Nine of the best pricing strategies for SMEs

Your pricing strategy says a lot more about your company than just how much your product or service costs. It determines what type of customers you can attract, whether they’ll come back, what your competitors think about you, and ultimately, how much profit you’ll make. 

That’s because prices signal value. Customers don’t always want the lowest price. They want a price that accurately reflects the value of what they need. 

Say you want to buy a pen. If you see one for 30p and one for £3, you’ll likely choose the £3 one because you’ll think the 30p pen is cheaply made. Built into the higher price of the pen is the assumption of its higher value. If you’re a luxury shopper, you may be willing to spend £30 or even £300 on a top-of-the-range pen.  

So, the right price should accurately reflect the value of your product or service. 

There’s a fine line between undervaluing yourself (losing profit) and overvaluing yourself (losing sales). Larger businesses have big budgets to conduct extensive market research, calculate demand, and adjust prices quickly. Smaller and medium-sized enterprises (SMEs) don’t have the same level of resources, so they need to choose their own pricing that keeps them competitive. 

This blog will help you determine which pricing strategy is the best for your business to help you reflect the value of your offering, attract customers and achieve returns.

The most popular pricing strategies for SMEs 

Your commercial goals should guide your pricing decisions, whether you want to ensure consistent profits, retain customers, or win new ones. Below are nine of the most popular methods for achieving these goals, along with examples demonstrating how they work.  

1. Cost-plus pricing

This means pricing something at the cost it took to produce, plus a markup. Whatever amount you set as the markup will be your profit. 

Example: a bakery.

Goal: to make a profit on every item sold.  

Strategy: they mark up their products by 25%. Production costs (ingredients + packaging + labour) + 25% markup = price.  

This method ensures you cover your costs and profit from every sale. To accurately measure your production costs per item, you should consider the cost of running your business (including rent, marketing, transport, etc.). 

However, this pricing strategy doesn’t consider competitors’ pricing, so you could unknowingly undervalue or overvalue your products.  

Similar to this method is keystone pricing, which sets the retail price at double the wholesale cost paid for a product. This strategy is easy to implement, but it can result in prices so high customers are unwilling to pay.  

2. Competitive pricing

This strategy involves setting your price just below your direct competitors’ price to attract a higher market share. 

Example: a nail salon.

Goal: to win over their local competition’s customers. 

Strategy: their neighbour charges £45 per manicure, so this salon charges £40. 

Lower prices, of course, mean lower profit margins, but hopefully, you’ll gain more sales overall. This works best in markets where customers can easily compare products or services, and the only real differentiator is the price.  

However, the moment you undercut your competition, they’re likely to undercut you back. This is called a price war, which eventually causes you both to cut your margins so that your business becomes unaffordable to operate. 

Competitive pricing also doesn’t highlight your business’s unique value. What makes you better than your competitors? Can you communicate that added value to your customers to justify higher prices?  

3. Premium pricing

This strategy takes the opposite approach to competitive pricing. It involves pricing products higher than your competitors to give the impression that yours is of higher quality or more luxurious.  

Example: a nail salon. 

Goal: to stand out from the competition to justify higher prices. 

Strategy: they advertise their business’s expert-level skilled technicians. Their neighbour charges £45 per manicure, so this salon charges £60. 

This gives your business the potential for higher profit margins and, hopefully, a higher volume of sales.  

You just have to find the right customers who will value your unique selling point (USP) and be willing to pay more for it. This will likely require marketing efforts to raise awareness of your key differentiator. 

4. Price skimming

This is when you charge the highest initial price customers are willing to pay, then lower it over time as market competition rises or demand decreases. This strategy works best for new, innovative products with no direct competition. 

Example: a boutique designer. 

Goal: to be an exclusive luxury brand and generate revenue quickly through an enthusiastic customer base.  

Strategy: they price their new limited-edition suit collection at £700 per suit for the first 3 months. Then £600 for the following three months. Then £500 on sale once the buzz dies down and they’re ready to release a new collection. 

This method allows you to maximise profit from early enthusiasts who want to be the first to access your offering. These customers are usually willing to pay more for an exclusive experience. This can also help you recoup your development costs quickly. High-in-demand, low-supply products can be priced higher, and as demand drops, the price drops too.  

If your product remains popular, it will eventually attract competitors who can afford to copy and sell it at a lower rate. Also, dropping prices too quickly or too much can leave a negative impression on your early adopters. 

5. Penetration pricing

This is the opposite of price skimming. It’s when you penetrate the market with an initial low price to attract customers and gain a market share, then gradually increase your prices once your customers are established and loyal. 

