Pricing Strategies – BMS Notes
When selling a good or service, a company can set the price in a number of different ways. The price can be set so that the business makes the most money from the market as a whole or from each unit sold. It can be used to protect an existing market from new competitors, to get a bigger share of an existing market, or to get into a new market.
Different ways to set prices:
Pricing for Penetration
In order to get a bigger share of the market, prices for goods and services are kept artificially low. While this is going on, the price goes up. France Telecom and Sky TV both used this method. To make their business worthwhile, these companies need to get a lot of customers. To do this, they offer free phones or cheap satellite dishes to get people to sign up for their services. Once there are a lot of subscribers, the prices start to rise slowly. When there is a premium movie or sporting event, prices go up for Sky TV and all other cable and satellite companies. This is because they switch from a penetration approach to more of a skimming/premium pricing approach.
Looking at Prices
When a business price skims, it charges more because it has a big advantage over its competitors. The benefit, on the other hand, doesn’t last long. When there are more products on the market, the price has to go down because there are more competitors.
In the 1970s, companies that made digital watches used a method called “skimming.” Since the watches could be made for less money per unit, which attracted other manufacturers, the company changed its marketing and pricing strategies. There were new products made, and the watch market became known for being innovative.
Prices in the Competition
Setting your prices at the same level as your competitors is what competitive pricing means. This method is based on the idea that prices set by competitors have already been thought through in detail. There are a lot of companies in the market that sell the same or very similar goods. Classical economics says that the prices of these goods should already be at an equilibrium (or at least at a local equilibrium). Because of this, a new company can avoid the costs of trial and error when setting prices by setting the same price as its competitors. But each business is different, and so are its prices. Because of this, the main problem with the competitive pricing method is that it doesn’t take into account how different companies’ costs (like production, buying, sales force, etc.) are. Because of this, this way of setting prices might not work well and cause businesses to make less money.
Like, a company needs to set the price of a new coffee maker. It costs $25 at other stores, and the company thinks that is the best price for the new coffee maker. It makes the choice to price their own product at this level. You can also use this pricing strategy along with others, like penetration pricing, which involves lowering the price below that of the competition (in this case, by $23 for the coffee maker).
Pricing for a Product Line
When there are different kinds of goods or services, the prices reflect the advantages of each type. Like at a car wash, a basic wash might cost $2, a wash and wax might cost $4, and the whole deal would cost $6. Product line pricing doesn’t usually show how much it costs to make a product because it gives customers a range of prices that they think are fair as they go up or down the range.
It is normal to pay X for a single package of chocolate bars or potato chips (crisps). But if you buy a family pack that is 5 times bigger, you should pay less than 5X the price. It might cost a lot more to make and sell big packs of chocolate or chips for families. The company that makes them might make more money if they sold them separately, even though they price the whole line together. Ranges, not single items, bring in more money.
Pricing based on psychology
When the marketer wants the customer to react emotionally instead of logically, this method is used. Price Point Perspective (PPP) is 0.99 cents, not 1 US dollar. People use price to judge a lot of different things, which is strange, especially when they are in new markets. People may avoid making decisions when they are in a place they aren’t familiar with, like when they are buying ice cream. Would you like an ice cream for $0.75, $1.25, or $2.00? You can make your choice. You might be going into a whole new market. Say you have never bought a lawnmower before and don’t know anything about garden tools. Would you always choose the cheapest? What would you buy that costs the most? Or would you choose a lawnmower in the middle? So, price may be a sign of quality or benefits in markets you aren’t familiar with.
Price Plus Cost
Your company has been working on a new printer that will help small businesses do many things more quickly and easily. You need to figure out how much the printer costs. You do some research and decide that the cost-plus method is the best way to set the price of the printer.
It’s easy to figure out what a product will sell for by adding a markup to its cost. This is called “cost-plus pricing.” In our printer example, the first thing you need to do is figure out the break-even price. This is the sum of all the costs that go into making a product, such as the cost of materials, the cost of production, and the cost of marketing. Adding up all the costs to get the price of each printer gives you $78 for each one. Your business would break even if you sold the printer for $78; it would not make or lose money.
Pricing based on costs
Setting prices based on how much it costs to make, ship, and sell a product is called cost-based pricing. The company usually adds a fair rate of return to make up for its work and risks. First, let us take a look at some well-known businesses that use cost-based pricing. Companies like Ryanair and Walmart try to be the cheapest in their fields. These businesses can offer lower prices because they are always looking for ways to cut costs. That does mean smaller profit margins, but it also means more sales and more money in the bank. Cost-based pricing can be used by companies with higher prices as well, though. But these businesses usually make costs higher on purpose so they can charge more and make more money.
Pricing for optional products
Once a customer starts to buy something, companies will try to get them to spend more. “Extras” that you can choose to add to a product or service make it more expensive overall. For instance, airlines will charge extra for things like reserving a row of seats next to each other or guaranteeing a window seat. Again, budget airlines are the main ones who use this method when they charge extra for extra luggage or legroom.
Premium Prices
When there is a unique brand, charge a lot. When there is a big advantage over the competition and the marketer knows they can charge a higher price, this strategy is used. You have to pay a lot of money for nice things like Cunard Cruises, rooms at the Savoy Hotel, and first-class air travel.
Bundle Prices
Putting several goods or services into one package and selling them for less than what would be charged if they were sold separately. Usually, the package has one expensive item and at least one other item that isn’t necessary. Retailers use bundled pricing as a way to sell items that are in high demand