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In this blog you will learn about the importance of choosing the right pricing strategy for a successful business plan.

Why is a pricing strategy important for a business plan?

A business plan is a written document outlining a company’s core business practices – from products and services offered to marketing, financial planning and budget, but also pricing strategy. This business plan can be very lengthy, outlining every aspect of the business in detail. Or it can be very short and lean for start ups that want to be as agile as possible.

This plan can be used for external investors and relations or for internal purposes. A business plan can be useful for internal purposes because it can make sure that all the decision makers are on the same page about the most important aspects of the business.

A 1% price increase can lead to an 8% increase in profit margin.

A business plan could be very lengthy and detailed or short and lean, but in all instances, it should have a clear vision for how pricing is tackled. A pricing strategy ultimately greatly determines the profit margin of your product or service and how much revenue the company will make. Thorough research of consultancy agencies also show that pricing is very important. McKinsey even argues that a 1% prices increase can lead up to an 8% increase in profits. That is a real example of how small adjustments can have a huge impact!

It is clear that each business plan should have a section about pricing strategies. How detailed and complicated this pricing strategy should be depends for each individual business and challenges in the business environment. However, businesses should at least take some factors into account when thinking about their pricing strategy.

What factors to take into account?

The pricing strategy can best be explained in the marketing section of your business plan. In this section you should describe what price you will charge for your product or service to customers and your argumentation for why you ask this. However, businesses always balance the challenging scale of charging too much or too little. Ideally you want to find the middle, the optimal price point.

The following questions need to be answered for writing a well-structured pricing strategy in your business plan:

What is the cost of your product or service?

Most companies need to be profitable. They need to pay their expenses, their employees and return a reasonable profit. Unless you are a well-funded-winner-takes-all-growth-company such as Uber or Gorillas, you will need to earn more than you spend on your products. In order to be profitable you need to know how much your expenses are, to remain profitable overall.

How does your price compare to other alternatives in the market?

Most companies have competitors for their products or services, only few companies can act as a monopoly. Therefore, you need to know how your price compares to the other prices in the market. Are you one of the cheapest, the most expensive or somewhere in the middle?

Why is your price competitive?

When you know the prices of your competitors, you need to be able to explain why your price is better or different than that of your competitions. Do you offer more value for the same price? Do you offer less, but are you the cheapest? Or does your company offer something so unique that a premium pricing strategy sounds fair to your customer? You need to be able to stand out from the competition and price is an efficient differentiator.

What is the expected ROI (Return On Investment)?

When you set your price, you need to be able to explain how much you are expeciting to make. Will the price you offer attract enough customers to make your business operate profitable? Let’s say your expenses are 10.000 euros per month, what return will your price get you for your expected amount of sales?

Top pricing strategies for a business plan

Now you know why pricing is important for your business plan, “but what strategies are best for me?” you may ask. Well, let’s talk pricing strategies. There are plenty of pricing strategies and which ones are best for which business depends on various factors and the industry. However, here is a list of 9 pricing strategies that you can use for your business plan.

• Cost-plus pricing
• Competitive pricing
• Key-Value item pricing
• Dynamic pricing
• Premium pricing
• Hourly based pricing
• Customer-value based pricing
• Psychological pricing
• Geographical pricing

Most of the time, businesses do not use a single pricing strategy in their business but rather a combination of pricing strategies. Cost-plus pricing or competitor based pricing can be good starting points for pricing, but if you make these dynamic or take geographical regions into account, then your pricing becomes even more advanced!

Pricing strategies should not be left out of your business plan. Having a clear vision on how you are going to price your product(s) and service(s) helps you to achieve the best possible profit margins and revenue. If you are able to answer thoughtfully on the questions asked in this blog then you know that you have a rather clear vision on your pricing strategy.

If there are still some things unclear or vague, then it would be adviceable to learn more about all the possible pricing strategies . You can always look for inspiration to our business cases. Do you want to know more about pricing or about SYMSON? Do not hesitate to contact us!

Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!

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Pricing Strategy in a Business Plan: Deep Dive

• March 21, 2024
• Business Plan , How to Write

In this blog post, we’re diving into how to choose and explain your pricing strategy in your business plan. We’ll cover different pricing models like penetration, premium, and value-based. We’ll also dive into how to present your pricing strategy in your business plan.

Whether you’re starting a new business or preparing a business plan for an existing company, getting your pricing right is key to attracting customers and making a profit. Let’s break down how to make your pricing strategy clear and effective. Let’s dive in!

What are the different pricing strategies?

Different pricing strategies can significantly influence demand, profitability, and market positioning for businesses. Here’s an overview of some common pricing strategies:

• Cost-Plus Pricing: Adds a markup percentage to the cost of producing a product or delivering a service. It’s simple to calculate and ensures a profit margin.
• Value-Based Pricing: Sets prices based on the perceived value to the customer rather than the cost of production. This strategy focuses on the benefits and value the product or service brings to the customer.
• Competitive Pricing: Prices are set based on competitors’ pricing structures. Businesses might price their products slightly lower than competitors to gain market share or at a similar level to match the market rate.
• Penetration Pricing: Involves setting lower prices to enter a competitive market and attract customers quickly. The goal is to gain market share and then gradually increase prices.
• Premium Pricing: Setting the price of a product or service higher than the competitors. This strategy is used to signal superior quality or exclusivity to justify the higher cost.
• Dynamic Pricing: Adjusting prices in real-time based on market demand, competition, and other factors. Common in industries like hospitality and airlines.
• Freemium Pricing: Offering a basic product or service for free while charging for premium features. This strategy is often used by software and service companies to attract users.
• Bundle Pricing: Combining several products or services and selling them at a single price, often lower than the total cost of buying each item separately. This can increase the perceived value and encourage sales.

How to choose a pricing strategy

Here’s how to come up with an efficient pricing strategy:

Align Pricing with Market Strategy

Begin by articulating how your pricing strategy complements your overall market strategy. If you’re aiming for market penetration, explain how your pricing is designed to attract a large volume of customers by being more affordable than competitors.

For a premium pricing strategy, discuss the exceptional quality, exclusivity, or unique value your offerings bring, justifying higher price points.

If you’re adopting a value-based pricing model instead, illustrate how your pricing directly correlates with the perceived value to the customer, possibly through superior benefits or cost savings they provide.

Relate Pricing to the Target Market

Your pricing strategy should be closely tied to your understanding of your target market .

For instance, if your target market highly values sustainability and is willing to pay more for eco-friendly products, your pricing should reflect this. Similarly, if you’re targeting a price-sensitive segment, explain how your pricing strategy enables you to offer competitive value while maintaining profitability.

Consider the Competitive Landscape

A comprehensive pricing strategy also considers the competitive landscape . Analyze your competitors’ pricing and how your strategy positions you within this context.

Are you offering a more affordable alternative to premium products, or are you introducing a higher-quality option in a market segment dominated by low-cost competitors?

Discuss how your pricing strategy gives you a competitive edge, whether it’s by filling a gap in the market, offering better value, or challenging the status quo with innovative pricing models.

Where to include your prices in your business plan?

In your business plan, prices should be detailed under “Products or Services” within the Business Overview section of your business.

This part of the plan not only describes what you are offering but also provides an ideal opportunity to outline your pricing strategy and the specific prices or price ranges of your products or services.

Here, you can explain how your pricing fits into the market and aligns with your overall business strategy, giving potential investors or lenders a clear understanding of your approach to generating revenue.

Remember your pricing strategy should align with your financial projections (projected income statement, cash flow statement, and balance sheet). Indeed, you will need to give some high-level explanation of how you came up with these financial projections, based on your pricing strategy too.

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The Ultimate Guide to Pricing Strategies & Models

Discover how to properly price your products, services, or events so you can drive both revenue and profit.

FREE SALES PRICING CALCULATOR

Determine the best pricing strategy for your business with this free calculator and template.

Published: 08/16/23

Pricing your products and services can be tough. Set prices too high, and you miss out on valuable sales. Set them too low, and you miss out on valuable revenue.

Thankfully, pricing doesn’t have to be a sacrifice or a shot in the dark. There are dozens of pricing models and strategies that can help you better understand how to set the right prices for your audience and revenue goals.

That’s why we’ve created this guide.

Whether you’re a business beginner or a pricing pro, the tactics and strategies in this guide will get you comfortable with pricing your products. Bookmark this guide for later and use the chapter links to jump around to sections of interest.

Pricing Strategy

Types of pricing strategies, how to create a pricing strategy, pricing models based on industry or business.

Conducting a Pricing Analysis

Pricing Strategy Examples

A pricing strategy is a model or method used to establish the best price for a product or service. It helps you choose prices to maximize profits and shareholder value while considering consumer and market demand.

If only pricing was as simple as its definition — there’s a lot that goes into the process.

Pricing strategies account for many of your business factors, like revenue goals, marketing objectives, target audience, brand positioning, and product attributes. They’re also influenced by external factors like consumer demand, competitor pricing, and overall market and economic trends.

It’s not uncommon for entrepreneurs and business owners to skim over pricing. They often look at the cost of their products (COGS) , consider their competitor’s rates, and tweak their own selling price by a few dollars. While your COGS and competitors are important, they shouldn’t be at the center of your pricing strategy.

The best pricing strategy maximizes your profit and revenue.

Before we talk about pricing strategies, let’s review an important pricing concept that will apply regardless of what strategies you use.

Free Sales Pricing Strategy Calculator

• Cost-Plus Pricing
• Skimming Strategy
• Value-Based Pricing

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Determine the Best Pricing Strategy For Your Business

Fill out this form to access the free template., price elasticity of demand.

Price elasticity of demand is used to determine how a change in price affects consumer demand.

If consumers still purchase a product despite a price increase (such as cigarettes and fuel) that product is considered inelastic .

On the other hand, elastic products suffer from pricing fluctuations (such as cable TV and movie tickets).

You can calculate price elasticity using the formula:

% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand

The concept of price elasticity helps you understand whether your product or service is sensitive to price fluctuations. Ideally, you want your product to be inelastic — so that demand remains stable if prices do fluctuate.

Cost, Margin, & Markup in Pricing

To choose a pricing strategy, it’s also essential to understand the role of cost, margin, and markup — especially if you’d like your pricing to be cost-based . Let’s dive into the definition for each.

Cost refers to the fees you incur from manufacturing, sourcing, or creating the product you sell. That includes the materials themselves, the cost of labor, the fees paid to suppliers, and even the losses. Cost doesn’t include overhead and operational expenses such as marketing, advertising, maintenance, or bills.

Margin (in this case, gross margin) refers to the amount your business earns after you subtract manufacturing costs.

Markup refers to the additional amount you charge for your product over the production and manufacturing fees.

Now, let’s cover some common pricing strategies. As we do so, it’s important to note that these aren’t necessarily standalone strategies — many can be combined when setting prices for your products and services.

• Competition-Based Pricing
• Dynamic Pricing
• High-Low Pricing
• Penetration Pricing
• Skimming Pricing
• Psychological Pricing
• Geographic Pricing

Now, let's dive into the descriptions of each pricing strategy — many of which are included in the template below — so you can learn about what makes each of them unique.

Discover how much your business can earn using different pricing strategies with HubSpot's free sales pricing calculator so you can choose the best pricing model for your business.

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1. competition-based pricing strategy.

Competition-based pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market rate (or going rate ) for a company’s product or service; it doesn’t take into account the cost of their product or consumer demand.

Instead, a competition-based pricing strategy uses the competitors’ prices as a benchmark. Businesses who compete in a highly saturated space may choose this strategy since a slight price difference may be the deciding factor for customers.

With competition-based pricing , you can price your products slightly below your competition, the same as your competition, or slightly above your competition. For example, if you sold marketing automation software , and your competitors’ prices ranged from $19.99 per month to $39.99 per month, you’d choose a price between those two numbers.

Whichever price you choose, competitive pricing is one way to stay on top of the competition and keep your pricing dynamic.

Competition-Based Pricing Strategy in Marketing

Consumers are primarily looking for the best value which isn’t always the same as the lowest price. Pricing your products and services competitively in the market can put your brand in a better position to win a customer’s business. Competitive pricing works especially well when your business offers something the competition doesn’t — like exceptional customer service, a generous return policy, or access to exclusive loyalty benefits .

2. Cost-Plus Pricing Strategy

A cost-plus pricing strategy focuses solely on the cost of producing your product or service, or your COGS . It’s also known as markup pricing since businesses who use this strategy “markup” their products based on how much they’d like to profit.

To apply the cost-plus method, add a fixed percentage to your product production cost. For example, let’s say you sold shoes. The shoes cost $25 to make, and you want to make a $25 profit on each sale. You’d set a price of $50, which is a markup of 100%.

Cost-plus pricing is typically used by retailers who sell physical products. This strategy isn’t the best fit for service-based or SaaS companies as their products typically offer far greater value than the cost to create them.

Cost-Plus Pricing Strategy in Marketing

Cost-plus pricing works well when the competition is pricing using the same model. It won’t help you attract new customers if your competition is working to acquire customers rather than growing profits. Before executing this strategy, complete a pricing analysis that includes your closest competitors to make sure this strategy will help you meet your goals.

3. Dynamic Pricing Strategy

Dynamic pricing is also known as surge pricing, demand pricing, or time-based pricing. It’s a flexible pricing strategy where prices fluctuate based on market and customer demand.

Hotels, airlines, event venues, and utility companies use dynamic pricing by applying algorithms that consider competitor pricing, demand, and other factors. These algorithms allow companies to shift prices to match when and what the customer is willing to pay at the exact moment they’re ready to make a purchase.

Dynamic Pricing Strategy in Marketing

Dynamic pricing can help keep your marketing plans on track. Your team can plan for promotions in advance and configure the pricing algorithm you use to launch the promotion price at the perfect time. You can even A/B test dynamic pricing in real-time to maximize your profits.

4. High-Low Pricing Strategy

A high-low pricing strategy is when a company initially sells a product at a high price but lowers that price when the product drops in novelty or relevance. Discounts, clearance sections, and year-end sales are examples of high-low pricing in action — hence the reason why this strategy may also be called a discount pricing strategy.

High-low pricing is commonly used by retail firms that sell seasonal items or products that change often, such as clothing, decor, and furniture. What makes a high/low pricing strategy appealing to sellers? Consumers enjoy anticipating sales and discounts, hence why Black Friday and other universal discount days are so popular.

High-Low Pricing Strategy in Marketing

If you want to keep the foot traffic steady in your stores year-round, a high-low pricing strategy can help. By evaluating the popularity of your products during particular periods throughout the year, you can leverage low pricing to increase sales during traditionally slow months.

5. Penetration Pricing Strategy

Contrasted with skimming pricing, a penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing attention (and revenue) away from higher-priced competitors. Penetration pricing isn’t sustainable in the long run, however, and is typically applied for a short time.

This pricing method works best for brand new businesses looking for customers or for businesses that are breaking into an existing, competitive market. The strategy is all about disruption and temporary loss … and hoping that your initial customers stick around as you eventually raise prices.

(Another tangential strategy is loss leader pricing , where retailers attract customers with intentionally low-priced items in hopes that they’ll buy other, higher-priced products, too. This is precisely how stores like Target get you — and me.)

Penetration Pricing Strategy in Marketing

Penetration pricing has similar implications as freemium pricing — the money won’t come in overnight. But with enough value and a great product or service, you could continue to make money and scale your business as you increase prices. One tip for this pricing strategy is to market the value of the products you sell and let price be a secondary point.

6. Skimming Pricing Strategy

A skimming pricing strategy is when companies charge the highest possible price for a new product and then lower the price over time as the product becomes less and less popular. Skimming is different from high-low pricing in that prices are lowered gradually over time.

Technology products, such as DVD players, video game consoles, and smartphones, are typically priced using this strategy as they become less relevant over time. A skimming pricing strategy helps recover sunk costs and sell products well beyond their novelty, but the strategy can also annoy consumers who bought at full price and attract competitors who recognize the “fake” pricing margin as prices are lowered.

Skimming Pricing Strategy in Marketing

Skimming pricing strategy can work well if you sell products that have products with varying life cycle lengths. One product may come in and out of popularity quickly so you have a short time to skim your profits in the beginning stages of the life cycle. On the flip side, a product that has a longer life cycle can stay at a higher price for more time. You’ll be able to maintain your marketing efforts for each product more effectively without constantly adjusting your pricing across every product you sell.

7. Value-Based Pricing Strategy

A value-based pricing strategy is when companies price their products or services based on what the customer is willing to pay. Even if it can charge more for a product, the company decides to set its prices based on customer interest and data.

If used accurately, value-based pricing can boost your customer sentiment and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.

On the flip side, value-based pricing requires you to constantly be in tune with your various customer profiles and buyer personas and possibly vary your prices based on those differences.

