Pricing Strategy
The strategy for setting a product's price. Types: Cost-Plus (cost + markup), Value-Based (what it's worth to the customer), Competitive (market-based), Penetration (low price to break in), Premium (high price to differentiate).
In practice
Price isn't just a number — it's a positioning statement. Low price: 'we're the best value.' High price: 'we're premium.' Mid-price with no differentiation: 'we're just like everyone else.' The question isn't 'what's the cheapest we can sell for?' but 'what price expresses our value?'
Common misconception
'Lowering price = more sales.' Not always. A price that's too low breeds suspicion (what's wrong with it?). Studies show: a 1% price increase = an 11% increase in average profit — because volume is hurt less than managers assume. Price sensitivity is usually smaller than executives believe.
How to fix it
Price isn't working? (1) Run an A/B test on price — two audiences, different prices, measure CR and revenue, (2) Van Westendorp Price Sensitivity survey — ask customers 4 pricing questions, (3) Check competitor pricing — are you an outlier? (4) Add a decoy price — a mid-tier product that makes the 'premium' option look reasonable.
Example
Coffee shop: capsules priced at $0.50/unit. Competitor: $0.58. Considered dropping to $0.44. A/B test: $0.50 vs $0.55. Result: $0.55 — CR dropped 3%, revenue rose 8.5%. Profit grew. They didn't lower the price.
Priority
Run a quarterly price review. Minimum calculation: COGS × 3 = a reasonable market price (rule of thumb). Beyond that: value-based analysis. The easiest tool: a Van Westendorp survey to 100 customers — 30 minutes with clear findings.
Related terms
Keep learning. Metrics that touch the same area:
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- Contribution MarginFinanceGross profit minus marketing, payment processing, and variable shipping costs. Contribution Margin = Net Revenue - COGS - Variable Costs. Reflects the real profit each order 'contributes' toward covering fixed costs.
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- COGS – Cost of Goods SoldFinanceThe direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
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