Pricing Strategy
The pricing strategy policy is a set of decisions and actions carried out to determine the structure and level of pricing of goods and services offered to customers won or to be won.
It is one of the constituents of the marketing mix, for example product policy, pricing policy, distribution policy and communication policy.
Pricing strategy involves evaluating the price you will charge for your product or service, and how this price fits in with your overall marketing plan. Price is one of the most important ways in which customers choose between different products and services, and knowing the optimum price that you should charge to maximize sales and profits is key to beating the competition.
It is the concrete translation, at a subordinate level, of higher level elements such as the vision and the general strategy of the company as well as the general company policy. It is embodied in operational action plans, such as the marketing action plan and the commercial action plan.
1. Dynamic pricing
It is also known as peak pricing, on-demand pricing, or time-based pricing, is a pricing strategy in which a business charges flexible prices for products or services based on current market demand. Firms can change prices based on an algorithm that takes into account competitor prices, supply and demand, and other external market factors.
Dynamic pricing is common practice in several industries such as hospitality, tourism, entertainment, retail, electricity and public transport. Each industry takes a slightly different approach to dynamic pricing based on individual needs and product demands.
Calculating Penetration Rate
The penetration rate is easy to calculate if you know your target market size. To calculate the penetration rate, divide the number of customers you have by the size of the target market and then multiply the result by 100.
Penetration Rate = (Number of Customers ÷ Target Market Size) × 100
For example, if you sell auto insurance in a small town that has 25,000 licensed drivers and your book of business has 1,200 drivers, your company’s penetration rate is 4.8 percent.
Penetration Rate = (1,200 ÷ 25,000) × 100 = 4.8%.
2. Starting price (Penetration pricing)
The introductory price is the price set when a new good is put on the market. This is generally lower than the market price expected in the long term for this good, in order to overcome reluctance in the face of a new product and to sever existing loyalty to a brand or an already existing good. The goal of this marketing approach is to increase market share (or initial sales volume) even at the expense of short-term profit.
How do you calculate penetration pricing?
To calculate the penetration rate, divide the number of customers you have by the size of the target market and then multiply the result by 100.
Some of businesses even give packages of new products away by, for example, sponsoring events and providing sample packs to attendees. When you enter a supermarket, you often also see advertisements for introductory low prices for some fresh items, which are the perfect examples of penetration pricing.
3. Value based or optimized pricing
Value-based pricing (also value-optimized pricing) is a pricing strategy that sets prices primarily, but not exclusively, based on the perceived or estimated value of a product or service to customers rather than based on product cost or historical prices. If used successfully, it will increase profitability by generating higher prices without having a major impact on sales volume.
Value-based pricing ensures that your customers feel happy paying your price for the value they’re getting. Pricing according to the value your customer sees in your product prevents you from short-changing yourself while creating an experience for customers that’s most aligned with their expectations.
This approach works best when the product is sold by emotion (fashion), in specialty markets, in limited supply (for example, drinks at an outdoor festival on a hot summer day) or for complementary products (eg printer cartridges, cell phone headsets))). Goods that are traded very intensively (eg petroleum and other commodities) are often sold at a price plus a cost. Goods sold to very sophisticated customers in large markets (e.g. the automotive industry) have also been sold in the past using cost-plus pricing, but through pricing software and pricing systems. Modern technology and the ability to capture and analyze market data, plus markets have migrated to market-based or value-based pricing.
What companies use value based pricing?
4 Value Based Pricing Examples to Inspire You
Value Based Pricing Example # 1 – Apple.
Value Based Pricing Example # 2 – Starbucks.
Value Based Pricing Example # 3 – Louis Vuitton.
Value Based Pricing Example # 4 – The Diamond Industry.
Value optimized pricing in the literal sense involves basing prices on the perceived benefits of the product to the customer rather than the exact costs of developing the product. For example, a painting can cost more than a canvas and a painting: the actual price really depends on who the painter is. The price of the painting also reflects such factors as age, cultural significance, and most importantly, how much profit the buyer gets. Owning an original painting by Dalí or Picasso increases the buyer’s self-esteem and therefore increases the perceived benefits of ownership.