Value-Based Pricing Strategy in Marketing

Marketing to your customers should always lead with value, so having a value-based pricing model should help strengthen the demand for your products and services. Just be sure that your audiences are distinct enough in what they’re willing to pay for — you don’t want to run into trouble by charging more or less based on off-limits criteria .

8. Psychological Pricing Strategy

Psychological pricing is what it sounds like — it targets human psychology to boost your sales.

For example, according to the " 9-digit effect ", even though a product that costs $99.99 is essentially $100, customers may see this as a good deal simply because of the "9" in the price.

Another way to use psychological pricing would be to place a more expensive item directly next to (either, in-store or online) the one you're most focused on selling . Or offer a "buy one, get one 50% off (or free)" deal that makes customers feel as though the circumstances are too good to pass up on.

And lastly, changing the font, size, and color of your pricing information on and around your products has also been proven, in various instances, to boost sales.

Psychological Pricing Strategy in Marketing

Psychological pricing strategy requires an intimate understanding of your target market to yield the best results. If your customers are inclined to discounts and coupons, appealing to this desire through your marketing can help this product meet their psychological need to save money. If paying for quality is important to your audience, having the lowest price on the shelf might not help you reach your sales goals. Regardless of the motivations your customers have for paying a certain price for a product, your pricing and marketing should appeal to those motivations.

9. Geographic Pricing Strategy

Geographic pricing is when products or services are priced differently depending on geographical location or market.

This strategy may be used if a customer from another country is making a purchase or if there are disparities in factors like the economy or wages (from the location in which you're selling a good to the location of the person it is being sold to).

Geographic Pricing Strategy in Marketing

Marketing a geographically priced product or service is easy thanks to paid social media advertising. Segmenting by zip code, city, or even region can be accomplished at a low cost with accurate results. Even as specific customers travel or permanently move, your pricing model will remain the same which helps you maintain your marketing costs.

Download our free guide to creating buyer personas to easily organize your audience segments and make your marketing stronger.

Like we said above, these strategies aren’t necessarily meant to stand alone. We encourage you to mix and match these methods as needed.

Below, we cover more specific pricing models for individual products.

Pricing Models

While your pricing strategy may determine how your company sets fees for its offerings overall , the below pricing models can help you set prices for specific product lines. Let's take a look.

1. Freemium

A combination of the words “free” and “premium,” freemium pricing is when companies offer a basic version of their product hoping that users will eventually pay to upgrade or access more features.

Unlike cost-plus, freemium is a pricing model commonly used by SaaS and other software companies. They choose this model because free trials and limited memberships offer a peek into a software’s full functionality — and also build trust with a potential customer before purchase.

With freemium, a company’s prices must be a function of the perceived value of their products. For example, companies that offer a free version of their software can’t ask users to pay $100 to transition to the paid version. Prices must present a low barrier to entry and grow incrementally as customers are offered more features and benefits.

Freemium Pricing in Marketing

Freemium pricing may not make your business a lot of money on the initial acquisition of a customer, but it gives you access to the customer which is just as valuable. With access to their email inboxes, phone number, and any other contact information you gather in exchange for the free product, you can nurture the customer into a brand loyal advocate with a worthwhile LTV .

2. Premium Pricing

Also known as prestige pricing and luxury pricing, a premium pricing model is when companies price their products high to present the image that their products are high-value, luxury, or premium. Prestige pricing focuses on the perceived value of a product rather than the actual value or production cost.

Prestige pricing is a direct function of brand awareness and brand perception. Brands that apply this pricing method are known for providing value and status through their products — which is why they’re priced higher than other competitors. Fashion and technology are often priced using this model because they can be marketed as luxurious, exclusive, and rare.

Premium Pricing in Marketing

Premium pricing is quite dependent upon the perception of your product within the market. There are a few ways to market your product in order to influence a premium perception of it including using influencers, controlling supply, and driving up demand.

3. Hourly Pricing

Hourly pricing, also known as rate-based pricing, is commonly used by consultants, freelancers, contractors, and other individuals or laborers who provide business services. Hourly pricing is essentially trading time for money. Some clients are hesitant to honor this pricing strategy as it can reward labor instead of efficiency.

Hourly Pricing in Marketing

If your business thrives on quick, high-volume projects, hourly pricing can be just the incentive for customers to work with you. By breaking down your prices into hourly chunks, customers can make the decision to work with you based on a low price point rather than finding room in their budget for an expensive project-based commitment.

4. Bundle Pricing

Bundle pricing is when you offer (or "bundle") two or more complementary products or services together and sell them for a single price. You may choose to sell your bundled products or services only as part of a bundle, or sell them as both components of bundles and individual products.

This is a great way to add value through your offerings to customers who are willing to pay extra upfront for more than one product. It can also help you get your customers hooked on more than one of your products faster.

Bundle Pricing in Marketing

Marketing bundle deals can help you sell more products than you would otherwise sell individually. It’s a smart way to upsell and cross-sell your offerings in a way that is beneficial for the customer and your revenue goals.

5. Project-Based Pricing

Project-based pricing is the opposite of hourly pricing — this approach charges a flat fee per project instead of a direct exchange of money for time. It is also used by consultants, freelancers, contractors, and other individuals or laborers who provide business services.

Project-based pricing may be estimated based on the value of the project deliverables. Those who choose this pricing model may also create a flat fee from the estimated time of the project.

Project-Based Pricing in Marketing

Leading with the benefits a customer will derive from working with your business on a project can make project-based pricing more appealing. Although the cost of the project may be steep, the one-time investment can be worth it. Your clients will know that they’ll be able to work with you until the project is completed rather than until their allotted hours are depleted.

6. Subscription Pricing

Subscription pricing is a common pricing model at SaaS companies, online retailers, and even agencies who offer subscription packages for their services.

Whether you offer flat rate subscriptions or tiered subscriptions, the benefits of this model are endless. For one, you have all but guaranteed monthly recurring revenue (MRR) and yearly recurring revenue. That makes it simpler to calculate your profits on a monthly basis. It also often leads to higher customer lifetime values .

The one thing to be wary of when it comes to subscription pricing is the high potential for customer churn . People cancel subscriptions all the time, so it's essential to have a customer retention strategy in place to ensure clients keep their subscriptions active.

Subscription Pricing in Marketing

When marketing your subscription products, it's essential to create buyer personas for each tier. That way, you know which features to include and what will appeal to each buyer. A general subscription that appeals to everyone won't pull in anyone.

Even Amazon, which offers flat-rate pricing for its Prime subscription, includes a membership for students. That allows them to market the original Prime more effectively by creating a sense of differentiation.

Now, let’s discuss how to build a pricing strategy of your own liking.

1. Evaluate pricing potential.

You want to make a strategy that is optimal for your unique business. To begin, you need to evaluate your pricing potential. This is the approximate product or service pricing your business can potentially achieve in regard to cost, demand, and more.

Some factors that can affect your pricing potential include:

• Geographical market specifics
• Operating costs
• Inventories
• Demand fluctuations
• Competitive advantages and concerns
• Demographic data

We’ll dive deeper into demographic data in the next step.

2. Determine your buyer personas.

You have to price your product on the type of buyer persona that’s looking for it. When you look at your ideal customer, you’ll have to look at their:

• Customer Lifetime Value
• Willingness to Pay
• Customer Pain Points

To aid in this process, interview customers and prospects to see what they do and like, and ask for your sales team’s feedback on the best leads and their characteristics.

3. Analyze historical data.

Take a look at your previous pricing strategies. You can calculate the difference in closed deals, churn data , or sold product on different pricing strategies that your business has worked with before and look at which were the most successful.

4. Strike a balance between value and business goals.

When developing your pricing strategy, you want to make sure the price is good to your bottom line and your buyer personas. This compromise will better help your business and customer pool, with the intentions of:

• Increasing profitability
• Improving cash flow
• Market penetration
• Expanding market share

5. Look at competitor pricing.

You can’t make a pricing strategy without conducting research on your competitors’ offerings. You’ll have to decide between two main choices when you see the price difference for your same product or service:

• Beat your competitors’ price - If a competitor is charging more for the same offering as your brand, then make the price more affordable.
• Beat your competitors’ value - Also known as value-based pricing , you can potentially price your offering higher than your competitors if the value provided to the customer is greater.

To see the competition’s full product or service offering, conduct a full competitive analysis so you can see their strengths and weaknesses, and make your pricing strategy accordingly.

So we’ve gone over how to create a pricing strategy, now let’s discuss how to apply these steps to different businesses and industries.

Not every pricing strategy is applicable to every business. Some strategies are better suited for physical products whereas others work best for SaaS companies. Here are examples of some common pricing models based on industry and business.

Product Pricing Model

Unlike digital products or services, physical products incur hard costs (like shipping, production, and storage) that can influence pricing. A product pricing strategy should consider these costs and set a price that maximizes profit, supports research and development, and stands up against competitors.

👉🏼 We recommend these pricing strategies when pricing physical products : cost-plus pricing, competitive pricing, prestige pricing, and value-based pricing.

Digital Product Pricing Model

Digital products, like software, online courses, and digital books, require a different approach to pricing because there’s no tangible offering or unit economics (production cost) involved. Instead, prices should reflect your brand, industry, and overall value of your product.

👉🏼 We recommend using these pricing strategies when pricing digital products: competition-based pricing, freemium pricing, and value-based pricing.

Restaurant Pricing Model

Restaurant pricing is unique in that physical costs, overhead costs, and service costs are all involved. You must also consider your customer base, overall market trends for your location and cuisine, and the cost of food — as all of these can fluctuate.

👉🏼 We recommend using these pricing strategies when pricing at restaurants: cost-plus pricing, premium pricing, and value-based pricing.

Event Pricing Model

Events can’t be accurately measured by production cost (not unlike the digital products we discussed above). Instead, event value is determined by the cost of marketing and organizing the event as well as the speakers, entertainers, networking, and the overall experience — and the ticket prices should reflect these factors.

👉🏼 We recommend using these pricing strategies when pricing live events: competition-based pricing, dynamic pricing, and value-based pricing.

Services Pricing Model

Business services can be hard to price due to their intangibility and lack of direct production cost. Much of the service value comes from the service provider’s ability to deliver and the assumed caliber of their work. Freelancers and contractors , in particular, must adhere to a services pricing strategy.

👉🏼 We recommend using these pricing strategies when pricing services: hourly pricing, project-based pricing, and value-based pricing.

Nonprofit Pricing Model

Nonprofits need pricing strategies, too — a pricing strategy can help nonprofits optimize all processes so they’re successful over an extended period of time.

A nonprofit pricing strategy should consider current spending and expenses, the breakeven number for their operation, ideal profit margin, and how the strategy will be communicated to volunteers, licensees, and anyone else who needs to be informed. A nonprofit pricing strategy is unique because it often calls for a combination of elements that come from a few pricing strategies.

👉🏼 We recommend using these pricing strategies when pricing nonprofits: competitive pricing, cost-plus pricing, demand pricing, and hourly pricing.

Education Pricing Model

Education encompasses a wide range of costs that are important to consider depending on the level of education, private or public education, and education program/ discipline.

Specific costs to consider in an education pricing strategy are tuition, scholarships, additional fees (labs, books, housing, meals, etc.). Other important factors to note are competition among similar schools, demand (number of student applications), number and costs of professors/ teachers, and attendance rates.

👉🏼 We recommend using these pricing strategies when pricing education: competitive pricing, cost-based pricing, and premium pricing.

Real Estate Pricing Model

Real estate encompasses home value estimates, market competition, housing demand, and cost of living. There are other factors that play a role in real estate pricing models including potential bidding wars, housing estimates and benchmarks (which are available through real estate agents but also through free online resources like Zillow ), and seasonal shifts in the real estate market.

👉🏼 We recommend using these pricing strategies when pricing real estate: competitive pricing, dynamic pricing, premium pricing, and value-based pricing.

Agency Pricing Model

Agency pricing models impact your profitability, retention rates, customer happiness, and how you market and sell your agency. When developing and evolving your agency’s pricing model, it’s important to take into consideration different ways to optimize it so you can determine the best way to boost the business's profits.

👉🏼 We recommend using these pricing strategies when pricing agencies: hourly pricing, project-based pricing, and value-based pricing.

Manufacturing Pricing Model

The manufacturing industry is complex — there are a number of moving parts and your manufacturing pricing model is no different. Consider product evolution, demand, production cost, sale price, unit sales volume, and any other costs related to your process and product. Another key part to a manufacturing pricing strategy is understanding the maximum amount the market will pay for your specific product to allow for the greatest profit.

👉🏼 We recommend using these pricing strategies when pricing manufacturing: competitive pricing, cost-plus pricing, and value-based pricing.

Ecommerce Pricing Model

Ecommerce pricing models are how you determine the price at which you’ll sell your online products and what it'll cost you to do so. Meaning, you must think about what your customers are willing to pay for your online products and what those products cost you to purchase and/or create. You might also factor in your online campaigns to promote these products as well as how easy it is for your customers to find similar products to yours on the ecommerce sites of your competitors.

👉🏼 We recommend using these pricing strategies when pricing ecommerce: competitive pricing, cost-based pricing, dynamic pricing, freemium pricing, penetration pricing, and value-based pricing.

Pricing Analysis

Pricing analysis is a process of evaluating your current pricing strategy against market demand. Generally, pricing analysis examines price independently of cost. The goal of a pricing analysis is to identify opportunities for pricing changes and improvements.

You typically conduct a pricing analysis when considering new product ideas, developing your positioning strategy, or running marketing tests. It's also wise to run a price analysis once every year or two to evaluate your pricing against competitors and consumer expectations — doing so preemptively avoids having to wait for poor product performance.

How to Conduct a Pricing Analysis

1. determine the true cost of your product or service..

To calculate the true cost of a product or service that you sell, you’ll want to recognize all of your expenses including both fixed and variable costs. Once you’ve determined these costs, subtract them from the price you’ve already set or plan to set for your product or service.

2. Understand how your target market and customer base respond to the pricing structure.

Surveys, focus groups, or questionnaires can be helpful in determining how the market responds to your pricing model. You’ll get a glimpse into what your target customers value and how much they’re willing to pay for the value your product or service provides.

3. Analyze the prices set by your competitors.

There are two types of competitors to consider when conducting a pricing analysis: direct and indirect.

Direct competitors are those who sell the exact same product that you sell. These types of competitors are likely to compete on price so they should be a priority to review in your pricing analysis.

Indirect competitors are those who sell alternative products that are comparable to what you sell. If a customer is looking for your product, but it’s out of stock or it’s out of their price range, they may go to an indirect competitor to get a similar product.

4. Review any legal or ethical constraints to cost and price.

There’s a fine line between competing on price and falling into legal and ethical trouble. You’ll want to have a firm understanding of price-fixing and predatory pricing while doing your pricing analysis in order to steer clear of these practices.

Analyzing your current pricing model is necessary to determine a new (and better!) pricing strategy. This applies whether you're developing a new product, upgrading your current one, or simply repositioning your marketing strategy.

Next, let’s look at some examples of pricing strategies that you can use for your own business.

Dynamic Pricing Strategy: Chicago Cubs Freemium Pricing Strategy: HubSpot Penetration Pricing Strategy: Netflix Premium Pricing: AWAY Competitive Pricing Strategy: Shopify Project-Based Pricing Strategy: Courtney Samuel Events Value-Based Pricing Strategy: INBOUND Bundle Pricing: State Farm Geographic Pricing: Gasoline

Pricing models can be hard to visualize. Below, we’ve pulled together a list of examples of pricing strategies as they’ve been applied to everyday situations or businesses.

1. Dynamic Pricing Strategy: Chicago Cubs

I live in Chicago five blocks away from Wrigley Field, and my friends and I love going to Cubs games. Finding tickets is always interesting, though, because every time we check prices, they’ve fluctuated a bit from the last time. Purchasing tickets six weeks in advance is always a different process than purchasing them six days prior — and even more sox pricing at the gate.

This is an example of dynamic pricing — pricing that varies based on market and customer demand. Prices for Cubs games are always more expensive on holidays, too, when more people are visiting the city and are likely to go to a game.

(Another prime example of dynamic pricing is INBOUND , for which tickets get more expensive as the event nears.)

2. Freemium Pricing Strategy: HubSpot

HubSpot is an example of freemium pricing at work. There's a free version of the CRM for scaling businesses as well as paid plans for the businesses using the CRM platform that need a wider range of features .

Moreover, within those marketing tools, HubSpot provides limited access to specific features. This type of pricing strategy allows customers to acquaint themselves with HubSpot and for HubSpot to establish trust with customers before asking them to pay for additional access.

