How do you position your product or service to generate revenue, compete effectively, and meet customer expectations? Pricing is not just about numbers, it’s about strategy. Choosing the right pricing strategy is important for any business to achieve long-term success and profitability.

This comprehensive guide covers the 5 most common pricing strategies for 2025, their pros and cons, and when to use them. These insights help you select a pricing strategy that reflects your costs, competition, and customer preferences.

What are pricing strategies?

A pricing strategy is a structured approach to setting the right price for your product or service. It balances three critical factors:

• Profitability—Ensuring your revenue exceeds your costs.
• Competitiveness—Staying attractive against competitors in the market.
• Customer value perception—Pricing aligned with your customers' willingness to pay.   

To ensure that your pricing aligns with broader business goals and market dynamics, you should define specific objectives known as "pricing objectives." Read more what pricing objectives are, why they are essential, and how they can be effectively leveraged to drive business growth and profitability: Pricing objectives are a roadmap to profitability | Academy 4 Pricing

1. Cost-Plus Pricing

Cost-plus pricing is one of the simplest and most straightforward methods to price products or services. It involves calculating the total cost of production or delivery and adding a fixed markup percentage for profit.

Pros

• Guarantees profit margins if costs are accurately calculated.
• Transparent and easy to implement.
• Suitable for industries or contracts where cost transparency is necessary.
  

Cons

• Ignores customer value and competitor pricing.
• May lead to pricing too high (or too low) if market dynamics aren’t considered. 

When to use Cost-Plus Pricing

• Stable costs: Ideal when your production or service delivery costs are predictable.
• Customized projects: Applicable for services like construction or specialized equipment.
• Limited competition: Useful in industries or situations with minimal competition.
• Government contracts: Often mandated in contracts requiring cost transparency.
• Industry norms: Common in specific fields like manufacturing or defense contracting.
• Read more on A guide to cost-based pricing for business owners | Academy 4 Pricing

Pricing tip! While cost-plus pricing ensures you cover costs, complement it by occasionally reviewing competitor pricing to remain competitive. Consider using tiered pricing to maxmimize profitability.

2. Value-Based Pricing

This customer-centric strategy revolves around pricing based on the perceived value to the customer rather than the cost to produce the product. It’s all about what your audience is willing to pay for the benefits and advantages your offering provides.

Pros

• Maximizes profitability through customer willingness to pay.
• Differentiates your product as high-quality or premium.
• Works well when your product meets unique customer needs.

Cons

• Requires significant research to understand customer value perceptions.
• Risk of overestimating or underestimating what customers will pay.

When to use Value-Based Pricing

• Highly differentiated products: Use this approach when your product offers something your competition doesn’t.
• Strong brand equity: Ideal for brands known for quality, innovation, or prestige.
• Market segmentation: Enables pricing adjustments for different customer groups.
• Customer value data: Effective when you have clear insights into what your audience values most.
  

3. Penetration Pricing

The goal of this pricing strategy is to capture market share by offering a low price. It's typically used by businesses entering a new market or introducing a new product. The idea is to attract customers who are sensitive to price and then gradually increase the price as you establish your brand. The downside is that it can be challenging to increase prices without losing customers once they've become accustomed to the lower price.

Pros

• Effective for capturing market share quickly.
• Encourages customer acquisition, especially in price-sensitive markets.

Cons

• Difficult to increase prices later without alienating customers.
• May lead to short-term profit losses.

When to use Penetration Pricing

• New product launch: Perfect for creating buzz and gaining initial traction.
• High price sensitivity: Works well in markets where customers base decisions primarily on price.
• Economies of scale: Suitable for businesses that can lower their costs as sales volume grows.
• Competitive market entry: Adopt penetration pricing to break into a market that is dominated by established competitors, using low prices as a lever to entice customers to switch to your brand.
• Network effects: Ideal for products like apps or platforms where their value increases with the number of users, such as in software or social platforms. 

Pricing tip! Make sure you have the financial resources to sustain low initial prices while scaling production or operations.

4. Skimming Pricing

This strategy involves setting a high price for a new product or service and then gradually reducing it over time. It's typically used in industries with a short product life cycle, such as technology. The high price reflects the novelty and uniqueness of the product, and as the market becomes saturated, the price is reduced to stay competitive. The downside is that customers may become alienated if they perceive the price reduction as a sign of lower quality.

Pros

• Helps recover R&D costs quickly.
• Taking advantage of customer willingness to pay a premium price for something new
• Positions your brand as high-value.

Cons

• May limit appeal to cost-conscious customers initially.
• Risks alienating early adopters when prices drop.

When to use Skimming Pricing:

• Innovative products with unique features: Ideal for tech companies launching gadgets or software.
• Luxury market: Works well when targeting high-income customers willing to pay for premium options.
• Limited competition: Best used when your product holds a temporary monopoly in its category.
• Recovering R&D costs: Helps offset expenses incurred during product development.
• Prestige positioning: Builds a high-value perception around your brand.

Example: Gaming consoles frequently implement skimming pricing, charging a premium at launch and lowering costs over time once mass production kicks in.

5. Dynamic Pricing

This strategy involves adjusting the price based on market demand, customer behavior, and competition. It's typically used in industries with fluctuating demand, such as airlines, hotels, and ride-sharing services. By adjusting the price based on supply and demand, businesses can maximize profits. The downside is that it can be difficult to implement and complex to manage.

Pros

• Maximizes revenue by aligning with customer/market behavior.
• Allows real-time adaptability to demand changes.
• Ensures optimal utilization of perishable inventory.

Cons

• Requires sophisticated pricing software and data management.
• May lead to customer dissatisfaction if price changes seem unfair.

When to use Dynamic Pricing

• High demand variability: Employ dynamic pricing when demand for your product or service fluctuates frequently, such as with hotels and airlines, which adjust prices based on seasonal demand, booking patterns, and occupancy rates.

• Perishable inventory: Opt for dynamic pricing in industries with perishable inventory where the value of the product diminishes over time, like in the case of event tickets or fresh produce, to maximize revenue before the item loses its value.

• Real-time market data: Use dynamic pricing when you have access to real-time market data and the ability to adjust prices quickly in response to market changes, competitor pricing, and supply and demand dynamics.

• Highly competitive markets: Choose dynamic pricing in highly competitive markets to stay competitive by frequently adjusting prices to undercut competitors, attract price-sensitive customers, and respond to market changes swiftly.
• E-Commerce platforms: Implement dynamic pricing for online retail or service platforms where algorithms can instantly change prices based on customer behavior, inventory levels, and other variables. 
• Read more on How companies are using dynamic pricing strategy | Academy 4 Pricing

Pricing Tip! Use transparency to build trust—clearly communicate why prices change (for example peak demand or limited capacity).

The choice you make in deciding the right pricing strategy affects your business's competitiveness and profitability. Each pricing strategy, whether it's the easy cost-plus pricing or the more complex real-time pricing, comes with its own pros and cons.

You should have your pricing strategy aligned with your costs, target audience, and competiton in the market. When you understand these strategies and know how to apply them effectively, you can develop a pricing model that maximizes your revenue and ensures sustainable growth.

We recommend using value-based pricing, if your target is to achieve maximum profit. For capturing market share, penetration pricing might be the best option, while skimming pricing can help position your product as a premium offering.