How to define your pricing strategy

How do you create a pricing strategy, and more importantly, what should you base it on? First and foremost, you need a well-defined overall business strategy and goals. If these are missing, pause your work on Pricing Academy and focus on developing your company’s strategy first. Without a solid foundation, you won’t be able to build an effective pricing approach.

As you shape your overall business strategy, don’t forget a few key elements that will later help you define your pricing strategy more effectively.

If your company strategy is already in place, take a moment to check whether these key points are clearly defined.

What is the market situation?

Regardless of your chosen pricing strategy, it’s essential to continuously monitor market conditions. The approach to pricing will differ depending on whether you're selling high-competition products like toner cartridges or smartphones, versus niche items like handcrafted toothbrushes made from Nigerian sandalwood.

Understanding your competitors is key—if you have access to competitive data, use it. Otherwise, consider automated tools for competitor price monitoring. If such tools aren’t an option, dedicate a few hours each week to manually checking the prices of your top products. However, keep in mind that product rankings change over time, and manual checks become increasingly inefficient.

Where do (or will) your customers come from?

Analyzing your marketing channels can help you assess whether your strategy is on the right track. In general:

• The more traffic you get from direct or organic search or newsletters, the stronger your brand is, meaning you have less pressure to compete on price.
• The more traffic comes from paid search (Google Shopping Ads, Facebook Ads, price comparison sites, etc.), the weaker the brand, and the greater the pressure to lower prices.
• Among paid search sources, price comparison sites typically indicate the lowest level of customer loyalty.

Who is your target audience, and how price-sensitive are they?

From an economic perspective, your goal is to understand the price elasticity of demand for your products.

• If demand is inelastic, a large price change results in only a small change in demand—meaning customers are less price-sensitive, and you can generally charge higher prices.
• If demand is elastic, even a small price change causes a significant shift in demand—meaning customers are highly price-sensitive, and price increases should be approached cautiously.

For example:

• Elastic products: Pet food, baby products, dietary supplements—small price changes cause significant demand fluctuations.
• Inelastic products: Luxury items like chandeliers or high-end smartphones, as well as essential goods like painkillers or bread. Low-cost products that are rarely the first items added to a shopping cart are often inelastic as well.

From business strategy to pricing strategy

If your business strategy and goals are clearly defined—following the SMART framework (Specific, Measurable, Achievable, Relevant, Time-bound)—they serve as a strong foundation for your pricing strategy. You should also understand how pricing connects to the strategies of other teams: What are marketing, logistics, finance, and product teams planning for the next period? The better you understand company-wide plans, the more effectively you can align your pricing strategy with them.

Once your business strategy is in place, you can define pricing strategies and objectives for individual teams. Who is responsible for pricing? Pricing affects multiple departments, so collaboration is essential—but ultimately, one team should own it.

From a marketing mix (4P) perspective, pricing (Price) typically falls under marketing, alongside promotion, place, and product. However, in retail and online businesses, pricing is often managed by the product, purchasing, or sales teams.

Among our clients, we most often see pricing responsibility assigned to the product team, while marketing focuses primarily on product promotion. Both approaches can work—it depends on the expertise and seniority of the teams, their cross-functional capabilities, and the company’s pricing objectives.

From business strategy to pricing objectives for specific segments

Once your overall business strategy shapes your pricing strategy, you can further break it down into specific objectives for different segments—whether by country (for businesses operating in multiple markets) or by product category. Within each segment, the focus shifts to selecting the right pricing tactics to achieve these objectives.

Example: Scaling through international expansion

Imagine a company aiming to double its revenue from € 300 mil to € 500 mil within two years (goal). The company sells standard retail products, which many competitors also offer, but it also has a private-label line with significantly higher margins. Since the domestic market is already saturated, the company chooses expansion into three new international markets as its growth strategy.

For each new market, the company conducts a macro-economic analysis, competitive research, and consumer behavior study to set its annual revenue targets. It then aligns its pricing strategy with broader company initiatives:

• Marketing develops a plan to drive sales.
• Logistics commits to opening a new warehouse within six months near the target markets.
• Finance defines the budget and expected revenue growth.

As a result, pricing gets a concrete target:

• Increase first-year revenue from new markets by € 70 mil.
• Accept lower margins on standard retail products to gain market share.
• Compensate by driving higher-margin private-label sales.
• By the end of year one, achieve at least € 10mil in margin, contributing to marketing costs.

With the pricing strategy in place, it is now applied to different product categories:

• Retail Category A → Aggressive pricing with significantly lower margins to attract customers.
• Retail Category B → Same approach to gain competitive advantage.
• Private-label products → Higher margins to offset losses from discounted retail items.

These tactics will be evaluated after the first few months, allowing for adjustments based on performance data.

A simplified example illustrates how overall strategy and goals gradually break down into specific tasks, eventually leading to the selection of tactics for individual product segments. What once seemed like a complex black-box pricing process becomes a clear, structured approach—easy to manage and measure.

But what if we find that some parts of the strategy are no longer working or seem unlikely to achieve their intended goals? In that case, it’s not the entire strategy that needs to change, but rather the tactics. Pricing remains flexible, allowing for adjustments and optimizations while staying aligned with the broader business objectives.

Questions for the chapter Strategic pricing

• What is your business strategy? To what extent did you achieve your previous goals, and where do you stand now? Why did you exceed or fall short of them? How will this impact your current strategy?

• What is the market situation? Who are your competitors, and why do they compete with you?

• Where do your customers come from? Can you break it down by percentage? Does this vary by segment or category? How significantly, and why?

• How do you currently structure your product portfolio? Do you categorize it by manufacturer, brand, category, or something else? What is the reasoning behind this approach?