

Definition of pricing

What are pricing strategies.

• Importance of pricing strategy

Top 7 pricing strategies

• 3 real-world examples
• How to create your strategy
• Determine value metric
• Customer profiles & segments
• User research & experiments
• Bonus: 10 data-driven tips
• Industry differences
• Final takeaway

Pricing strategies FAQs

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Too many businesses set their pricing without putting much thought into it. This is a mistake causing them to leave money on the table from the beginning. The good news is that taking the time to get your product pricing right can act as a powerful growth lever.  If you optimize your pricing strategy so that more people are paying a higher amount, you'll end up with significantly more revenue than a business who treats pricing more passively. This sounds obvious, but it's rare for businesses to put much effort into finding the best pricing strategy.

This guide will cover everything you need to know about setting a pricing strategy that works for your business. 

Check out this introduction video made by the Paddle Studios team.

Price Intelligently is Paddle’s dedicated team of pricing and packaging experts for SaaS and subscription companies. We combine unrivaled expertise and first-party data to solve your unique pricing challenges, break the mold, and catapult your growth.  Learn more

Pricing is defined as the amount of money that you charge for your products, but understanding it requires much more than that simple definition. Baked into your pricing are indicators to your potential customers about how much you value your brand, product, and customers. It's one of the first things that can push a customer towards, or away from, buying your product. As such, it should be calculated with certainty.

Pricing strategies refer to the processes and methodologies businesses use to set prices for their products and services. If pricing is how much you charge for your products, then product pricing strategy is how you determine what that amount should be. There are different pricing strategies to choose from but some of the more common ones include:

• Value-based pricing
• Competitive pricing
• Price skimming
• Cost-plus pricing
• Penetration pricing
• Economy pricing
• Dynamic pricing

Pricing is an underutilized growth lever

Many companies focus on acquisition to grow their business, but studies have shown that small variations in pricing can raise or lower revenue by 20-50%. Despite that, even among Fortune 500 companies, fewer than 5% have functions dedicated to setting the best price possible. There's a missed opportunity in the business world to see immediate growth for relatively little effort. 

Navigating PLG billing and pricing? Read our latest guide on product-led SaaS

Because most businesses spend less than 10 hours per year thinking about pricing, there's a lot of untapped growth potential in optimizing what you charge. In fact, choosing the best pricing method is a more powerful growth lever than customer acquisition. In some cases, it can be up to 7.5 times more powerful than acquisition. 

The importance of nailing your pricing strategy

Having an  effective pricing strategy  helps solidify your position by building trust with your customers, as well as meeting your business goals. Let's compare and contrast the messaging that a strong pricing strategy sends in relation to a weaker one.

A winning pricing strategy:

• Portrays value

The word cheap has two meanings. It can mean a lower price, but it can also mean poorly made. There's a reason people associate cheaply priced products with cheaply made ones. Built into the higher price of a product is the assumption that it's of higher value.

• Convinces customers to buy 

A high price may convey value, but if that price is more than a potential customer is willing to pay, it won't matter. A low price will seem cheap and get your product passed over. The ideal price is one that convinces people to purchase your offering over the similar products that your competitors have to offer.

• Gives your customers confidence in your product 

If higher-priced products portray value and exclusivity, then the opposite follows as well. Prices that are too low will make it seem as though your product isn't well made.

A weak pricing strategy:

• Doesn't accurately portray the value of your product

If you believe you have a winning product, and you should if you are selling it, then you need to convince customers of that. Setting prices too low sends the opposite message.

• Makes customers feel uncertain about buying

Just as the right price is one that customers will pull the trigger on quickly, a price that's too high or too low will cause hesitation.

• Targets the wrong customers

Some customers prefer value, and some prefer luxury. You have to price your product to match the type of customer it is targeted towards.

Let's now take a closer look at the seven most common pricing strategies that were outlined above with more from Paddle Studios .

Click on any of the links below for a more in-depth guide to that particular pricing strategy.

1. Value-based pricing

With value-based pricing, you set your prices according to what consumers think your product is worth. We're big fans of this pricing strategy for SaaS businesses.

2. Competitive pricing

When you use a competitive pricing strategy, you're setting your prices based on what the competition is charging. This can be a good strategy in the right circumstances, such as a  business just starting out , but it doesn't leave a lot of room for growth.

3. Price skimming  

If you set your prices as high as the market will possibly tolerate and then lower them over time, you'll be using the price skimming strategy. The goal is to skim the top off the market and the lower prices to reach everyone else. With the right product it can work, but you should be very cautious using it.

4. Cost-plus pricing 

This is one of the simplest pricing strategies. You just take the product production cost and add a certain percentage to it. While simple, it is less than ideal for anything but physical products.

5. Penetration pricing

In highly competitive markets, it can be hard for new companies to get a foothold. One way some companies attempt to push new products is by offering prices that are much lower than the competition. This is penetration pricing. While it may get you customers and decent sales volume, you'll need a lot of them and you'll need them  to be very loyal  to stick around when the price increases in the future.

6. Economy pricing 

This strategy is popular in the commodity goods sector. The goal is to price a product cheaper than the competition and make the money back with increased volume. While it's a good method to get people to buy your generic soda, it's not a great fit for SaaS and subscription businesses.

7. Dynamic pricing 

In some industries, you can get away with constantly  changing your prices  to match the current demand for the item. This doesn't work well for subscription and SaaS business, because customers expect consistent monthly or yearly expenses.

Three real-world pricing strategy examples

Real-world pricing strategy examples are the best way for a business to better understand the above-listed pricing strategies. Evaluating other businesses' approaches can be a good starting point but keep in mind that the right pricing strategy is based on math, market research, and consumer insights. For now, let’s look at the pricing strategy examples of some of the biggest brands of today: 

1. Streaming services 

Have you noticed that you pay roughly the same amount for Netflix, Amazon Prime Video, Disney+, Hulu, and other streaming services? That's because these companies have adopted competitive pricing , or at least a form of it, called  market-based pricing .

2. Salesforce

When Salesforce first came out, they were the only CRM in the cloud. (It wasn't even called 'the cloud' back then!) Armed with ground-breaking deployment and a target customer of a large enterprise, Salesforce could charge what they wanted. Later, after they'd grown, they were able to lower prices so small businesses could sign up. This is a classic example of  price skimming . 

3. Dollar Shave Club

At one time, you couldn't turn on your TV without an ad for Dollar Shave Club telling you how much cheaper they were than razors at the store. Although an aggressive  marketing strategy  and advertising like that is unusual for the pricing model, they were nevertheless employing economy pricing. It worked out well for them. They were acquired by Unilever in 2016 for a reported $1 billion.

How to create a winning pricing strategy

In the beginning, the actual number you're charging isn't that important.

There are some exceptions, but for the most part, you should first be figuring out the range you're in: a $10 product, $100 product, $1k product, etc. Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you.

Instead, understanding the following is much more important:

• Finding your  value metric
• Setting your ideal  customer profiles and segments
• Completing  user research + experimentation

This video from Paddle Studios goes deep on mastering a winning pricing strategy.

Step 1: Determine your value metric

A “ value metric ” is essentially what you charge for. For example: per seat, per 1,000 visits, per CPA, per GB used, per transaction, etc. 

If you get everything else wrong in pricing, but you get your value metric right, you'll do ok . It's that important. Partly because it bakes lower churn and higher expansion revenue into your monetization.

A pricing strategy based on a value metric (vs. a tiered monthly fee) is important because it allows you to make sure you're not charging a large customer the same as you'd charge a small customer.

If you remember your high school or college economics class, the professor put a point on a demand curve for the perfect price and said “the revenue a firm gets is the area under that point.” The problem here is: what about all that other area under the curve?  You’re missing out on that revenue by charging a flat monthly fee.

“Good, better, best” pricing strategy is a bit more advantageous, because you end up with three points on our trusty demand curve, and thus more revenue potential. You see this problem among many eCommerce businesses and retailers whose products are constrained by being physical goods—the car with the basic package vs. the car with the stereo and sunroof vs. the car with everything. In software, it’s thankfully dying out, but you’ll still see it with mass-market products:  Netflix, Adobe Creative Cloud, etc.

A value metric, however, allows you to have essentially infinite price points—maximizing your revenue potential. In practice, you’ll never show infinite price points on your pricing page , sales deck, or mobile conversion page, but you may have a new customer come in at a certain level and then grow.

Value metrics also bake growth directly into how you charge because as usage or the amount of value received goes up (and those are not the same thing), the customer pays more. If they end up using or consuming less, they pay less (and thus avoid churning). This is why companies using value metrics are typically growing at  double the rate with half the churn and 2x the expansion revenue  when compared to companies that charge a flat fee or where the only difference between their pricing tiers are features.

To determine your value metric, think about the  ideal essence of value  for your product—what value are you directly providing your customer?

In B2B, it's likely going to be money saved, revenue gained, time saved, etc. In  DTC , it may be the joy you bring them, fitness achieved, increased efficiency, etc. Obviously, we can't measure all of these, but if you can,  and  your customer trusts your measurement (meaning you say you saved them $100 and they agree you saved them $100), that’s your value metric.

As an example, the perfect value metric for  Paddle Retain  (our churn recovery product) is how much churn we recover for you. We can measure this, and our customers agree to the measurement, so we can charge on that axis. Other pure value metric products include  MainStreet , which handles government paperwork to automatically get you back tax credits—you pay a percentage of the money saved.

Most of you won't have a pure value metric, so the next step is to find a proxy for that metric. Take for example  HubSpot ’s marketing product. Their pure value metric is the amount of revenue their tool drives for your business. This is hard to measure and hard for the customer to agree to in terms of what percentage of credit HubSpot deserves for revenue from a blog post. Proxies for HubSpot are things like the number of contacts, number of visits, number of users, etc.

To find the right proxy metric, you want to come up with 5-10 proxies and then talk to your customers and prospects. You’ll typically find 1-2 of these pricing metrics will be most preferred amongst your target customers. You then want to make sure those 1-2 also make sense from a growth perspective. Your larger customers should be using/getting more of the metric, whereas your smaller customers should be using/getting less of the metric. You also want to make sure the metric encourages retention.

When we look at HubSpot, if they were to primarily price on “number of seats”, folks could share a login and HubSpot wouldn’t make much more money on large customers vs. small. Ironically they wouldn’t get as many people invested in HubSpot, because there’d be friction to adding additional seats. Instead, if they give unlimited seats and price based on “number of contacts” there’s minimal friction to getting as many people into HubSpot as possible to do activities (e.g., blog posts,  email campaigns , landing pages, etc.) that then produce contacts.

The result: HubSpot’s marketing product’s value metric is “contacts”, which ensures growth is baked directly into how they make money. The usage drives the metric, which therein drives revenue. Most importantly customers small, medium, and large are all paying at the point they see the value and then can grow.