3. Penetration Pricing Strategy: Netflix

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Netflix is a classic example of penetration pricing : entering the market at a low price (does anyone remember when it was $7.99?) and increasing prices over time. Since I joined a couple of years ago, I’ve seen a few price increase notices come through my own inbox.

Despite their increases, Netflix continues to retain — and gain — customers. Sure, Netflix only increases their subscription fee by $1 or $2 each time, but they do so consistently. Who knows what the fees will be in five or ten years?

4. Premium Pricing: AWAY

There are lots of examples of premium pricing strategies … Rolex, Tesla, Nike — you name it. One that I thought of immediately was AWAY luggage .

Does luggage need to be almost $500? I’d say no, especially since I recently purchased a two-piece Samsonite set for one-third the cost. However, AWAY has still been very successful even though they charge a high price for their luggage. This is because when you purchase AWAY, you’re purchasing an experience. The unique branding and the image AWAY portrays for customers make the value of the luggage match the purchase price.

5. Competitive Pricing Strategy: Shopify

Shopify is an ecommerce platform that helps businesses manage their stores and sell their products online. Shopify — which integrates with HubSpot — has a competitive pricing strategy.

There are a number of ecommerce software options on the market today — Shopify differentiates itself by the features they provide users and the price at which they offer them. They have three thoughtfully-priced versions of their product for customers to choose from with a number of customizable and flexible features.

With these extensive options tailored to any ecommerce business' needs, the cost of Shopify is highly competitive and is often the same as or lower than other ecommerce platforms on the market today.

6. Project-Based Pricing Strategy: Courtney Samuel Events

Anyone who's planned a wedding knows how costly they can be. I'm in the midst of planning my own, and I've found that the bundled, project-based fees are the easiest to manage. For example, my wedding coordinator Courtney charges one flat fee for her services. This pricing approach focuses on the value of the outcome (e.g., an organized and stressless wedding day) instead of the value of the time spent on calls, projects, or meetings.

Because vendors like Courtney typically deliver a variety of services — wedding planning, day-of coordination, physical meetings, etc. — in addition to spending time answering questions and providing thoughtful suggestions, a project-based fee better captures the value of her work. Project-based pricing is also helpful for clients and companies who'd rather pay a flat fee or monthly retainer than deal with tracked hours or weekly invoices.

7. Value-Based Pricing Strategy: INBOUND

While INBOUND doesn't leave the ultimate ticket price up to its attendees, it does provide a range of tickets from which customers can choose. By offering multiple ticket "levels," customers can choose what experience they want to have based on how they value the event.

INBOUND tickets change with time, however, meaning this pricing strategy could also be considered dynamic (like the Cubs example above). As the INBOUND event gets closer, tickets tend to rise in price.

8. Bundle Pricing: State Farm

State Farm is known for its tongue-in-cheek advertisements and its bundle deals for home and auto insurance. You can receive a quote on one or the other, but getting a quote on both can save you money on your premiums.

State Farm benefits from bundle pricing by selling more policies, and consumers benefit by paying less than they normally would if they used two different insurance providers for home and auto coverage.

9. Geographic Pricing: Gasoline

Gasoline is notorious for having a wide range of prices around the world, but even within the United States, prices can vary by several dollars depending on the state you live in. In California for example, gas prices have consistently hovered around $3 in the summer months for the past 10 years. On the other hand, gas prices in Indiana have been in the $2 range during the same time period. Laws, environmental factors, and production cost all influence the price of gasoline in California which causes the geographic disparity in the cost of the fuel.

Get Your Pricing Strategy Right

Thinking about everything that goes into pricing can make your head spin: competitors, production costs, customer demand, industry needs, profit margins … the list is endless. Thankfully, you don’t have to master all of these factors at once.

Simply sit down, calculate some numbers (like your COGS and profit goals), and figure out what’s most important for your business. Start with what you need, and this will help you pinpoint the right kind of pricing strategy to use.

More than anything, though, remember pricing is an iterative process. It’s highly unlikely that you’ll set the right prices right away — it might take a couple of tries (and lots of research), and that’s OK.

Editor's note: This post was originally published in March 2019 and has been updated for comprehensiveness.

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9 Popular Pricing Strategies to Maximize Revenue Growth

• Table of contents

Pricing is one of the most crucial and influential levers in driving revenue for your company. Unfortunately, many organizations take a “set and forget” approach to pricing and fail to develop a comprehensive, research-backed strategy to determine appropriate price points.

This mistake leaves a significant revenue opportunity on the table and is responsible for as much as 18% of startup failures .

It seems obvious, optimize your pricing strategy to maximize revenue from each customer. This leads to improved growth and higher profit.

However, many SaaS revenue leaders fail to put this simple idea into effective practice.

This guide will dive deep into 9 of the most powerful pricing strategies and outline how to choose the optimal approach based on the type of company you operate.

What Is Pricing, and Why Is It Important to Get Your Pricing Right?

Simply put, pricing is the process of determining what you’re going to charge for your company’s products or services.

The operative term in this definition is “process.” Setting your price must not be an arbitrary decision based loosely on market norms and competitor price points (though these factors should be taken into account).

That “process” (which we’ll discuss in more detail in subsequent sections) is informed by your pricing strategy — the theory and principles behind your product pricing.

So, why is it so crucial to get pricing correct?

The main reason is that pricing optimization leads to increased profits. Studies show that a pricing increase of just 1% can induce profit growth of more than 11%.

Of course, by setting prices too high, you’ll alienate certain market segments and risk pricing yourself out of the market. You need to find the right price, or prices, to maximize market penetration.

More than that, a company’s pricing contains inherent indicators of value and how customers should perceive that product. 

At a basic level, higher-priced items are perceived as being of higher quality (a psychological phenomenon known as premium or prestige pricing ) and vice versa. 

How, then, do you determine the optimal price point for your product or service? First, you need to determine the pricing strategy that best fits your revenue and organizational goals.

What Are Pricing Strategies? 

Your pricing strategy is your methodology, concept, or theory behind your product pricing. 

Pricing strategies allow you to make informed decisions on pricing changes and to understand how those changes will be impactful and appeal to your target audience.

Let’s take two common pricing strategies to illustrate: price skimming and cost-plus pricing (both of which we’ll discuss in more detail shortly).

Price skimming is a strategy where you start by setting high prices — as high as the market can tolerate (capturing maximum revenue per unit early on) — and then gradually lower prices to reach a wider audience as demand reduces.

Cost-plus pricing is a strategy that takes your total production cost and adds a margin on top of it (typically a percentage).

A startup entering the CRM market, for example, might perform research and determine that the maximum they can charge for their product right now is $80 per user (using the price skimming strategy). They’ll capture some high-value clients upfront and then slowly reduce their price over time to widen the pool of potential customers.

If they choose to use a cost-plus pricing strategy, however, with a margin of 50%, they may calculate the total cost of production to $30 per user and so decide to set their price at $45 per user.

Why Are Pricing Strategies Important? 

Without an effective pricing strategy, you’re essentially throwing darts in the dark — there’s a chance you’ll hit the bullseye, but you’re more likely to miss the board altogether.

Several things go wrong when the price of a product is not informed by a sound strategy:

You fail to meet market expectations

You fail to capture as much revenue as you could

You risk losing business to competitors whose pricing more accurately reflects market sentiment

You fail to communicate the real value of your product

Your marketing strategy misses the mark

To illustrate, let’s examine the opposite scenario. 

You’re releasing a new product, and it’s time to nail down pricing and get it to market. Because you aren’t using a specific pricing strategy, you’re just going to make your best guess at what the price should be and see how things pan out.

One of two things will happen:

1. Your price is too high. Most of the market isn’t going to buy from you. If you’re really good at selling value, you might capture a few upmarket buyers, though they’ll likely churn once they realize the value you sold isn’t reflective of the actual product, and they’ll move to a competitor that offers the same value for a lower price.

2. Your price is too low. The majority of the market sees your product as cheap, inferior, and altogether not worth purchasing, as the price point you’ve selected doesn’t indicate the product’s true value. You’ll close a few frugal customers, but you won’t generate much revenue from them. If you’re not careful, you may even fail to set the price high enough to cover your production costs. Then, when you realize you’ve gone too low, you’ll increase your pricing and lose the majority of those buyers who only purchased your product — because the price was the most important factor to them. 

The latter is more likely, statistically speaking, as the majority of startups underprice their products and gradually increase total deal size as they grow.

But it’s not as simple as continuing to bump up your product’s price point. Inevitably you’ll reach a glass ceiling, and you’ll experience diminishing returns. Once you exceed a certain pricing threshold, you’ll narrow your addressable market, close fewer deals, and risk actually reducing total revenue.

So, neither of the above scenarios is ideal, but the problem runs deeper.

Because you don’t have a well-developed pricing strategy in place, pricing across your product range is likely to be disconnected, particularly when you have different leaders in charge of each.

And, as you continue to adjust to the market and learn more about how your pricing fits (and the fact that you got it wrong to begin with), you’re going to keep changing it, which is a sure way to confuse and alienate your existing customer base.

Pricing strategies are crucial because they help you to:

Communicate the value of your product and create expectations you can actually make

Target the right customers to increase average deal size and minimize churn

Differentiate your offering from competitors — a good pricing strategy can be a competitive advantage

What Are The Top 9

There are a number of pricing strategies that SaaS companies adopt to communicate value to their target audience and drive revenue.

Before settling on a singular strategy for your own company, take time to consider these nine approaches and how they might impact your own profitability. 

1. Value-Based Pricing

Value-based pricing is the most common approach for SaaS and subscription businesses . With the value-based pricing strategy, you’re setting pricing based on what your customers believe the value of your product to be.

That is, you charge as much as your customers are willing to pay.

It doesn’t take into account cost factors, as the assumption is that if the cost of producing that product exceeds what customers would be willing to pay, then the business model isn’t viable and not worth venturing into.

Many B2B SaaS organizations use this strategy. Take Asana, for example.

Asana uses a freemium model (more on that later), with two paid pricing tiers: Premium and Business.

Note that the Business plan costs twice as much as the Premium plan. That’s because, with the features included in this plan, Asana can demonstrate how they’ll create significant value for their Business customers, and so they’ve priced this plan based on that value.

Value-based pricing is the most suitable strategy for the majority of subscription businesses for a few reasons.

First of all, determining the cost of production (in order to use a strategy like cost-plus pricing) is more well-suited to physical goods than virtual goods like software platforms. With software, once a product is built, it’s built, and so the cost is less relevant to pricing than it would be for, say, a smartphone.

Secondly, it’s the best way to maximize your revenue. Charging based on value allows you to find the optimal balance between revenue per user and the number of users in total.

Thirdly, it puts the customer at the center of your pricing decisions. 

This ensures an alignment between the product and its pricing (as both are designed around the end-user) and puts upward pressure on your company to provide more value. If you can deliver more value than your competitors, you can justify charging a higher price and prevent engaging in a race to the bottom (a competitive situation that occurs when companies compete solely on price).

However, there is one drawback of using the value-based pricing strategy: it’s a reasonably time-consuming process.

Where strategies like competitive pricing are easy to implement (you monitor what your competitors are charging and adjust when they do), value-based pricing requires a deep understanding of your target audience, their needs, and the benefits your product provides. 

It can also be hard to satisfy different segments, like price-sensitive small businesses and big-budget enterprises, with the same offering.

That said, you should get to know your target market and different segments in-depth anyway if you want to effectively market your product, so it’s not the most concerning drawback.

Value-based pricing is a fairly dynamic approach. It involves testing different pricing points (whether actively in the market or by conducting surveys) as well as performing customer research and interviews.

And, of course, each time you release a new update or feature, your value changes, so you’ll need to reassess how that impacts your pricing.

While the value-based pricing strategy is best implemented through a combination of testing and research, a simple formula called the 10x rule can be used to get you into the ballpark:

Value-based price = Value you provide to client (monetarily) / 10

That is, the value you provide in monetary terms — either the additional revenue you help to create for a customer or the amount of money your product saves them — should be 10x your price.

If your product costs $499 per month, for instance, then you should be saving or creating $4999 of value per month for the customer — a premium price needs to line up with your product’s perceived value in your customer’s mind.

2. Competitive Pricing

Competitive pricing is a fairly straightforward strategy. You’re simply setting your prices in accordance with what your competitors are charging.

It’s not a particularly sophisticated strategy, but it’s an easy one and one that can help you find a decent pricing range fairly quickly, assuming your product or service is very similar to the companies you’re competing with.

A company using the competitive pricing strategy would assess the competitive landscape and the various pricing models used and then determine whether they want to sit slightly above, slightly below, or on par with the market.  

If you’re new to a market that has a few established businesses, then competition-based pricing can be a reasonable approach (though it should really only be used as a starting point).

Let’s say you’ve developed a new CRM for sales reps. You’re entering a pretty well-established (and fairly saturated) market, so there’s plenty of competition to base your pricing on.

First, you check out Pipedrive.

Then, Copper.

And a third for good measure: Zoho CRM.

Now we’ve got some good ballpark figures to work from. If you’re planning on offering three different plans, you should start your pricing in these ranges:

Tier 1 - $15-20 

Tier 2 - $40-50

Tier 3 - $60-90

Remember: use these figures as a starting point only. You should test and optimize from there, and ideally move toward a value-based pricing strategy once you’re able to establish and demonstrate the value your product delivers

If your product or service differs significantly from what your competitors offer, then competitive pricing might not be a suitable strategy, as you’re not comparing apples with apples, despite competing in the same market segment.

The other downside of the competition-based pricing model is that you’re relying on someone else’s research, and as we know, that research isn’t always applicable to your business. 

In some instances, it might even be non-existent, and so you’re setting your prices based on a competitor with a price point that isn’t backed by data.

All things considered, paying attention to your competition is still an important aspect of pricing, regardless of your chosen strategy.

Charge much more than your competitors (without being able to communicate additional value), and you’ll likely alienate a large segment of the market. Charge much less, and customers are likely to make the assumption that your product is somehow inferior.

3. Price Skimming

The price skimming strategy is all about squeezing as much revenue out of each customer as possible, focusing initially on those who are willing to pay the most.

With the price skimming strategy (also known as the high-low pricing strategy), you start by setting your price as high as the market will tolerate. You’ll capture revenue from buyers who have the most need and demand for your product or service, but be priced out of the market for the majority.

As time progresses, you’ll gradually lower your price to capture more of the market.

This is a pretty common approach in the electronic goods market, with console producers like Sony and Microsoft using the price skimming strategy for their PlayStation and Xbox product lines.

This pricing strategy works best for products that are able to be positioned as premium (iPhones, for example) and for one-off purchase items such as electronic goods (the intersection of these two product types is ideal).

It’s not so well-suited to subscription products or services because your intention with this style of business is to grow revenue over time. But if you continue to lower your prices, you’ll reduce your revenue from each existing customer and ruin your Customer Lifetime Value (LTV) .

But many of today’s consumers are aware of this pricing strategy, and they understand that prices for certain goods are likely to come down with time. Many will even wait for price reductions before purchasing. So inevitably, you won’t capture the full market demand in the short term, slowing down your cash flow.

4. Cost-Plus Pricing

Cost-plus pricing is an incredibly simple pricing strategy — it’s your costs plus your markup.

To set prices for a new product, you take the total cost of producing it, then add a percentage on top to determine your price.

It’s easy to calculate but not really suitable for anything other than physical products, where your production costs align reasonably closely with an increase in the number of units produced.

With software products, however, the majority of the production costs happen up front. The cost to develop the product is the cost to develop the product; that doesn’t change each time you land a new customer.

As such, cost-plus pricing is generally unsuitable for subscription-based businesses.

On the other hand, the major benefit of using this pricing strategy is that it guarantees your profit margin and provides some security as far as profitability is concerned. If you build a 50% margin into your pricing, then you’ll always maintain a healthy profit margin.

5. Penetration Pricing

Penetration pricing is a strategy commonly used by new companies looking to break into an existing market and generate a solid customer base that they can then leverage to create social proof and move upmarket.

With the penetration pricing strategy, you set your prices far below what your competitors are charging but provide the same (or similar) value.

The idea here is that customers will switch over to your company from a competitor, and you’ll be able to gain a foothold, despite making less revenue and profit per customer than you could if you charged more. In some cases, companies using penetration pricing actually make a loss but offset this against future gains.

There are, of course, a few drawbacks to this strategy:

You’ll need to close a lot more customers to make decent revenue

There’s a significant risk that as you increase pricing, you’ll lose existing customers

You risk setting a low pricing expectation in the market, which could prevent you from lifting prices later on

There’s always a risk that you’ll be unable to survive the phase of unprofitability while prices are set so low

New Relic, an observability platform for developers, is a great example of a company using penetration pricing to gain some ground in the market.

