Pricing Strategies – BMS Notes
There are several pricing tactics that a firm may use when marketing a product or service. The price might be chosen to maximise profits from the market as a whole or from each item sold. It may be used to enter a new market, grow market share within an existing market, or protect an established market from new competitors.
Different Price Strategies Types:
Pricing for Penetration
To increase market share, the price of goods and services is purposefully kept low. The price is raised when this is accomplished. Both Sky TV and France Telecom used this strategy. These businesses give free phones or reduced satellite dishes to get people to join up for their services since they need to land big numbers of customers to make it worthwhile for them. Prices progressively rise when a significant number of members sign up. Using Sky TV as an example, or any other cable or satellite provider, they go from a penetration strategy to more of a skimming/premium pricing strategy when there is a premium movie or athletic event.
Pricing Skimming
Price skimming occurs when a business raises its pricing due to a significant competitive advantage. But the benefit is usually not long-lasting. Due to increasing supply brought about by the high price, more rivals are drawn into the market, and eventually the price will drop.
In the 1970s, skimming was a tactic utilised by makers of digital timepieces. More pricing and marketing methods are used once the watches are manufactured at a reduced cost per unit and other manufacturers are enticed to enter the market. The watch industry became known for its creativity as new items were created.
Competitive Costing
Placing the price at the same level as one’s rivals is known as competitive pricing. This strategy is predicated on the notion that rivals have already extensively refined their prices. Many businesses in every market offer identical or extremely similar goods, and classical economics states that the price of these goods should, in principle, already be at equilibrium (or at least at a local equilibrium). Thus, a recently established company may save money on price-setting trial and error by establishing the same price as its rivals. But just as every business is unique, so are its expenses. In light of this, the primary drawback of the competitive pricing strategy is its inability to take into consideration the variations in expenses (manufacturing, buying, sales force, etc.) across different businesses. This pricing strategy may thus be ineffective and result in lower profitability.
A company must set the price of a new coffee machine, for instance. The corporation believes that $25 is the ideal price for the new coffee machine, even if its rivals are selling it for $25. It chooses to charge this exact amount for its own goods. Furthermore, this pricing strategy may be used with other strategies, such penetration pricing, which is, for instance, putting the price of the coffee maker below those of its rivals (placing the price of the coffee maker at $23, for example).
Pricing for Product Lines
When a variety of goods or services are offered, the cost of each item is commensurate with its advantages. For instance, vehicle washes may cost $2 for a simple wash, $4 for a wash and wax, and $6 for the whole package. Since product line pricing offers a range of costs that consumers consider to be reasonable gradually along the range, it seldom accurately represents the cost of manufacturing the product.
When purchasing chocolate bars or potato chips (crisps), you should budget X for a single packet; but, if you get a family pack, which is five times larger, you should budget less than five times as much. Large family packs of chocolate chips might be produced and distributed at a significantly higher cost. Although they price throughout the whole range, the manufacturer may make more by selling them individually. Instead than making money on individual goods, the range does.
Pricing Psychology
When a marketer wants a customer to react emotionally rather than logically, they use this strategy. Price Point Perspective (PPP), for instance, is 0.99 cents rather than one US dollar. It’s odd how customers, particularly in foreign markets, utilise price as a proxy for a variety of other criteria. When purchasing goods in an unfamiliar environment, such as ice cream, consumers may use a choice avoidance strategy. Which amount of ice cream—$1.25, $1.25, or $0.75—would you prefer? You have the option. Maybe you’re going for a whole other market. Suppose that you have no prior experience with garden equipment and are purchasing a lawnmower for the first time. Would you buy the cheapest one out of the bunch? Would you purchase the priciest item? Or, in the midst, would you choose a lawnmower? Therefore, in uncharted markets, price may be a sign of quality or advantages.
Price Plus/Cost
Your organisation has been working on a new printer that will simplify a lot of procedures for your small business clients. It is your responsibility to ascertain the printer’s cost. You perform some study and find that the cost-plus technique is the most effective way to price the printer.
Adding a markup to a product’s cost is a clear and easy method of determining the sales price via cost-plus pricing. You must first ascertain the break-even price in our printer example, which is the total of all costs associated with producing a product, including expenditures for supplies, manufacturing, and marketing. Upon totaling up all the costs, you arrive to the conclusion that the production cost of each printer is $78. Your business would break even if you sold the printer for $78; that is, there would be no profit or loss.
Price dependent on Cost
With cost-based pricing, the product’s production, distribution, and sales expenses are taken into account when determining the price. In addition, the business often adds a reasonable rate of return to cover its costs and risks. Let’s start by examining a few well-known instances of businesses that have implemented cost-based pricing. Companies like Ryanair and Walmart strive to become the lowest-cost manufacturers in their respective sectors. These firms are able to drop rates because they are always looking for ways to reduce expenses. Smaller margins are undoubtedly the result, but sales and earnings are also increased. However, cost-based pricing may be used by businesses with higher costs as well. But these businesses often do it on purpose to drive up expenses in order to justify greater margins and pricing.
Pricing for Optional Products
Businesses will make an effort to get consumers to spend more money when they begin making purchases. “Extras” that are optional raise the cost of the item or service overall. Airlines will charge extra for optional services like securing a window seat or booking a row of seats close to one another, for instance. Once again, low-cost airlines are the main practitioners of this strategy when they impose surcharges for excess baggage or legroom.
Elevated Cost
When there is a distinct brand, charge a premium price. When there is a significant competitive advantage and the marketer feels secure in the knowledge that they can charge a comparatively higher price, they will use this strategy. Luxuries like Cunard Cruises, first-class airfare, and Savoy Hotel suites come at such exorbitant costs.
Bundle Discounts
the practise of bundling many goods or services into one bundle and charging less for them than you would if you were to offer them individually. Usually, the bundle consists of one expensive item and at least one complimentary item. Retailers utilise bundled pricing as a marketing strategy to sell things in large quantities.