4. Skimming price
Skimming policy is a strategy that consists of charging a high price above the competition in order to reach a specific customer segment with high purchasing power. To be able to practice this strategy, the company must first have a certain competitive advantage (eg quality, reputation, image, etc.). This concept is also used in marketing jargon under the name of “differentiation” and / or “distinction” strategy.
The main benefit of a skimming pricing strategy is that it helps you make more money. This approach is based on identifying the opportunities and occasions where customers are willing and able to pay more, and then billing the most expensive customer.
Firms often use skimming to recover the cost of development. Skimming is a useful strategy in the following contexts: There are enough prospective customers willing to buy the product at a high price. The high price does not attract competitors.
Price skimming is a pricing strategy that involves setting a high price before other competitors come into the market. For example, the Playstation 3 was originally sold at $599 in the US market, but it has been gradually reduced to below $200.
5. Price discrimination
Price discrimination refers to the modulation by agent of the prices of its supply according to known or supposed characteristics of demand.
Classically, there are three types of price discrimination depending on the information available to the discriminating agent:
Discrimination of the first type, or perfect discrimination: the price is fixed according to the quality of the buyer.
Second type discrimination: The price is the same for all customers. It differs depending on the quantity purchased.
Third type discrimination: We segment the clientele into sub-markets. The price is set according to these sub-markets.
Examples
Retail price discrimination
Manufacturers can sell their products to similarly situated retailers at different prices based solely on the volume of products purchased.
The airline industry. Consumers buying airline tickets several months in advance typically pay less than consumers purchasing at the last minute. When demand for a particular flight is high, airlines raise ticket prices in response.
Coupons: Coupons are used in retail to distinguish customers by their reserve price. The assumption is that people who collect coupons are more sensitive to a higher price than those who do not. By offering coupons, a producer can charge a higher price to price insensitive customers and offer a discount to price sensitive individuals.
Premium pricing: Premium products are priced at a level well above their marginal cost. For example, a regular cup of coffee can cost $ 1, while premium coffee costs $ 2.50.
Occupancy-Based Discounts: Many companies offer reduced prices to serving military personnel. It can increase sales to the target group and provide positive publicity for the business, resulting in increased sales. Less publicized discounts are also offered to workers in off-duty services like the police.
Retail incentives: Retail incentives are used to increase market share or revenue. They include discounts, wholesale and quantity prices, seasonal discounts
Gender discounts: Gender discounts are available in some countries, including the United States. Examples include free drinks at ladies’ bars on Ladies Night, men often receive lower prices at dry cleaners and barbershops than women because women’s clothes and hair take generally more time to work. On the other hand, men generally have higher auto insurance rates than women based on the probability of being in an accident based on their age.
Financial Aid: Financial aid is offered to college students depending on the economic situation of the student and / or parents.
Bargaining: Bargaining is a form of price negotiation that requires the knowledge and trust of the customer.
6. High low pricing
High low pricing is a pricing strategy in which a firm relies on sale promotions. In other words, it is a pricing strategy where a firm initially charges a high price for a product and then subsequently decreases the price through promotions, markdowns, or clearance sales.
High-low pricing is a particularly useful pricing and marketing technique when you don’t have any sales history to base pricing decisions on.
Your goal as a retailer is (typically) to increase profitability, so it’s reasonable to start your pricing strategy by maximizing your gross profit.
But because calculating the optimal price point for a new product is very difficult without sales history, high-low pricing allows you to start high and keep lowering the price until you get to a point where the Sales x Gross Margin results in the most absolute profit.
Examples
Virtually all smartphones (especially flagship and mid-range phones) are introduced at a high price point, and gradually discounted as hype dies down (and new models are announced). While Apple popularized this approach to smartphone pricing — this is now standard across most brands including Samsung, Google, Huawei, etc.
