Pricing Strategy in 2026: How Companies Balance Profit and Demand
-
By
Arthur Kellan
- Business
- # strategies
- 5 min read
-
By
Arthur Kellan
- Business
- # strategies
- 5 min read
Are you still sure that pricing is a purely arithmetic process? Unfortunately, today the things are different. Due to fragmented markets and instant comparisons, pricing strategy has become the main tool for managing consumer behavior and saving margins.
The Shift From Cost-Plus to Value-Based Pricing
The traditional “cost plus markup” model is ineffective today, as it completely ignores consumer psychology. Leading brands are increasingly shifting to value-based pricing, where the cost is determined by perceived value and the customer’s willingness to pay at a given moment.
Let’s take the examples of Apple and Dyson: they ignore competitive pressure, building their pricing philosophy around technological superiority. Their margins remain stable even as component costs rise, as consumer demand for their products is inelastic, all because loyal consumers perceive price as an indicator of top quality (and not as a basis for comparison with similar products).
Dynamic Pricing and Algorithmic Adjustments
Dynamic pricing implies that a price is a variable that must be recalculated in real time based on thousands of signals.
For example, many systems use reinforcement learning, where the algorithm constantly runs micro-tests – for example, raising the price by 0.5% on a narrow product category to measure price elasticity. User data is also applied – all this enables the creation of personalized policies, a method long practiced by large online platforms like Amazon. However, it’s important to be careful here to avoid ethical risks and pressure from regulators like the FTC.
Finally, if a business regularly faces an oversupply of short-lifecycle products in stock (for example, electronic devices before the release of a new model), the algorithm will initiate aggressive cost reductions to minimize inventory costs. Incidentally, Zara and H&M have long used predictive analytics to determine the best time to launch discounts to maximize revenue before the latest fashion trend becomes obsolete [1].
Pricing Strategy vs Brand Positioning
Are you still not perceiving price as the strongest signal of your product’s quality? If so, you risk brand dilution, where a luxury product begins to be perceived as mass-market due to frequent and very steep discounts. Yes, this will certainly yield short-term KPIs, but as in the Michael Kors example, you risk ultimately suffering from excessive presence in discount centers and diminishing your appeal as a luxury brand [2]. Since consumers have become accustomed to expecting a discount, full-price sales will simply collapse.
To maintain a high price in the face of cheaper alternatives, companies invest in the ecosystem. This allows them to keep the price above market, ignoring the undercutting efforts of cheap manufacturers.
Here’s a brief comparative analysis of market positioning strategies.
|
Costing strategies
|
Method
|
Target audience
|
Example
|
Psychological effect
|
|---|---|---|---|---|
|
Skimming
|
Setting the highest possible price initially
|
Innovators, early adopters
|
Sony PlayStation
|
A sense of exclusivity
|
|
Penetration
|
Competitive pricing below market to capture market share
|
Price-sensitive mass market
|
Xiaomi
|
High entry threshold for competitors
|
|
Premium
|
Consistently high pricing regardless of market conditions
|
High-status consumers
|
Rolex
|
Guarantee of social status
|
|
Economy
|
Minimal costs, no service
|
Budget shoppers
|
Walmart
|
Focus on rational savings
|
|
Freemium
|
Basic features are free, but advanced features require payment
|
Digital service users
|
Spotify
|
Smooth integration into the ecosystem
|
Where Companies Miscalculate Demand
The main mistake of modern business is the belief in a relationship between demand and price. Today, price elasticity has become unstable due to AI assistants that find alternatives in seconds.
It’s important to understand that there is a point of no return, after which even a minimal increase of 1-2% triggers consumers to cut costs or search for analogs. This occurs due to reliance on historical data: if a customer paid more last year, they will continue to pay more now. At the same time, consumer behavior becomes reactive.
Another typical mistake is underestimating the substitution effect. For example, in clothing retail, a sharp cost increase on mid-range mass-market products doesn’t increase profits but simply redirects traffic to second-hand stores or ultra-fast fashion brands like Shein, thereby “killing” the loyal base.
Stability vs Aggression in Volatile Markets
During periods of economic turbulence, companies face a dilemma: protect profit margins or aggressively increase market share.
For example, companies with strong brands, such as LVMH, opt for cost control, deliberately accepting temporary sales volume reductions to preserve brand value and ensure long-term revenue stability [3]. This carries the risk of becoming a niche player, but it also protects against bankruptcy in a protracted crisis.
At the same time, players with huge liquidity reserves, such as Chinese electric vehicle manufacturers, opt for dumping [4]. They lower prices, thereby driving smaller competitors without a financial cushion out of the market.
Ultimately, only those who combine these approaches, maintaining high prices on flagship products and offering aggressive discounts on key products to attract traffic, have the best chance of winning.
Conclusion
As we can see, price is not just a number – it’s a tool for risk management and wise resource allocation. Therefore, instead of blindly honing algorithms to generate “the best price”, it makes sense to focus on understanding consumer psychology.
Sources:
[1] – How Predictive Analytics in Supply Chain Powers Smarter Fashion Sourcing
[2] – Michael Kors is in danger of getting ‘lost in a sea of ‘stuff”
[3] – LVMH reverses decline with plan to invest in brand ‘desirability’
[4] – Tesla CEO Musk: Chinese EV firms will ‘demolish’ rivals without trade barriers
Arthur Kellan
Discover with Vireon Press
Middle East Conflict Pushes Maersk to Reroute Again
Lockheed Martin and Raytheon Gain as Defense Spending Climbs
