Pricing is one of the most critical decisions in business strategy, as it directly affects profitability, competitiveness, and how a product is perceived in the market. Knowing about different pricing methods and how to apply them correctly can make all the difference in a company’s success.
In this article, we’ll explore the main pricing methods typically used by businesses and how they evolve over time. In addition, we will discuss the growing role of artificial intelligence (AI) in optimizing pricing strategies and the importance of customer-perceived value as a key factor.
The evolution of pricing methods
For years, pricing was based on experience and intuition. However, as José A. Rodríguez-Serrano points out in his article on the importance of data-driven decision-making, “In the digital age, access to and analysis of large volumes of data have revolutionized the way organizations make decisions.”
This revolution has obviously also reached decision-making in pricing: companies that adopt innovative approaches, such as the use of AI algorithms, can adjust their prices in real time to maximize their profitability.
What are pricing methods?
Pricing methods are strategies that define the price of a product or service based on a variety of factors, including costs, competition, and market demand. Below, we’ll explore three of the most common methods. In most cases, companies do not rely on a single method but a combination of them:
3 Classic Pricing Methods
#1 Cost-based
One of the simplest and most traditional methods is cost-based pricing. Here, the price is set by adding a profit margin to the production costs. Although it is easy to apply, it does not always reflect the value perceived by the customer or market conditions.
Sale price = cost price + % added or profit
#2 Competency-based
This approach adjusts prices according to competitors’ prices in the market. This method is ideal for businesses operating in saturated markets, as it ensures that prices remain competitive. However, it can involve risks if the perceived value of the product is not taken into account.
#3 Demand-based
Demand-based pricing is set based on the quantity of products available and market demand. During periods of high demand, prices may rise, while in times of low demand, prices may be reduced to stimulate sales.
Essential practices today in pricing strategies
Esade’s MBA and the Open Programs in its Executive Education portfolio highlight the importance of exploring pricing strategies that align with new forms of consumption, the digital age, and the need to generate relationships of trust with customers.
These include models such as:
- Demand-based pricing + context: Prices must be adjusted not only to demand but also to the context of the purchase. The same product can have different prices depending on the time and place where it is sold.
- Price based on perceived value: The price is set according to what the customer is willing to pay for the value they perceive of the product. It is ideal for products with high added value or for those companies that seek to differentiate themselves through brand and quality.
- Personalized prices according to the customer: Thanks to data analysis, companies can set prices that are adjusted to the customer’s profile, considering their purchase history, level of use, and preferences.
- Prices that encourage sustainability: These are models that reward responsible consumption, through differentiated tariffs or pay-for-impact models, and that allow companies to align their pricing strategy with sustainability and social responsibility objectives.
- Dynamic pricing and AI optimization: The use of AI tools and algorithms allows prices to be modified in real time, based on consumption, stock, and competition data. This method is common in the aviation, hotel, and e-commerce industries.
“But, beyond all this, it’s important to remember that what defines my price is the value perceived by the customer.“
The customer’s perspective on pricing
Regardless of the pricing strategy and models adopted, it is important to highlight that the value perceived by the consumer is a fundamental factor.
It is not just a matter of choosing a number — depending on costs, demand, context, competition, etc. — but of understanding how that number is interpreted in the mind of the customer.
This means that it is not the company that unilaterally determines how much a product is worth, but that the customer assigns a subjective value to what they receive.
This value does not come out of nowhere; it is created and captured. Value is built in the customer’s mind through storytelling, positioning, experience, and the impact that the product or service has on their life. Companies must actively work on communicating, reinforcing, and delivering that value through their proposition, narrative, and brand experience and then capture it through price. Only then will they be able to set prices that are valued as well as simply accepted.
Pricing and the influence of AI
Artificial intelligence and machine learning are transforming the way products and services are priced. AI algorithms can analyze large volumes of data, such as consumer behavior, supply and demand, and competition.
Thanks to their real-time analysis capabilities, these systems enable dynamic pricing, adjusting prices more accurately and frequently. However, transparency in these price changes is key to preventing consumers from perceiving them as ‘unfair manipulations.’
“Price transparency is no longer optional. Technology allows
customers to question every price decision, and companies that are not clear will lose the trust of their customers.”
Airlines and hotels are examples of industries that use AI tools to modify prices in real time. But, as Professor Marco Bertini points out in his article on dynamic pricing published in Esade’s Do Better blog, honest communication with the customer is essential to avoid feelings of frustration and mistrust.
“An airline with dynamic pricing that informs its customers about the best time to get the lowest prices will earn their trust.”
Biases in AI and their impact on prices
The use of artificial intelligence also brings challenges; AI can have biases that affect pricing. For example, if algorithms do not correctly consider regional or demographic differences, they could set inappropriate prices, affecting fairness and competitiveness.
Monetization strategies beyond price
Pricing isn’t always the only way to monetize a product or service. Monetization strategies such as ‘freemium’, subscription, or product bundles offer businesses additional ways to generate revenue without relying solely on pricing. In addition, as Marco Bertini points out, they often contribute to establishing long-term relationships with the customer.
“Many times, monetizing the value we provide is more sustainable than simply selling units.”
Let’s look at some examples:
Freemium
Many digital companies use a freemium model, in which they offer a free version with limited features and a premium version with more benefits. Spotify, for example, allows you to listen to music for free with ads, but its premium version eliminates advertising and improves the user experience. This model encourages mass adoption and gradual conversion to paying customers.
Subscription
In the subscription model, instead of paying for an individual product, customers access services through recurring subscriptions. Netflix is a clear example, as it allows users to consume unlimited content as long as they keep their subscription active. This model incentivizes retention and ongoing value.
Bundling
Product bundling is another key strategy. McDonald’s sells complete menus at a lower price than if the products were purchased separately, which increases the average purchase ticket. Microsoft Office applies the same principle, offering software packages (Word, Excel, and PowerPoint) in a single subscription, rather than selling each program separately.
How to choose the right method for your company?
When considering pricing methods for your business, a starting point may be to consider factors such as:
- Type of product or service: If you offer a unique or luxury product, pricing based on perceived value may be more appropriate. If you’re selling a standard product, cost-based or competition-based pricing may be more effective.
- Brand positioning: If your brand seeks to be perceived as premium, prices should reflect this value. In this case, perceived value will be key.
- Growth strategy: If your goal is to gain market share quickly, a low-price strategy can be helpful, especially with competition-based pricing.
But this is just a starting point; there are many aspects to take into account. That is why expert training and education are key to establishing a successful pricing strategy. Esade’s Strategy and General Management programs, its Spanish-language Marketing Digital, and its Diploma Ejecutivo en Marketing y Ventas provide the advanced knowledge and tools needed to create pricing strategies in today’s digital and fast-changing context.
If you want to create and implement successful pricing strategies, don’t hesitate to ask us. We will work with you to identify the program that best aligns with your profile and requirements.