Competing with existing industry standards like Datadog and Dynatrace, New Relic offers a similar feature set but charges significantly less than its competitors.

It’s worth bearing in mind that some customers may be wary of newcomers who are charging significantly less. Pricing has a major psychological impact on how customers perceive your value, so penetration pricing does put you at risk of customers thinking your product is inferior.

New Relic does a fantastic job of overcoming this objection by providing a breakdown of the features they offer (and how they charge for them) in comparison to competitors, demonstrating that they can offer the same value at a fraction of the price.

The penetration pricing strategy is best utilized by companies in markets where consumer demand is reasonably elastic (demand is significantly influenced by price).

6. Economy Pricing

Economy pricing is all about sales volume.

With the economy pricing strategy, you aim to produce a product with lower production costs than your competitors (which often means you create an inferior product) and sell it at a lower price. The idea is to sell the product at a higher volume and thereby generate the same profit as you would if you sold a lower volume at a greater price.

This is the pricing strategy that generic soda brands use to compete with established and recognizable brand names like Coca-Cola and Pepsi.

However, it’s not a great fit for subscription and SaaS businesses, as it limits your revenue potential and generates downward pressure on market pricing.

Plus, it incentivizes producing an inferior product, which is not a strategy that’s suitable for delivering long-term growth in SaaS, where customer relationships are everything.

7. Dynamic Pricing

Dynamic pricing is a pricing strategy that involves rapid changes to your pricing in response to either market demand or costs of production.

Depending on the approach you take, you set your initial price (based on current conditions) and then continue to alter it upward or downward based on cost or demand.

As you can imagine, this isn’t a very suitable pricing strategy for subscription businesses, but it does have a place in certain markets and is more common than you might expect.

Entities like Shell and Mobil, for example, use a dynamic pricing strategy to set pricing for their fuel. In this case, their dynamic pricing is informed by the cost of crude oil.

On the demand side, we can look to Uber for an example of the dynamic pricing model in action.

When immediate demand for Uber’s service is high, the company imposes “Surge Pricing,” an inflated pricing differential designed to capitalize on the fact that a high number of users in the area are seeking to access Uber’s driver network.

8. Geographic Pricing

The geographic pricing strategy involves setting different prices based on your customers’ geographic location.

Market demand differs from country to country, which has a major impact on local pricing expectations. As such, it may be appropriate to use different pricing structures in different markets.

This approach ensures you’re capturing maximum revenue in markets where demand and price expectations are high and meeting the largest market possible in markets where the opposite is true.

Most global enterprises follow this strategy. Consider Netflix’s pricing in different regions.

In India, the cost of a Netflix subscription starts as low as ₹149 ($1.95).

In Denmark, customers are paying 10x that price, with a Netflix subscription topping $12 a month.

Of course, the geographic pricing strategy can be combined with any of the other strategies we’ve covered here. For example, you could use an economy pricing strategy as your general approach but then use market insights to determine what pricing level is appropriate in each country.

9. Bundle Pricing

Bundle pricing is a strategy employed to create the appearance of greater value while simultaneously maximizing the throughput of product lines that might otherwise be purchased less frequently.

With bundle pricing, you sell multiple similar products as a package (i.e., a bundle) rather than separately.

The bundle pricing strategy is prevalent in the fast-food industry, with companies such as McDonald’s regularly promoting products together.

There are three factors that make this such an effective pricing model for a company like McDonald’s. 

Firstly, meal deal combos include a main, a side, and a drink; a fairly standard combination, meaning they’re appealing to existing demand.

Secondly, the difference in the cost of the bundle and the price of the items individually is significant (it’s much cheaper), so it creates the illusion of greater value. We say illusion because, in reality, very few people purchase the items individually.

Thirdly, the addition of extra items like fries and, in particular, a drink comes at a minimal cost increase to McDonald’s, especially compared to the price increase. The difference in price between the burger on its own and the bundle might be a couple of dollars, but the cost increase to McDonald’s is mere cents.

This pricing strategy has an application in the SaaS and subscription industries as well.

Mailchimp, for example, offers blocks of email credits for purchase individually.

Alternatively, customers can sign up for a bundle plan which includes a designated number of email sends (based on the size of your contact base), as well as access to their other tools such as landing page builders, automation, and A/B testing.

Pipedrive , for example, offers “add-ons” for customers subscribing to their CRM who need additional capability.

A pricing manager at Pipedrive could experiment with bundle pricing by creating a package that includes the standard CRM as well as all four available add-ons.

How to Choose the Right Pricing Strategy for Your Business?

Having a knowledge of the different pricing strategies available to you is important, but knowing how to apply that knowledge and choose the ideal strategy for your business is even more crucial.

We’re going to look here at six key steps to take in choosing the ideal strategy. When following these steps, bear in mind that the initial idea is to determine the broad range your product fits into. Is it a $10 product? A $50 product? A $500 product?

We don’t want to waste time here arguing over the difference between $45 and $49. We’ll optimize for that down the line. The important component here is understanding the broad category you’ll fit into.

1. Conduct Target Market Research

We know that a thorough understanding of our customers’ challenges, goals, and demographics is important for marketing a product, but we need some technical details in order to land on an appropriate pricing strategy.

This template , for example, demonstrates how granular you need to get to understand a customer profile in relation to pricing strategies.

In particular, the data that will guide pricing strategy choice includes:

Customer Acquisition Cost (CAC), Customer Lifetime Value (LTV), and Average Revenue per User (ARPU) by customer profile/market segment

Acceptable pricing range and “indifference” price point

Compelling value props

Feature preferences 

2. Assess Your Competitors’ Pricing

While you don’t want to base your product pricing entirely on competitors (unless you’re using a competition-based strategy), this information is still necessary for certain strategies.

Consider Pipedrive’s pricing tiers:

And then look at those of Copper, a close competitor to Pipedrive.

These two products are fairly similar as far as pricing goes. Imagine, then, that you’re in charge of pricing at ActiveCampaign, and you want to use a penetration pricing model to break into the CRM market.

You’d need to know what these two competitors are charging, so you can position your most basic product package at a much lower price point.

3. Consider Your Revenue Model

Your revenue model has a significant impact on the appropriateness of different pricing strategies.

If you’re primarily generating recurring revenue, for example, then the price skimming strategy might not be the most appropriate approach. However, it might be a suitable method for those selling high-value goods such as electronics and vehicles.

Similarly, economy pricing often isn’t the best strategy for SaaS and subscription businesses, though it’s great for many FMCG (fast-moving consumer goods) companies. 

Perhaps, though, your revenue model is a partial subscription model , with the remainder of your revenue made up of services. 

Bench, for example, uses this model.

They have a proprietary software platform and offer services over and above this.

In this instance, it may be suitable to use an economy pricing model for the platform itself (acting as a sort of loss leader to attract new clients) and generate the majority of its revenue using a value-based pricing strategy for service.

4. Get Absolute Clarity on Your Costs

Even if you aren’t going to use a cost-based strategy (such as cost-plus pricing), it’s imperative that you understand the total expense of production.

This will help you to ensure your pricing more than covers that cost and will be crucial in conducting analyses such as calculating your breakeven point .

5. Evaluate Your Company’s Strengths and Weaknesses

What is your company great at, and in what areas are you not so strong?

If, for example, you have a great marketing team with strong storytelling skills, you know you’ll be able to get more leverage out of a value-based pricing strategy.

If, on the other hand, you’re really good at cost reduction and maximizing production, an economy pricing strategy might prove appropriate. 

6. Ensure Your Pricing Strategy Aligns with Your USP

What is your company’s unique selling point? Is it convenience? Financial savings? Customer revenue growth?

Your USP needs to align with the strategy you choose to determine pricing.

For example, if your value props demonstrate your ability to generate the customer thousands of dollars in new revenue, a penetration pricing model where you charge relatively little for your product probably doesn’t align.

Pricing Strategy for Different Industries 

In general, the most appropriate pricing strategy for SaaS and subscription businesses is the value-based pricing strategy.

This pricing strategy:

Maximizes your revenue per user

Allows you to increase pricing as the value your product offers improves

Mitigates the effect of competition that uses penetration or economy pricing models 

2. Ecommerce

For ecommerce companies, the ideal pricing strategy to use depends quite heavily on the industry you’re in, the stage your company is at, and the kinds of products you’re selling.

Value-based pricing is always a good move, and competitive pricing can be a good place to start if you’re unsure about what customers are willing to pay. Both can also be valuable strategies for ecommerce companies moving over to a subscription model.

If you’re selling discount goods at volume, economy pricing can be a viable solution.

3. E-learning

E-learning companies can follow similar advice to SaaS companies (value-based being the ideal strategy), assuming they’re operating on a subscription model.

For e-learning businesses selling using a perpetual license model, penetration pricing can be a viable alternative for market newcomers looking to gain market share, though value-based will win out in the long term.

4. Publishing

Value-based and competitive pricing strategies will be best for subscription-based publishing companies , though price skimming may be suitable if you’re able to position yourself as a premium product.

5. OTT and Video

OTT and video businesses should follow suit with SaaS companies and adopt a value-based approach. 

Competition should be analyzed, but given content varies significantly from platform to platform, a strictly competition-based approach shouldn’t be followed.

Difference Between Pricing Strategy and Pricing Model 

Many revenue leaders confuse pricing strategies and pricing modes, and they’re often used as synonyms, despite this being incorrect.

Your pricing strategy is the theory behind your product pricing. It tells you how you set your price and what data you need to pay attention to when calculating that figure.

Your pricing model, on the other hand, is the way you display, package, and communicate your product pricing to your customer.

Examples of pricing models include seat-based or user-based pricing (common in SaaS, for example, $49 per month, per user), perpetual license (a one-off purchase), and usage-based (such as your monthly utility bills).

When determining product pricing, you’ll need to decide on both. You’ll use a pricing strategy to determine how you’ll set the price, then decide on a pricing method to determine how you’ll communicate and invoice that price.

Types of Pricing Models 

So far, we’ve laid out the most common pricing strategies and discussed what distinguishes these strategies from pricing models.

Here, we’ll examine eight common pricing models, which you can combine with the overall strategy you’ve chosen for your company. 

1. Freemium

Freemium is an extremely common approach to pricing and involves offering a free version of your product with the goal of converting users to a paid plan at a later point.

monday.com, for example, makes use of the freemium pricing model .

With freemium, the idea is to design a stripped-back version of your product, so you retain some leverage to bring users up to a paid plan.

It’s important, however, that you still provide enough value in the free version to make it worthwhile to the user. 

In monday.com’s case, the free plan allows for unlimited boards and access to over 200 templates to get started immediately. 

However, users on the free plan are limited to just two team members, meaning monday.com has built growth right into its pricing (if the free user gets significant value out of monday.com, their team will grow beyond two members, and they’ll need to upgrade to a paid plan).

2. Per Seat

With the per-seat pricing model (also known as the per-user model), your customers pay based on the number of employees that are using the product.

GitHub, for example, uses the per-seat pricing model:

Note, like with both GitHub and monday.com, the per-seat model can be combined with the freemium model.

The per-user model has a few important advantages:

Revenue growth is built-in — as the customer’s company grows in size, they’ll add more users (depending on the need your product serves)

Pricing is easy to digest, and customers can budget accordingly

Customers have immediate access to all features (that are included in their plans)

However, it has some drawbacks as well:

Users can often share passwords to avoid paying for extra seats

Total costs can get expensive for customers when they expand, so they can be reluctant to upgrade

Getting customers from one user to many users can be a challenge

High-usage customers can be a drain on your resources relative to the revenue you’re receiving from them

Low-usage customers may feel they aren’t getting a lot of value out of your product

Most subscription businesses use the tiered approach. With a tiered pricing model , you’ll create different ‘plans’ (generally between three and five) at different pricing points.

ActiveCampaign, for example, uses the tiered model:

With tiered pricing, each subsequent plan gives users access to more features or higher usage volumes.

This is a powerful method for attracting revenue growth from SME customers. When new customers in this segment sign up, they’re more likely to opt for a more affordable plan.

As the company grows, you’ll continue to demonstrate value through the results your product generates, as well as any marketing and sales activities you engage in to increase your annual contract value.

It can also be an effective way to take advantage of price anchoring, a technique where the lowest and/or highest pricing tiers help to establish the middle tier as better value. 

GitHub’s pricing model demonstrates price anchoring in action, where their “Team” plan appears as higher in value when compared with the much higher cost of the “Enterprise” option. 

4. Flat-rate

Flat-rate pricing takes the opposite approach to the tiered pricing model.

With a flat-rate pricing model, you charge one price for access to all of your product features. Basecamp, for example, uses the flat-rate pricing model, which is unusual in SaaS.

Flat-rate pricing models can be considered a form of penetration pricing, where companies compete with industry leaders who charge on a per-user model.

Consider, for example, a company with 30 users comparing Basecamp’s pricing with monday.com’s pricing.

Even at monday.com’s lowest pricing tier ( $8 per month ), that’s a cost of $240 per month vs. $99 at Basecamp.

The primary benefit of running a flat-rate pricing model is this competition. Plus, it makes your pricing much more digestible, as potential customers don’t need to waste time figuring out the differences between your various plans.

It does come with a major drawback though: the inability to grow revenue from existing accounts. 

When you use a tiered pricing model, you’ve got revenue growth built in, as you always have the ability to upsell lower-tier accounts. And if you’re charging per user, you’ll continue adding revenue as your customers scale.

There is a workaround for this problem. Note that Basecamp’s flat-rate pricing model includes unlimited users. It’s also possible to combine the flat-rate model with a per-user pricing model, where you offer only one plan at a flat rate but charge extra per additional seat.

5. Usage-Based

Usage-based pricing is a pricing model where customers pay based on what they use in a given month.

You’ll find this model used across the majority of utility companies.

In the B2B world, usage-based pricing is often used for cloud computing and web infrastructure services. Entrepreneurs and business owners often prefer this model because of the transparency — you pay for what you get.

Amazon Web Services (AWS), for example, uses this pricing model.

Some companies use a hybrid model, where usage-based and per-seat pricing models are combined to provide a set monthly rate with usage ceilings.

Auth0, for instance, takes this approach.

It makes the most sense for high-volume plans — sending an extra invoice for each new user is not feasible.

6. Pay as You Go

The pay-as-you-go pricing model is a variation of the usage-based model in that customers pay only for what they use.

The difference, however, is that they pay in each instance they use the product rather than receiving an invoice at the beginning of the month for the last period’s total usage.

Ride-sharing apps like Uber and Lyft are good examples of the pay-as-you-go model. Customers pay based on usage (longer distances cost more) and are changed at the point of use.

Twilio is an example of a B2B SaaS company who charges using the pay-as-you-go model for certain features.

7. À La Carte

The a la carte pricing model allows customers to pick and choose features or modules, essentially building their own customized solution.

This is beneficial when you offer a large range of features and want to ensure customers are getting maximum value for their dollar. Rather than having to upgrade to a more comprehensive plan to access a single feature, they can simply add it on.

This does, however, have implications for revenue. 

With a tiered approach, customers who need a more advanced feature must upgrade to a more expensive plan. With a la carte pricing, they can simply add on the new feature they need, which typically costs less than the difference between tiered plans, meaning your ability to grow revenue from upsells is limited.

Because of this risk, a la carte is less common as a SaaS pricing model, though some companies, such as Pipedrive, incorporate a la carte into their tiered approach.

8. Perpetual License

The perpetual license is, for lack of a better term, the “old” software model.

Before SaaS was the most common approach, customers would need to purchase the software outright (now known as a perpetual license).

With the perpetual license pricing model, customers pay a one-off fee and have access to the product in perpetuity. Depending on your structure, that might include all future updates, or they may need to pay a crossgrade/upgrade fee in the future.

Microsoft, for example, still sells Word on a perpetual license (though you’ll see that they’re trying to push customers toward a subscription model).

Making the Most of Pricing: Tips and Best Practices

Not sure how to start optimizing your prices? Here are a few tips and best practices.

1. Adopt a Localized Pricing Model

While the USD may be a pseudo-universal currency, failing to display localized pricing inevitably creates friction in the buying process.

Buyers in regions that also use the term “dollar” (Australia, New Zealand, and Singapore), for example, may misinterpret how you’re displaying prices, resulting in an unwelcome surprise when it comes time to enter their credit details (often resulting in cart abandonment).

Moreover, charging exclusively in one currency means customers incur foreign currency fees, and due to fluctuations in exchange rates, your consistent monthly cost is no longer all that consistent.

A simple way to get around this is to install a plugin on your site that detects the visitors’ region and calculates local pricing automatically. There are two drawbacks here, however:

The nature of exchange rates means that prices are displayed differently each time the customer visits. So unappealing price points ($43.67, say) limit your ability to take advantage of psychological pricing.