Some other examples:

• Wistia  charges by the number of videos or channels you use/have
• Zapier  invented the concept of zap (connection of software) and charge based on time to connect
• Theater in Barcelona charged based on the number of laughs
• Husqvarna  charges based on time for lawn care products vs. making you buy them
• Rolls Royce  charges per mile for airplane engines. They own the engines on the plane you own and do all the maintenance. Cool model.
• Fresh Patch  charges based on the amount of grass you want per month for your dog—yes they deliver grass to you monthly

As a side note, you should stop pricing based on seats for products where each seat doesn’t provide a unique experience. For instance, imagine you're an AE using a CRM. If you log into the account of the AE sitting next to you, you can’t really do your work because you are only seeing their leads and accounts. Conversely, if you were a marketing exec and were to log in to another marketing manager’s account in HubSpot, you could do all the work you need to. Thus, for the latter, seats are not the right value metric.

Per-seat pricing is a relic of the  perpetual license  era when we couldn’t measure usage or value enough within our products. We’re beyond that point, so use the above as a good litmus test.

Step 2: Determine your customer profiles and segments

The second key component of your pricing strategy is determining your target segment and ideal customer profile. We've all heard about personas, and you may be rolling your eyes at the concept, but most personas are useless because they aren’t quantitative enough. When used properly, quantified personas and segments are beautiful tools. The information needs to go beyond just cute names like “Startup Steve" with a cute avatar, and cute meetings where people tell you they’re targeting "developers."

To get quantified personas, you need to pull out a spreadsheet.  Here’s a template  you can use.

1. Columns: Customer profiles you're targeting

These can take many forms, but the ultimate goal is to be as specific as possible so that you not only know who you’re targeting but how to monetize and retain them. Pragmatically, you typically separate these customer profiles based on size or role (or both). For example, a marketing automation product may target the following profiles:

• Marketing leaders (Director and higher) at companies $1M to $10M
• Marketing leaders (Director and higher) at companies $10.01M to $50M
• Marketing leaders (Director and higher) at companies $50.01M to $100M

The point is you can’t be everything to all people and you need to understand who you’re targeting in order to make better decisions.

2. Rows: Characteristics of each profile to help you differentiate between them

• Most valued features
• Least valued features
• Willingness to pay
• Lifetime value (LTV)
• Customer acquisition costs (CAC)
• ... and any other metric or category you think could be useful

If you're just starting out or you don't have some of this data, it’s fine. Still fill it out though with your hypotheses. You know  something  about your customers.

Next, you then need to validate (or invalidate) the most pressing hypothesis in that spreadsheet based on the decisions you’re going to make. If you're going to validate a new feature for a particular segment, then that's where you should start. Price point the biggest question? Start by researching the price point with each of these roles/segments.

If you don't know who your key roles/segments are, there's no way in hell you’ll set up an efficient growth flywheel, let alone an optimized pricing strategy. Personas act as a constitution within your business to centralize your focus and arguments about direction.

If you don't do segment and persona analysis, you better be able to raise a ton of money. I guarantee you there's some persona or segment on some vision document or in that euphoric part of your entrepreneurial brain that is completely wrong for your business. I see it all the time. Even I—someone who thinks about segments and customer research all the time—fall prey to being an absolute idiot with who we should target.

When we built  ProfitWell Metrics (our free subscription metrics tool) I thought we were geniuses who were going to be billionaires. Turns out analytics products are terrible. Willingness to pay for them is terrible; retention for them is terrible; NPS is terrible. Everything is just terrible, mainly because customers don't appreciate graphs or at least aren't willing to pay much for them. When we did our research this became obvious and put us 18 months ahead of our competitors, pushing us to change up the positioning of the product to freemium, which has fueled our business ever since (oh and our NPS is 70, because we massively over-deliver a free product better than the paid competition).

Never underestimate the power of focusing on the customer through research. You should never, ever just do what they ask, but you need to be an anthropologist who knows them better than anyone else.

Step 3: User research + experimentation

Beyond your value metric and core segments, the monetization game becomes extremely tactical and research-based. Figuring out your price point involves researching those segments and then making decisions in the field. Same with discounting, add-on, and packaging strategies. The point: monetization is never finished because it’s the very essence of translating your value into an optimal framework for your target customer segments.

Practically this is why you should be experimenting with your monetization every quarter. Experimentation can get tricky and have a few quirks, but you’ll find it’s similar to most growth frameworks out there (which are all versions of the scientific method).

Here’s a good prioritization list of what business owners should attack in optimizing their  monetization strategy  once they have the core segments and value metric figured out:

Priority 1: Foundational [see above]

• Core customer segments
• Value metrics

Priority 2: Core

• Order of magnitude price point (are you a $10 product vs. a $500 product)
• Positioning and value props

Priority 3: Optimizations

• Add-on strategy
• Specific price point (are you a $10 product vs. a $11 product)
• Price localization/internationalization
• Discounting strategy
• Contract Term optimization

Priority 4: Growth accelerators

• Market expansion (going up or down market)
• Vertical expansion
• Multi-Product

Your true order of operations with monetization will vary, but for the most part, all companies should work through the foundational and core sections before moving to the optimizations and growth accelerators. If you’re larger or there’s a fire, you may start with an optimization. In fact, this is sometimes a good idea. Something more scoped like “price localization” can help get momentum, be a forcing function to clean up tech and experimentation stacks, and mitigate political conversations. Remember, monetization is something that’s important, uncomfortable, and something you likely don’t know much about, so progress is better than nothing. Start small. You can (and should) always do more.

Bonus: 10 rapid-fire pricing strategy tips rooted in data⚡

In case you're still hungry for more tips on nailing your pricing strategy and achieving maximum profitability, look no further. We've got you covered:

1. You should  localize your pricing  to the currency and willingness to pay of the prospect's region

• Revenue per customer is 30% higher when you just use the proper currency symbol
• Having different price points in different regions increases revenue per customer further, and is justified based on different consumer demands in different regions

2. Freemium is an acquisition model, not a part of pricing

• Think of  freemium  as a premium ebook driving leads, not another pricing tier
• Don't do freemium until you truly understand how to convert leads to customers, because you’ll end up increasing noise or false positives when you’re trying to figure out your segment beachheads. The best folks who deploy free typically don’t implement freemium until two to three years into their business. The exceptions to this notion are if you have a very specific need or network effect (eg., marketplaces, social networks, etc.) or if you have a top 50 growth person on your team.
• To be clear, we're not saying DON’T do freemium. we're saying it's a scalpel, not a sledgehammer that requires thought. A lot of people end up reading our articles on freemium and end up going, “Cool, let’s do freemium and we’ll be a unicorn.” I’m being pragmatic in that you need to realize freemium is fantastic, but doing freemium properly takes a lot of effort and nuance.
• Paid users who convert from free tend to have higher NPS, better retention, and much lower CAC .

3. Value propositions matter oh so much

In B2B value propositions can swing willingness to pay ±20%, in DTC it's ±15%

4. Don't discount over 20%

In some verticals discounting over 20% may be fine, but you're likely not in one of them (although you may think you are), but the size of the discount almost perfectly correlates with higher churn. Large  discounts  get people to convert, but they don't stick around.

5. For upgrades to annual discounts, don't use percentages and try offers

Percentages don't work as well as whole dollar amounts for discounts (ie., "one month" will work better than "X percent off"). Annuals see much lower churn rates.

6. Should you end your price in 9s or 0s? Depends on your price point

Ending your prices in 9s evokes a discount brand, making the customer feel like they're getting something. Ending in 0 evokes luxury or premium, making them feel like they're getting a high-end product. Studies on this for technology products are inconclusive. We have seen it increase conversion in lower-cost products, but retention isn't as good with those customers.

7. You should experiment with your pricing in some manner every quarter

This doesn't mean change you should the price point each quarter, but experiment with variable costs. More changes correlate with increasing revenue per customer. Like all things, focusing on something makes you improve it.

8. Case studies boost willingness to pay quite a bit

Social proof is important.  Case studies  that offer proof of the high quality of your products can boost willingness to pay by 10-15% in both B2B and in DTC.

9. Design helps boost willingness to pay by 20%

This graph didn't look this way 10 years ago when design didn't do much for willingness to pay. Today, affinity for a company's design can boost willingness to pay considerably.

10. Integrations boost retention and willingness to pay

The more integrations a customer is using, typically the higher their willingness to pay and the better their retention. I wouldn't charge for the integrations, but I'd use this as a tool to get people hooked in and paying more or buying different add-ons.

Pricing strategies for different industries

Pricing strategies are not one size fits all. Finding the proper pricing strategy is dependent on your industry, as well as your company's unique objectives. But to give you an idea, we've listed a couple of industries and strategies that are well suited for each other. 

SaaS/Subscriptions

For SaaS and subscription-based businesses, value-based pricing is the winner hands down. As long as your customers are willing to pay, you can charge much more than your competitors.  Because your price is based on how much customers will spend, it isn't artificially lowered like other methods that fail to account for that. 

We also like value-based pricing for B2B companies. Value-based pricing requires you to look outward and understand your customers better. This is good for finding the optimal price, but it's also good for building optimal relationships that will also help grow your company. 

No more price guessing, just pricing that works

Accurately pricing your product for maximum growth requires a lot of market research and even more expertise on how to conduct and analyze that research. Our Price Intelligently  service combines our years of experience in the field with powerful machine learning tools to understand your target customer base and what makes them tick. We know the data to collect, the questions to ask, and the people to ask them of. This is important because businesses in different stages of growth need different strategies for evaluating pricing. Additionally, every business has a unique set of potential selling points and a unique target audience to pitch to.

You need someone in your corner who knows how to evaluate pricing options for your specific businesses. With our help, you can be confident that your pricing strategy and chosen price points will unlock growth levers at your company that have been sitting idle, because they'll be tailored to finding and maximizing the value propositions that are unique to your business. 

Which pricing strategy is best? 

This depends on your business model. For SaaS and subscription companies, as well as many others, we recommend value-based pricing.

How do you determine the selling prices of a product?

First, find a pricing strategy that fits well with your business model and product. As you've seen, pricing strategies differ, but they all give clear instructions for how to use them to set prices.

What is the simplest pricing strategy?

Since you only need to add up the cost to make your product and add a percentage to it, cost-plus pricing is the simplest form of pricing to use.

What is a pricing curve?

A pricing curve is a graph that shows you the number of people who are willing to pay a given price for a product.

What are the 4 major pricing strategies?

Value-based,  competition-based , cost-plus, and  dynamic pricing are all models  that are used frequently, depending on the industry and business model in question.

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An effective pricing strategy is essential for continued sales success. Here's how to determine the right tactic for your business.

Setting your business’s prices may seem simple: List your product for higher than it costs you to manufacture or acquire it, and you’ll make a profit.

But your prices are more than just numbers. The way you price your products or services can be a reflection of your business’s identity, how you view and treat your competitors and how you value your customers. That’s why it’s important to have a carefully planned pricing strategy.

What to consider when setting your pricing strategy

Setting your product or service’s prices shouldn’t be a haphazard decision focused entirely on profit. It should be a calculated, informed choice in which your business identity, brand and financial stability are considered.

