Pricing is one of the most powerful tools a business has. It shapes how customers perceive your product, how revenue flows through your business and whether your growth is sustainable. And yet, many pricing decisions still come down to guesswork, gut instinct or copying the closest competitor. Below, we'll explain how to build, evaluate and develop pricing strategies for your business.

What's in this article?

• What are the main types of pricing strategies?
  
• How to create an effective pricing strategy
  
• How do pricing strategies differ across industries?
  
• How to measure and improve pricing performance
  

What are the main types of pricing strategies?

There's no single approach to pricing. Most businesses pull from a few well-known strategies, often blending them depending on their products, markets and stages of growth. Here's a roundup of the most common strategies and when they make sense.

Cost-based pricing

This is the classic markup model. To get your price, you figure out your costs and add a margin. It's easier to calculate and ensures you're covering expenses, but it ignores customer demand and perceived value.

This model is best for retailers or manufacturers with predictable unit costs.

Value-based pricing

In this model, your price is based on what your product is worth to the customer, not what it costs you to make. If your product saves a client £100,000 a year, charging £10,000 might still feel like a deal.

This model is best for software as a service (SaaS), consulting or any offering where the return on investment is transparent and quantifiable.

Competition-based pricing

You set your price based on what others in your space are charging. It's a way to stay in sync with the market, but it can become a race to the bottom if you're not careful.

This model is best for commoditised products or highly competitive markets.

Penetration pricing

You start low, sometimes even at a loss, to quickly attract customers and build market share. Then, you raise prices once you've proven value.

This model is best for new product launches or startups that want to break in fast.

Price skimming

This is the opposite of penetration pricing: you launch high, target early adopters and gradually lower the price over time. It's a way to maximise early margin while demand is hot.

This model is best for innovative or high-demand products with limited competition.

Dynamic pricing

You adjust prices in real time based on demand, inventory or behaviour. Airlines, rideshare platforms and e-commerce giants use this approach.

This model is best for businesses with flexible supply or swiftly changing demand.

Premium pricing

You charge more to signal exclusivity and quality. The high price is part of the appeal.

This model is best for luxury goods, prestige brands or anything where perception drives demand.

Companies typically employ a blend of strategies. You might combine value-based pricing with competition-based pricing or start with penetration pricing before you shift to premium pricing. What matters is that your pricing reflects both what customers are willing to pay and what makes sense for your business.

How to create an effective pricing strategy

A strong pricing strategy starts with an understanding of what your product is worth, whom it's for and how it fits into the market. Here's a step-by-step plan that balances value, business goals and market realities.

Understand the value you deliver

Start with the fundamentals. Decide what problem you're solving and how much that's worth to your customer. Determine what you're helping them save, gain or avoid. The more you can quantify the value, the better positioned you are to price it. Talk to customers. Ask what they'd pay. Use that input to anchor your pricing around outcomes, not features.

Know your audience

Know whom you're selling to and how price-sensitive they are. Enterprises think about pricing differently from small businesses. Some segments will trade time for money, while others want convenience at a premium. Understand how your target customers make buying decisions, what they compare you to and what pricing formats they expect (e.g. flat rate, usage-based, tiered).

Study the competition

Know what you're up against. Look at how competitors price and package similar offerings, and pinpoint where you provide more value or are different. Use this to position your pricing, both in terms of the number and how you explain it. Undercutting might win on price, but differentiating on value is usually more sustainable.

Understand your costs

Even if you're not using cost-based pricing, you still need a clear view of your margin, including what it costs to deliver each unit or service and what your customer acquisition and support costs are. Your price needs to be profitable at scale after you account for discounts, support and churn.

Match pricing with your business model

Your pricing should support what you're trying to do. If you want to grow fast, lower prices or freemium models can help. If you'd prefer to drive profitability, focus on margin and average deal size. If longer retention is your focus, consider annual contracts or loyalty-based discounts. The pricing model is a lever for your goals.

Choose the right structure

Whether it's flat-rate, tiered, usage-based or per seat, your pricing model shapes how customers perceive and use your product. The best model matches how customers get value from you. If they increase usage over time, usage-based pricing can scale revenue with them. If they want predictability, flat-rate pricing might win their confidence.

Test, learn and adjust

Don't treat pricing as a one-time decision. Try pilots. Do A/B tests on different tiers or bundles. Look at conversion rates, retention and deal sizes. Small shifts, such as changing the anchor price and bundling a feature, can have an outsized impact. Make a habit of reviewing pricing regularly. It should develop alongside your product and your market.