You’re not truly localizing pricing.

Localized pricing must reflect the demands and expectations of the geography you’re selling into, and this is not always the same as a simple exchange rate calculation.

Zoho, for example, makes it clear to Australian visitors that they’re charging in AUD, and uses localized pricing to set digestible, round numbers for each of their pricing tiers. You also need to consider the buying power of your target market in each country.

2. Messaging Matters

Though the price points you choose do influence how customers perceive the value your product offers, they’re far from the only lever you can pull.

The messaging around your pricing, and the value propositions you use to communicate the benefits your customers can expect to receive, can influence buyers’ willingness to pay by as much as 20% .

Testing is the best (and really only) way to nail your messaging with 100% confidence. The problem is, testing messaging on a live audience can be time consuming, and presents a risk to revenue growth, because testing ineffective messaging on real customers means you’ll convert less than you could.

To maximize impact (and minimize time spent in A/B testing in a real-life scenario where revenue is on the line), use a message testing service like Wynter to gather in-depth feedback from relevant B2B audiences.

Start by testing internally before investing in professional message testing. Perform Voice of Customer research by interviewing your current buyers and questions about the challenges they faced previously and how your product impacts their lives today.

Pull important quotes and insights from these interviews to use as fuel for your product messaging. Develop several messaging options, and ask for feedback from internal stakeholders (marketing, sales, and customer service).

Use this feedback to refine your message and draft the final landing page copy, then submit it for testing, and use the feedback from that professional process to polish, finalize, and publish.

3. Test Psychological Pricing

Psychological pricing is somewhat of a misnomer — all pricing is psychological.

The term itself, however, refers to the concept of manipulating price points at the micro level to influence buyers’ perceptions of value.

The classic example, and one which you see nearly everywhere, is ending price points with a 9 (such as $19 instead of $20, or even better, $19,99).

Ending your pricing in 9s isn’t the only method, however. While this strategy does work for lower-value products (think FMCGs like those pictured above), it tends to be coupled psychologically with discount brands.

Pricing that ends in a 0, on the other hand, can establish the opposite; an appearance of luxury or premium quality.

The most important factor here is what works for your audience. Set up multivariate testing to establish whether 9, 0, or 5 (or any other number, for that matter) appeals most to your target customer.

4. Keep Pricing Packages Simple

Many studies support the notion that offering too many choices results in something known as “ analysis paralysis .” Buyers are too overwhelmed with the number of options they have and are less likely to make a decision than those given fewer options.

Limiting your selection to three to five packages tends to be the most effective approach. It is also enough space to incorporate a free plan and a custom enterprise plan on either side of the scale, like monday.com does.

Pricing presented like this is extremely easy to digest, because most customers will fall into one of three categories:

Customers who are just getting started who know they want a free platform

Customers at the enterprise level who will gravitate automatically to the Enterprise plan

Customers that are anywhere in between, who’ll then only have three options to choose from

Plus, presenting three options makes it easy to take advantage of the center stage effect , the tendency for consumers to choose the middle option when presented with a row of pricing packages.

Note also how monday.com uses a subtle design cue (the “Most Popular” icon) to further influence this decision pathway with a bit of social proof.

5. Use Design to Impact Purchase Decisions

The design of your pricing page (in conjunction with the price points you set and the messaging you use to sell your value props) can have a significant impact on pricing decisions.

It’s fairly well-established that buyers more readily choose the middle option when presented with a selection of products or packages.

But, if, like many SaaS brands, you want to influence customers to choose a more extensive package with a higher price point, you can use subtle design cues to make one package stand out.

ActiveCampaign, for example, uses a couple of simple yet effective design tricks to make their Professional plan stand out, as well as a subtle “Most Popular” banner to influence choice based on social proof.

Conclusion 

Your pricing strategy is one of the most crucial growth levers you have.

It helps you establish a price point that serves market expectations, and if you choose the appropriate strategy for your industry and company type, can build revenue growth right into your price tags.

Of course, determining pricing is just one small step on a very large journey towards revenue optimization. On the other side of that journey is a need to manage, influence, and grow subscription revenue , which is where a platform like Chargebee comes in.

Chargebee is a dedicated revenue management and subscription billing platform designed to help you streamline revenue operations and consistently improve profitability.

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The Power of Pricing: How to Create a Pricing Strategy that Drives Profits (+Examples)

Pricing is one of the most important aspects of any business. After all, you won't make a profit if you don't charge enough for your product or service. On the other hand, if you charge too much, you may struggle to find customers. Enter: pricing strategies .

Finding the right pricing strategy is essential for every business. A thoughtful, well-constructed pricing strategy allows you to remain competitive while still being able to cover all of the costs that are involved with running your business.

There are several different pricing strategies--and no one-size-fits-all solution. Your pricing strategy can even become an integral part of your marketing strategy and contribute to bolstering your competitive advantage.

In this guide, we’ll explain 11 different pricing strategies and provide examples of how they work. This way, you’ll have a better understanding of the intricacies involved with pricing—and can determine which strategy makes the most sense for your business.

What is a Pricing Strategy (+ Why is it Important?)

A pricing strategy is a strategic plan for how you will price your products or services and earn a profit. The right pricing strategy considers costs, the perceived value of your offering, market research, and a competitive analysis

Let's say you're selling a unique product or service that has a high perceived value, like an enterprise software suite, you might be able to charge a premium price. If you're selling a commodity product that is more price-sensitive and can easily be replaced by competitors' offerings, you might need to focus on competitive effective pricing to win market share.

Businesses should continually monitor and adapt their pricing strategy as economic and competitive landscapes evolve. In fact, according to Profitwell , most successful companies review their prices quarterly and make adjustments every six months .

Why does pricing strategy matter? It's not just about profits. (Though that is part of it!) Here's a few other reasons why pricing strategy matters:

• Gain a Competitive Advantage : In a highly competitive market, your pricing strategy can be key to gaining a competitive advantage. Companies can use a strategic pricing strategy to attract a new customer base or retain current customers.
• Attract Your Target Audience : Pricing strategy can impact consumer behavior. For example, a low price might attract price-sensitive customers in SMBs, while a higher pricing plan can signal quality and attract enterprise customers .
• Support Brand Image : The right pricing strategy can also bolster your brand image. For example, Rolex’s higher pricing strategy supports its image as a luxury brand.

Whatever pricing strategy you choose, it's important to have a clear plan backed by market research. But be ready to adapt if needed.

11 Types of Pricing Strategies with Real Examples

Now that we've covered the importance of having a pricing strategy in place, let's go over 11 common pricing strategy examples you can use as inspiration for your own pricing strategy.

1. Competitive Pricing Strategy

Many business owners use the competitive pricing strategy to attract customers and increase market share. Essentially, this involves doing a comprehensive competitive landscape analysis and setting prices at or below the level of their competitors’ prices.

This can be a useful strategy if the competitor is a large company with significant overhead and cannot reduce its prices much further. By offering a lower price, small businesses can compete without sacrificing profitability.

However, there are also risks associated with this strategy. If the competitor can lower its prices, the smaller company may be forced to follow suit and risk losing money.

In addition, if customers perceive the quality of a lower-priced offering is also lower, they may be reluctant to purchase it even at a lower price.

Competitive Pricing Strategy Example

Competitive pricing is often be seen in e-commerce. Take, for example, Apple’s AirPods vs a competitor’s “Earbuds.” As you can see below, AirPods cost $329, which Apple can justify thanks to their brand recognition and the quality of their products.

If you go to Amazon and find a similar product from a smaller competitor, you’ll see that these earbuds are just $39.99. They’re similar in style, and they may or may not be similar in quality, but they’re definitely cheaper.

Although nobody knows this brand, they can still compete with big players. This is thanks to the massive discount they’re offering for a product that does more or less the same thing.

Other examples of competitive pricing include bundle pricing, where companies group similar items together and offer a discount.

With competitive pricing, a company may rely more on sales volume than profit margin. With a high enough sales volume, a company can make up for low profit margins with sheer numbers.

2. Price Skimming

Price skimming is a strategy in which a company charges a high price for a new product or service at first, and then gradually lowers the price over time. The goal of price skimming is to generate the highest possible revenue in the shortest amount of time.

To do this, companies typically target early adopters willing to pay a premium for new products or services. The high price also helps to recoup the costs of developing and marketing the new product or service.

Once the early adopters have been captured, the company lowers the price to appeal to a wider range of consumers. This pricing strategy can be very effective in market conditions where there is a lot of consumer demand for new products or services. However, it can also backfire if the company cannot sustain high prices for long enough to make a profit.

Price Skimming Pricing Strategy Example

Gaming consoles are the perfect example of price skimming. Every time a new gaming console hits the market, the price is much higher than what it will be a few years later.

For example, take the Xbox 360. When it was launched in 2005, Microsoft was charging $400 for the console . Now, you can get an Xbox 360 from Walmart for just $183.59.

Due to the novelty of a brand-new product, Microsoft was able to take advantage of the price skimming strategy and maximize its profits in the beginning.

3. Penetration Pricing Strategy

Penetration pricing can be a great way to quickly gain market share. The basic idea is to set the initial price of a product or service low to entice customers. Once customers are hooked, the price increases to a more profitable level.

Of course, this strategy only works if the quality of the product is high enough to justify the higher price. But when done correctly, penetration pricing can be a powerful tool for driving growth.

Penetration Pricing Strategy Example

Jasper.ai is an AI writing software that uses machine learning to produce content. However, now they’re extending their feature set and introducing a new product called Jasper Art.

This tool uses AI and can produce art based on the inputs you give it. It’s a brand-new product, and they’re using penetration pricing to quickly onboard new customers. Here is a screenshot from their product launch post on Facebook.

The post states that their pricing will start at $20/user/month but will likely change (i.e. increase) in the future. A brand new feature combined with an enticing initial price is the perfect combination to get their target audience excited about using their new product, and simultaneously helps them test market demand.

4. Premium Pricing

Premium pricing involves setting a high price for a product or service to convey quality and prestige. This strategy can be particularly effective for luxury goods or products that are higher quality.

There are a few potential drawbacks to premium pricing, however. For one thing, it can alienate potential customers who don't perceive the product as worth the high price tag. In addition, it leaves little room for discounts or promotions, which can be important tools for boosting conversions.

Premium Pricing Example

What better example is there to use for premium pricing than Rolex? Although made with superior craftsmanship, Rolex watches are the epitome of premium pricing. Rolex as a company doesn’t want everyone to own a Rolex. They want to make customers feel like they are purchasing something rare and valuable.

Rolex watches often cost multiple 5-figures and sometimes even 6-figures.

Although the Rolex watches are priced at a premium, it gives their customers a sense of status. This pricing method certainly doesn’t work for everyone (especially new businesses), but it can be a powerful pricing strategy with the right business model, sales strategies , and product offering.

5. Cost-Plus Pricing Strategy

Cost-plus pricing is a popular pricing strategy in which a company sets its prices by adding a fixed markup to the total production costs of its goods or services.

Because cost-plus pricing takes all costs into account, it can help to ensure that a company is making a profit on each sale. However, it can also lead to higher prices for consumers, which can limit demand. In addition, cost-plus pricing can encourage companies to cut corners to provide lower-cost products, which can subsequently lead to lower-quality products.

Cost-Plus Pricing Strategy Example

Cost-Plus pricing is difficult to show as an example as it’s merely a formula:

Cost of goods sold x fixed markup percentage = final price

Cost-Plus pricing is oftentimes used with the sale of alcohol . If a bar is charged on a per liter basis from their supplier, they can then set a markup percentage and pass that fee onto their final customer to make their profit margin.

6. Economy Pricing

Economy pricing is a strategy in which products are priced at a low, competitive rate. The goal of economy pricing is to attract customers looking for a good deal in a competitive market .

This pricing strategy is often used for essential items in high demand, such as food and clothing. Economy pricing can also be used as a loss leader, to attract customers to a store with the hope that they will purchase other, more profitable items as well.

While economy pricing can be an effective way to attract customers, it is important to make sure the low price does not come at the expense of quality. Otherwise, customers may not return in the future.

Economy Pricing Example

For an example of economy pricing, just check your local grocery store’s flyer every week. Grocery stores typically add their best-priced items on the first page to entice people to come shop at their store.

Take, for example, the Big Y flyer below. The weekly sales items are prominently featured, using larger images and attractive pricing.

Grocery stores aren’t worried about making a small margin on their sale items because they know, more often than not, you’ll pick up additional (larger margin) items while you're shopping.

7. Discovery Call Pricing

Discovery call pricing is used by businesses to provide potential customers with an estimate for services. Under this pricing model, customers are required to book a consultation with the business to discuss their needs.

Based on the information gathered during the consultation, the business will provide the customer with a price for their services.

While discovery call pricing can be beneficial for businesses, it is important to note that it can also be frustrating for customers who are not given a clear price upfront.

Discovery Call Pricing Example

Parakeeto for example, a company that helps agencies become more profitable, requires that you fill out an application form and jumping on a call before pricing is disclosed.

This type of strategy can work well for businesses that offer more custom services because it allows you to better understand the customer’s needs before putting together a proposal.

8. Value-Based Pricing Strategies

Value-based pricing is an ideal pricing strategy for SaaS companies that takes into account the perceived value of your offering. This can be based on factors like brand recognition, quality, or even customer service .

When setting prices using this method, businesses typically start with their costs and then add a markup that reflects the perceived value of their product or service. While this approach can help you to attract customers who are willing to pay more for a high-quality product, it's important to remember that perception is often subjective.

Value-based pricing is not an exact science, and there is always some risk involved. Nevertheless, when done correctly, value-based pricing can be an effective way to boost your profits.

Value-Based Pricing Strategy Example

Starbucks is a great example of value-based pricing. They can charge a large markup mainly due to the perceived value of their brand. Even more shocking is that lower-priced competitors, like Dunkin’ Donuts, scored higher in a blind taste test .

A small Dunkin’ Donuts coffee (10 oz) is priced at $1.69. Compare that to a Short Starbucks coffee (8 oz), and you’re paying $2.55, that’s a whopping 41 percent price increase (for less coffee.)

Are you curious about value-based selling and how it can improve your sales performance? Check out this article to discover the benefits and best practices.

9. Dynamic Pricing Strategies

The basic idea of dynamic pricing is to charge customers different prices based on factors, such as time of day, demand, and even the weather.

For example, a business might charge higher prices during peak times, or when demand is high, and lower prices when demand is low. Dynamic pricing can be a very effective way to increase revenue, but it can also be controversial. Some customers feel like they are being charged more than others, based on factors that they cannot control.

As a result, businesses need to be careful when implementing dynamic pricing strategies. But when done correctly, dynamic pricing can be a very effective tool for increasing profits.

Dynamic Pricing Example

Ride-sharing companies like Uber and Lyft take advantage of dynamic pricing. This allows their prices to fluctuate based on the current demand.

Try to find an Uber after a stadium concert, while it’s raining. You’ll pay a lot more for that ride than you would on a sunny Sunday morning when half of local businesses are closed.

10. Psychological Pricing Strategies

Have you ever noticed that some prices end in .99? That’s because businesses are using a pricing strategy called psychological pricing.

Studies show consumers perceive prices ending in .99 as being significantly lower than prices that round up to the next dollar. Businesses can increase their profits by using this seemingly small change in pricing. In addition to prices ending in .99, businesses also use a variety of other pricing strategies to manipulate consumer behavior.

For example, SaaS companies may use anchoring to make a high-priced package seem more reasonable by offering a premium package that costs even more. Or they may use loss aversion to encourage people to buy now by stressing the potential loss of a sale price.

Whether we realize it or not, businesses constantly use pricing strategies to influence our behavior.

Psychological Pricing Strategy Example

You’re likely very aware of what psychological pricing looks like. We see it daily, both online and in physical stores. Just do a quick search on Amazon for any product, and you’ll probably see some form of psychological pricing at play.

Take the example above. Whether products are priced at .99 or .95, they’re all using psychology to trick our brains into thinking prices are lower than they are.

11. Freemium Pricing Strategy

With freemium pricing, businesses offer a basic version of their product for free, with the option to upgrade to a premium version for a fee. This can be an appealing option for customers who are undecided about whether they want to commit to a paid subscription. And it can be a great way for businesses to generate interest in their products.

If you're considering using freemium pricing for your business, you should keep a few things in mind. First, make sure the free version of your product is still useful and enjoyable to use. Otherwise, customers will have no incentive to upgrade to the paid version.

Second, consider what features you will include in the premium version. You want to strike a balance between offering enough value to justify the price tag, but not so much that there are no compelling reasons for customers to continue using the free version.