As with any business decision, determining your pricing strategy starts with assessing your own business’s needs and goals. This involves some commercial soul searching — what do you want your business to contribute to the economy and world? This could mean embracing a traditional retail strategy, establishing a service business mindset or emphasizing personal customer relationships in your offering.

Once you define your goals and needs, do some research on the market you’re entering. Determine three to five main competitors in the industry by conducting online research or scouting out local businesses. No matter what pricing strategy you adopt, what your competitors are doing will impact your business’s success and future decisions. Understanding your competitors’ strategies can also help you differentiate your business from other businesses in the market. In an economy where there are thousands of small businesses providing the same products and services, an effective pricing strategy can help you stand out.

A good final stage in your research is speaking with potential customers to get a feel for how they value your brand, product or service. This can give you valuable insight into how to set your pricing. This kind of research can range from casual conversations with friends and family to formal surveys of potential buyers.

While you may have already done some of this legwork when developing your business plan , it’s good to have as much insight and information as possible before you decide what pricing strategy to adopt.

Pricing strategies to attract customers to your business

There are dozens of ways you can price your products, and you may find that some work better than others — depending on the market you occupy. Consider these seven common strategies that many new businesses use to attract customers.

1. Price skimming

Skimming involves setting high prices when a product is introduced and then gradually lowering the price as more competitors enter the market. This type of pricing is ideal for businesses that are entering emerging markets. It gives companies the opportunity to capitalize on early adopters and then undercut future competitors as they join an already-developed market. A successful skimming strategy hinges largely on the market you’re looking to enter.

2. Market penetration pricing

Pricing for market penetration is essentially the opposite of price skimming. Instead of starting high and slowly lowering prices, you take over a market by undercutting your competitors. Once you develop a reliable customer base, you raise prices. Many factors go into deciding on this strategy, like your business’s ability to potentially take losses upfront to establish a strong footing in a market. It’s also crucial to develop a loyal customer base, which can require other marketing and branding strategies.

3. Premium pricing

Premium pricing is for businesses that create high-quality products and market them to high-income individuals. The key with this pricing strategy is developing a product that is high quality and that customers will consider to be high value. You’ll likely need to develop a “luxury” or “lifestyle” branding strategy to appeal to the right type of consumer.

If you’ve already launched your business, you can experiment with these strategies until you determine what works best for your business. You can also vary strategies between products depending on the market for each good or service.

4. Economy pricing

An economy pricing strategy involves targeting customers who want to save as much money as possible on whatever good or service they’re purchasing. Big box stores, like Walmart and Costco, are prime examples of economy pricing models. Like premium pricing, adopting an economy pricing model depends on your overhead costs and the overall value of your product.

5. Bundle pricing

When companies pair several products together and sell them for less money than each would be individually, it’s known as bundle pricing. Bundle pricing is a good way to move a lot of inventory quickly. A successful bundle pricing strategy involves profits on low-value items outweighing losses on high-value items included in a bundle.

6. Value-based pricing

Value-based pricing is similar to premium pricing. In this model, a company bases its pricing on how much the customer believes the product is worth. This pricing model is best for merchants who offer unique products, rather than commodities.

How do you know what a customer perceives a product to be worth? It’s hard to get an exact price, but you can use certain marketing techniques to understand the customer’s perspective. Ask for customer feedback during the product development phase, or host a focus group. Investing in your brand can also help you add “perceived value” to your product.

7. Dynamic pricing

Dynamic pricing allows you to change the price of your items based on the market demand at any given moment. Uber’s surge pricing is a great example of dynamic pricing. During low periods, Ubers can be quite an affordable option. But, when a rainstorm hits during the morning rush hour, the price of an Uber will skyrocket, given that demand is also likely to rise. Smaller merchants can do this too, depending on seasonal demand for your product or service.

Which pricing strategy is right for you?

Each of these seven strategies offers different advantages and downsides. At the very least, you must make sure your pricing strategy covers your costs and includes a margin for profit. Determining your needs upfront can clarify which strategies are ideal for your business.

Focus on finding the right range of costs, rather than pinpointing a specific number. “Don't waste time debating $500 vs. $505, because this doesn't matter as much until you have a stronger foundation beneath you,” wrote Profitwell .

Regardless of which tactic you choose, pricing your inventory properly is essential for continued business success. You may have the best product in the world, an excellent team and a beautiful storefront, but if you can’t price your products effectively, your sales will ultimately struggle.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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• How to Use Your Business Plan to Track Performance
• How to Make Your Business Plan Attractive to Prospective Partners
• Is This Idea Going to Work? How to Assess the Potential of Your Business.
• When to Update Your Business Plan
• Write Your Business Plan | Part 3 Overview Video
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• Write Your Business Plan | Part 4 Overview Video
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• Write Your Business Plan | Part 5 Overview Video
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

How to Define Your Product and Set Your Prices Before you can start promoting your business, you need to have a marketing strategy that defines what you are selling, how much it costs, and where customers can find it.

By Dan Bova Oct 27, 2023

Key Takeaways

• The four Ps of marketing are product, price, place, and promotion.
• Defining your product involves breaking out the core product (i.e. a snowcone) from the actual product (i.e. the store where customers find comfortable seating, napkins and friendly service.)
• Your marketing needs to speak directly to your ideal customer. Trying to market something to everyone is the kiss of death.
• Pricing is one of your most crucial decisions. You can use prices to attack competitors, position your business, test a new market, and/or defend a niche.

This is part 6 / 9 of Write Your Business Plan: Section 4: Marketing Your Business Plan series.

What are you selling? How are you selling it? Why would anybody want to buy from you? Where can they find your product or services? After all, even the greatest invention will not launch a successful business if people do not know where to find it. Once upon a time the most important aspect of marketing for a brick-and-mortar business was location, location, location—indeed, to a large extent it still is. But today, in the virtual world that is the internet, location may be replaced by Facebook, LinkedIn, Instagram, YouTube, and TikTok.

Related: What You Need to Know Before Finalizing the Price of your Product

Your marketing plan is all about knowing your target market and making sure those customers know where they can find you. However, before you can start reaching out to your public, you need to have a marketing strategy that defines what you are selling, at what price(s), from where, and how you are going to spread the word. To simplify, you can use the four Ps of marketing: product, price, place, and promotion. In this article, we will tackle the first two Ps.

Related: How to Get Customers in Your Store and Drive Traffic to Your Website

Defining Your Product

Product, the first of the four Ps, refers to the features and benefits of what you have to sell (as usual, we're using the term as shorthand for products and services). Many modern marketers have a problem with this "P" because it doesn't refer to customer service, which is an important part of the bundle of features and benefits you offer to customers. However, it's pretty easy to update product by simply redefining it to include whatever services are offered.

Related: How to Effectively Promote Your Business to Customers and Investors

There are a number of issues you need to address in your product section. You need to first break out the core product from the actual product. What does this mean? The core product is the nominal product. Say you're selling snow cones. A snow cone is your core product. But your actual product includes napkins, an air-conditioned seating area, parking spaces for customers, and so forth. Similarly, an electronics store nominally sells computers, tablets, and devices, but it also provides expert advice from salespeople, a service department for customers, opportunities to comparison shop, software, and so on.

Related: 5 Must-Answer Questions to Succeed Targeting Your Customer Base

It's important to understand that the core product isn't the end of the story. Sometimes the things added to it are more valuable than the core product itself. That's not necessarily bad, but failing to understand this is likely to lead to trouble.

Defining Your Customer

Marketing great toys for five-year-olds to teenagers isn't going to work, nor will selling singles cruises to married couples or milkshakes to people who are lactose intolerant. While you may not be able to define everyone who is a likely customer, you need to know your target audience and know it well.

Related: 9 Sales and Marketing Tips for Startups

You need to talk about your ideal customer as if he or she is someone you know very well. For example, she or he is twenty-five to twenty-nine years of age, earning x amount of money, has no children yet, and earned a college degree.

A new Italian restaurant might say it's going for families eating out on a budget who live within a five-mile radius of its location. It might quote Census Bureau figures showing there are 12,385 such families in its service area. Even better, it would cite National Restaurant Association statistics about how many families it takes to support a new Italian restaurant.

Related: 4 Steps to Creating Buzz on a Shoestring Budget

A bicycle seat manufacturer might have identified its market as casual middle-aged cyclists who find traditional bike seats uncomfortable. It may cite American College of Sports Medicine surveys, saying that sore buttocks due to uncomfortable seats is the chief complaint of recreational bicyclists.

It is important to quantify your market's size if possible. If you can point out that there are more than six million insulin-dependent diabetics in the United States, it will bolster your case for the new easy-to-use injection syringe your company has developed.

Related: Use This Worksheet to Write a Product Description That Sells

In addition to fully defining your product, you need to address other issues in your marketing plan. For instance, you may have to describe the process you're using for product development. Tell how you come up with ideas, screen them, test them, produce prototypes, and so on.

You may need to discuss the life cycle of the product you're selling. This may be crucial in the case of quickly consumed products such as corn chips and in longer-lasting items like household appliances. You can market steadily to corn chip buyers in the hopes they'll purchase from you frequently, but it makes less sense to bombard people with offers on refrigerators when they need one only every ten or twenty years. Understanding the product's life cycle has a powerful effect on your marketing plan, as does knowing logical buying habits. For example, one popular department store was offering a buy-one-get-one-at-half-price deal on fine jewelry. The deal was not generating a strong response because most people do not shop for expensive jewelry in "bulk" quantities but instead take a personalized approach. In fact, such a promotion was cheapening the products.

Related: Testing Your Values, Living Your Brand

Other aspects of the product section may include a branding strategy, a plan for follow-up products, or line extensions. Keeping these various angles on products in mind while writing this section will help you describe your product fully and persuasively.

The Universally Wrong Assumption

It's always easy to market something by saying, "Everyone will love it!" But that's the kiss of death in marketing. No matter how wonderful a product or service may appear, nothing will please "everyone." Therefore, each product or service must have a defined market if you are serious about your business succeeding. Narrow your demographic group by positioning your product appropriately. That may include more than one place, such as bicycles, which might go under "bikes" or "sporting goods," but not "everywhere" or for "everyone."

Related: The Biggest Mistake Is Ignoring the Law of Supply and Demand

How to Set Prices

One of the most important decisions you have to make in a business plan is what price to charge for what you're selling. Pricing determines many things, from your profit margin per unit to your overall sales volume. It influences decisions in other areas, such as what level of service you will provide and how much you will spend on marketing. Pricing has to be a process you conduct concurrently with other jobs, including estimating sales volume, determining market trends, and calculating costs. There are two basic methods you can use for selecting a price.

One way is to figure out what it costs you altogether to produce or obtain your product or service, then add in a suitable profit margin. This markup method is easy and straightforward, and assuming you can sell sufficient units at the suggested price, it guarantees a profitable operation. It's widely used by retailers. To use it effectively, you'll need to know all of your costs as well as standard markups applied by others in your industry.

Related: Who Is Your Customer? 4 Questions to Ask.

