What is Pricing Strategy?

Pricing strategy refer to decisions concerning setting initial prices for products and services, and adopting new prices influenced by challenges or opportunities. The simple purpose of a pricing strategy is to decide upon a favorable price that ensures an organization sells as much units of a product as possible, while maximizing profit.

Pricing strategy is important in situations where the nature of demand is inconsistent and uncertain and only organizations with mastery of strategies can make profit. Pricing strategies are also essential when there are mixed customers with varying buying behaviors and purchasing power.

Every organization has several pricing strategies that they can explore and implement, depending on their goals, objectives, and other similar influences. A firm first ought to have a pricing objective, as discussed above, before having one or more pricing strategies that they employ.

If a firm defines their pricing objective correctly, they will find it easy to price their products at all times. Naturally, certain pricing strategies go along with some pricing objectives. If a pricing objective and the pricing strategy are in opposition, then the firm cannot achieve their sales goals.

It is expedient to then go back to the drawing board to select a pricing objective that leads to the appropriate strategies.

Pricing Strategy

Pricing Strategy Examples

Cost-oriented pricing strategy

Cost based-pricing strategy entails fixing prices solely based on data from the production process and its cost. Such pricing strategy does not examine a customer’s willingness or ability to pay that amount of money for such a product.

Cost oriented pricing can be achieved with either of two methods, which are the full cost pricing and cost-plus method.

Full cost pricing entails all fixed and variable costs in the production process, alongside a profit margin.

Cost plus pricing or markup pricing includes only direct or variable costs that are measurable into its unit cost. After this, you add a margin that serves as an addition to overheads and a profit. Many firms tend towards cost-based pricing because they find it easy to budget and calculate. It also offers an opportunity to cover costs and achieve prices that are relatively stable.

However, cost plus pricing has its disadvantages because it doesn’t consider the value of a product or service to a consumer or the demand for that product.

Competition-based or Market-parity pricing

Market parity pricing is a system whereby a price is set based on the price of rival products or brands. This competitive pricing comes in handy for homogenous markets and a pricing system targeted at survival or maintaining a position.

Product bundle pricing

Product bundle pricing is the process of assembling several products under one package so that the customer doesn’t have to look for these products and buy them separately.

This pricing strategy is explored when purchasing a group of products that go together. Seasonal items or complimentary items work well with the product bundle pricing. When customers purchase the items they need, they then buy extra products under bundle pricing.

The advantage of this pricing strategy is that an organization can sell of overloads or unpopular but complementary products. It will entail including multiple products under a single product price.

This pricing strategy affords an organization the opportunity to boost income, maximize sales processes, or help to sell products that have lasted long on the shelves but still remained unsold.

Premium pricing

The premium pricing strategy complies with the sales of unique products that have high quality and the sellers only make a few available. In such situations, the seller will add a premium or expensive cost to the product to create a standard that extravagant buyers will love to keep up with.

Companies benefit from this pricing strategy because they use these high prices to make up for other products that are sold with little to no profit. The premium price allows a company to generate a wide profit margin on every item in that sales category. Customers will also be attracted to the firm because they see it as a firm that they can trust to deliver qualitative products.

Companies can use the premium pricing alongside leadership pricing or overall revenue amplification objectives. The premium price is perfect for situations where the firm’s aim to generate and maximize profit.

Price skimming

Price skimming is a strategy that firms use when introducing new products, especially those with few competitors. When entering the market, this pricing strategy focuses on attaining profit and profit margin.

However, over time, the price be reduced as other competing brands enter the market and begin to compete. While the product stays in the market without competition, companies can make increased profits, revenue, and sales margins.

Customers won’t have an option in this situation because there are no other firms to compete with. They have no option but to buy the product from the firm that has it on sale.

However, firms must be careful, because sometimes, the price of a product might be so high that the customers decide to give up on it totally, even without competitors.

Using this pricing policy, many companies make their price high and then offer a lot of promotions.

Pricing Strategy

Product line pricing

When an organization sells a range of complementary products, these products can be put together to show an increase in value.

Product pricing strategy encourages a customer to buy several products in the same line at a more expensive rate. However, the purchase will seem reasonable and valuable when compared with buying all products individually.

If a customer goes into a shopping mall; Shoprite, for example, a stand might have cream, roll-on, and body spray because they are all cosmetics, so they are complimentary. The vendor might choose to sell these products separately, or place them in a single pack or box and sell them at a price which is slightly cheaper than what the buyer will spend when purchasing individual products.

Organizations that opt for the product line pricing strategy will consider the cost of different products, their features, and the cost of other competing products, They will then set a price line that favorably incorporates all these features.

The best time for a firm to use the product line pricing is when they want to improve the purchase of a particular product that many customers have not been buying. It is also a great idea with the pricing objective or profit maximization.

Many customers will be positively inclined towards purchasing products that come in a group, especially because they are complementary, and would prove useful.

Value-based pricing

This pricing strategy hinges on an organization’s interest and ability to find out how much value their product offers customers. When they realize what emotional, practical, and economic benefits their products offer customers, they set a price based on that value they offer.

The Value based approach places a price based on the benefits and significance of a product to its consumer. They could consider factors like the lifespan and long-term value of that product, alongside production cost, before fixing a price for the product.

Leader pricing

Leader pricing, also called Loss leader pricing, is a Promotional Pricing system in which businesses set lowest prices for their products. They set this price either by making zero profit or even run at a loss with the aim to attract more customers to buy a product.

Several companies use leader pricing to sell a new product, which saves their advertisement and other marketing costs. Other companies use this strategy to clear their inventory through creating higher demands and making better sales.

Most times, companies increase the prices of other products to make up from the loss incurred by selling this product, as customers are most likely to purchase other products on their shopping trip.

Everyday low pricing

Every Day Low Pricing is a pricing strategy used by firms that promise customers consistently low prices on a range of products without a sales event going on. Firms using this pricing strategy set low prices and maintain them over a long time, provided product costs remain the same.

Several marketing studies show that customers are more content with everyday low prices than wild price swings. Customers can ensure that products will be affordable at any time, without waiting for sales to be ongoing.

Customers also won’t have to spend time comparing prices of different stores to seek the best deal, because everyday low pricing promises consistent prices to their customers.

Businesses also benefit from this pricing because they can make trustworthy sales forecast based on constant patronage.

Companies that operate this pricing strategy spend less on advertising or promoting singular items because the stable low price is a natural marketer for the company.

 

Leave a Reply

Your email address will not be published.

You May Also Like

Financial Crisis and 3 Models

Definition of Financial Crisis Financial crisis – the financial crisis is an…

Offshore Crypto: The World’s Largest Cryptocurrency Exchanges Are Moving to Malta

Offshore Crypto Offshore Crypto Cryptocurrency exchanges have started making their way to…

What is Phillips Curve?

The Phillips Curve is an economic concept developed by William Phillips that…

The Unique Nature of Acqui Hires

Acqui-hiring is a relatively novel acquisition practice of established technology firms. Unlike…