What is Pricing Strategy

What is Pricing Strategy

You’ve done all the fun stuff, like building your branding kit. You know, all the creative stuff. Like picking out colours and fonts. And asking your friends which version of your logo they like better. For many entrepreneurs, marketing is the fun stuff because it makes real the vision you have for your business. But marketing can’t launch without putting a price to the products or services your business offers. Which is when, for most people, the fun stops. Because then it’s time to look at numbers. And decide what to charge customers. This is more than simple math. Pricing strategy is about market positioning, consumer expectations, and human psychology. Pricing strategy is also tied to marketing communication. So let’s get into what is pricing strategy and why it matters so much for your business.

What is Pricing Strategy

Essentially, pricing strategy is the methodology behind setting the prices you charge your customers. For a business selling products, this is mostly a function of per-unit price and mark-ups. For example, you buy 1000 widgets at $2 each and the standard keystone markup for retail is 100%, so you price your widgets at $4. 

However, if your competitors are selling the same widgets for $3.90, then it may be hard to sell yours. This is part of why market research is so important, because what your competitors are doing influences decisions you make in your business.

What to do now? Well, your pricing strategy could be to keep your price at $4 and differentiate with compelling branding or an engaging customer experience. Or, you can make sure that your marketing message includes the ways your widget is better than those other widgets. Promote all the reasons why it’s worth paying 10 cents more for your widget.

Another pricing strategy is to undercut your competitors, and sell your widgets for $3.85.

Pricing Strategy for Products vs Services

The pricing strategy explained above makes sense for businesses selling things. But what about for businesses that provide a service?  Service businesses have a whole other set of factors to consider when it comes to understanding what is pricing strategy. Basically, the math isn’t so simple when your business is providing a service. Because a service takes time, and it’s a variable that can be hard to measure.

For example, at a hair salon, one haircut isn’t the same as another haircut. The length of hair and the complexity of the style are factors into how long that haircut will take. Of course, there is also the level of expertise of the person providing the haircut, and their own expectations for what they will be paid for the work. An experienced stylist with many years of professional development will naturally expect to earn more per haircut than a junior stylist who just graduated. 

Similarly, doing a tax return isn’t a one size fits all thing. A student working part time in their first job has different needs than an entrepreneur with rental properties and multiple businesses.

This difficulty in quantifying output is part of the reason why running a service business is so unique. And since here at The Hagstone Blog we focus on service businesses, let’s set aside all that product pricing calculations and focus on what is pricing strategy for a business providing services to people.

6 Key Factors in Deciding Pricing Strategy

1. Cost of Goods Sold (COGS)

First, to understand what is pricing strategy, the following 6 key factors are important. And these apply to both product- and service-based businesses.

COGS is the price your business paid for the widgets you sell. For a service business, this is the cost of labour to provide the service AND the cost of any supplies required to complete that service. For example, a lawn care company may include the wages for their team and the cost of lawn bags and fertiliser used to complete a maintenance visit for a customer. Therefore, this is sometimes knowns as COS (Cost of Services) or COSP (Cost of Services Performed).

2. Market Demand

Remember economics class? The concept of supply and demand is tried and true through hundreds of years of change in our society. Quite simply, when there is less of something that people want, or the demand of something outstrips supply, then prices go up. Remember what happened to the price of toilet paper during the pandemic?

3. Competitor Prices

As explained above, what competitors are charging influences what you can charge. This is tied to customer expectations, which we get more into in a later section. Essentially, if house painting companies in your area charge $75 – 125 a room and you charge $300, it’s not likely that you will get any leads.

4. Brand Positioning

Branding is more than the logo and tagline. It’s the whole look and feel of the brand. And it’s the language and tone of messaging on your website, on social media channels, and all communication with your customers. Brand positioning is the feelings and values that consumers associate with your brand. For example, when you think of Apple, you think innovation and cutting edge technology.

5. Customer Segmentation

This is about knowing your customers. Not just their age and where they live, but also what they care about. What problem they are trying to solve, or need they want met. And then, aligning your messaging specifically for them. For example, a home decorating business may segment their customer list according to size of the home. Those with large homes would receive marketing for higher priced packages than the customers in smaller homes, who may be expecting to spend less.