The other way, competitive pricing, is more concerned with the competition and the customer than with your own internal processes. The competitive pricing approach looks at what your rivals in the marketplace charge, plus what customers are likely to be willing to pay, and sets prices accordingly. The second step of this process is tougher—now you have to adjust your own costs to yield a profit. Competitive pricing is effective at maintaining your market appeal and ensuring your enterprise's long life, assuming you can sell your goods at a profit.

Pricing is inherently strategic. You can use prices to attack competitors, position your business, test a new market, and/or defend a niche. The only hard-and-fast rule to follow in setting prices is: Set prices carefully, deliberately, knowledgeably, and with long-range goals in mind. All the rest are footnotes.

Setting Prices Objectives

Before you can select a pricing approach, you need to know your pricing objectives. Following are questions to ask yourself about your pricing goals:

• Which is more important: higher sales or higher profits?
• Am I more interested in short-term results or long-term performance?
• Am I trying to stabilize market prices or discourage price-cutting?
• Do I want to discourage new competitors or encourage existing ones to get out of the market?
• Am I trying to quickly establish a market position, or am I willing to build slowly?
• Do I have other concerns, such as boosting cash flow or recovering product development costs?
• What will the impact of my price decision be on my image in the market? How does that fit the image I want?
• What reputation do I want—"sells low and beats prices" or "provides higher-quality goods and/or more personalized service"?

Related: I Watch Great Teams Make These Business-Destroying Mistakes All The Time. Here's Where They're Going Wrong (And How To Fix It).

Answer these questions first, then prioritize them to decide how each objective will weigh in setting your pricing strategy. That way, when you present your price objectives in your business plan, it will make sense and be supported by reasonable arguments integrated with your overall business goals.

Further Pricing Thoughts

Why is setting price so tough? Perhaps because nobody really understands it. Pricing is as much art as science. Price too low and lose money. Price too high and lose customers. Price in the middle and lose position. It seems like a no-win situation for most small business owners. There is no mechanical way to grind out the right price. There is no shortcut. It's a matter of doing your research, and then it often comes down to some trial and error.

Small businesses simply cannot afford to compete on price. Lowballing drives small businesses out of business, cheapens their image, and costs them the opportunity to upgrade their customer base. It's a race to the bottom and simply does not work.

Related: How to Make Your Business Stand Out

There's always someone willing to sell on price alone. Sometimes the price competition comes from a giant like Walmart, which buys in such huge quantities that suppliers cave in and pare their margins to the bone. (Walmart has revolutionized inventory management and distribution, which allows them to make vast profits on thin margins. They aren't just competing on price.) Sometimes the competitor is a newcomer who thinks—erroneously—that the best way to enter a market is to buy market share with loss-leader pricing.

The two main ways to deal with price competition are to meet the price (cave in and watch your margins evaporate) or to reposition yourself so the price competition is indirect (repositioning).

Related: 3 Apps to Help You Write a Marketing Plan

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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How to Calculate Selling Price for Your Small Business

Editorial team.

Cash Flow Inventory

• Last Updated: 25 th Feb 2024
• Business Resource
• Business Tips

Editorial Note: We earn a commission from partner links on Cash Flow Inventory. Commissions do not affect our editors' opinions or evaluations.

Editorial Note: We are an inventory management software provider. While some of our blog posts may highlight features of our own product, we strive to provide unbiased and informative content that benefits all readers.

In the competitive world of small businesses, every decision holds significant weight. Among them, determining the selling price of your products or services stands as a crucial factor impacting your success. Striking the right balance between profitability and attracting customers can be a delicate dance.

This blog post serves as your comprehensive guide to navigating the intricacies of calculating selling price . We’ll delve into the key factors at play, from understanding cost structures to incorporating market dynamics. By the end, you’ll be equipped with actionable insights and practical strategies to set competitive and profitable prices that drive your small business forward.

So, whether you’re a seasoned entrepreneur or just starting your journey, buckle up and get ready to unlock the secrets of effective pricing!

Understanding Cost: The Foundation of Profitable Pricing

Before we embark on the journey of calculating selling price, it’s essential to establish a firm understanding of cost , the bedrock upon which all pricing decisions rest.

Cost Price: This refers to the total amount of money your business spends to acquire and produce the product or service you offer. It encompasses various components, each playing a crucial role in determining your overall financial picture.

Components of Cost Price:

• Direct Materials:  The raw materials or ingredients directly used in creating your product. For example, flour and sugar for a bakery, or fabric and thread for a clothing line.
• Direct Labor:  The wages and benefits paid to employees directly involved in producing your product or service. This could include assembly line workers, hairstylists, or consultants.
• Overhead Costs:  These are indirect expenses necessary for running your business, but not directly attributable to a specific product or service. Examples include rent, utilities, marketing expenses, and administrative costs.

Understanding Costing Methods:

Calculating the exact cost price can involve different methods depending on your inventory management practices and industry norms. Here are three common costing methods :

• Average Costing:  This method assumes a constant average cost per unit throughout a period, regardless of fluctuations in individual purchase prices.
• FIFO (First-In, First-Out):  This method assumes the first items purchased are the first ones sold, reflecting the actual flow of goods.
• LIFO (Last-In, First-Out):  This method assumes the most recently purchased items are the first ones sold, potentially impacting cost calculations during periods of inflation.

Choosing the Right Costing Method: The most suitable method depends on your specific business, inventory turnover rate, and industry practices. Consulting with a financial advisor can help you determine the best approach for your unique situation.

The Importance of Accurate Cost Calculation:

Precise cost calculation forms the cornerstone of effective pricing. An underestimation can lead to profit erosion , while an overestimation can price you out of the market . By accurately determining your cost price, you gain a clear understanding of your financial baseline , enabling you to establish competitive and sustainable pricing strategies that ensure both profitability and customer satisfaction.

In the next section, we’ll delve deeper into the concept of profit margin and its intricate relationship with selling price.

Profit Margin:

Having established a solid understanding of cost, we now turn our focus to profit margin , the crucial element that bridges the gap between cost and selling price.

What is Profit Margin?

Profit margin, expressed as a percentage, signifies the portion of revenue remaining after accounting for all associated costs . It essentially reflects the profitability generated from each unit sold.

Different Expressions of Profit Margin:

Profit margin can be expressed in various ways, each offering a slightly different perspective:

• Profit Margin as a Percentage:  This is the most common way, calculated as:
• Markup Percentage:  This represents the percentage added to the cost price to arrive at the selling price:
• Markdown Percentage:  This reflects the percentage reduction from the original selling price to reach a lower price point, often used for clearance sales:

Understanding the Relationship with Selling Price:

Profit margin plays a vital role in determining the selling price. By establishing your desired profit margin, you can work backwards to calculate the selling price that needs to be set to achieve your profitability goals.

Calculating Profit Margin based on Cost and Desired Profit:

Here’s how you can calculate the selling price based on your cost and desired profit margin:

• Determine your cost price:  Include all direct and indirect costs associated with producing or delivering your product or service.
• Decide on your desired profit margin:  This represents the percentage of profit you want to earn on each sale.
• Use the following formula:
• Cost Price = $10
• Desired Profit Margin = 20%

By understanding the concept of profit margin and its relationship with selling price, you gain the power to set prices that not only cover your costs but also generate the desired level of profitability for your small business.

In the next section, we’ll explore the external factors that influence pricing decisions, venturing beyond the realm of internal costs and profit margins.

Market Factors:

While understanding cost and profit margin is crucial, effective pricing requires venturing beyond the confines of your internal financial landscape. Market factors play a significant role in shaping your pricing strategy, exerting an undeniable influence on customer behavior and ultimately, your business success.

Key Market Factors Influencing Pricing:

• Competition:  Analyzing your competitors’ pricing strategies is essential. Are they offering similar products or services at lower or higher prices? Understanding their approach allows you to position your offerings competitively while maintaining profitability.
• Customer Demand:  The willingness of customers to pay for your product or service directly impacts your pricing decisions. Conducting market research to gauge customer perceptions of value and price sensitivity is crucial for setting prices that resonate with your target audience.
• Market Trends:  Staying informed about broader economic trends, industry fluctuations, and consumer buying habits is essential. Adapting your pricing strategy to align with these trends can help you maintain relevance and capitalize on emerging opportunities.

The Importance of Market Research:

Gathering reliable market data through surveys, competitor analysis, and industry reports empowers you to make informed pricing decisions . By understanding customer preferences, competitor strategies, and broader market trends, you can navigate the dynamic landscape and set prices that are both competitive and profitable .

Considering Competitor Pricing:

While competitor pricing shouldn’t solely dictate your strategy, it serves as a valuable benchmark . Analyze their pricing structures and identify potential gaps where you can position your offerings. Remember, undercutting competitors might not always be the best approach . Focus on highlighting the unique value proposition of your product or service to justify your pricing decisions.

Adapting to Market Dynamics:

Market conditions are constantly evolving. Be prepared to adjust your pricing strategy as needed based on shifts in customer demand, competitor actions, and broader economic trends. Maintaining flexibility allows you to adapt to changing circumstances and ensure your pricing remains competitive and sustainable in the long run.

In the next section, we’ll delve into various pricing strategies , equipping you with the tools to translate market insights and financial considerations into actionable pricing decisions for your small business.

Pricing Strategies:

Having explored the foundational elements of cost, profit margin, and market factors, we now delve into the realm of pricing strategies : the tactics you employ to translate insights into actionable pricing decisions for your small business.

Common Pricing Strategies:

• Cost-Plus Pricing:  This straightforward approach involves adding a desired profit margin to your cost price to arrive at the selling price. It’s simple to implement but may not account for market dynamics.
• Competitive Pricing:  This strategy involves setting your prices based on what your competitors charge. While offering a baseline, it can limit your ability to differentiate your offerings and capture value.
• Value-Based Pricing:  This approach focuses on the  perceived value  your product or service delivers to customers, rather than solely relying on cost or competition. It allows you to command premium prices if you can effectively communicate your unique value proposition.
• Skimming Pricing:  This strategy involves setting a high initial price for a new product or service, gradually lowering it as the market matures and competition increases. It can be effective for innovative products but requires careful monitoring to avoid alienating customers.
• Penetration Pricing:  This strategy involves setting a low introductory price to gain market share and brand recognition, potentially followed by price increases later. It can be useful for new businesses but carries the risk of conditioning customers to expect lower prices.

Choosing the Right Strategy:

The optimal pricing strategy depends on various factors unique to your business, including:

• Your target market:  Who are you selling to, and what is their price sensitivity?
• Your product or service:  What unique value do you offer, and how does it compare to competitors?
• Your business goals:  Are you aiming for rapid market share growth, maximizing profit margins, or establishing a premium brand image?

Experimentation and Refinement:

There’s no one-size-fits-all approach to pricing. Experiment with different strategies, monitor their effectiveness , and adapt based on market feedback and business performance . Utilize data analytics to track sales trends, customer behavior, and competitor pricing to continuously refine your strategy and optimize your pricing decisions.

