10 pricing strategies for small businesses to cut costs without sacrificing quality
Charging the right price for your products or services is vital to any small business pricing strategy. Nail it and you're on a path to growth, but misstep and you could see a dent in your sales and profits.
Whether you're launching a startup or have been running your business for a while, you know just how pivotal this decision is. It's not just about numbers; it's about striking a balance that draws in new customers while keeping your bottom line healthy.
Since there’s no one-size-fits-all approach to pricing, it can be challenging to know which strategy is best for your business. In this article, we’ll dive into 10 pricing strategies for small businesses to help you cut costs without sacrificing quality — empowering your business to remain profitable and competitive.
1. Cost-plus pricing
Cost-plus pricing, one of the simplest pricing strategies for small businesses, is when a company figures out how much it costs to make a product and then adds a markup to determine the selling price. Essentially, it's the cost of making the product plus a bit more for profit.
Best for: Startups and small businesses with a cost advantage
Pros: Simple to implement; can provide predictable profits
Cons: Ignores competition; no market flexibility
Pro-tip: Use technology to manage your expenses and help you determine the actual cost of making your product. This reduces human error and, in turn, can help you set the right markup.
2. Value-based pricing
Value-based pricing means setting a product's price based on how much customers believe it's worth. Instead of just considering the cost to make the product, businesses look at the unique benefits and value it offers to customers.
Best for: Businesses with a competitive market advantage; services-based businesses
Pros: Maximizes profit if customers see high value
Cons: Difficult to determine perceived value; higher marketing costs
Pro-tip: Conducting customer feedback surveys with incentives can give insights into how they value your products.
3. Penetration pricing
Penetration pricing is a very popular pricing strategy for startups and small businesses. This strategy helps introduce new brands to the market by offering a low introductory price that’s cheaper than the competition before gradually increasing prices as customers become loyal to the brand.
Best for: Startups and small businesses looking to build brand recognition, especially in a crowded niche
Pros: Quick market penetration; encourages word-of-mouth
Cons: Low profit margins; customers might grow to expect low prices and be an unsupported business model long term
Pro-tip: Keep an eye on data and insights during your introductory pricing phase to evaluate its success and adjust your strategy accordingly.
4. Price skimming
Price skimming involves setting a high price initially and then lowering it over time. An example of price skimming is when the latest and greatest smartphone comes out and it's sold at a high price because it's new and in demand. Over time, as newer models come out or the excitement fades, the price of the older model drops.
Best for: Businesses with high-demand products
Pros: High initial profits; makes products look in-demand and exclusive
Cons: Risk of alienating cost-conscious customers; quality must match the price
Pro-tip: Ensure you can maintain the quality that justifies your initial high prices without going over budget by getting corporate credit cards for employees. This will help you keep track of what your business is spending and why.
5. Bundle pricing
With bundle pricing, businesses sell multiple items together for a lower price than consumers would pay if they bought each item individually. This strategy makes customers feel like they’re getting more for their money and helps businesses reduce inventory.
Best for: Businesses with complementary products
Pros: Increases sales volume; moves old stock
Cons: Reduced profit per product
Pro-tip: Use bundle pricing to introduce customers to a new product by offering it at a discounted rate when paired with a tried-and-true popular product. Expensify offers bundled pricing when you commit to an Annual plan, as well as additional discounts if you bundle our expense management platform with the Expensify Card. See our pricing page for more details on how it works.
6. Psychological pricing
Psychological pricing is when products are priced just below round numbers to make them seem cheaper. For example, pricing something at $9.99 instead of $10 because it feels like a better deal to the customer, even though the difference is just a penny.
Best for: B2C businesses targeting price-sensitive customers
Pros: Increases sales by appealing to consumer psychology
Cons: May decrease perceived product value; won’t set you apart from competitors
Pro-tip: Depending on your brand and product, the opposite method (a rounded-up number) can sometimes be more effective as it promotes a feeling of prestige and authenticity. When using this pricing strategy, be sure to think about your target audience to figure out which method would resonate more.
7. Hourly pricing
Hourly pricing involves charging clients based on the time spent on their specific project or case. This approach is common in professions such as law or consulting, where the cost to the client corresponds directly to the hours dedicated to their needs.
Best for: Freelancers; businesses in industries where time and expertise directly impact the value delivered
Pros: Ensures payment for all work hours
Cons: Limits earning potential; can be difficult to track
Pro-tip: Tools like Expensify can help freelancers and businesses create, send, and fulfill invoices easily.