Finally, be prepared for an influx of users when you launch your freemium pricing strategy. If your dedicated servers can't handle the increased demand, customers will be turned off and may never come back. If you can manage the pitfalls successfully, freemium pricing can be a great way to grow your business.

Freemium Pricing Strategy Example

Dropbox and Google Drive are great examples of the freemium model at work.

Dropbox, for example, offers a free basic account with 2GB of storage. If you need more storage, you can upgrade to a paid plan.

This provides new users with the ability to try out a service, and as they find more value in it, they can upgrade to a paid account. Freemium pricing is typically found in software service-based businesses due to the low marginal costs of providing additional service to customers.

How to Create a Pricing Strategy for Your Business in 5 Steps

Every business needs to have a pricing strategy to remain competitive and profitable. But how do you create a pricing strategy? It's not as difficult as it might seem. Here are five steps to follow.

1. Determine Your Pricing Objectives

The first step is to determine your pricing objectives. What are you trying to achieve with your pricing? Do you want to maximize profits? Or are you more focused on getting market share? Once you know your objectives , you can start to develop a pricing strategy that will help you achieve them.

2. Understand Your Customers

The second step is to understand your customers. Who are they, and what are they willing to pay for your product or service? If you don't understand your customers, it will be very difficult to price your products correctly. Take the time to create your ideal customer profile and get to know what they want.

3. Research Your Competition

Third, research your competition. How are they pricing their products or services? What strategies are they using? You need to be aware of what other businesses in your industry are doing so that you can stay competitive.

4. Find Your Value Proposition

The fourth step is finding your value proposition . What makes your product or service better than the competition? Why should someone pay more for what you're offering? What’s the customer value? If you can't answer these questions, then it's going to be difficult to justify a higher price point. An effective pricing strategy starts with knowing the real value of your product.

5. Collect Data and Modify If Necessary

The fifth and final step is collecting data and modifying it if necessary. Once you've launched your pricing strategy, it's important to monitor how it's working and make changes if necessary. Don't be afraid to experiment a bit and see what works best for your business.

Pricing Strategy FAQs (Frequently Asked Questions)

What are the best pricing strategies for a new product.

When it comes to pricing a new product, there are several different strategies that businesses can use. However, two strategies that work well for new products are price skimming and penetration pricing .

With price skimming, businesses charge a high price for the initial release of the product to capitalize on early adopters who are willing to pay a premium. This strategy is typically used for products with no close substitutes.

Penetration pricing, on the other hand, involves setting a low introductory price to attract customers and gain market share. This strategy is often used for products that face intense competition.

What is the best pricing strategy for SaaS companies?

While many factors can impact the right pricing strategy for a company, most SaaS companies use either freemium pricing or psychological pricing strategies to drive user adoption and target customers in their ideal customer market.

How can pricing strategies be improved?

There are a few general tips that can help to improve your pricing strategy. First, make sure that your selling prices are in line with the competition. If you are too high, you will lose customers; if you are too low, you will struggle to make a profit.

Second, don't be afraid to experiment. Try different price points and see how your customers respond. Finally, keep an eye on your bottom line. At the end of the day, your goal should be to maximize profits, not just sales. These are simple ways to find the right price for your product without decreasing the customer life cycle.

Final Thoughts on Developing Pricing Strategies

Pricing is a critical part of your business and, if done correctly, can be the deciding factor between you and your competition.

By understanding the different pricing strategies and how to create your own strategy amongst the sea of advice floating around, you'll be able to put yourself in a much better position to increase profits, grow your business, and keep your customers happy.

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Pricing structure: Tips, definition, and examples

What is a pricing structure.

• Pricing structure vs. strategy
• The importance of pricing structures

Using pricing as a growth lever

• 7 pricing structure examples
• Tips for a strong structure

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Here at Paddle, we’re pretty keen on pricing. We’re always available to talk about pricing. Doesn’t matter who you are or what you’re selling, if it’s pricing, we’re interested. That’s because your pricing structure is absolutely definitive for your business. Where you go with pricing structure will define not only your approach to your price points but also your packaging and discounts throughout your business. Developing a solid pricing structure is the first step to optimizing your pricing, and optimized pricing can be a wicked (and often overlooked) growth lever for your business.

Your pricing structure defines your pricing setup for products or services, including your core price points plus discounts, offers, and strategy. It fundamentally answers the question, “How much do I charge for my product?” by helping you figure out the relationship between the value of your product or service (and especially how your customers perceive that value) and the costs incurred to create and provide it. Your pricing structure is powerfully influential over how your company is perceived from the outside and how fast it’s likely to grow. A company with a solid grasp of their buyer personas and the competitive value of their product charges a fair price. That equals big growth. Every pricing structure begins with a pricing objective. Change the objective, and you’ll have to change the structure, too. Whether you’re attempting to break into a competitive field, hawking a high-value and very innovative product, catering to a broad array of buyer personas, or playing to a narrow field, adapt your pricing structure accordingly.

Pricing structure vs. pricing strategy: What’s the difference?

You might expect to see written below a whole host of pricing strategy buzzwords: penetration pricing ,  price skimming , product line pricing. However, a  pricing strategy  is  not  the same as a pricing structure.

Pricing structure

Involves your whole approach to pricing across your company but with a specific emphasis on how your pricing relates to the features of your product being made available and how it affects customer use of your product.

Pricing strategy

Less concerned with your customers than it is with the competitiveness of your product in the market. Even with original products that have value, you will almost certainly have competition in the market. Pricing strategy concerns the method of setting your price points in a way that establishes your product as competitive in the eyes of potential buyers.

Unsurprisingly, the terms are related. Pricing strategy is the market-facing part of your pricing structure and (as we’ll see below) should complement your pricing structure. You can find out more about pricing strategy  here .

Why pricing structures are so important

Once your product is ready for market, your first priority is to ensure that the right customers are made aware of its value, and that, once those customers buy-in, they can benefit from the value they’ve paid for. A good pricing structure can do both.

It is complementary to your pricing strategy

Understanding who you’re selling to and how to package your product are key parts of your pricing structure and play a major role in the development of your pricing strategy, too. Cornering your market share has a lot to do with understanding how your product features appeal to your buyer personas. The word ‘features’ is important — unless your product has a very narrow focus, and you’re only catering to a niche buyer, it’s likely that different features of your product will appeal to different potential customers. That’s particularly true when you’ve got a very broad-use product, like Paddle's ProfitWell Metrics (our software helps you achieve faster recurring revenue growth) or  Wistia  (provides simple software for creating, managing, and sharing videos for business). Developing a crack  product pricing strategy  requires knowing just who finds your product appealing.

It can pull or push away customers

It’s easier, and more helpful even, to think of your pricing structure as a method of presentation. It strongly influences the way your customer will perceive the value of your business. A well-developed pricing structure will attract the right kind of customers: those who find your product/service useful. It repels those who are likely to cancel a month after signing up upon discovering that they need something else. For example, if you’re using  tiered pricing , a good pricing structure will not only divide feature availability according to buyer personas, it will also make the distinctions between tiers clear. Below is the pricing page for Hubstaff.

The page clearly shows what features are available in which tier. They have a very wide user base, so a little more explanation on how each tier could benefit each potential buyer persona would make this already-effective demonstration of their pricing structure even  more  appealing. Plus, a clear pricing structure that lets your buyer know exactly what to expect makes onboarding — one of the most high-risk stages of the customer journey — go smoothly. It’s even more important in making sure the customer gets all the value out of your product that they paid for. Think of a good pricing structure as an anti-churn device!

Monetization is much more than just a way of positioning your product -  it’s one of the most important pricing levers in business today, and yet this fact is seldom recognized. The amount of businesses talk about acquisition compared to retention and monetization illustrates that clearly (see chart left).

Finding the right pricing structure will pay off big time. The average SaaS company spends less than 10 hours updating its pricing every year — but more time invested in pricing can give you huge returns.

If the pricing’s right, your product can fully make the most of its inherent value.

Shopify has the right number of tiers to simultaneously give them coverage of different buyer types and provide room for upselling later, all the while maintaining focus on serving the key areas of their market base. It’s true that having a higher number of tiers can lead to certain empirical advantages, like a higher ARPU, as we can see here.

C ompanies with more than five plans are seeing 40-50% higher ARPU on a relative basis than those companies with fewer than five plans. However, that doesn’t necessarily mean you should swamp a prospect with a 10-tiered structure. Too much choice, especially if your feature range is narrower or your buyer personas not as numerous, can actually turn off a potential buyer. Consider simplifying the initial conversion with two to three tiers on your new customer pricing page, and then give them a wider array of options when they’re upgrading later.

3. Variable pricing

Variable pricing is on offer if part of a company’s selling line involves words to the effect of “Contact us for more information on pricing.” A company working from a variable pricing model seeks to negotiate a specific price for each customer who needs their services. This pricing structure is most useful for specific software or software that comes at a financial premium. Similarly, if your product is in-demand in areas that require deployments of varied scale — for instance, if you’re approached by companies with five employees as well as those with 500 — you might find variable pricing useful for both maintaining a broad market appeal and getting the most out of larger clients. Variable pricing is not to be confused with “usage pricing,” which we’ll be covering shortly.

4. Tiered and variable

A company employing this hybrid pricing structure uses tiering as a basis for pricing with ‘regular’-sized customers. The benefits of tiered pricing are retained. Meanwhile, the addition of a variable option gives the business room to negotiate rates and cut customized deals with customers who fall outside of their usual range. The tiered and variable pricing structure is the most complex on our list, but it can be effective when you have a consumer-facing product that is also used by specific business fields. Consumers have a range of options to choose from, while bigger businesses can negotiate for rates and even specific feature packages.

5. Per-user pricing

Per-user pricing is a simple, highly popular pricing structure that is extremely well-liked among SaaS subscribers. In per-user pricing, a single user pays a fixed monthly price. They may then add another user to their plan, and the baseline price increases (it might double, for instance); a third user increases the price by the same token, and so on. Its main virtue — being linear — is why per-user pricing is best suited for simpler products with a smaller feature array. It’s easy for customers to understand what they're paying for in this instance, and just as easy for companies to manage and predict their revenue. As with  flat-rate pricing , however, it's not easy to tap into the value of differing buyer needs to maximize your growth potential.

6. Usage-based pricing

This pay-as-you-go type model relates the cost of a SaaS product to its usage. This is particularly effective for infrastructure- and platform-related software, such as Amazon Web Services and other services where companies are charged for smaller transactions within the product (e.g., API requests, transactions processed, or data used). Usage-based pricing  is for companies working in  price sensitive  market areas, as customers will always be able to  justify the change in price . From the perspective of a subscription company, usage-based pricing is not ideal. It makes it difficult, however, for companies using it to make concrete revenue forecasts.

7. Freemium

Ah yes, freemium. Hugely popular with meteorically successful SaaS companies, from Dropbox and Slack to Yammer and Skype, freemium dovetails excellently with the tiered pricing model. Entry-level access to product features is kept free, with increasing restrictions on higher-level features to incentivize upgrading. It’s particularly good for very sticky products (like those mentioned) that get customers eager to upgrade, even though it requires taking an initial financial hit. Freemium is a versatile pricing structure: restrictions can be made on the basis of feature or capacity and use case. Plus, there are  seven different types of freemium structures .

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4 tips for building a strong structure

1. understand your product’s value before determining price.

Never decide on your pricing before you have a finished product. Let the product speak for itself; be reactive to the behavior and feedback of your initial customers before changing your monetization approach. Remember, differing features within your product will be defined by customers’ perception of them — just because Feature A and Feature B are in the same package doesn’t mean that they’re equivalent in value or in customers’ willingness-to-pay (WTP) for them. Observe early patterns and adjust accordingly.

2. Make it simple

When drawing up your pricing structure, think about the last time you had all those different membership options down at the gym presented to you, then do the exact opposite of that. Keep it  simple . Clearly outline your tiers, their content, and help guide your different buyer personas towards the tier that’s best for them. As noted above, nesting tiers — a base range for new customers, more for upgrading customers — can ease the process. Ensure that the steps from purchase to onboarding are also well-laid-out. You know your pricing strategy is successful when happy customers eagerly inquire about upgrading, not when they hit ‘Purchase’ the first time.

3. Be flexible

Flexibility, re-evaluation, and a sense of dynamism when dealing with pricing strategy are fundamental. Your strategy is not totemic — it has to change as your product does. We’ve seen it proven that companies that switch up price points every six months  see notable ARPU  increases compared to those that evaluate pricing once per year or less. Make sure your pricing scales alongside your product’s own improvements. A vastly expanded product with new and improved features  and  last year’s price points will actually be losing you revenue per sale relative to its value — don’t be afraid to increase your price points!

4. Make it scalable

Young subscription businesses can sometimes be overeager to please a customer base they haven’t even won yet. To a degree, the truism that low price = good value applies in the SaaS world, too. However, your pricing structure needs to value your product every bit as much as it needs to be realistic for your customers. If you begin with a low, fixed price, you may find yourself missing out on additional revenue from customers with a higher-willingness-to-pay who value your product at a higher rate than its pricing. Alternately, a static pricing option may harm your product’s credibility (if the pricing’s too low) or turn off a prospect who only needed part of your functionality (if it’s too high).

The success of your product does not solely depend on the quality of service you’re bringing with it. It’s your pricing structure that will present your product’s value to customers in a way that they’ll understand; it’s not something to leave to chance, and yet it’s something so many businesses neglect. Analyze your product’s position in the market and who you want to target, and plan your pricing structure accordingly. Getting the balance right between a price that drives you forward and a price that customers can’t resist is never easy — but with the right time and care, it’s possible.

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How to Create a Pricing Structure

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You can’t open a business without answering this fundamental question: How much do I charge? Even with an answer in hand, you may find sales are slow, an indicator you may be charging more than customers will pay. Or your sales are great, but you’re charging too little for a healthy profit.

Pricing is one of the hardest business aspects to get right. I built several software products for startups and large businesses where I was responsible for pricing. I know the challenges of getting pricing right while factoring in considerations such as costs and profit margin.

Pricing is tough because it involves many variables. It affects all business areas, including sales techniques such as how to prospect for sales, sales forecasting, and the entire sales cycle. A pricing structure solves these issues and helps you achieve your pricing goals.

Overview: What is a pricing structure?

A pricing structure defines and organizes prices for your company’s products and services. The objective is to charge a rate that aligns with your pricing strategy while balancing profits with what the market will bear to avoid over- or under-charging customers.

A pricing structure prices products and services so that it makes sense to customers and gets them to buy. For instance, you might offer a discount when customers buy more than one product.

Several pricing structures exist. These are common ones:

• Flat rate: You choose one price for your offerings and you’re done. This works great when you have a single product or service, or you charge an hourly rate that doesn’t change.
• Tiered pricing: This is a popular option. You set different product prices based on value. The greater the value, the higher the price. An example is a software product. The basic version is one price, and if you want more features, you upgrade and pay a higher price.
• Pay per use: This pricing structure charges based on how much of your offering is used. A typical example is electricity. The more electricity you consume, the more you pay.
• Razor-blade pricing: This approach is called "razor-and-blade" because razor blades are an example of how the model works. You sell a core product, the razor, then make money from selling complementary products: the razorblades.

Prices are dynamic. Your competition may change prices. Your costs increase as suppliers charge more. The pricing structure keeps you organized in this dynamic environment.

A robust pricing structure is important to maximize sales and profit. If your pricing structure is too simplistic or lacks price controls, particularly in B2B sales, you end up with prices all over the map.

I’ve seen firsthand how sales reps abandon the price list to make up their own pricing. In these cases, the business loses money because of unnecessary discounting and lack of price fences.

Pricing structure vs. pricing strategy: What’s the difference?

Pricing strategy is the overarching approach used to set pricing for a company’s products and services. It doesn’t define actual price points, but the pricing structure is a consequence of the strategy, and it’s where you set the price customers see.

You must first set a pricing strategy before you can build a price structure since the former dictates the latter. Netflix is a good pricing structure example. It uses a value-based pricing strategy to lure customers from cable television subscriptions.

Netflix applies a tiered subscription pricing structure to articulate its pricing strategy. The tiered pricing enables customers to choose an option based on their needs, such as selecting a higher priced plan for high-definition picture quality. Netflix uses a free trial as a carrot to get sign-ups.

Netflix uses a tiered pricing structure for its subscriptions. Image source: Author

How to set up a pricing structure

Pricing structures can be simple or complex. Start with a simple approach to avoid becoming overwhelmed by the process, especially if you sell several products or services. Then evolve your pricing. These steps show you how.

Step 1: Do your homework

Before you tackle pricing, do your homework. Research and understand your target customers, the competition, and the marketplace. Depending on the industry you operate in, other factors may affect price, such as local laws and industry regulations.