Effective pricing is a continuous process , not a one-time decision. By understanding the interplay of cost, profit margin, market factors, and various pricing strategies, you can equip yourself to make informed pricing decisions that drive profitability and sustainable growth for your small business.

Psychological Factors Influencing Pricing Decisions:

While understanding cost, profit margins, and market dynamics are crucial for setting effective prices, psychological factors also play a significant role in influencing customer behavior and ultimately, your sales success. Here’s a deeper exploration of these often-overlooked yet powerful elements:

1. Anchoring:

• The first price presented  to a customer can serve as an  anchor  that influences their subsequent evaluation of other prices.
• Example:  If you initially showcase a premium product at a higher price, even a discounted version might seem more appealing compared to the initial anchor.

2. Price Perception:

• Customers often  perceive prices based on relative value  rather than absolute numbers.
• Example:  Offering a product at $9.99 instead of $10 might be perceived as significantly cheaper, even though the difference is minimal.

3. Odd-Pricing:

• Prices ending in odd numbers (e.g., $19.99)  can sometimes be perceived as  less deliberate  and potentially lower than round numbers (e.g., $20).

4. Charm Pricing:

• Pricing just below a round number  (e.g., $9.99) can create the  perception of a better deal , even though the difference is small.

5. Price Framing:

• Framing prices as discounts, savings, or investments  can influence how customers perceive the value proposition.
• Example:  Highlighting a 20% discount instead of the final price might make the product seem more attractive.

6. Reference Points:

• Customers often  compare prices to similar products or their previous experiences , influencing their perception of value.
• Example:  If your product offers unique features compared to competitors at a slightly higher price point, emphasizing the additional value can justify the cost.

7. Emotional Connection:

• Pricing strategies that evoke positive emotions  (e.g., associating your product with luxury or exclusivity) can influence purchase decisions.

Leveraging these psychological factors:

• Be strategic with initial pricing:  Utilize anchoring to set the right initial impression.
• Focus on perceived value:  Communicate the unique benefits your product or service offers to justify the price.
• Experiment with price presentation:  Consider odd-pricing or charm pricing to subtly influence customer perception.
• Frame prices effectively:  Highlight discounts, savings, or investment aspects to enhance the value proposition.
• Utilize reference points:  If your product offers superior value compared to competitors, leverage that comparison to justify your pricing.
• Evoke positive emotions:  Associate your brand with positive emotions to create a stronger connection with customers.

Ethical considerations are paramount when applying these psychological factors. Avoid misleading or manipulative tactics, and always strive to deliver genuine value that justifies your pricing decisions.

By understanding and ethically incorporating these psychological factors, you gain a powerful edge in influencing customer behavior and driving profitable growth for your small business.

Calculating Selling Price: A Step-by-Step Guide

Now that you’ve grasped the fundamental concepts of cost, profit margin, and market factors, let’s dive into the practical application of this knowledge: calculating your selling price .

Here’s a step-by-step guide using the formula:

1. Gather Your Information:

• Cost Price:  Determine the total cost per unit of producing or delivering your product or service. This includes direct materials, direct labor, and overhead costs.
• Desired Profit Margin:  Decide on the percentage of profit you want to earn on each unit sold. This will depend on your business goals and industry norms.

2. Apply the Formula:

Selling Price = Cost Price + (Cost Price x Profit Margin %)

3. Example:

• Cost Price:  $10
• Desired Profit Margin:  20%

Therefore, based on this example, you should set a selling price of $12 per unit to achieve your desired profit margin of 20%.

Additional Tips:

• Consider Market Factors:  While the formula provides a starting point, remember to incorporate insights from market research and competitor analysis. Adjust your calculated selling price based on these external factors to ensure competitiveness and customer appeal.
• Round Strategically:  Round your final selling price to a psychologically appealing price point, considering customer buying habits and industry norms.
• Utilize Pricing Tools:  Explore online calculators and software specifically designed for calculating selling prices based on different factors.
• Seek Professional Guidance:  If navigating pricing strategies feels overwhelming, consider consulting with a financial advisor or pricing specialist for personalized recommendations tailored to your business.

Calculating selling price is just one step in your pricing journey. Continuously monitor your results, adapt your strategy based on market feedback and performance data, and experiment with different approaches to find the optimal pricing formula for your small business success.

Market Research and Competitor Analysis into Pricing Decisions:

Market research and competitor analysis are crucial tools for making informed pricing decisions that are competitive, profitable, and resonate with your target audience . Here are some practical tips to incorporate them effectively:

Market Research:

• Identify your target market:  Clearly define your ideal customer profile, including demographics, needs, and buying habits.
• Conduct surveys and focus groups:  Gather direct feedback from potential customers about their perceptions of your product or service, price sensitivity, and willingness to pay.
• Analyze market trends:  Stay informed about industry trends, consumer buying patterns, and economic factors that might impact your pricing strategy.
• Utilize market research reports:  Invest in credible reports and data that provide insights into your industry, competitor landscape, and overall market dynamics.

Competitor Analysis:

• Identify your key competitors:  Research the businesses offering similar products or services to yours.
• Track their pricing strategies:  Monitor their advertised prices, promotional offers, and any pricing changes they implement.
• Analyze their value propositions:  Understand how they position their offerings and the unique value they communicate to customers.
• Identify potential gaps:  Look for opportunities to differentiate your pricing strategy based on your unique value proposition or target a specific customer segment underserved by competitors.

Integrating Insights into Pricing Decisions:

• Don’t solely rely on competitor pricing:  While competitor analysis is valuable, avoid simply copying their prices. Use it as a benchmark and consider your own cost structure, value proposition, and target market.
• Focus on perceived value:  Understand how your product or service compares to competitors in terms of features, benefits, and overall customer experience. Price based on the  perceived value  you deliver, not just production costs.
• Segment your pricing:  Consider offering different pricing options or tiers catering to diverse customer needs and budget constraints.
• Test and iterate:  Don’t be afraid to experiment with different pricing strategies and monitor their effectiveness. Use A/B testing or limited-time offers to gauge customer response and refine your pricing based on data and feedback.
• Utilize online tools:  Leverage online resources and software that provide competitor pricing data, market research reports, and pricing analytics tools.
• Network with industry professionals:  Connect with other businesses in your sector to gain insights into market trends and pricing strategies.
• Seek expert advice:  If needed, consult with pricing consultants or marketing specialists who can offer tailored guidance based on your specific business and market context.

By effectively incorporating market research and competitor analysis, you gain a deeper understanding of your target audience, competitive landscape, and broader market dynamics. This empowers you to make informed pricing decisions that are strategic, sustainable, and drive growth for your small business.

Tools and Resources for Cost Estimation and Competitor Pricing Research:

In addition to the practical tips mentioned above, here are some helpful tools and resources that you can leverage for cost estimation and competitor pricing research:

Cost Estimation Tools:

• Free Online Calculators:  Several websites offer free online calculators that can help you estimate your product or service costs. These calculators typically factor in material costs, labor costs, overhead costs, and desired profit margin to provide you with an estimated selling price.
• Spreadsheet Templates:  You can also create your own cost estimation spreadsheet template using Microsoft Excel or Google Sheets. This allows you to customize the calculations to your specific needs and include all relevant cost factors.
• Accounting Software:  If you have a more complex business operation, you may consider investing in accounting software that can help you track your costs, inventory, and profitability. Popular options include QuickBooks, Xero, FreshBooks, and Cash Flow Inventory.

Competitor Pricing Research Tools:

• Price Monitoring Tools:  These tools allow you to track the prices of your competitors’ products or services over time. This can be helpful for identifying pricing trends and understanding how your competitors are adjusting their prices. Some popular options include PriceLabs, Prisync, and Keepa.
• Market Research Reports:  Industry research firms often publish reports that include data on pricing trends, competitor analysis, and market forecasts. These reports can be a valuable resource for gaining insights into your target market and the competitive landscape.
• Web Scraping Tools:  While not recommended for ethical reasons, some businesses use web scraping tools to extract pricing data from competitor websites. However, it is important to be aware of the legal and ethical implications of using such tools before doing so.

Additional Resources:

• U.S. Small Business Administration (SBA):  The SBA website offers a wealth of resources for small businesses, including articles, guides, and webinars on pricing strategies.
• SCORE:   SCORE is a non-profit organization that provides free mentoring and workshops to small businesses. They can also offer guidance on pricing strategies and market research.

By using a combination of these tools and resources, you can gain valuable insights into your costs, your competitors’ pricing strategies, and your target market. This information can then be used to develop a pricing strategy that is both competitive and profitable for your small business.

Experimenting with Different Pricing Strategies:

Setting the right price for your product or service is crucial for achieving success in the competitive world of small businesses. While the formula and tips provided earlier offer a solid foundation, experimentation is key to finding the optimal pricing strategy that resonates with your target market and maximizes your profitability.

Here’s a guide to help you experiment with different pricing strategies and track their effectiveness:

Choosing Strategies to Experiment:

• Consider your business goals:  Are you aiming for rapid market share growth, maximizing profit margins, or establishing a premium brand image? Choose strategies that align with your objectives.
• Analyze your target market:  Understand their price sensitivity, willingness to pay, and preferences for different pricing models.
• Learn from competitors:  Analyze their pricing strategies and identify potential gaps where you can differentiate yourself.

Common Strategies for Experimentation:

• Price Tiers:  Offer different pricing tiers with varying features or service levels to cater to diverse customer needs and budgets.
• Promotional Pricing:  Utilize limited-time discounts, bundle offers, or introductory pricing to attract new customers and test market response.
• Value-Based Pricing:  Focus on the perceived value your product or service delivers and adjust your price accordingly. A/B test different price points to gauge customer willingness to pay for the value proposition.
• Freemium Model:  Offer a basic version of your product or service for free, with premium features available at a higher price point. This can be a good way to attract new customers and upsell them later.

Experimentation Techniques:

• A/B Testing:  Present different pricing options to different segments of your audience and compare their conversion rates and revenue generated.
• Limited-Time Offers:  Run temporary promotions with different pricing structures to gauge customer response and gather data.
• Surveys and Feedback:  Ask customers directly about their perception of your pricing and gather their feedback on different price points.

Tracking and Analyzing Results:

• Define Key Metrics:  Identify relevant metrics to track, such as conversion rates, average order value, customer acquisition cost, and profit margins.
• Utilize Analytics Tools:  Leverage website analytics, sales data, and marketing campaign reports to monitor the impact of different pricing strategies on your key metrics.
• Analyze the Data:  Draw insights from your data to understand which pricing strategies resonate best with your target audience and contribute to your business goals.
• Start small and iterate:  Begin with controlled experiments and gradually expand your testing based on the results.
• Be patient and persistent:  It may take time to find the optimal pricing strategy. Don’t be discouraged by initial setbacks, and keep refining your approach based on ongoing learning.
• Seek professional guidance:  If navigating pricing experimentation feels overwhelming, consider consulting with marketing specialists or pricing consultants who can offer tailored advice based on your specific business and market context.

By experimenting with different pricing strategies , tracking their effectiveness , and adapting based on data and feedback , you can gain valuable insights into your target market and optimize your pricing to drive sustainable growth and profitability for your small business.

