Pricing Strategies

Pricing Strategies: When selling a product or service, a company may use a range of pricing tactics. The price might be chosen to maximise profit from each sold unit or from the market as a whole. It may be used to protect a current market against new entrants, grow market share within an existing market, or join a new market.

Pricing Strategies: There are many different types of pricing strategies.

• Pricing for Penetration

To acquire market share, the price paid for goods and services is intentionally low. When this is accomplished, the price is raised. France Telecom and Sky TV both employed this strategy.

These businesses need to attract a large number of customers to make it worthwhile, so they offer free phones or discounted satellite dishes to entice people to sign up for their services. When a huge number of people sign up for a service, the price steadily rises. When there is a premium movie or athletic event, for example, Sky TV, or any cable or satellite business, rates are at their highest, therefore they shift from a penetration method to a skimming/premium pricing approach.

• Price Skimming

When a corporation uses price skimming, it charges a higher price because it has a significant competitive advantage. The advantage, on the other hand, isn’t always sustained. The high price invites more rivals to the market, and as a result of the increased supply, the price will surely decline.

In the 1970s, manufacturers of digital timepieces employed a skimming method. Additional marketing methods and price approaches are adopted after other manufacturers are enticed into the market and the watches are manufactured at a reduced unit cost. New items were created, and the watch industry established a reputation for being forward-thinking.

• Pricing in a Competition

Setting the price at the same level as one’s rivals is known as competitive pricing. This strategy is based on the assumption that rivals have already spent considerable time and effort refining their price. Many enterprises offer the same or very similar items in every market, and according to classical economic theory, the pricing for these products should already be at an equilibrium (or at least at a local equilibrium). As a result, a newly-launched business may avoid the price-setting trial and error expenses by establishing the same price as its rivals.

Every business, however, is unique, as are its costs. Given this, the competitive pricing method’s fundamental flaw is that it fails to account for changes in different firms’ expenses (manufacturing, buying, sales force, etc.). As a consequence, this pricing strategy may be wasteful and result in lower profitability.

A company, for example, has to price a new coffee machine. Competitors offer it for $25, and the manufacturer believes that this is the best pricing for the new coffee machine. It chooses to price its own goods at this level. Furthermore, this pricing approach may be combined with others, such as penetration pricing, which entails establishing a price below that of the competitors (for example, in this case, putting the price of the coffee machine at $23).

• Pricing for a Product Line

Pricing for a range of goods or services reflects the advantages of different segments of the range. For example, vehicle washes may cost $2 for a simple wash, $4 for a wash and wax, and $6 for the whole package. Because it gives a range of prices that a customer considers as fair progressively — throughout the range, product line pricing seldom matches the cost of creating the goods.

If you purchase a single packet of chocolate bars or potato chips (crisps), you can expect to spend X, but if you buy a family pack that is 5 times larger, you can expect to pay less than 5X the price. Producing and delivering huge family packs of chocolate/chips might be prohibitively costly. Although they price throughout the whole range, it may benefit the manufacturer to sell them individually in terms of profit margin. Rather than single goods, profit is generated on the whole range.

Pricing from a Psychological Perspective

When a marketer wants the customer to react emotionally rather than rationally, this strategy is utilised. For example, the Price Point Perspective (PPP) is 0.99 cents, not $1. It’s funny how customers use pricing as a barometer for all kinds of things, particularly in foreign areas. When purchasing things in an unfamiliar context, such as when purchasing ice cream, consumers may use a choice avoidance strategy. Would you prefer $0.75, $1.25, or $2.00 worth of ice cream? It’s all up to you.

Perhaps you’re breaking into a whole new market. Assume you’re purchasing a lawnmower for the first time and have no experience with gardening tools. Would you always choose the cheapest option? Would you go for the most costly option? Or would you want to use a lawnmower in the middle? In new areas, price may therefore be a signal of quality or advantages.

• Pricing is calculated on a cost plus basis.

Your firm has been working on a new printer that will help your small business clients expedite a number of operations. Your task is to figure out how much the printer will cost. After some investigation, you decide that the cost-plus technique is the best way to price the printer.

By adding a markup to the cost of a product, cost-plus pricing is a basic and uncomplicated technique to arrive at a sales price. In our printer example, you must first establish the break-even price, which is the total of all costs associated with producing a product, including supplies, manufacturing costs, and marketing costs. When you add up all of the costs to figure out how much each printer will cost to make, you find that each one will cost $78 to make. Your firm would break even if you sold the printer for $78; there would be no profit or loss.

• Pricing based on costs

Setting prices based on the expenses of making, distributing, and selling a product is known as cost-based pricing. In addition, to compensate for its efforts and dangers, the corporation usually adds a reasonable rate of return. Let’s start with some well-known instances of organisations that use cost-based pricing. Companies like Ryanair and Walmart strive to be the lowest-cost manufacturers in their respective sectors.

These businesses are able to establish cheaper pricing by consistently cutting expenses wherever feasible. On the one hand, this means lesser margins, but on the other, it means more sales and profits. Companies with higher prices, on the other hand, may use cost-based pricing. These businesses, on the other hand, often create greater expenses on purpose in order to claim higher pricing and profits.

• Product Pricing Options

Once clients begin to purchase, businesses will want to raise the amount they spend. Optional ‘extras’ raise the product or service’s total price. Optional extras such as reserving a window seat or a row of seats next to each other, for example, will be charged by airlines. Budget airlines, once again, take use of this tactic when charging more for extra baggage or legroom.

• Premium Rates

When there is a distinctive brand, use a premium pricing. This strategy is employed when the marketer has a significant competitive advantage and is confident in their ability to charge a higher price. Cunard Cruises, Savoy Hotel accommodations, and first-class air travel are all offered at exorbitant costs.

• Bundle Discounts

The act of bundling many goods or services into a single bundle and selling them at a lesser price than if they were offered individually. One high ticket item and at least one supplementary item are generally included in the bundle. Retailers utilise bundled pricing as a marketing strategy to offer items in high demand.