Four Types of Pricing Objectives (2024)

By Devra Gartenstein Updated January 31, 2019

Setting prices for your products or services doesn't simply come down to a simple calculation. Prices can be practical tools for making ends meet or they can be marketing tactics for communicating something about the quality of your offerings. To figure out the best way to set prices, it's worthwhile to take a step back and examine your pricing objectives to develop a clear idea of what you want your pricing strategy to achieve.

Profit-Oriented Pricing

In a sense, all pricing is profit-oriented because, even if you set prices with other objectives in mind, you still need to earn a profit to stay in business. However, profit-oriented pricing makes profit the top priority when figuring out the ideal price to set. A profit-oriented pricing strategy looks for the sweet spot that allows you to charge as much as possible for your offerings without charging so much that you alienate potential customers and lose money through missed sales. This type of pricing objective can either aim to maximize profit per unit relative to cost of goods sold and other operating costs, or it can aim to maximize overall profit by setting a price that is competitive enough to increase the overall number of units you sell.

Competitor-Based Pricing

Competitor-based pricing uses the price you set to appeal to customers and define your niche relative to your competitors. It doesn't necessarily rely on setting a lower price than other available options, although this strategy will certainly make your products appeal to customers who shop on the basis of price alone. You can also use competitor-based pricing effectively by setting a price that's in the same ballpark as other products in the same niche, or by choosing a higher price to send the message that your product is superior and worth the extra money.

Market Penetration Pricing

A market penetration pricing strategy is geared towards getting a foothold in a competitive market, usually by offering a low initial price. If you start out by attracting customers on the basis of price, you can get more people to try your products, and then start building a reputation and clientele that will allow you to eventually charge more. A market penetration strategy can be risky because customers don't like growing accustomed to a low price and then being asked to pay more. However, this approach can be successful if your products really do have qualities other than price that will make customers want to buy them, such as unique features or unusually high quality.

Skimming Pricing Strategy

A skimming pricing strategy uses the opposite logic from one based on market penetration. Although market penetration uses low prices to attract attention, skimming uses a reputation that has already been built to charge high prices from early adopters. If customers are passionate about your products and willing to pay extra to be the first to have them, you can charge initial high prices when you first introduce a new innovation or a new line, and then lower the prices once you've already attracted the people who are willing to pay more.