Conclusion:

Setting the right price is a continuous journey, not a one-time destination. By understanding the foundational elements of cost, profit margin, and market factors, coupled with the strategic application of various pricing strategies and ongoing experimentation , you equip yourself to make informed pricing decisions that drive success for your small business.

Remember, effective pricing is not just about maximizing profit; it’s about finding the sweet spot where you deliver value to your customers while ensuring the sustainability and growth of your business. Embrace the learning process , experiment with different approaches , and continuously refine your strategy based on market feedback and data-driven insights.

As you navigate the dynamic world of pricing, remember these key takeaways:

• Cost : Understand your cost structure to set a  realistic baseline  for pricing.
• Profit Margin : Determine your desired  profitability level  to guide your pricing decisions.
• Market Factors : Consider  competition, customer demand, and market trends  to adapt your strategy.
• Pricing Strategies : Choose the approach that aligns with your  business goals and target market .
• Experimentation :  Test different pricing models  and track their effectiveness to find the  optimal fit .

By mastering the art of pricing, you unlock the potential to attract customers, generate healthy profits, and propel your small business towards long-term success .

Led by Mohammad Ali (15+ years in inventory management software), the Cash Flow Inventory Content Team empowers SMBs with clear financial strategies. We translate complex financial concepts into clear, actionable strategies through a rigorous editorial process . Our goal is to be your trusted resource for navigating SMB finance.

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9 Business Plan Examples to Inspire Your Own (2024)

Need support creating your business plan? Check out these business plan examples for inspiration and guidance.

Any aspiring entrepreneur researching how to start a business will likely be advised to write a business plan. But few resources provide business plan examples to really guide you through writing one of your own.

Here are some real-world and illustrative business plan examples to help you craft your business plan .

Business plan format: 9 examples

The business plan examples in this article follow this template:

• Executive summary
• Company description
• Market analysis
• Products and services
• Marketing plan
• Logistics and operations plan
• Financial plan
• Customer segmentation

1. Executive summary

Your executive summary is a page that gives a high-level overview of the rest of your business plan. While it appears at the beginning, it’s easiest to write this section last, as there are details further in the report you’ll need to include here.

In this free business plan template , the executive summary is four paragraphs and takes a little over half a page. It clearly and efficiently communicates what the business does and what it plans to do, including its business model and target customers.

2. Company description

You might repurpose your company description elsewhere, like on your About page , social media profile pages, or other properties that require a boilerplate description of your small business.

Soap brand ORRIS has a blurb on its About page that could easily be repurposed for the company description section of its business plan.

You can also go more in-depth with your company overview and include the following sections, like in this business plan example for Paw Print Post:

Business structure

This section outlines how you registered your business —as an LLC , sole proprietorship, corporation, or other business type : “Paw Print Post will operate as a sole proprietorship run by the owner, Jane Matthews.”

Nature of the business

“Paw Print Post sells unique, one-of-a-kind digitally printed cards that are customized with a pet’s unique paw prints.”

“Paw Print Post operates primarily in the pet industry and sells goods that could also be categorized as part of the greeting card industry.”

Background information

“Jane Matthews, the founder of Paw Print Post, has a long history in the pet industry and working with animals, and was recently trained as a graphic designer. She’s combining those two loves to capture a niche in the market: unique greeting cards customized with a pet’s paw prints, without needing to resort to the traditional (and messy) options of casting your pet’s prints in plaster or using pet-safe ink to have them stamp their ’signature.’”

Business objectives

“Jane will have Paw Print Post ready to launch at the Big Important Pet Expo in Toronto to get the word out among industry players and consumers alike. After two years in business, Jane aims to drive $150,000 in annual revenue from the sale of Paw Print Post’s signature greeting cards and to have expanded into two new product categories.”

“Jane Matthews is the sole full-time employee of Paw Print Post but hires contractors as needed to support her workflow and fill gaps in her skill set. Notably, Paw Print Post has a standing contract for five hours a week of virtual assistant support with Virtual Assistants Pro.”

Your mission statement may also make an appearance here. Passionfruit shares its mission statement on its company website, and it would also work well in its example business plan.

3. Market analysis

The market analysis consists of research about supply and demand , your target demographics, industry trends, and the competitive landscape. You might run a SWOT analysis and include that in your business plan. 

Here’s an example SWOT analysis for an online tailored-shirt business:

You’ll also want to do a competitive analysis as part of the market research component of your business plan. This will tell you which businesses you’re up against and give you ideas on how to differentiate your brand. A broad competitive analysis might include:

• Target customers
• Unique value proposition , or what sets the products apart
• Sales pitch
• Price points for products
• Shipping policy

4. Products and services

This section of your business plan describes your offerings—which products and services do you sell to your customers? Here’s an example for Paw Print Post that explains its line of custom greeting cards, along with details on what makes its products unique.

5. Marketing plan

It’s always a good idea to develop a marketing plan before you launch your business. Your marketing plan shows how you’ll get the word out about your business, and it’s an essential component of your business plan as well.

The Paw Print Post focuses on four Ps: price, product, promotion, and place. However, you can take a different approach with your marketing plan. Maybe you can pull from your existing marketing strategy , or maybe you break it down by the different marketing channels. Whatever approach you take, your marketing plan should describe how you intend to promote your business and offerings to potential customers.

6. Logistics and operations plan

The Paw Print Post example considered suppliers, production, facilities, equipment, shipping and fulfillment, and inventory. This includes any raw materials needed to produce the products.

7. Financial plan

The financial plan provides a breakdown of sales, revenue, profit, expenses, and other relevant financial metrics related to funding and profiting from your business.

Ecommerce brand Nature’s Candy’s financial plan breaks down predicted revenue, expenses, and net profit in graphs.

It then dives deeper into the financials to include:

• Funding needs
• Projected profit-and-loss statement
• Projected balance sheet
• Projected cash-flow statement

You can use a financial plan spreadsheet to build your own financial statements, including income statement, balance sheet, and cash-flow statement.

8. Customer segmentation

Customer segmentation means dividing your target market into groups based on specific characteristics. These characteristics can be demographics, psychographics, behavior, or geography. Your business plan will provide detailed information on each segment, like its size and growth potential, so you can show why they are valuable to your business. 

Airsign , an eco-friendly vacuum cleaner company, faced the challenge of building a sustainable business model in the competitive home appliance market. They identified three key customer personas to target:

• Design-oriented urban dwellers
• Millennials moving to suburbs
• Older consumers seeking high-quality appliances

The company utilized Shopify’s customer segmentation tools to gain insights and take action to target them. Airsign created targeted segments for specific marketing initiatives.

Put your customer data to work with Shopify’s customer segmentation

Shopify’s built-in segmentation tools help you discover insights about your customers, build segments as targeted as your marketing plans with filters based on your customers’ demographic and behavioral data, and drive sales with timely and personalized emails.

9. Appendix

The appendix provides in-depth data, research, or documentation that supports the claims and projections made in the main business plan. It includes things like market research, finance, résumés, product specs, and legal documents. 

Readers can access detailed info in the appendix, but the main plan stays focused and easy to read. Here’s an example from a fictional clothing brand called Bloom:

Appendix: Bloom Business Plan

Types of business plans, and what to include for each

This lean business plan is meant to be high level and easy to understand at a glance. You’ll want to include all of the same sections in one-page business plan, but make sure they’re truncated and summarized:

• Executive summary: truncated
• Market analysis: summarized
• Products and services: summarized
• Marketing plan: summarized
• Logistics and operations plan: summarized
• Financials: summarized

A startup business plan is for a new business. Typically, these plans are developed and shared to secure funding . As such, there’s a bigger focus on the financials, as well as on other sections that determine viability of your business idea—market research, for example:

• Market analysis: in-depth
• Financials: in-depth

Your internal business plan is meant to keep your team on the same page and aligned toward the same goal:

A strategic, or growth, business plan is a big-picture, long-term look at your business. As such, the forecasts tend to look further into the future, and growth and revenue goals may be higher. Essentially, you want to use all the sections you would in a normal business plan and build upon each:

• Market analysis: comprehensive outlook
• Products and services: for launch and expansion
• Marketing plan: comprehensive outlook
• Logistics and operations plan: comprehensive outlook
• Financials: comprehensive outlook

Feasibility

Your feasibility business plan is sort of a pre-business plan—many refer to it as simply a feasibility study. This plan essentially lays the groundwork and validates that it’s worth the effort to make a full business plan for your idea. As such, it’s mostly centered around research:

Nonprofit business plans are used to attract donors, grants, and partnerships. They focus on what their mission is, how they measure success, and how they get funded. You’ll want to include the following sections in addition to a traditional business plan:

• Organization description
• Need statement
• Programs and services
• Fundraising plan
• Partnerships and collaborations
• Impact measurement

Set yourself up for success as a business owner

Building a good business plan serves as a roadmap you can use for your ecommerce business at launch and as you reach each of your business goals. Business plans create accountability for entrepreneurs and synergy among teams, regardless of your business model .

Kickstart your ecommerce business and set yourself up for success with an intentional business planning process—and with the sample business plans above to guide your own path.

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Business plan examples FAQ

How do i write a simple business plan.

To write a simple business plan, begin with an executive summary that outlines your business and your plans. Follow this with sections detailing your company description, market analysis, organization and management structure, product or service, marketing and sales strategy, and financial projections. Each section should be concise and clearly illustrate your strategies and goals.

What is the best format to write a business plan?

The best business plan format presents your plan in a clear, organized manner, making it easier for potential investors to understand your business model and goals. Always begin with the executive summary and end with financial information or appendices for any additional data.

What are the 4 key elements of a business plan?

• Executive summary: A concise overview of the company’s mission, goals, target audience, and financial objectives.
• Business description: A description of the company’s purpose, operations, products and services, target markets, and competitive landscape.
• Market analysis: An analysis of the industry, market trends, potential customers, and competitors.
• Financial plan: A detailed description of the company’s financial forecasts and strategies.

What are the 3 main points of a business plan?

• Concept: Your concept should explain the purpose of your business and provide an overall summary of what you intend to accomplish.
• Contents: Your content should include details about the products and services you provide, your target market, and your competition.
• Cash flow: Your cash flow section should include information about your expected cash inflows and outflows, such as capital investments, operating costs, and revenue projections.

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How to Sell Your Business

9 min. read

Updated January 4, 2024

Selling a business is as complex as starting one . If you want to do it right and maximize the value of your business, you must take specific steps. 

This article will cover what to do before, during, and after the sale to ensure you’re legally covered and have a plan to exit gracefully.

*Disclaimer: All content in this guide is intended to be general information, and nothing constitutes legal advice. 

1. Know why you’re selling

Understanding your motivation for selling not only shapes your approach but can significantly influence the outcome of the sale. Potential buyers will likely ask why you’re selling, and you need a good answer. 