Business costs are the other research area. These costs aren’t limited to the production of your goods or services. Rent, employee payroll, taxes, Sales and marketing, and other factors contribute to your costs.

This information influences your pricing strategy. Once a strategy is in place, you’re ready to build your pricing structure.

Tips for doing your homework

This first step is the foundation for effective pricing. These tips can help.

• Know your customers: No matter your product or service, you must identify your target audience and learn as much about them as possible. This includes their income level and why they are attracted to your offerings. Do this through customer surveys, reading research online, or simply asking your customers for feedback, not just about your business, but also what they think of competitor prices and pricing structures.
• Examine competition: Look at competitors and dissect their pricing structures. Why are they using that approach? Should you use the same? See what they typically charge for an offering similar to yours. Check their website, visit their location, or call them. This research ensures you’re not charging too much or using an overly complex pricing structure, which can drive customers to competitors. It also identifies if you’re too far below the market price, which eats into your profits.
• Understand the market: Your local market consists of several elements: your geography, industry, and addressable audience. For example, a luxury car dealership’s business is limited by the number of people with the income level to afford the cars who live nearby. You want to know your market, including how it may evolve over time and what trends can affect you later. Much of this information is available online, although some sources may require you to purchase the data.

Step 2: Define success metrics

You’ve done the research and set a pricing strategy aligned with your company’s positioning, which defines how your business is presented to customers. Now decide how to measure your sales.

Do you track the number of units sold? Is your business subscription based, so you’re looking at subscription sign-ups? Do you employ a sales team? If yes, track the number and amount of closed sales.

These success metrics help you identify your pricing structure and measure its effectiveness.

Tips for defining success metrics

Your business flies blind without metrics. Define them with the suggestions below.

• Track what’s important to your business: The metrics should align with your company’s offerings. For example, some products may require a higher price point. In this case, use a tiered pricing structure, and track sales separately for each tier. Doing so gives you visibility into each pricing tier’s performance.
• Look at your sales process: Examine how you generate sales. Should you bundle products or services together? Do you offer greater benefits when customers pay more? Does demand fluctuate seasonally or because of other factors? A bed-and-breakfast owner may have a room with a view that generates a higher price point. Tracking bookings by room type becomes a necessity to capture this factor.

Step 3: Find a base price

Establish a base price to build your pricing structure. The base price is the foundation for pricing decisions, even if the amount isn’t applied to all offerings.

The base price gives you a starting point from which to assess higher price points, how much to discount when you want to generate demand, and other pricing decisions.

Tips for finding your base price

Setting your base price can prove tricky. These recommendations can help.

• Factor your costs: Your base price should cover your costs, and include some markup. This gives you flexibility to discount when you employ pricing strategies such as bundling.
• Evaluate value: Your offerings hold higher value to some customers than others. That’s why it’s important to define your target audience. If you sell organic groceries, a customer who cares about eating healthy food will happily pay more for organic food. Your research helps to evaluate your offering’s value to arrive at a base price.

Step 4: Develop pricing models

This is the culmination of the other steps. Using your success metrics and base price, model how you see your business growing.

This pricing model helps you assess which pricing structure makes the most sense. For instance, with vacation rentals, if your business is seasonal, your model should account for more units rented during your high season.

You can modify your base price up or down to evaluate the impact on revenue. From there, try different pricing structures to determine how you want to price your offerings.

Tips for developing pricing models

This is where the rubber meets the road. Here are suggestions to help.

• Establish fences: Set appropriate buyer and price fences in your model. These are criteria for certain price points to take effect. This approach is critical if you rely on others to generate sales, such as sales reps, because the fences act as guardrails to prevent a price that’s too low while they’re prospecting or performing lead management during the sales process. When you run a New Year’s sale that ends on New Year’s Day, you’re setting a time-based fence. If you provide a discount based on the volume of units bought, you’re setting a purchase quantity fence.
• Keep it simple: The first time you model pricing, keep it simple and don’t get lost in the details. If you use tiered pricing, limit the tiers to no more than three. Keep discounts and special offers to a minimum, or consider excluding them until you’ve collected real world pricing data by seeing how customers respond to your pricing structure before adding complexity into the mix.

Step 5: Experiment to grow market share and profit

Despite your best efforts, you won’t know how customers will respond to your pricing until you try them. Some business owners are hesitant to test, thinking once a price is in front of customers, it’s difficult to change without alienating them.

That’s not the case. Today’s customers are used to dynamic pricing. Think of airlines that change prices daily, or companies such as Amazon, where the price for goods can suddenly plummet through their lightning deals before rising back to full price.

Introduce your pricing structure, collect real world data, and see how your success metrics are trending. Customer engagement software, such as CRM software , collects customer data you can use for this exercise.

Get a baseline, such as a month’s worth of sales. Then experiment. See what kinds of pricing approaches drive sales or help you grow market share, then double down on those to grow your business.

Tips for experimenting

If you don’t test and experiment, it’s an uphill battle to grow.

• Choose low-risk tests: Start tests in a low-risk environment. Choose customers you, or if you have a sales team, your sales management have a strong relationship with. Select a small sample size or a specific segment of your customer base. Adjust based on your findings, and continue testing until you see your success metrics moving in the right direction. That’s when you can roll out the pricing structure to all customers.
• Look at non-sales outcomes: Analyze if certain pricing structures incur higher costs in time, money, or effort. Even if sales increase, a labor-intensive pricing program could eat up profits due to increased employee hours. Also consider how your pricing approach affects customer perception relative to competitors.

Final advice on pricing structures

Pricing is a lever to grow your business, and its impact on your customers is the most important factor in choosing the right pricing structure for your business. Prices that draw customers in but aren’t profitable are as bad as prices that drive customers away.

Apply a pricing structure that strikes the right balance and makes the most sense for your business model and customers. Experiment to find that balance, and watch your profits grow.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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What is a business plan?

1. write an executive summary, 2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. summarize how your company operates, 10. add any additional information to an appendix, business plan tips and resources.

A business plan outlines your business’s financial goals and explains how you’ll achieve them over the next three to five years. Here’s a step-by-step guide to writing a business plan that will offer a strong, detailed road map for your business.

LLC Formation

A business plan is a document that explains what your business does, how it makes money and who its customers are. Internally, writing a business plan should help you clarify your vision and organize your operations. Externally, you can share it with potential lenders and investors to show them you’re on the right track.

Business plans are living documents; it’s OK for them to change over time. Startups may update their business plans often as they figure out who their customers are and what products and services fit them best. Mature companies might only revisit their business plan every few years. Regardless of your business’s age, brush up this document before you apply for a business loan .

» Need help writing? Learn about the best business plan software .

This is your elevator pitch. It should include a mission statement, a brief description of the products or services your business offers and a broad summary of your financial growth plans.

Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.

» MORE: How to write an executive summary in 6 steps

Next up is your company description. This should contain basic information like:

Your business’s registered name.

Address of your business location .

Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.

Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.

Lastly, write a little about the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.

» MORE: How to write a company overview for a business plan

The third part of a business plan is an objective statement. This section spells out what you’d like to accomplish, both in the near term and over the coming years.

If you’re looking for a business loan or outside investment, you can use this section to explain how the financing will help your business grow and how you plan to achieve those growth targets. The key is to provide a clear explanation of the opportunity your business presents to the lender.

For example, if your business is launching a second product line, you might explain how the loan will help your company launch that new product and how much you think sales will increase over the next three years as a result.

» MORE: How to write a successful business plan for a loan

In this section, go into detail about the products or services you offer or plan to offer.

You should include the following:

An explanation of how your product or service works.

The pricing model for your product or service.

The typical customers you serve.

Your supply chain and order fulfillment strategy.

You can also discuss current or pending trademarks and patents associated with your product or service.

Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.

Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.

Include details about your sales and distribution strategies, including the costs involved in selling each product .

» MORE: R e a d our complete guide to small business marketing

If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.

Accounting software may be able to generate these reports for you. It may also help you calculate metrics such as:

Net profit margin: the percentage of revenue you keep as net income.

Current ratio: the measurement of your liquidity and ability to repay debts.

Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.

This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.

This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.

Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.

Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.

NerdWallet’s picks for setting up your business finances:

The best business checking accounts .

The best business credit cards .

The best accounting software .

Before the end of your business plan, summarize how your business is structured and outline each team’s responsibilities. This will help your readers understand who performs each of the functions you’ve described above — making and selling your products or services — and how much each of those functions cost.

If any of your employees have exceptional skills, you may want to include their resumes to help explain the competitive advantage they give you.

Finally, attach any supporting information or additional materials that you couldn’t fit in elsewhere. That might include:

Licenses and permits.

Equipment leases.

Bank statements.

Details of your personal and business credit history, if you’re seeking financing.

If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.

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We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Here are some tips to write a detailed, convincing business plan:

Avoid over-optimism: If you’re applying for a business bank loan or professional investment, someone will be reading your business plan closely. Providing unreasonable sales estimates can hurt your chances of approval.

Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.

Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.

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What Is a Business Plan? Definition and Planning Essentials Explained

Posted august 1, 2024 by kody wirth.

What is a business plan? It’s the roadmap for your business. The outline of your goals, objectives, and the steps you’ll take to get there. It describes the structure of your organization, how it operates, as well as the financial expectations and actual performance. 

A business plan can help you explore ideas, successfully start a business, manage operations, and pursue growth. In short, a business plan is a lot of different things. It’s more than just a stack of paper and can be one of your most effective tools as a business owner. 

Let’s explore the basics of business planning, the structure of a traditional plan, your planning options, and how you can use your plan to succeed. 

What is a business plan?

A business plan is a document that explains how your business operates. It summarizes your business structure, objectives, milestones, and financial performance. Again, it’s a guide that helps you, and anyone else, better understand how your business will succeed.  

Why do you need a business plan?

The primary purpose of a business plan is to help you understand the direction of your business and the steps it will take to get there. Having a solid business plan can help you grow up to 30% faster , and according to our own 2021 Small Business research working on a business plan increases confidence regarding business health—even in the midst of a crisis. 

These benefits are directly connected to how writing a business plan makes you more informed and better prepares you for entrepreneurship. It helps you reduce risk and avoid pursuing potentially poor ideas. You’ll also be able to more easily uncover your business’s potential. 

The biggest mistake you can make is not writing a business plan, and the second is never updating it. By regularly reviewing your plan, you can understand what parts of your strategy are working and those that are not.

That just scratches the surface of why having a plan is valuable. Check out our full write-up for fifteen more reasons why you need a business plan .  

What can you do with your plan?

So what can you do with a business plan once you’ve created it? It can be all too easy to write a plan and just let it be. Here are just a few ways you can leverage your plan to benefit your business.

Test an idea

Writing a plan isn’t just for those who are ready to start a business. It’s just as valuable for those who have an idea and want to determine whether it’s actually possible. By writing a plan to explore the validity of an idea, you are working through the process of understanding what it would take to be successful. 

Market and competitive research alone can tell you a lot about your idea. 

• Is the marketplace too crowded?
• Is the solution you have in mind not really needed? 

Add in the exploration of milestones, potential expenses, and the sales needed to attain profitability, and you can paint a pretty clear picture of your business’s potential.

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Understanding where you’re going and how you’re going to get there is vital for those starting or managing a business. Writing your plan helps you do that. It ensures that you consider all aspects of your business, know what milestones you need to hit, and can effectively make adjustments if that doesn’t happen. 

With a plan in place, you’ll know where you want your business to go and how you’ve performed in the past. This alone prepares you to take on challenges, review what you’ve done before, and make the right adjustments.

Pursue funding

Even if you do not intend to pursue funding right away, having a business plan will prepare you for it. It will ensure that you have all of the information necessary to submit a loan application and pitch to investors. 

So, rather than scrambling to gather documentation and write a cohesive plan once it’s relevant, you can keep it up-to-date and attempt to attain funding. Just add a use of funds report to your financial plan and you’ll be ready to go.

The benefits of having a plan don’t stop there. You can then use your business plan to help you manage the funding you receive. You’ll not only be able to easily track and forecast how you’ll use your funds but also easily report on how it’s been used. 

Better manage your business

A solid business plan isn’t meant to be something you do once and forget about. Instead, it should be a useful tool that you can regularly use to analyze performance, make strategic decisions, and anticipate future scenarios. It’s a document that you should regularly update and adjust as you go to better fit the actual state of your business.

Doing so makes it easier to understand what’s working and what’s not. It helps you understand if you’re truly reaching your goals or if you need to make further adjustments. Having your plan in place makes that process quicker, more informative, and leaves you with far more time to actually spend running your business.

What should your business plan include?

The content and structure of your business plan should include anything that will help you use it effectively. That being said, there are some key elements that you should cover and that investors will expect to see. 

Executive summary

The executive summary is a simple overview of your business and your overall plan. It should serve as a standalone document that provides enough detail for anyone—including yourself, team members, or investors—to fully understand your business strategy. Make sure to cover:

• The problem you’re solving
• A description of your product or service
• Your target market
• Organizational structure
• A financial summary
• Necessary funding requirements.

This will be the first part of your plan, but it’s easiest to write it after you’ve created your full plan.

Products & Services

When describing your products or services, you need to start by outlining the problem you’re solving and why what you offer is valuable. This is where you’ll also address current competition in the market and any competitive advantages your products or services bring to the table. 

Lastly, outline the steps or milestones you’ll need to hit to launch your business successfully. If you’ve already achieved some initial milestones, like taking pre-orders or early funding, be sure to include them here to further prove your business’s validity. 

Market analysis

A market analysis is a qualitative and quantitative assessment of the current market you’re entering or competing in. It helps you understand the industry’s overall state and potential, who your ideal customers are, the positioning of your competition, and how you intend to position your own business.

This helps you better explore the market’s long-term trends, what challenges to expect, and how you will need to introduce and even price your products or services.

Check out our full guide for how to conduct a market analysis in just four easy steps.  

Marketing & sales

Here you detail how you intend to reach your target market. This includes your sales activities, general pricing plan, and the beginnings of your marketing strategy. If you have any branding elements, sample marketing campaigns, or messaging available—this is the place to add them. 

Additionally, it may be wise to include a SWOT analysis that demonstrates your business or specific product/service position. This will showcase how you intend to leverage sales and marketing channels to deal with competitive threats and take advantage of any opportunities.

Check out our full write-up to learn how to create a cohesive marketing strategy for your business. 

Organization & management

This section addresses the legal structure of your business, your current team, and any gaps that need to be filled. Depending on your business type and longevity, you’ll also need to include your location, ownership information, and business history.

Basically, add any information that helps explain your organizational structure and how you operate. This section is particularly important for pitching to investors but should be included even if attempted funding is not in your immediate future.

Financial projections

Possibly the most important piece of your plan, your financials section is vital for showcasing your business’s viability. It also helps you establish a baseline to measure against and makes it easier to make ongoing strategic decisions as your business grows. This may seem complex, but it can be far easier than you think. 

Focus on building solid forecasts, keep your categories simple, and lean on assumptions. You can always return to this section to add more details and refine your financial statements as you operate. 

Here are the statements you should include in your financial plan:

• Sales and revenue projections
• Profit and loss statement
• Cash flow statement
• Balance sheet

The appendix is where you add additional detail, documentation, or extended notes that support the other sections of your plan. Don’t worry about adding this section at first; only add documentation that you think will benefit anyone reading your plan.

Types of business plans explained

While all business plans cover similar categories, the style and function depend on how you intend to use your business plan . So, to get the most out of your plan, it’s best to find a format that suits your needs. Here are a few common business plan types worth considering. 

Traditional business plan

The tried-and-true traditional business plan (sometimes called a detailed business plan ) is a formal document meant for external purposes. It is typically required when applying for a business loan or pitching to investors. 

It can also be used when training or hiring employees, working with vendors, or any other situation where the full details of your business must be understood by another individual. 

A traditional business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix. We recommend only starting with this business plan format if you plan to immediately pursue funding and already have a solid handle on your business information. 

Business model canvas

The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea. 

The structure ditches a linear structure in favor of a cell-based template. It encourages you to build connections between every element of your business. It’s faster to write out and update and much easier for you, your team, and anyone else to visualize your business operations. 

The business model canvas is really best for those exploring their business idea for the first time, but keep in mind that it can be difficult to actually validate your idea this way as well as adapt it into a full plan.

One-page business plan

The true middle ground between the business model canvas and a traditional business plan is the one-page business plan . Sometimes referred to as a lean plan, this format is a simplified version of the traditional plan that focuses on the core aspects of your business. It basically serves as a beefed-up pitch document and can be finished as quickly as the business model canvas.

By starting with a one-page plan, you give yourself a minimal document to build from. You’ll typically stick with bullet points and single sentences making it much easier to elaborate or expand sections into a longer-form business plan. 