Ensure your systems can support it

Great pricing ideas fall flat if your billing system can't implement them. If you want to run experiments, offer usage-based models or localise pricing by country, your infrastructure needs to be flexible. Stripe Billing, for example, makes it easier to launch and adjust pricing models without long dev cycles so that your pricing strategy isn't restricted by your software.

How do pricing strategies differ across industries?

What works in one industry might not in another. Pricing strategy depends heavily on what you sell, how it's delivered and what your customers expect. Here's how pricing tends to look across a few major business models.

Physical goods

When you sell tangible products, you're usually working with fixed production costs, supply chains and inventory limits. That makes cost-based pricing more common: you cover your expenses, then add a margin. Competitive pricing is also important because shoppers can compare prices instantly. If you have a luxury brand, premium pricing works, but only if the product and brand experience justify it.

Digital products and SaaS

For software and digital programs, the marginal cost of serving one more customer is close to zero. That enables value-based pricing, where you charge based on outcomes, not cost.

You'll often see tiered pricing, freemium models or usage-based billing that scales with how customers use the product. Free trials are common too. And because many of these businesses are global, they often localise pricing by region or user type (e.g. student discounts, nonprofit tiers). The main focus is on maximising recurring revenue and matching price with usage and customer value.

Services

Service-based businesses often charge by the hour or project but determine their rates using value-based pricing. That works only if you can definitively demonstrate your impact.

Trust and reputation matter here. If the price is too low, you look inexperienced. If the price is too high, you risk losing the deal. Many service providers also use competitive price bands that depend on location, specialisation or client size. The goal is to match price to perceived expertise, scope and outcomes delivered.

Travel, hospitality and other dynamic markets

Some industries work with perishable inventory such as hotel rooms, airline seats and rides. Once a date passes, unsold capacity is gone. That's why dynamic pricing is the default. Prices change in real time based on supply, demand, timing and even user behaviour.

You'll also see surge pricing (e.g. a rideshare during rush hour) or yield management strategies that try to maximise revenue by selling the right thing to the right person at the right time for the right price.

How to measure and improve pricing performance

Pricing affects nearly every part of your business, from revenue to retention and brand perception. Once your pricing is live, the real work begins. The only way to know whether your strategy is working is to carefully track the outcome.

Start with the following metrics:

• Profit margin: Track gross and net margin across products or segments. If margin shrinks, either production costs are rising or prices aren't holding up.

• Revenue and sales volume: Assess whether you're making more money, and do your research. Perhaps a price change affected conversions or the average order size. More revenue isn't always better if margin or retention take a hit.

• Conversion rate or win-loss rate: In B2B transactions, look at whether you're winning deals at your current price point or losing to cheaper alternatives. In e-commerce or SaaS, ensure your checkout conversion is where it should be.

• Average deal size or order value: Find out whether customers are upgrading, bundling or choosing premium plans. Track whether your pricing nudges them upward.

• Churn and retention: Especially for recurring models, watch how pricing affects long-term behaviour. Higher prices could be increasing churn.

• Customer lifetime value (LTV): Pricing should support, not erode, LTV. Monitor how acquisition, spend and retention shift across different pricing tiers.

• Market share: If one of your goals was to grow fast, pay attention to whether you actually gained share. Sometimes that means tracking proxy indicators such as inbound demand and competitor mentions.

Once you have a grasp on how well you're performing, use the following tactics to improve:

• Test your way to better outcomes: Run A/B pricing tests when possible. Try different tiers, bundles or billing models. Even small tweaks (e.g. framing or default options) can affect conversions or deal size.

• Use your tools: Manual analysis takes you only so far. Pricing performance improves faster when you have the systems to support it. Stripe, for example, gives you flexible billing infrastructure and analytics so you can launch, measure and improve without building everything from scratch.

• Communicate well: When you change prices, how you roll them out matters as much as the change itself. If you're raising prices, explain why. Add value where you can. Grandfather in loyal users when appropriate. The goal is transparency.

• Add value before you discount: If pricing feels mismatched, don't default to cutting it. First, ascertain whether the problem is price or perceived value. Sometimes, better onboarding, support or feature packaging fixes the issue without sacrificing margin.

• Stay flexible: Pricing isn't a one-time decision. Markets shift, competitors change and costs rise. Review your strategy regularly (ideally quarterly) and be ready to adapt. Build pricing into your growth playbook and use it as a tool in your market positioning and marketing strategies.