It usually comes down to one (or a few) of the following reasons:

• Retirement: Often planned well in advance, retiring business owners are typically concerned with ensuring continuity and may still have some involvement in the business.
• Burnout: Sometimes, you simply hit a wall as a business owner and want an exit.
• Market conditions: It’s a good time to sell a home when market demand increases. The same can be said for businesses. 
• Financial need: Facing a cash crunch? Before jumping to sell, explore other avenues like business loans or investors . Selling under pressure might not provide the best deal.
• Strategic move: It’s not always about selling to leave your business, sometimes it’s about pursuing growth. The right buyer can bring specific resources and expertise to take your business to the next level.
• Personal reasons: A desire for a more stable work-life balance, a death in the family, changing career preferences, etc., are all perfectly understandable reasons to explore a sale.

Dig deeper: How to know when to close your business and start over

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• 2. Compile financial statements and tax returns

Organized and strong financials will pull a lot of weight in convincing prospective buyers of the value of your business. Your financials tell the story of your business and provide a glimpse into profitability and potential. It’s not all that different from pitching to investors when pursuing funding.

When preparing to sell, your financials will be under the greatest scrutiny. You’ll likely need to provide at least the last 3-5 years of data. To ensure everything is correct, consult a licensed accountant or financial advisor to review your financials and tax returns. The last thing you want to do is have gaps in reporting.

Additionally, you’ll want to summarize your business model and operations . Combined with your financials, it provides a full picture of how your business runs and generates revenue.  

If you’ve written a business plan , you have already addressed this information and may just require a small update. If you haven’t, use the one-page business plan format to quickly create a brief summary.

• 3. Get a business valuation

A professional valuation is the process of determining the economic value of a business. You can do this yourself , but it will be easier and more credible if you hire a professional appraiser. 

An appraiser will evaluate: 

• Financial statements
• Tangible and intangible assets (i.e. intellectual property )
• The strength and diversity of your customer base
• Efficiency of operations
• The management team’s capabilities

They will also factor in external market conditions and industry trends to finalize the estimated value of your business. This number or range can be used to set the sale price for your business

Dig deeper:

Rule of thumb business valuation explained

This valuation method leverages common sense and experience to provide you with an approximation of your business value. It can be a great option to use before hiring a professional.

How to increase the value of your business before selling

If you’re worried that your business isn’t as valuable as it could be, focus on improving cash flow, expanding your reach, and strengthening relationships.

• 4. Hire a broker

Hiring a business broker or investment bank can significantly streamline the sale of your business. They will guide you through the complexities of the sales process, handle paperwork, and ultimately help you land the best deal for buyers and sellers. 

Here are the services a broker should provide:

• Market analysis: Assess the value of your business in the current market.
• Marketing: Promote your business to potential buyers through various channels.
• Screen buyers: Conduct due diligence to ensure potential buyers are serious and financially capable.
• Aid in negotiations: Represent your interests to get the best deal.
• Paperwork: Manage the extensive documentation involved in selling a business.
• Close the sale: Facilitate the final steps to ensure a smooth transition.

While hiring a good broker isn’t necessarily cheap, it will save you time, help you avoid mistakes, and ensure the transaction goes smoothly. If you’re transitioning ownership to a family member, employee, or other trusted party, you could do this yourself. However, you must involve a lawyer to confirm that everything is done correctly and is legally binding.

Tip: When hiring a broker, be wary of those who demand large upfront fees, make over-optimistic valuations of your business, or lack references from previous sales.

• 5. Find a buyer

Ideally, your broker will promote your business and seek out buyers for you. However, even with this support, identifying the right buyer and finalizing a sale can still take months or even years. 

To keep the process moving and ensure you don’t waste your time, here are a few best practices to follow:

• Leverage your network: Sometimes, the best leads come from within your existing professional network. Talk to industry peers, suppliers, and even competitors.
• Use multiple channels: Don’t rely on one promotional method. Use business-for-sale websites, industry publications, and social media to cast a wider net.
• Prepare an information packet: Create a concise, detailed document about your business. This should include financial summaries, operational details, and growth potential. Again, the one-page business plan is a great option.
• Pre-qualify buyers: Before initiating discussions, ensure potential buyers are actually able to make the purchase. This will save you time and protect any sensitive information.
• Stay engaged: Even if you use a broker, stay involved. Your insights and passion for the business are often a selling point.
• Consider seller financing: Offering to finance a portion of the sale can widen your pool of potential buyers. You just need to ensure you’re comfortable with the terms and risks.

Ideally, you’ll end up with multiple interested buyers. This will give you greater leverage and more options if a deal falls through. 

Dig deeper: How to position your business to be acquired

• 6. Finalize a sales agreement

Speaking of deals, once you have reached a potential agreement, it’s time to get all the documents and legal details in order.

You should work with a lawyer at this stage to safeguard your interests and ensure a smooth transition to the new owner. Here’s an overview of the essentials they’ll help you assemble:

Documentation

• Letter of intent (LOI): A preliminary document outlining the basic terms and conditions of the sale. It’s not legally binding but sets the stage for the formal agreement.
• Purchase agreement: The primary legal document detailing the terms and conditions of the sale. It includes the price, assets being sold, liabilities being assumed, and any contingencies.
• Bill of sale: This confirms the transfer of ownership and itemizes the assets included in the sale.
• Non-compete agreement: Buyers often want assurance that the seller won’t start a similar business within a specific time frame and geographic area.
• Employee and supplier agreements: New contracts or agreements may need to be drafted if the buyer retains current employees or suppliers.

Legal considerations

• Due diligence: The buyer will conduct a thorough investigation of your business’s financial records, contracts, assets, and other critical documents to validate the purchase.
• Liabilities: Clearly define which liabilities the buyer will assume and which remain with the seller.
• Warranties and representations: These are statements made by the seller about the current state and history of the business. Any breach can lead to legal consequences.
• Indemnification provisions: These protect the buyer from future liabilities arising from the business’s past activities.

The sales process

• Escrow: To ensure both parties fulfill their obligations, funds are often placed in escrow until all conditions are met.
• Financing: The seller may need to provide documentation or cooperate with the buyer’s lender.
• Transition period: The seller may remain involved for a specified period and help with training, introductions to key clients, or operational guidance.
• Closing: This is the final step where all documents are signed, funds are transferred, and ownership is officially changed.
• Post-sale notifications: All stakeholders, including employees, clients, suppliers, and relevant government entities, are notified of the change in ownership.

7. Plan how you’ll manage funds from the sale

Successfully selling your business isn’t the end. You now need to plan how to manage any profits from the sale. 

You may want to start another business , support charitable causes, or enjoy the fruits of your labor. Planning ahead can reduce tax liabilities and ensure the money serves your long-term goals. 

While we can’t account for everything, here are some of the most common financial considerations to plan for post-sale.

• Capital gains tax: The sale will likely result in capital gains, which are taxed differently than regular income. 
• Installment sales: If you receive payments over time, you might be eligible for installment sale treatment, spreading the tax liability over several years.
• State taxes: There may be state-specific sales tax depending on where your business is located.
• Debt repayment: A portion of the proceeds may need to clear any outstanding debts.

Don’t rush any decisions about how you’ll use your newfound wealth. Take the time to consider all options and speak with financial and tax advisors to discuss your goals, investment options, and the pros and cons of specific decisions.

Additional options to exit your business

Selling a business is a common exit strategy—but it’s not the only option.

There are strategic benefits to combining with another business. The key is to find a partner whose business objectives and culture align with yours. Once the merger is complete, you can explore stepping back and allowing other leadership to take over.

Transfer ownership 

If you have family members, heirs, or trusted employees interested in the business—consider transferring ownership to them. This eliminates the drawn-out process of finding a buyer and can be especially meaningful for family-owned enterprises.

While not a common option for small business owners, initiating an initial public offering (IPO) can raise capital and potentially provide an exit by gradually selling your stake. 

Liquidation

Liquidating your company assets may be the best option if your business isn’t profitable and you can’t find a buyer. While it’s often a less lucrative exit strategy, you’ll at least recoup something from your business.

• Preparing to sell your business

Deciding to sell your business is a huge milestone in your entrepreneurial career. It’s not something you should do rashly. By taking the time to plan properly—you’ll increase your chances of getting your asking price.

Check out our other business management resources to learn how to grow and prepare your business long before considering a sale:

• Create a business strategy
• Manage during a crisis
• Set business goals

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.

Table of Contents

• 1. Know why you’re selling
• 7. Plan how you'll manage funds
• Other options for exiting

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Family HVAC Businesses: Should I Keep or Sell?

Understand how to plan this crucial next step for your family’s business.

TWO ROADS DIVERGE: Ultimately, the decision to keep or sell a family is not one that should be taken lightly — it is one that should be made rationally and unanimously by the family. (Courtesy of The Beringer Group)

The only permanence is impermanence. The only constant is change. There comes a point in the life cycle of every family business when this most important decision must be made: should I keep or sell? 

This is certainly not an easy decision for anyone to make. There are a lot of nuances that factor in — financials, family, emotions. As much as one would like to see their legacy being carried down through their family, it is simply just not in the cards for everyone. Longevity and continued success are difficult to achieve. This is where exiting the business comes into play. However, just because you sold does not mean you won’t get to see your legacy continue to thrive. 

KEY QUESTIONS TO CONSIDER  

1)    Is the family the most suitable leadership team for this business? Do the skill sets, interests, and values of the family members align with the company? Just because a business was founded by one’s family does not mean that two generations later, members of that family are the best successors. Every generation is different. Every family member is different. They might have other interests or passions in life. They might have different career goals. They might have honed different skill sets throughout their life. Such misalignment is what often drives a family business to the ground. Therefore, this is an important factor to consider when deciding whether to keep or sell. 

2)    Is the family fully prepared to keep managing the business through generations? This means whether or not the family has a proper succession plan in place to ensure that the business can be passed down smoothly in different scenarios. A succession plan should be written out and agreed upon by all key decision-makers in a family-owned business. It should act as a clear blueprint that details how the business should be managed, who (both family and non-family members) should assume leadership and operational roles, and how equity should be divided up, among other key points. A clear, strong, and unanimously supported succession plan is a prime indicator that the family is ready to continue running the business. 

3)    Is the business truly a financial asset for the family? Emotions, pride, and ego always play a part in this decision — oftentimes too much of a role. A family-owned business represents years of hard work that generations of a single family have put in. Strong personal connections are thereby forged through decades of sacrifice and resilience. Therefore, many owners may feel an obligation to keep the business in the family, even if the business ceases to bring financial gains to the family. These feelings are valid. Therefore, it is important to consider what aspect you and your family value most from the business — financial or emotional. This will greatly shed light on whether to keep or sell.   

UPSIDES TO SELLING 

Selling may seem as though it’s a last resort option, but there are, in fact, a myriad of benefits. 

First, being bought up by a larger firm means access to greater resources and potential for your business. Choosing the right buyer allows your family-owned business to realize synergies, expand to different locations, and penetrate new markets and consumer segments — all of which may not have been possible purely from isolated organic health. 