6. Economic Conditions

Economic conditions impact pricing strategy. Because the larger world and events outside our control impacts us. Just think about the example mentioned above about toilet paper during the early days of the pandemic. Remember when shop shelves were empty because of the disruption to the supply chain? Those economic conditions disrupted the cost of goods and our expectations of pricing. So retailers needed to charge more, and consumers paid it. 

What is Pricing Strategy Economic Factors Covid

Consumer Expectations and Pricing Strategy

As mentioned in the examples above, consumer expectations have a huge impact on pricing strategy for a service business. Generally speaking, the higher the price for a service, the higher the expectation of what they will receive. And for a service business, it’s more than the value of the service, it’s also about the entire customer experience. Just think of what you expect if you go to an upscale spa for an expensive massage in a high-end area of town. You expect a professional, qualified massage therapist. But you also expect a warm greeting from the reception staff and the offer of tea or water. You expect the treatment room to be beautifully decorated with lush furnishings. And you expect the massage table to be comfortable, with clean soft sheets and blankets. 

However, if you booked a massage at half the price of what that upscale spa charges, you would not expect all those luxurious touches. It might be a student massage therapist with a temporary table set up in a spare room of their house.

The bottom line here is that when thinking about pricing strategy for your service business, understand that your customers will expect more when you charge more.

Brand Positioning

When it comes to understanding what is pricing strategy for a service business, brand positioning is very important because this is connected to consumer expectations. For example, when the service is being positioned as budget-friendly and affordable, then consumers expect low pricing. If the company name is “Budget Cleaning” then prices better be on the low-end of the market rates. 

On the other hand, say an event planning business is called “Gold Star Events.” And the brand positioning speaks luxury, customization, and personal attention. Then, the pricing strategy will be rates at the higher end of what competitors in the area are charging. Or if Gold Start Events has a special attribute or distinction, then they could charge a little higher than everyone else. For example, if they were featured on a reality show, or had planned a high-profile celebrity event. Winning awards can support a higher price point for a service business. Read Are Business Awards Worth it? 

Last but not Least - Profits

Some service business entrepreneurs underestimate how long things take. Many also undervalue the worth of their time. Just recently I spoke to an entrepreneur with a language tutoring business. When we got talking about pricing strategy, I observed that the rate for her courses seemed low, and suggested doing some market research. She insisted it was fine and she didn’t want to charge more. But then I did the math. Considering the time she spent on planning and delivering classes, her hourly income was much lower than minimum wage. So now she is reconsidering. 

When it comes to setting out the pricing strategy for your business, be sure to run the numbers. Factor in the time required, and the cost involved in delivering the service. Going back to the first example of haircuts, you’ll notice that many salons set prices according to hair length and level of stylist. This makes sure their staff are paid appropriately AND the salon earns a profit. Because it’s great that you enjoy what you do and love your customers. But if your business isn’t making a profit, it isn’t sustainable for the long term.

What is Pricing Strategy: Putting it all together

Ok, we’ve covered alot here about what is pricing strategy for a service business. As a summary, let’s put it all together.

1

Costs

Find all the tools Calculate the cost of the service you offer. Be sure you know how long it takes, and measure it. Don’t estimate “maybe an hour” because it could be an hour and a half. And when it comes to paying staff to perform the service, that 30 minutes may make the difference between making a profit or just breaking even.

2

Know Your Customer

Who are your services for? Be specific. Where they live, what they care about, and what they expect from your services.

3

Know Your Competitors

What are other businesses doing in your area? What do they offer, and what are they charging? This data is so important for making decisions around pricing strategy, positioning, and marketing message. How can you effectively stand out in the market when you don’t know what is out there?

4

Alignment

Finally, alignment. Meaning, align pricing strategy with your customers, your brand, and your messaging. Bespoke service with high-end branding can support a higher price point. 

Pricing Strategy Guide

When setting pricing for your services, consider these questions. Use these as a guide for making these important decisions for your business.

By: Rebecca Page-Chapman, MBA

Rebecca has been passionate about small business since her first marketing campaign at age 8. She is an award-winning CEO and franchisor. She geeks out over history, languages, and the origin of things. As a digital nomad, she works online to coach and mentor small business owners all over the world. Follow her travels on Instagram

Further Reading

What are KPIs
Small Business Taxes: What You Need to Know in 2025 and Beyond

Browse the Blog

What is Pricing Strategy
Scroll to Top

Subscribe to
The Hagstone Blog

Insider stuff for entrepreneurs like you