How to establish a good pricing strategy for different markets

Price is one of the most critical elements in any company’s marketing strategy. How many times do we marketing professionals face the complex decision of establishing a price range that fits the quality of the goods and services that a company sells and also that these prices are adapted to the circumstances of each market?

And it is that not long ago I was exchanging impressions in a group of marketing professionals with other colleagues in the profession about how prices should be established in different geographical locations. We see, for example, how many companies vary their prices depending on the market and how others do not change even a decimal of their prices in any of the markets in which they operate.

However, I think that companies need to adapt their prices to adapt to the circumstances of the different markets and that premise also has another component that marketing professionals must take into account today and that is the online environment.

Let me explain, for example, the price of a hamburger from a well-known international fast food chain can vary between different markets because the customer is not going to physically travel to another market to look for the cheapest hamburger joint because it is not profitable either in time or money. So for products that are offered in physical establishments in different markets, there is a significant variation in price depending on the market in which they operate.

But what happens when you sell online to different markets? What happens if what you sell online is an electronic device? Do you sell it at the same price all over the world or do you also set a different price for each market? The answer is found in companies like Apple, companies in which there are hardly any differences (except for the exchange rate of the currency you want to use) between the prices of the products they offer globally.

Therefore, establishing a coherent pricing policy will depend on the nature of the company’s business and the relationship model it wants to establish with its customers. This will, in some way, define the pricing policy to be applied to enter different markets with certain guarantees of success.

In my opinion, and based on my personal experience, I am in favour of establishing a pricing policy that is flexible enough to allow the company to operate without incurring risks to its business model. For example, if you must maintain the price for different markets, you can always add a new package of value-added services that complement your income in those markets in which you are interested in obtaining a good position.

Establishing the right price for a product or service can mean the difference between success and failure in a market as competitive as the current one. Pricing strategies not only influence consumer perception, but also directly affect a company’s profitability and market share. In this article, I will explain the various pricing strategies used in different markets, analyze how they adapt to market conditions, and provide concrete examples that illustrate their effective application.

Pricing strategies in competitive markets

1. Penetration pricing

In my opinion, and based on my experience, this is perhaps the riskiest pricing policy of all, since penetration pricing is a strategy that consists of setting a low initial price to attract a large number of consumers and quickly gain market share. This strategy is especially useful in highly competitive markets, where companies seek to differentiate themselves from the competition and establish a solid customer base.

But be careful, if the company subsequently wants to raise the price of its products, it will have a very difficult time if it does not add some additional component that justifies this increase. That is, a company can choose a penetration price for a product that incorporates a series of basic components that satisfy the needs of consumers in a specific market. Up to that point, it may be gaining market share and from that moment on, it can add new components to that product to, for a little more, enjoy new advantages and benefits.

The risk that this penetration pricing policy represents in my opinion is that precisely because of its initial competitive price, it is incorporating a critical mass of customers who may not be its true target and, therefore, when it raises the price and offers an improved product, it is very likely that this market will not be willing to acquire the new products, which may put the viability of the company in that market at stake.

For example, the launch of streaming services such as Netflix and Spotify is a clear example of this strategy. By offering their services at a reduced price or even free in the initial phase, these companies managed to attract a large number of users, who then became paying subscribers. Subsequently, we are witnessing the emergence of new premium accounts that offer new and interesting advantages to their subscribers, such as the elimination of advertisements or even a substantial improvement in the image quality (in the case of Netflix) and audio (in the case of Spotify) of their respective content. Another issue is determining how many of these initial users will become premium accounts and how many will remain anchored in the initial phase of the content offering of these platforms.

2. Skimming pricing

On the other hand, the skimming pricing strategy involves setting a high price at the time of launching a product or service, targeting consumers who are willing to pay a premium to be the first to purchase it. Over time, the price is gradually reduced to attract a wider audience.

This strategy is very common in the technology industry, where companies like Apple use it when launching products like the iPhone. Initially, newer models are priced high, but as newer versions are released, prices for older models are reduced, making the product accessible to a wider segment of the market.

Another very clear example is in the video game industry, where the big titles of each season are launched at high prices and, over time, they are reduced to low prices when there is really no market left to sell the game to.

Skim pricing carries a significant risk, as more and more consumers are willing to wait for the price to drop to purchase the products they are interested in. This forces companies to be increasingly creative in the initial stage of product launch to offer significant added value to those willing to purchase the product in its initial marketing phase. Otherwise, an increasing number of consumers will wait for discounts to purchase the product, which would be detrimental to the profitability of the business model deployed by the company.

3. Competitive pricing

Competitive pricing, also known as market pricing, is a strategy that focuses on matching or slightly below the prices of competitors. This strategy is especially effective in markets where products are perceived as similar or interchangeable, that is, in markets where there are almost perfect substitutes for each type of good or service to be marketed.

This type of pricing operates especially in low-cost markets, where consumers expect to obtain quality goods and services at reduced prices. Personally, I feel very uncomfortable in this area, as it is a business model that is not at all aligned with my philosophy of a high added value exchange that must exist in societies that aspire to enjoy a good quality of life.