Second, being acquired oftentimes does not mean giving up your business. Most buyers actually prefer if the original management team stays on, or is at least still involved in the operations of the merged company after the sale. This yields families both the financial gain of selling their business as well as the ability to continue aiding in operating said business. 

DOWNSIDES TO SELLING 

On the other hand, there will be aspects of running your own family-owned business that may be lost in a sale. 

Agency is a key issue. Whereas owning a family business allows you to dictate the direction you wish the firm to go in, selling your stake in it will result in the loss of control over the company, which can be difficult to get accustomed to. Nevertheless, depending on the buyers, you will still have a say in the company’s business plan in most cases. 

A dynamic shift in company culture is another risk that comes with selling. The acquirer may completely disrupt the culture rooted within the seller. However, given the right choice of buyer, this risk can be greatly minimized. 

CONCLUSION 

Ultimately, the decision to keep or sell is not one that should be taken lightly — it is one that should be made rationally and unanimously by the family. Every family is different. Every business is different. However, by following the aforementioned steps and understanding what it means to sell, you will be able to make the best and most informed decision for your business as well as your family.  

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Big lots prepares bankruptcy filing with plans to sell stores.

(Bloomberg) -- Discount home goods retailer Big Lots Inc. is preparing to file for bankruptcy as soon as Sunday, and plans to sell its chain of stores via a court-supervised process, according to people familiar with the plans.

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The company will continue to operate under Chapter 11 protection, the people said, and is in the process of lining up a so-called stalking horse bid, meaning it’s subject to better offers should any materialize. The company has been working with advisers from AlixPartners and Guggenheim Partners on the bankruptcy and sale process.

Representatives for Big Lots and AlixPartners didn’t respond to requests seeking comment on the bankruptcy plans, while Guggenheim declined to comment.

Big Lots, which has around 1,400 stores and employs over 30,000 people, has suffered from declining sales for years, including in recent quarters as rising inflation squeezed the wallets of its budget-conscious shoppers. Its share price has plunged to around $0.50, after peaking above $72 in 2021.

Big Lots inked a sale and leaseback deal for a distribution center and 26 owned stores with affiliates of Blue Owl Capital last year that served to raise a quick $318 million, but also added to its costs.

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Why competition in the housing market is cooling off

More homeowners  are listing their  homes  for sale, but properties are taking longer to sell as potential buyers face high prices and interest rates.

New listings from home sellers jumped in May, up 13% from a year ago,  according  to the latest market report by Zillow.

“You have an increase in sellers coming back on the market,” said Orphe Divounguy, a senior economist at Zillow.

But with buyers not returning to the market, many new listings are just adding to inventory. The number of homes on the market rose 22% compared with last year, Zillow found.

“Homes are staying on the market for a bit longer because the sales are not keeping up with the flow of homes coming on the market,” Divounguy said.

'The market is slowing down'

Almost two-thirds, or 61.9%, of homes listed on the market in May had been for sale for at least 30 days without going under contract, according to a  new  analysis by Redfin. About 40.1% of homes that were for sale in May had been listed for at least two months without going under contract, Redfin found.

“The market is slowing down. Homes are taking longer to sell and that allows inventory to accumulate on the market,” said Daryl Fairweather, chief economist at Redfin.

Yet despite the recent jump in supply, “we’re still starved for inventory in the for-sale market,” said Divounguy. The housing inventory in the U.S. is still 34% below pre-pandemic levels, according to Zillow.

“We’re short nationwide of about 4.3 million homes,” he said. “We’re still in a housing unit deficit.”

Homebuyers are waiting on lower mortgage rates

As mortgage rates have remained high and housing affordability has strained household finances, buyers have been unable to enter the market, Divounguy explained.

“Buyers are facing these incredibly high mortgage rates, at least relative to what they were during the pandemic,” said Fairweather, who believes homebuyers might lack the motivation and financial ability to purchase a home.

The 30-year fixed rate mortgage in the U.S.  slid  to 6.95% on June 13, lower from 6.99% a week prior, according to Freddie Mac data via the Federal Reserve. 

While mortgage rates could “change pretty quickly” or “on a dime,” said Fairweather, buyers are unlikely to see big movement in the near term.  The Fed held rates  steady at its June meeting and now anticipates just one rate cut this year. Its next meeting is July 30-31.

“There’s no right answer for homebuyers who are deciding whether to wait or not,” Fairweather said. “It’s just up to chance when mortgage rates drop. Nobody really knows when that will happen, so it’s hard to plan your life around that.”

What to do if you're a buyer or a seller

Some markets in the U.S. are seeing a significant increase in unsold inventory. About 60.5% of listings in Dallas, Texas, stayed on the market for at least 30 days, up from 53% a year earlier, according to Redfin.

In Fort Lauderdale, Florida, the share of unsold listings that have stayed on the market for at least 30 days is 75.5%, up from 68.2% a year prior, Redfin found.

A similar increase is happening in two other areas in Florida. The share of unsold homes in Tampa that have been on the market for 30 days is 68.7%, up from 61.9% a year ago; in Jacksonville, 69.2%, up from 62.9% in the same period, per Redfin data.

“When you give buyers more options, that means they have more bargaining power,” Divounguy said.

If you notice homes for sale linger on the market for longer in your area, “there’s probably an opportunity to get [a property] for under its listed price,” Fairweather said.

If you make it into the  home inspection   process  and you learn about issues that were neither noticeable during the initial walkthrough nor disclosed, it may be worth asking the home seller to do repairs, she said. 

But don’t overdo it: “You don’t want to be nit-picky and ask for every single repair,” such as chipped paint, Fairweather said. 

Other markets are still in favor of home sellers as inventory remains tight, Divounguy said. Not only do many homeowners have  record home equity , they also have low mortgage payments.

If a home seller needs to move this year due to upcoming  life changes  and their area is experiencing high levels of unsold listings, they may need to be prepared to cut their asking price to draw interest.

“Price cuts sell homes,” he said.

More from CNBC:

• Here’s the inflation breakdown for May 2024
• How much homeownership costs annually
• Biden and Trump both want to extend tax cuts

Ana Teresa Solá is a personal finance reporter for CNBC.

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Harris to propose tenfold startup tax incentive increase she says will spur small business creation

Democratic presidential nominee Vice President Kamala Harris campaigns with President Joe Biden at the IBEW Local Union #5 union hall in Pittsburgh on Labor Day, Monday, Sept. 2, 2024. (AP Photo/Susan Walsh)

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WASHINGTON (AP) — Vice President Kamala Harris plans to propose on Wednesday a tenfold increase in federal tax incentives for small business startup expenses, from $5,000 to $50,000, hoping to help spur a record 25 million new small business applications over her four-year term should she win the presidency in November .

She’s set to unveil the plan during a campaign stop in the Portsmouth area of New Hampshire — marking a rare deviation from the Midwestern and Sunbelt battlegrounds the Democrat has focused on in her race against former Republican President Donald Trump .

A Harris campaign official, who spoke on the condition of anonymity to discuss a policy plan that hadn’t been released publicly, said Tuesday the change would cover the $40,000 it costs on average to start a business. The proposal would let new businesses wait to claim that deduction until they first turn a profit, to better maximize its impact lowering their taxes.

Such changes would likely require congressional approval. But a series of tax cuts approved during the Trump administration are set to expire at the end of next year, setting up a scenario where lawmakers may be ready to consider new tax policies. The proposal can help Harris show her support for entrepreneurs even as she’s called for higher corporate tax rates.

Since President Joe Biden dropped his reelection bid and endorsed Harris in July, the vice president has focused on campaigning in the “ blue wall ” states of Michigan, Wisconsin and Pennsylvania that have been the centerpiece of Democratic campaigns that have won the White House in recent decades.

She’s also frequently visited Arizona, Nevada and Georgia, all of which Biden narrowly won in 2020, and North Carolina, which last voted Democratic in a presidential race in 2008 but which she’s still hoping to flip from Trump. Biden won New Hampshire by 7 percentage points in 2020, though Trump came far closer to winning it against Hillary Clinton in 2016.

“The cost of living in New Hampshire is through the roof, their energy bills are some of highest in the country, and their housing market is the most unaffordable in history,” Trump posted last week on his social media platform.

Harris’ team says securing 25 million new business applications in four years if she wins the White House would exceed the roughly 19 million such applications filed since Biden took office. And those were millions more than the previous four years under Trump. The vice president’s goal would be a record for new small business applications — but records only go back about 20 years.

Applications to start a business don’t always translate to small businesses actually being formed. Still, Harris’ plan could keep new small businesses that do come to fruition from otherwise incurring more debt which, at a time of high interest rates, might help them better succeed.

In the weeks since Harris took over the top of the Democratic ticket, she has offered relatively few major policy proposals — attempting to strike a political balance between injecting new energy into the race and continuing to support many of the Biden administration proposals she helped champion as vice president.

Harris’ small business plan follows her announcing last month proposed steps to fight inflation by working to lower grocery prices , and to use tax cuts and other incentives to encourage homeownership. The vice president has also proposed ending federal taxes on tips to service industry workers, an idea Trump proposed first.

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The plan she’s introducing Wednesday further calls for developing a standard deduction for small businesses meant to save their owners time when doing their taxes, and making it easier to get occupational licenses — letting people work across state lines and businesses expand into new states. Harris also wants to offer federal incentives so state and local government will ease their regulations.

In an effort to spur business investment outside urban and suburban hubs, Harris is pledging to launch a small business expansion fund to enable community banks and federal entities to cover interest costs while small businesses are expanding or otherwise creating jobs. Her team says those efforts will focus especially on areas that traditionally receive less investment.

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Wall Street Is Worried About Carl Icahn

The value of the 88-year-old activist investor’s company has fallen by nearly $20 billion. Mr. Icahn said that he was “absolutely not selling.”

By Maureen Farrell

Chief executives of public companies have long feared Carl C. Icahn. The 88-year-old investor made a name and billions for himself by questioning the decisions and strategies of corporate leaders and agitating for change at companies like Apple, RJR Nabisco and Netflix.

But now Mr. Icahn is under intense scrutiny from Wall Street investors, who are rapidly selling his company’s stock. In the past year and a half, shares of Icahn Enterprises, his publicly traded investment company, have dropped more than 75 percent, losing nearly $20 billion of value. After dropping more than 30 percent since mid-August alone, it now trades at $10.53 a share, its lowest level in more than two decades.

Mr. Icahn owns roughly 86 percent of the shares, so he has personally lost about $17 billion.

“There’s a confidence game and he’s lost the confidence of investors,” said Don Bilson, who focuses on activist investing as the head of event-driven research at Gordon Haskett Research Advisors.

Some Wall Street investors are now worried that the stock’s continuing fall could threaten the health of the entire company and that it could be forced to sell companies it holds. Icahn Enterprises holds a mix of public stocks, real estate and other investments, according to interviews with Mr. Bilson and several other market watchers.

Investors have been questioning whether Mr. Icahn himself has been selling his stock. He has taken out personal loans using his stock as collateral. Banks that offer these loans typically have strict requirements related to the value of a company. A sharp drop in a stock price could force a lender to sell shares.

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