7 product pricing strategies & how to choose the right one

Looking for a product pricing strategy but unsure about which one to go with? We’ll simplify it for you by narrowing down your options to seven options. 

We’ll also share some tips, so you make the right choice. First, however, we need to briefly explain what product pricing strategies are.

What is a product pricing strategy? 

A product pricing strategy is GPS for your pricing decisions. It’s about devising a plan of action rather than just setting a price. This plan is always built around your costs, your customers, and the market you operate in.

If billing models are the how of charging customers, pricing strategies are the why behind those choices. They influence how you position your product, how much you charge, and when to adjust prices.

Let's dive into seven key pricing strategies. Let’s see how they can help you find the sweet spot between high revenue and happy customers:

1. Cost-based pricing

This is one of the pricing strategies rooted in the fundamentals of cost management. You calculate the total cost of producing your product, add a markup for profit, and that’s your price. It's a simple, straightforward approach that ensures you cover your expenses and make a profit.

Pros

• Easy calculation: This strategy is relatively simple to implement. This is especially true for businesses with clear and predictable cost structures.
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• Cost recovery: Your production, marketing, and distribution costs are covered. This guarantees a baseline level of profitability.

Cons

• Ignores market dynamics: Cost-based pricing can feel prohibitive. It doesn't consider factors like customer demand, competitor pricing, or perceived value. This may lead to prices that are out of touch with the market.
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• Missed opportunities: You might miss out on potential profits in two scenarios. One is if your product's value exceeds its cost and you’re undercharging. The other is if you struggle to compete because costs are high.

Best for: Businesses with clear-cut cost structures and predictable production costs. It's also suitable for industries that want to make their pricing simpler. 

2. Competition-based pricing

In this product pricing strategy, the competition’s pricing comes center stage. You’ll closely monitor it and set your prices accordingly. You can choose to price your product slightly lower, at the same level, or even slightly higher. It'll all depend on your positioning and perceived value.

Pros

• Market awareness: This approach ensures you stay competitive in the market. It helps you avoid pricing yourself out of reach.
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• Simple implementation: It's relatively easy to gather competitor pricing info. This means adjusting your own prices so that they fit your market.

Cons

• Underestimating value: You might inadvertently undervalue your product. This could happen if your competitors are also using cost-based pricing. Worse yet, they probably haven't optimized their pricing strategy.
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• Price wars: Focusing too much on competitor pricing can lead to a race to the bottom. Be mindful, as this could erode profit margins for everyone.

Best for: Newer businesses entering a competitive market. It could also work for those with products that are similar to existing offerings.

3. Penetration pricing

This product pricing strategy means launching your product at a lower price than its perceived value. The goal is to attract customers quickly and gain market share. It's a bold move that can shake up the market and disrupt established competitors.  

Pros

• Fast market entry: Penetration pricing can help you acquire customers quickly. This way you establish a foothold in the market faster.  
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• Discouraging competition: Low prices help you carve out a space for yourself. You make it difficult for competitors to enter the market or gain traction.

Cons

• Low initial profits: You'll likely experience lower profit margins. This could just be the case during the initial penetration phase.  
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• Customer expectations: Customers might come to expect permanently low prices. This can make it challenging to raise prices later on.

Best for: New products or businesses entering a competitive or saturated market. It can also be useful for products with a network effect, where value increases as more people use them.

4. Value-based pricing

This strategy is about aligning your prices with the value your product delivers to customers. It requires understanding your target market's willingness to pay. Then, you set prices that reflect the perceived benefits of your product.

Pros

• Higher profit margins: You’re capturing the full value of your product. This means you can achieve higher profit margins compared to other strategies.
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• Happier customers: When customers feel they're getting a fair price, they're more likely to be satisfied and loyal.

Cons

• Research intensive: Value-based pricing requires in-depth customer research. You’ll have to dig deep to understand their perceived value.  
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• Communication challenges: You’ll have to clearly articulate the value of your product. This happens with new product pricing strategies. Justifying the price can be a challenge in itself.

Best for: Unique or highly specific products that offer benefits to customers. It's also suitable for markets where customers prioritize value over price.

5. Freemium pricing

This strategy involves offering a basic version of your product for free. You’re charging for premium features or additional usage. It's a popular way to attract a large user base and create upselling opportunities.

Pros

• User acquisition: The free version lowers the barrier to entry. This makes it easy for potential customers to try your product.
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• Viral growth: Satisfied free users can become advocates. They often spread the word and attract new users.

Cons

• Conversion challenges: Converting free users to paying customers isn’t easy. It requires a well-crafted strategy and ongoing nurturing.
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• Support costs: Providing support to a large number of free users can strain your resources.

Best for: SaaS products and digital services with easily scalable features. It's also suitable for businesses with a strong focus on rapid user acquisition. 

6. Tiered pricing

This product pricing strategy is more of a step-by-step affair. You offer multiple pricing tiers with varying levels of features and benefits. It allows you to cater to different customer segments and budgets. You’re also providing a clear upgrade path for users scaling up. 

Pros

• Segmentation: You can tailor each tier to specific customer needs. You’re increasing the likelihood of attracting and retaining customers.
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• Upselling potential: Tiered pricing encourages customers to upgrade to higher tiers. The key is they need to experience the value of your product as fast as possible.  