Not long ago, and I would almost say against my principles, I had the opportunity to carry out a complete market analysis for a company that wanted to sell low-cost products related to the decoration and gardening sector in Europe. To my surprise, and despite offering very low prices, the percentage of profitability obtained by this company was very high, which is a clear indication not only of the low quality of the product but of the tremendous business that low cost represents for most companies and organizations that operate in this field. Another aspect that caught my attention when I carried out the market study was the high level of demand of the low-cost consumer, a customer who, although extremely price-sensitive, is convinced that he is acquiring quality products at a very good price, something that in my opinion is incompatible, that is, either you demand quality or you demand price, both components are mutually exclusive. But I will perhaps address the issue of low-cost in another more specific article because there is much to talk about and many aspects to take into account that will help us discover how low-cost companies operate and who their true products and services really are. Yes, I have said “who” in a totally deliberate way… Because in many cases, the low-cost customer is the true product. But, as I say, I will address this issue in another much more specific article.

Companies that implement this strategy seek to attract price-sensitive consumers who are looking for the best value for their money. Walmart, for example, is famous for its “Always Low Prices” strategy, which has allowed it to dominate the retail market in the United States. In Spain, we have the example of the supermarket chain Mercadona, which also has a policy of continuously low prices.

Pricing strategies in niche markets

1. Premium price

This is undoubtedly the segment in which I feel most comfortable and in which I am used to working. In the so-called niche markets, where products or services are aimed at a specific segment of consumers who value quality, exclusivity or experience, the premium price strategy is very effective. This approach consists of setting a high price to reflect the perceived value of the product and attract customers who are willing to pay more for a unique offer. It is used, for example, in the luxury industry.

And why is the premium segment so special to me? Because precisely in this area, price is the component that provides the least value to the exchange of goods and services. Marketing professionals who operate in the luxury industry face truly complex challenges that force us to be creative to build a narrative capable of establishing an emotional connection between brand and customer. In my opinion, the easy way is to lower the price again and again. The really difficult thing is to identify the values ​​that justify a high price that in turn guarantees an efficient and profitable exchange of goods and services.

Luxury brands such as Hermès, Rolex or Louis Vuitton use this strategy to maintain their exclusivity and prestige. Consumers of these products not only acquire the item itself but also the status and experience associated with the brand. The mere commercial transaction does not exist and that is something that particularly excites me.

2. Bundle pricing

Another common strategy in niche markets is bundle pricing, which consists of bundling several products or services and offering them all at a single price. This strategy not only increases the perceived value for the consumer, but also incentivizes customers to buy more than they originally planned.

An example of this strategy can be seen in the software industry, where companies such as Microsoft offer product packages such as Office 365, which includes multiple applications for a reduced price compared to purchasing each application individually. We would never use many of the applications offered by Microsoft on their own, but the company knows that if it includes these applications in the package, it is very likely that we will end up using them and incorporating them into our daily professional activities.

Dynamic Pricing Strategies

1. Demand-Based Pricing (Dynamic Pricing)

Anyone working in the travel industry will be fully familiar with this pricing policy. Dynamic pricing is a strategy that adjusts the prices of a product or service in real time based on factors such as demand, supply, time, and other external elements such as special events or changes in consumer behaviour. This strategy is common in industries where demand can fluctuate significantly in short periods, such as in the aforementioned travel, hospitality, transportation, and e-commerce sectors.

Success Stories:

• Uber: Uber is perhaps the best-known example of dynamic pricing. Its “surge pricing” is activated during periods of high demand (for example, during sporting events or adverse weather conditions), increasing fares to balance supply and demand. According to a study by the University of Chicago, Uber’s dynamic pricing not only optimizes service availability by attracting more drivers when demand is high but also significantly increases the company’s revenue. Data indicates that this strategy can increase prices by up to two to three times during peak demand, which, while it may create discontent among some users, manages to maintain the balance between supply and demand and maximize revenue for drivers and the company.
• Amazon: Amazon uses dynamic pricing on its e-commerce platform, adjusting prices for thousands of products based on competition, inventory, and consumer behaviour. This approach has been particularly effective during events such as Black Friday, where Amazon quickly adjusts prices to capitalize on high demand and outperform the competition. It can also be seen in the day-to-day life of the platform where those who usually go to buy witness the price war that exists between the different suppliers that operate in the marketplace and how they can even vary substantially during a day.