Example: a new café. 

Goal: to get exposure to new customers to win them over in a saturated market. 

Strategy: they offer coffee at a discount price of £2 during their first month of trading. During the second month, prices are brought up to £3, then during the third, they set their price of £4. 

Heavy discounts can attract a lot attention from those who wouldn’t have otherwise tried your product. It will result in lower profit margins initially, but it will help you quickly establish a presence in a new market and gain the trust of new customers. 

Just make sure you have a solid and transparent plan for raising prices, which will help you retain customers and ensure long-term stability.  

6. Anchor pricing

Anchor pricing is where you display a lower price next to a higher price to show how much money a consumer could save. 

Example: a car dealer. 

Goal: to sell more units of cars in its seasonal sale. 

Strategy: they cross out a car’s original £15,000 sticker price and place a larger sticker showing its new £12,000 discounted price. 

Discounts next to original prices can pique consumers’ curiosity, tapping into their cognitive bias that they’re getting a good deal. Another way to use this principle is to place more expensive items next to cheaper ones on shelves and on your e-commerce website to indicate the cheaper items’ good value. 

Remember, consumers can check prices with comparison websites, so make sure the original price listed is realistic and not overly inflated. 

If this tactic is used too often, it can give you more of a bargain-retailer reputation, limiting your customer base to price-conscious consumers. You could also deter consumers from purchasing products at their regular price if they always believe a discount is around the corner.  

7. Loss-leader pricing

This involves selling an item for a loss to get people in the door to upsell more items. 

Example: a jewellery shop. 

Goal: to increase overall sales. 

Strategy: they price bracelets at a loss, hoping to attract customers who then buy accompanying charms at a premium price.  

Encouraging shoppers to buy multiple items in a single transaction can cover your losses from cutting the original product’s price. It could also familiarise customers with your brand and make them more willing to return.  

However, your business model will become unsustainable if customers only buy the item you’re selling for a loss. Plan appropriately if you’re considering adopting this strategy – for example, limit your loss-making product to one per customer, and cap the supply to avoid being taken advantage of.  

8. Subscription pricing

This is where customers pay a regular recurring fee for access to a product or service. 

Example: a print and digital magazine.  

Goal: for customers to purchase their new issue every week. 

Strategy: they introduce a subscription service so customers don’t need to make repeated purchases online or in-store. They get access to the magazine online as soon as it’s published, and delivered to their door the same day. 

This model can generate predictable recurring revenue and long-term customer relationships, but you need to be a business that can deliver ongoing value to retain customers. 

Obvious examples include apps and publishing services, but even car washes and hairdressers can benefit from subscription pricing. Retail products, too, if people need them frequently, like cat food or toilet paper.  

People won’t want to continue paying regularly for items they don’t use often, so they will unsubscribe, and your revenue will become less predictable. 

9. Use-based pricing

This method involves pricing your product or service according to how much a customer uses it.  

Example: a personal shopper. 

Goal: to gain repeat customers who value the service. 

Strategy: rather than charging a fee for an appointment, they charge customers a fee for the items they take home. Though the personal shopper may have picked out 20 or more items for a client, if the client only wants to keep two of them, they will only pay for two. 

This way, customers are left satisfied as they get tangible value—they only pay for how much they’ve used your service. This may make them more likely to return instead of paying an hourly rate or a fee for an appointment they might not have found worthwhile. 

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That being said, depending on your business, it can be difficult to quantify how much a customer uses your product or service. Consider charging customers per unit, like a warehouse offering £10 per square foot of storage space or a freelance graphic designer charging £300 per design. 

The main drawback for small enterprises with niche services, like the personal shopper we mentioned, is that they might spend a lot of time on customers who ultimately buy nothing. This is an inevitable risk, so you must calculate your fee accordingly. 

Key takeaways on choosing the right pricing strategy 

Here’s what you need to remember to help you find the right pricing strategy for your business: 

1. Define your commercial goal: Is it to become an exclusive luxury product? Is it to gain the largest market share? Is it to entice new customers? Choose the strategy that best aligns with this goal. 
2. Know your minimum price: Calculate the cost of running your business to determine the amount you need to charge to maintain your business. 
3. Know your target market: How much can they afford to pay? How much will they be willing to pay? 
4. Look at your competition: What do they charge? And how is their offering different to yours? 
5. Rely on your USP: This is what will make customers want to choose you over other businesses and what you can lean on to know your price is worthwhile. 

Keep experimenting to find the right price that aligns with your brand, covers your costs, and, most importantly, resonates with your customers.