8. Dynamic pricing
Dynamic pricing is when prices change based on current market demand. Think of airline tickets or hotel rooms: prices might go up when there's high demand, like during holiday seasons, and drop during slower times.
While dynamic pricing won’t work for every business, it’s relatively common in the e-commerce and transportation industries.
Best for: Businesses with fluctuating demands, like airlines, hotels, or event-based services
Pros: Allows real-time market response; potential for high profits during peak demand
Cons: Can alienate customers if prices fluctuate too often; requires sophisticated tech to monitor and adjust prices
Pro-tip: Continuously monitor market demand and adjust prices with a clear strategy to avoid alienating customers.
9. Freemium pricing
Freemium pricing is when a business offers a basic version of its product for free but charges for advanced features or services. This strategy allows customers to use the basic features of your product and catch a glimpse of what the full package will offer them, which can encourage them to purchase the premium version.
Best for: SaaS companies, mobile apps, online platforms
Pros: Attracts a large user base; offers upselling opportunities; establishes trust
Cons: Can be challenging to convert free users to paid ones; risk of undervaluing the product
Pro-tip: Ensure the free version of your product is valuable enough to attract users, but leave enticing advanced features for the paid premium offering.
10. Competitive pricing
Competitive pricing is when businesses set the price of their products or services based on what their competitors are charging. This typically means selling your products at a lower price than other businesses in your market.
Best for: Businesses in highly competitive industries where products or services are similar
Pros: Helps businesses stay relevant and attractive in a competitive market; can be combined with other strategies
Cons: Can lead to price wars and a “race to the bottom,” which might decrease overall profits and doesn't consider the individual costs or value proposition of your business
Pro-tip: Regularly research competitor prices, but don't undervalue your unique selling points in the race to match or undercut them.
Getting back to basics: pricing strategy essentials
Understanding the fundamentals of pricing is the first step towards making informed decisions that can impact your business's profitability. Setting the right pricing strategy for your business is all about balancing efficiency with accuracy while keeping an eye on your competition.
Let’s explore some common questions about small business pricing strategies below.
What is a pricing strategy, exactly?
A pricing strategy is a method businesses use to determine how much to charge for their product or service. It helps businesses choose prices to maximize profits while considering consumer and market demand.
What should you consider when choosing a pricing model for your business?
When choosing a pricing strategy for your business, you need to consider the following factors:
Your customer base: Understand who is buying your product, and determine how much they’re willing to pay for your product.
The competition and market demand: Familiarize yourself with what competitors offer and at what price, and find your sweet spot.
Your business's unique value proposition: Identify what sets you apart from your competition, and ensure your pricing reflects that value.
External influences: Stay updated on broader economic conditions, regulations, and other factors that might affect your prices.
Choosing the best pricing strategy for your small business isn't just about picking numbers out of thin air — it's a methodical process that plays a huge role in your business's success. Before setting those price tags, take a deep breath, do your homework, and make sure your pricing reflects not just the value of what you're selling but also the world around you.
Which pricing strategy is best for small businesses?
The best pricing strategies for small businesses are value-based, cost-plus, and competitive pricing strategies. Here’s why:
Value-based pricing focuses on the perceived value of a product or service to the customer, which can be especially effective when your business offers a new, unique solution that competitors can't easily replicate.
Cost-plus pricing is straightforward and ensures that all costs are covered while adding a profit margin on top, which can help you maintain consistent profitability as you start out.
Competitive pricing involves setting prices based on what competitors charge, allowing your business to appear valuable as soon as you enter the market since you’re a more affordable option than your competitors.
Remember, pricing strategies aren't one-size-fits-all. Every business has its own unique circumstances, target audience, and objectives, so it's important to conduct thorough research and analysis to determine which pricing strategy aligns best with your individual business goals and value proposition.
What is the most profitable pricing strategy?
Value-based pricing tends to be the most profitable pricing strategy for small businesses. This method focuses on the product's perceived value to the customer, allowing businesses to charge a premium.
By understanding what customers are willing to pay for the benefits they receive — especially ahead of holidays like Small Business Saturday — businesses can optimize their pricing to match that perceived value, often resulting in higher profits and more satisfied customers.
No matter how you price it, Expensify helps it thrive
Setting the right price is just the beginning. For your business to truly thrive, you need to efficiently manage your expenses and understand your financial flow.
That's where Expensify steps in. Our platform gives you a clear picture of your finances, ensuring you're always making the best choices for your business.