Conditions for the success of this type of pricing policies

• Real-time data analysis: The effectiveness of dynamic pricing depends largely on the company’s ability to analyze large volumes of data in real-time. This includes data on demand, customer behaviour, competitor prices, and other data. Companies like Uber and Amazon invest significantly in Big Data and machine learning technologies to optimize their pricing strategies. Some platforms help companies identify their competitors’ prices so they can adjust their prices in real time.
• Market flexibility: Dynamic pricing is most effective in markets where consumers are willing to pay variable prices and where demand can be influenced by external factors. For example, this is most clearly seen in the travel industry, where consumers expect prices to fluctuate based on the season and availability. Many people anticipate buying airline tickets or even booking hotels because of this more competitive price if they book their trips well in advance.
• Transparency and communication: It is crucial for companies to transparently communicate the reasons behind price changes. Uber, for example, notifies users when fares are higher than normal due to dynamic pricing, which helps mitigate discontent and maintain consumer confidence. Otherwise, customer perception can vary considerably and leave the company exposed to a delicate situation in the market.

Some references I would like to share with the reader:

• Cohen, P. et al. (2016). “Using Big Data to Estimate Consumer Surplus: The Case of Uber.” National Bureau of Economic Research.
• Priceonomics (2019). “How to Price Your Airbnb: Strategies for Maximizing Earnings.”

2. Freemium model: Scalability and conversion

The freemium model is a strategy in which a company offers a basic service for free, while charging for additional features or services. This approach is common in the software, mobile app, and online services industry, where barriers to product distribution are low and the marginal cost of adding a new user is minimal.

Success Stories:

• Spotify: Spotify has used the freemium model to attract a vast user base, offering a free, ad-supported music streaming service, while incentivizing users to become premium subscribers. According to Spotify’s 2023 financial report, the company has over 210 million premium subscribers, which accounts for a large portion of its total revenue. This success is attributed to the company’s ability to convert free users into paid subscribers by offering additional benefits such as ad removal, offline playback, and better audio quality.
• Zoom: During the COVID-19 pandemic, Zoom experienced exponential growth thanks to its freemium model. The company offered free video meetings with a 40-minute limit for groups, attracting millions of new users. Those who needed more time or additional features, such as unlimited meetings and greater participant capacity, opted for paid plans. In 2020, Zoom’s revenue grew by 326%, reaching $2.65 billion, largely thanks to the conversion of freemium users to paying customers.
• GenexiGente: The Spanish-language luxury magazine GenexiGente offers quality content available to all users who regularly visit its website. But it also provides high added-value content such as opinion articles, features or reports to those who want to know the trends of the luxury industry worldwide. The low marginal cost that GenexiGente has to incorporate new premium subscribers means that the platform can continue to provide quality content both openly and only available to its premium customers.

Conditions for the success of this pricing policy:

• High-value proposition: For the freemium model to be effective, the free version must offer enough value to attract users, but there must also be premium features attractive enough to incentivize users to pay. The key is to find a balance between what is offered for free and what is reserved for paid users.
• Low marginal costs: This model works best in industries where the marginal costs of adding new users are low, such as in software and digital services. This allows companies to quickly scale their user base without incurring prohibitive costs.
• Effective conversion strategies: Companies must implement effective strategies to convert free users into paying subscribers. This can lead them to create marketing campaigns, limited promotions, or free trials of the premium version for a limited time. For example, Spotify or Apple Music offer a three-month free trial period for their premium service, which has been effective in increasing conversions.

Dynamic pricing and freemium pricing are pricing strategies that have proven to be very effective when implemented under the right conditions. The success of dynamic pricing depends on the company’s ability to analyze data in real time and the market’s willingness to accept fluctuating prices. On the other hand, the freemium model is most effective in digital markets with low marginal costs, where companies can scale quickly and convert free users into paying customers with little change in their efforts and output.

Some references I would like to share with the reader:

• Spotify Technology S.A. (2023). «Q2 2023 Financial Results.»
• Zoom Video Communications, Inc. (2020). «Zoom’s Revenue Growth Soars Amid Pandemic.»

3. Penetration pricing: Xiaomi in the smartphone market

Xiaomi, the Chinese technology company, once used a penetration pricing strategy to quickly establish itself in the competitive smartphone market. By launching products at significantly lower prices than its competitors, Xiaomi managed to capture a large market share, especially in emerging markets.

In an analysis by Counterpoint Research, I could read that Xiaomi became the number one smartphone manufacturer in Europe, surpassing Samsung, thanks to its aggressive pricing strategy and the expansion of its product catalogue. Xiaomi has maintained low profit margins, relying on economies of scale as well as the sale of additional products and services from the Xiaomi ecosystem to generate additional revenue to compensate, as I already pointed out at the beginning of this article, for the low margin that the products that have been the subject of this penetration pricing strategy can provide.

Some references that I would like to share with the reader:

• Counterpoint Research (2021). “Xiaomi Becomes Europe’s No. 1 Smartphone Brand for the First Time.”

In summary

Pricing strategies are critical to the success of any business, and choosing the right strategy depends largely on the type of product, competition, and target market. From penetration pricing to freemium pricing, each strategy has its advantages and challenges. Companies must carefully analyze the market environment, consumer needs, and business goals before implementing a pricing strategy.

Understanding and effectively implementing these strategies can help companies maximize revenue, increase market share, and improve their competitiveness in an increasingly dynamic global marketplace.