What is pricing?

Two shops can sell exactly the same product, and one does well while the other doesn’t. Often the difference lies in how they decide what to charge.

Pricing is the process of deciding the selling price of a product or service so that it delivers the profitability you’re aiming for. To set it, you combine three pieces of information: what the product costs you, what your competitors charge and what the customer is willing to pay.

Pricing is part of any business’s marketing plan and can follow very different strategies: psychological pricing, prestige or premium pricing, price skimming, penetration pricing, cost-based pricing and promotional pricing. Below you’ll find the factors that influence price, how each strategy works, a table comparing them and a worked example of how a discount changes your margin.

Key points:

• Pricing decides the selling price; cost is only one of the starting inputs.
• Each strategy pursues a different goal (margin, market share, brand image or stock turnover) and carries its own risk.
• Price skimming launches a product at a high price and lowers it over time; penetration pricing does the opposite.
• A small discount can wipe out almost all your profit: in the example below, a 10% price cut means 83% less profit per unit.

Pricing strategy and profitability

The right pricing method depends on what you want to achieve: maximise profit, hold on to market share, improve your brand image or boost sales. There is no single correct price for every case. The same product can sell cheaply in a shop chasing volume and at a higher price in another that competes on service and warranty.

To choose a pricing method, you need to take into account your business objectives, market conditions and the preferences of your potential customers. Price also determines which segment you target, and with it the tone of your campaigns and of your inbound marketing content.

A good price keeps the business competitive and improves conversion without giving away margin. The challenge is balancing profitability against your other goals: the price that maximises margin today may cost you market share tomorrow, and vice versa.

Example: how a discount affects your margin

Say a product costs you €40 and you sell it for €49.99 excluding VAT. The gross margin is €9.99: 20% of the selling price and almost 25% on cost. If you add €4 of other costs per order (shipping, picking and payment processing) to that €40, the total cost is €44 and the profit per unit drops to €5.99.

Now apply a 10% discount. The price falls to €44.99 and the profit per unit to €0.99. You’ve cut the price by 10%, but profit falls by 83%, and to earn the same as before you’d need to sell roughly six times as many units.

Before launching any promotion, it pays to calculate your profit margin properly. For the full process, with a pricing formula, see the guide on how to calculate the price of a product.

Key factors in applying a pricing strategy

A good price comes from combining internal data, such as your costs and goals, with external data, such as your competitors and your customers. Every business, online or bricks-and-mortar, has to work through these questions. These are the factors that carry the most weight:

• Knowing your target audience: identify their needs, purchasing power, wants and buying habits. That tells you the highest price they’re willing to pay.
• Competitor analysis: research your competitors’ prices and what they offer for that price (delivery charges, delivery time, warranty).
• Costs: the price has to cover production or purchase costs (materials, labour, overheads) and leave the profit margin you’re after.
• Perceived value: the price should match the quality of your product, and you need to be able to get that quality across to the end consumer.
• Product life cycle: the price changes with each stage. It can start high at launch (skimming) or low to break into the market (penetration), and is then adjusted during maturity and decline.
• Flexibility: leave room to offer discounts, promotions or bundles when you need to attract customers or speed up sales.
• Monitoring and adjustments: competitors’ prices change often. Tracking them regularly is essential if you apply a repricing or dynamic pricing strategy.

On top of these factors come your business objectives, which have their own section further down.

Types of pricing strategies

There are many strategies for setting the price of a product or service. The table summarises the most common ones; each is explained below it.

Psychological pricing

Psychological pricing plays on how the customer perceives the figure. The classic example is €9.99 instead of €10, which looks lower. It also covers round prices, which convey quality, and showing a higher reference price next to yours so that yours looks like a good deal.

Price skimming

Price skimming means launching a new product at a high price to capture the customers willing to pay more first. The price then comes down gradually as the product moves through its life cycle, the market becomes saturated and competitors arrive.

Each price drop opens the product up to a new, more price-sensitive segment. It’s common in technology, games consoles and innovative household appliances. At the end of the cycle, the price cut often coincides with the arrival of a new model.

Penetration pricing

Penetration pricing is the opposite of skimming: you enter the market at a low price to attract customers and gain share quickly. Once you have a customer base, you raise the price to improve your margin. The risk lies in that increase, because some of the customers who came for the price will leave as soon as it stops being the lowest.

Premium or prestige pricing

With premium pricing, you set the price above that of similar products to convey quality, exclusivity or status. You give up volume in exchange for more margin per unit, and it only works if the brand and the product justify the difference. You’ll find it explained with examples in the guide on what a premium pricing strategy is.

Cost-based pricing

With cost-based pricing, you add a fixed percentage to the product’s cost. If it costs you €40 and you apply 25%, you sell it for €50. It’s simple and guarantees a margin, but it ignores what your competitors charge and what the customer is willing to pay, so treat it as a starting point.

Promotional pricing

With promotional pricing, you offer discounts for a set period to attract customers and increase sales. A promotion is temporary by definition: a discount that is never withdrawn stops being a discount and becomes your new price. The risk is setting prices so low that they leave you with almost no profit (as in the example above) or even a loss, or that they get customers used to buying only when there’s a deal.

If you sell in the European Union, when you announce a price reduction the previous price you display must, as a general rule, be the lowest price you applied in the preceding 30 days. This is set out in Directive (EU) 2019/2161, known as the Omnibus Directive, which each Member State has transposed into its national law; in Spain, for example, it’s included in the Law 7/1996 on Retail Trade (in Spanish).

Pricing objectives

The main objective of pricing is to set profitable prices that allow the business to maximise its revenue and profit. You can also pursue other goals with your pricing strategy. The most common are:

• Increase market share: sell to more customers, even with less margin per unit.
• Match competitors’ prices: stop price from being the reason a customer goes to another shop.
• Improve brand image: use price to convey quality or exclusivity.
• Improve stock turnover: adjust prices so products don’t sit idle in the warehouse.
• Maximise long-term profitability: give up some margin today to win customers who come back.

Which objectives to prioritise depends on the company’s overall goals and its position in the market. A shop that has just opened usually goes after market share; an established brand, after margin.

How do you apply a pricing strategy in an online shop?

Applying a pricing strategy takes knowing your competitors’ prices and your real margin, plus rules that run frequently. Boardfy is a SaaS platform for competitor price monitoring and dynamic pricing for e-commerce, with direct price updates on Amazon, eBay, Google Shopping and Mirakl marketplaces.

• Boardfy reads your competitors’ prices every 6 hours with its price monitoring.
• Boardfy applies your dynamic pricing rules every 30 minutes and never goes below your minimum price or margin.
• Boardfy calculates your margin from cost, deducting marketplace commissions, card payment fees and any other costs you want to allocate.
• Boardfy keeps the price history and gives you competitor analysis product by product.

Boardfy doesn’t decide your strategy: it applies the rules you define. You can try it free for 7 days, no card required.