Cons

• Complexity: Managing and communicating multiple tiers can be complex. Make sure your pricing page is clear and easy to understand.
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• Feature envy: Customers on lower tiers might feel unhappy about lacking access to features reserved for higher-tier customers.

Best for: Products with a wide range of features and functionalities. It's also suitable for businesses targeting diverse customer segments — especially those with varying needs and budgets.

7. Dynamic pricing

This product pricing strategy involves adjusting prices in real-time. You do so based on factors like demand, competition, or customer behavior. It allows you to maximize revenue and react quickly to market changes.

Pros

• Revenue optimization: This strategy can help you extract the maximum value from your product. It does so by adjusting prices based on demand and willingness to pay.
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• Market responsiveness: You can quickly adjust prices. Reacting to changes in market conditions is much easier.

Cons

• Customer perception: Frequent price changes make you look sloppy. This can lead to customer confusion or frustration, potentially damaging trust.  
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• Implementation complexity: Dynamic pricing means looking at many variables. You’ll need sophisticated systems and data analysis capabilities.  

Best for: Industries with fluctuating demand, such as travel, hospitality, or event ticketing. It's also suitable for businesses with advanced data analytics and pricing infrastructure.

How to choose the right pricing strategy

Pricing your product is a strategic decision with far-reaching consequences. The right pricing strategy can unlock growth, profitability, and customer loyalty. Let's explore the key factors to consider when crafting your pricing playbook:

Know your numbers to uncover your costs

Every successful product pricing strategy begins with clear costs. Calculate both fixed and variable costs. Keep your eye on those linked to developing, producing, marketing, and delivering your product. Let’s look at both side by side:

• Fixed costs: These include expenses like salaries, software licenses, and office overhead that remain constant regardless of how many customers you have.
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• Variable costs: Consider costs that fluctuate with your growth, such as customer support, payment processing fees, and bandwidth.

Once you've got a firm grasp on your costs, add a profit margin that aligns with your financial goals. This baseline will make sure you're actually making money.

Scope out the market and competitors 

Your pricing strategy doesn't exist in isolation. Take the time to understand the market dynamics and what your competitors are up to:

• Competitor pricing: Research how similar products or services are being priced. This provides a valuable benchmark. Remember, value-based pricing should be your north star.
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• Market demand: Is there a strong appetite for your product? High demand could allow for premium pricing. A less enthusiastic market might require a more competitive approach.
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• Economic conditions: Consider the broader economic climate. Inflation, recessions, and other factors can influence customer spending habits. This of course has an impact on your pricing strategy.

Walk in your customers' shoes and understand their value perception

Understanding how customers gauge value is non-negotiable. You’ll want to get to know them deeply. Here’s what to keep in mind:

• Willingness to pay: How much are customers prepared to invest in a solution to their problem? Surveys, focus groups, and market research can help you uncover this information.
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• Perceived value: Does your product offer unique features or exceptional customer service? High perceived value can justify premium pricing.
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• Price sensitivity: How sensitive are your customers to price changes? This will help you determine the optimal price points and understand their reaction to potential increases.

Set your compass to align pricing with business goals

Your pricing strategy should be closely tied to your overall business objectives. Think about:

• Short-term goals: Are you focusing on rapid market penetration? Or maximizing early profits?
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• Long-term vision: Do you want to establish yourself as a premium brand? Or prioritize affordability and accessibility?

Your pricing strategy should support your vision for the future.

Test, learn, and adapt:

The great thing about SaaS pricing is its flexibility. Be bold and think about different pricing strategies and gather feedback from your customers. Consider:

• A/B testing: Experiment with different pricing pages. Swap out different offers to see which ones resonate best with your audience.
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• Customer surveys: Ask your customers directly about their perception of your pricing. You can send them email surveys or embed them into your interface. 
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• Monitor metrics: Keep a close eye on key metrics. Think conversion rates, churn rates, and customer lifetime value. They’ll help you gauge the effectiveness of your product pricing strategy.

Next steps with Orb

We've explored the intricacies of product pricing strategies. You’ve learned that each is a unique tool for growth and aligning your prices with customer value. 

Now, it's time to translate those strategic insights into practical implementation. This way you’ll guarantee your pricing captures value and fosters customer trust.

This is where Orb shines.

Orb is designed to improve your pricing strategy, handling the mechanics of billing and invoicing so you can focus on the big picture. Orb is the flexible billing engine for hybrid and usage-based pricing built for developers and finance teams.

The Orb platform ingests product usage data at massive scale, speeds up new product launches, and provides detailed financial reporting.

Here’s how Orb helps:

• Data-driven decisions: Orb's advanced analytics and reporting provide deep insights. They show you customer behavior, usage patterns, and revenue trends. We help you make informed pricing decisions backed by data, not just guesswork.
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• Experimentation made easy: Test different pricing strategies with confidence. Orb's flexible infrastructure lets you experiment over time.
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• Usage-based pricing perfected: It doesn’t matter if it's API calls or data storage. Orb's granular tracking and flexible billing logic allow you to implement usage-based pricing. Precision and fairness are always put in the forefront. 
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• Easier integration: Connect Orb with your existing tech stack with ease. Whether it's your data warehouse or accounting software, Orb integrates with them.

Take control of your revenue engine and optimize your pricing to achieve sustainable growth. Do so with the help of Orb and test it out yourself here.