A one-page business plan is useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Growth plan

Now, the option that we here at LivePlan recommend is a growth plan . However, growth planning is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance.

It holds all of the benefits of the single-page plan, including the potential to complete it in as little as 27-minutes . 

However, it’s even easier to convert into a more detailed business plan thanks to how heavily it’s tied to your financials. The overall goal of growth planning isn’t to just produce documents that you use once and shelve. Instead, the growth planning process helps you build a healthier company that thrives in times of growth and stable through times of crisis.

It’s faster, concise, more focused on financial performance, and ensures that your plan is always up-to-date.

How can you write your own business plan?

Now that you know the definition of a business plan, it’s time to write your own.

Get started by downloading our free business plan template or try a business plan builder like LivePlan for a fully guided experience and an AI-powered Assistant to help you write, generate ideas, and analyze your business performance.

No matter which option you choose, writing a business plan will set you up for success. You can use it to test an idea, figure out how you’ll start, and pursue funding.  And if you review and revise your plan regularly, it can turn into your best business management tool.

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How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated July 29, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan

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Economists push back on Harris’ price gouging plan

WASHINGTON - Ms Kamala Harris’ price gouging policy has been criticised by economists and analysts, who say it is an uncompetitive proposal that could end up hurting, and not helping, US consumers.

Ms Harris, the Democratic nominee for president, announced the policy last week as part of a raft of populist proposals that included a US$6,000-a-year (S$7,800) tax credit for families with newborn children and a US$10,000 tax credit for first-time home buyers.

If elected president, Ms Harris would work with Congress to advance “the first-ever federal ban on price gouging on food and groceries”, her campaign said in a statement.

The proposals would look to set “clear rules of the road” to stop big corporations from running up “excessive” profits on food and groceries, and beef up state and federal regulatory powers to penalise rule-breakers.

While popular with the Democratic base, the price gouging plans elicited a fierce reaction from Republican presidential candidate Donald Trump, who is running against Ms Harris in November’s elections.

“Kamala will implement SOVIET Style Price Controls,” he wrote in a social media post a day after the proposals were published.

Supporters of the policy say it has been mischaracterised and misunderstood.

“When there is more concentration in an industry, we have seen much greater increases in the profit margins,” US Senator Elizabeth Warren said in an interview with CNBC on Aug 23.

The Harris campaign did not respond to a request for comment. But several US media organisations, including The Washington Post, reported that the Harris campaign sees the policy as an attempt to elevate existing state-level rules on price gouging to the federal level.

What price gouging?

A global inflationary surge at the tail-end of the Covid-19 pandemic contributed to a sharp rise in the cost of everyday items across the United States.

Consumer inflation has eased dramatically since peaking at more than nine per cent in 2022. But Americans are still contending with an overall price increase of just over 20 per cent since President Joe Biden took office, according to data from the US Labour Department.

However, “very little” of that increase is down to price gouging, Oxford Economics chief US economist Ryan Sweet told AFP.

Instead, Mr Sweet points to a pandemic-fuelled supply shock, and an increase in demand for goods and services spurred – in part – by generous federal support for households during the pandemic.

“What this gouging does is pivot the blame from the Biden administration, which Harris was part of, to corporations,” said Mr Gary Hufbauer, a non-resident senior fellow at the Peterson Institute for International Economics.

“It’s a pretty successful political argument,” he told AFP. “It has no economic basis.”

‘Penny business’

The retail business is notoriously tough, with profit margins often in the low single digits – in stark contrast to higher-margin sectors like tech.

“Is there a more competitive space than retail?” Target chief executive Brian Cornell said in an interview with CNBC on Aug 21 that touched on Ms Harris’ price gouging plans.

“It is a penny business, and it’s a very competitive space, and we provide the value consumers are looking for,” he added.

But for people struggling with the cost of living, it is a difficult argument to make.

“People see that gasoline prices are higher than they were a few years ago, food prices are going to be higher than they were a few years ago,” said Mr Sweet, from Oxford Economics.

“But we’re not going back down to the prices that we saw pre-pandemic,” he added.

That’s because easing inflation does not translate into lower sticker prices at the grocery store.

Instead, when wages increase faster than inflation – as they have been for well over a year now – the cost of those items relative to wages declines over time.

But it is a slow process.

The US Federal Reserve appears increasingly confident that it is winning its battle to bring inflation back down to its long-term target of 2 per cent.

On Aug 23, Fed chairman Jerome Powell said “the time has come” to start lowering interest rates, lifting expectations of a rate cut in September.

Said Mr Sweet: “There’s clear evidence that businesses’ pricing power has started to diminish.”

“I think over time, as inflation gets back down to the Fed’s target, this discussion of price gouging is going to start to fade to the background,” he added. AFP

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Food store CEO sets record straight on Harris' price-gouging claim

'let the market handle pricing,' stew leonard jr. says.

Stew Leonard’s CEO on Harris’ price-fixing plan: ‘Let the market handle pricing’

Stew Leonard’s president and CEO Stewart Leonard, Jr. reacts to a major downward revision in U.S. job creation and discusses Vice President Kamala Harris’ economic plan on ‘The Evening Edit.’

The CEO of a grocery chain is setting the record straight on Vice President Kamala Harris' claim over price gouging.

"I haven't met anybody price gouging." Stew Leonard Jr. told FOX Business' Elizabeth MacDonald during an interview on " The Evening Edit. "

However, he noted the farmers and ranchers he has met have adjusted their prices to reflect the rise in costs.

SMALL BUSINESS OWNERS IN THE MIDWEST SEEING STRESS FROM CONSUMERS

"Our farmers and our ranchers have been reflecting their price increases that they've had, which has elevated food prices over the last two, three years now," he noted.

"We're seeing increases, you know, like everybody who has a house or a condo or an apartment, you're seeing costs go up on fuel and energy or gas used to be around 2 or 3 bucks a gallon, it's a little higher than that now," he continued. 

Leonard Jr. also mentioned how he speaks and deals with his suppliers who inform him their prices are rising. 

"They're not calling me up and trying to artificially increase their prices, they're calling me because their prices are going up." 

Kamala Harris' energy policies punish the meat industry: Chris Young

The American Association of Meat Processors executive director Chris Young criticizes Kamala Harris' price control proposal on 'Cavuto: Coast to Coast.'

The Harris' campaign released a document last week saying that if she's elected, her administration would work with Congress to "advance the first-ever federal ban on price gouging on food and groceries; set clear rules of the road to make clear that big corporations can't unfairly exploit consumers to run up excessive profits on food and groceries."

When it comes to the vice president's plan to fight price gouging, Leonard Jr. said, "I'm sure" there was a "small percentage" of companies who saw a "little window during COVID." 

"Most of the people out there right now had to increase their prices due to their costs going up," and added that overall regulation for his business is "good" to "protect the consumer." 

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As far as regulating grocery prices , Leonard Jr. said, "let the market handle pricing." 

"One thing I've learned in my 50 years of retailing in our family business, if you raise prices, guess what happens to sales, they go down, you know, unless you're Gucci or Prada or something like that." 

FOX Business' Eric Revell contributed to this report.

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What is ‘price gouging’ and why is VP Harris proposing to ban it?

FILE - Vice President Kamala Harris speaks during the American Federation of Teachers’ 88th national convention, July 25, 2024, in Houston. Immediately after President Joe Biden left the race a week ago, Harris began to craft her own narrative around the economy. Not once in speeches did she mention the word “inflation,” the overwhelming economic challenge that has dogged Biden’s administration. Republicans have quickly moved to blame Harris for the inflation that less than a week ago they pinned on Biden. (AP Photo/Tony Gutierrez, File)

File - A shopper peruses cheese offerings at a Target store on Oct. 4, 2023, in Sheridan, Colo. (AP Photo/David Zalubowski, File)

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With inflation and high grocery prices still frustrating many voters , Vice President Kamala Harris on Friday proposed a ban on “price gouging” by food suppliers and grocery stores, as part of a broader agenda aimed at lowering the cost of housing, medicine, and food.

It’s an attempt to tackle a clear vulnerability of Harris’ head-on: Under the Biden-Harris administration, grocery prices have shot up 21%, part of an inflation surge that has raised overall costs by about 19% and soured many Americans on the economy, even as unemployment fell to historic lows. Wages have also risen sharply since the pandemic, and have outpaced prices for more than a year. Still, surveys find Americans continue to struggle with higher costs.

“We all know that prices went up during the pandemic when the supply chains shut down and failed,” Harris said Friday in Raleigh, North Carolina. “But our supply chains have now improved and prices are still too high.”

Will her proposals do much to lower prices? And what even is “price gouging”? The answers to those and other questions are below:

What is price gouging?

There is no strict definition that economists would agree on, but it generally refers to spikes in prices that typically follow a disruption in supply, such as after a hurricane or other natural disaster. Consumer advocates charge that gouging occurs when retailers sharply increase prices, particularly for necessities, under such circumstances.

Is it already illegal?

Several states already restrict price gouging, but there is no federal-level ban.

There are federal restrictions on related but different practices, such as price-fixing laws that bar companies from agreeing to not compete against each other and set higher prices.

Will Harris’ proposal lower grocery prices?

Most economists would say no, though her plan could have an impact on future crises. For one thing, it’s unclear how much price gouging is going on right now.

Grocery prices are still painfully high compared to four years ago, but they increased just 1.1% in July compared with a year earlier, according to the most recent inflation report . That is in line with pre-pandemic increases.

President Joe Biden said Wednesday that inflation has been defeated after Wednesday’s inflation report showed that it fell to 2.9% in July, the smallest increase in three years.

“There’s some dissonance between claiming victory on the inflation front in one breath and then arguing that there’s all this price gouging happening that is leading consumers to face really high prices in another breath,” said Michael Strain, an economist at the American Enterprise Institute.

In general, after an inflationary spike, it’s very hard to return prices to where they were. Sustained price declines typically only happen in steep, protracted recessions . Instead, economists generally argue that the better approach is for wages to keep rising enough so that Americans can handle the higher costs.

So why is Harris talking about this now?

Probably because inflation remains a highly salient issue politically. And plenty of voters do blame grocery stores, fast food chains, and food and packaged goods makers for the surge of inflation in the past three years. Corporate profits soared in 2021 and 2022.

“It could be that they’re looking at opinion polls that show that the number one concern facing voters is inflation and that a large number of voters blame corporations for inflation,” Strain said.

At the same time, even if prices aren’t going up as much, as Harris noted, they remain high, even as supply chain kinks have been resolved.

Elizabeth Pancotti, a policy analyst at Roosevelt Forward, a progressive advocacy group, points to the wood pulp used in diapers. The price of wood pulp has fallen by half from its post-pandemic peak, yet diaper prices haven’t.

“So that just increases the (profit) margins for both the manufacturers and the retailers,” she said.

Did price gouging cause inflation?

Most economists would say no, that it was a more straightforward case of supply and demand. When the pandemic hit, meat processing plants were occasionally closed after COVID-19 outbreaks, among other disruptions to supply. Russia’s invasion of Ukraine lifted the cost of wheat and other grains on global markets. Auto prices rose as carmakers were unable to get all the semiconductors they needed from Taiwan to manufacture cars, and many car plants shut down temporarily.

At the same time, several rounds of stimulus checks fattened Americans’ bank accounts, and after hunkering down during the early phase of the pandemic, so-called “revenge spending” took over. The combination of stronger demand and reduced supply was a recipe for rising prices.

Still, some economists have argued that large food and consumer goods companies took advantage of pandemic-era disruptions. Consumers saw empty store shelves and heard numerous stories about disrupted supply chains, and at least temporarily felt they had little choice but to accept the higher prices.

Economist Isabella Weber at the University of Massachusetts, Amherst, called it “seller’s inflation.” Others referred to it as “greedflation.”

“What a lot of corporations did was exploit consumers’ willingness” to accept the disruptions from the pandemic, Pancotti said.

Is banning price gouging like instituting price controls?

During the last spike of inflation in the 1970s, both Democratic and Republican presidential administrations at times imposed price controls, which specifically limited what companies could charge for goods and services. They were widely blamed for creating shortages and long lines for gas.

Some economists say Harris’ proposal would have a similar impact.

“It’s a heavy-handed socialist policy that I don’t think any economist would support,” said Kevin Hassett, a former top economic adviser in the Trump White House.

But Pancotti disagreed. She argued that it was closer to a consumer protection measure. Under Harris’ proposal, the government wouldn’t specify prices, but the Federal Trade Commission could investigate price spikes.

“The proposal is really about protecting consumers from unscrupulous corporate actors that are trying to just rip the consumer off because they know they can,” she said.

Economist Paul Krugman defends Harris' price-gouging plan — but 'Shark Tank' star Kevin O'Leary calls it a 'horror film'

• Kamala Harris' proposal to stop price gouging has sparked cheers and warnings from commentators.
• The Democratic presidential candidate plans to pursue a federal ban, make rules, and punish defiers.
• Dave Ramsey and Kevin O'Leary slammed her plan, while Paul Krugman said it might not be a bad idea.

Vice President Kamala Harris' plan to stop price gouging in the food and grocery industries has divided commentators, with some cheering her proposal and others labeling her a communist.

The Democratic presidential nominee intends to pursue the first federal ban on excessive overpricing of food and groceries, introduce rules to stop big industry players from exploiting consumers to rake in exorbitant profits, and empower regulators and prosecutors to root out and punish bad behavior.

Harris has framed her proposal as a response to painful inflation in recent years, which has made it far more expensive for families to afford basics such as food, fuel, and rent.

The Federal Reserve responded to surging prices by hiking interest rates from nearly zero to north of 5%, which resulted in many people paying more toward their credit cards, car loans, and mortgages each month. In short, consumers have been dealt a one-two punch of steeper prices and borrowing costs.

Several experts and other commentators have reacted strongly to Harris' plan. Here's what they said:

1. Lindsay Owens of Groundwork, a progressive think tank and advocacy group

Harris is "laser-focused on lowering costs for American families, particularly the costs that matter most — the cost of a roof over your head and food on the table," she said, later adding: "This is not price controls; 40 states have price-gouging laws on the books." She then said, "Donald Trump did price-gouging laws," adding: "The reason that she's proposing something like this is because it works." ( CNBC )

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2. Mark Zandi, chief economist at Moody's Analytics

"Aggressive or unfair pricing practices are at bottom of list of reasons" for the high inflation we've suffered over the past recent years, "if they're on the list at all," he said, adding: "Today, it's hard to point to any significant, meaningful examples of price gouging."

He later said: "Things can and should be done to make sure there is competition in the markets and businesses are following good pricing policies. And prices need to be transparent so people can shop for a good deal." (CBS MoneyWatch)

3. Donald Trump, Republican presidential nominee and former president

"After causing catastrophic inflation , Comrade Kamala announced that she wants to institute socialist price controls," Trump said, adding: "What they are doing is a communist takeover of our country." (New York Post)

4. Dave Ramsey, personal finance guru and host of 'The Ramsey Show'

"It's been tried; it does not work. What works is to flood the market with supply: Lots of oil means lower oil prices. Lots of labor means lower labor prices. Lots of whatever means lower prices — it's a simple supply-and-demand curve," he said.

Ramsey added: "When you insert government and try to artificially cramp it down, it simply does not work because you can only hold that hose for so long until the pressure builds up and then it blows on you." (Fox News)

5. Kevin O'Leary, 'Shark Tank' investor nicknamed 'Mr. Wonderful'

"Price fixing, we tried that in the '70s — that's beyond crazy. Can you imagine an America where there's a ministry of pricing for groceries that tells a farmer what an apple can be sold for and what you can buy it for? I mean, that is a horror film on Netflix no one's even written the script for. That's not America. There's no chance in hell that's going to happen."

O'Leary added that price fixing had strong links to communism, saying it's been tried in Cuba, Venezuela, North Korea, and the Soviet Union. "It just reduces supply like crazy. It's a really bad idea," he said. (Fox News)

6. Paul Krugman, Nobel Memorial Prize laureate and Princeton economist

"I've been amazed at how many credulous commentators, and not just on the right, have asserted that Harris is calling for price controls, making her out to be the second coming of Richard Nixon if not the next Nicolas Maduro.

"What she has actually called for is legislation banning price gouging on groceries. Obviously, this is a populist political gesture — a way to offer something to voters upset about high food prices. But just because something is popular doesn't mean that it's a bad idea."

Krugman added that many states, including Texas, had laws banning businesses from overcharging for essentials like food and fuel during disasters. (New York Times column)

7. Target CEO Brian Cornell

The retail giant's boss said that offering value to customers is core to Target's business , adding that its operating margin was only about 6% and shoppers could easily compare prices across different stores to find the best deal.

"We're in a penny business. It's a very competitive space," Cornell said. (CNBC)

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