High-low pricing is the preferred strategy for many mid-range sports apparel retailers (especially those found in North American malls). New designs are released at peak price at the onset of a new season, and are discounted as demand wanes. This strategy does not extend to high-end sports goods (professional equipment, official team jerseys, etc.) or sports departments in EDLP (Everyday low price) retailers.
While not all video game products use this strategy (video game accessories like controllers almost never drop in price) — this is the primary pricing strategy for mass market game consoles and game software. Game publishers introduce their products at peak price (59.99 USD / 79.99 CAD for a video game), only discounting as demand wanes (after weeks, months, or years, depending on the product).
The major exception to this strategy is Nintendo — who almost never discounts their products, even after years of being on the market.
7. Everyday low price
EDLP, which stands for Every Day Low Prices, is a pricing strategy. Markup is expressed as a percentage over the cost in which firms promise consumers consistently low prices on products without having to wait for sale events.
Is offering low prices always good?
Despite all the hype surrounding great deals, it turns out that cheaper isn’t always better: Research suggests that low prices can backfire for retailers because consumers sometimes see low prices as a sign of a low-quality product. However, the researchers also found that consumers see low prices simply as good deals.
Walmart is a well-known giant retailer that offers products at low prices every day. This may result in a lower profit margin for the retailers, but it creates volume, so the retailers gained by the volume that they sell. Walmart has its branches in many countries and has millions of consumers around the world.
8. Economy pricing
This pricing strategy is a “no-frills” approach that involves minimizing marketing and production expenses as much as possible. Used by a wide range of businesses, including generic food suppliers and discount retailers, economy pricing aims to attract the most price-conscious consumers. Because of the lower cost of expenses, companies can set a lower sales price and still turn a slight profit.
While economy pricing is incredibly useful for large companies like Walmart and Target, the technique can be dangerous for small businesses. Because small businesses lack the sales volume of larger companies, they may find it challenging to cut production costs. Additionally, as a young company, they may not have enough brand awareness to forgo custom branding.
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9. Pricing at a premium
With premium pricing, businesses set costs higher because they have a unique product or brand that no one can compete with. You should consider using this strategy if you have a considerable competitive advantage and know that you can charge a higher price without being undercut by a product of similar quality.
Because customers need to perceive products as being worth the higher price tag, a business has to work hard to create a perception of value. Along with creating a high-quality product, owners should ensure that the product’s packaging, the store’s decor, and the marketing strategy associated with the product all combine to support the premium price.
An example of premium pricing is seen in the luxury car industry. Companies like Tesla can get away with higher prices because they’re offering products, like autonomous cars, that are more unique than anything else on the market.
10. Psychological pricing
Psychological pricing refers to techniques that marketers use to encourage customers to respond based on emotional impulses, rather than logical ones.
For example, setting the price of a watch at $199 is proven to attract more consumers than setting it at $200, even though the actual difference here is quite small. One explanation for this trend is that consumers tend to put more attention on the first number on a price tag than the last. The goal of psychology pricing is to increase demand by creating an illusion of enhanced value for the consumer.
11. Bundle or package pricing
With bundle pricing, small businesses sell multiple products for a lower rate than consumers would face if they purchased each item individually. A useful example of this occurs at your local fast food restaurant where it’s cheaper to buy a meal than it is to buy each item individually.
Not only is bundling goods an effective way to reduce inventory, it can also increase the value perception in the eyes of your customers. Customers feel as though they’re receiving more bang for their buck. Many small businesses choose to implement this strategy at the end of a product’s life cycle, especially if the product is slow selling.
Small business owners should keep in mind that the profits they earn on the higher-value items must make up for the losses they take on the lower-value product. They should also consider how much they’ll save in overhead and storage space by pushing out older products.
12. Promotional pricing
Promotional pricing is another competitive pricing strategy. It involves offering discounts on a particular product. For instance, you can provide your customers with vouchers or coupons that entitle them to a certain percentage off the good or service. You could also entertain a “Buy One Get One” campaign, tacking on an additional product as an add-on.
Promotional pricing campaigns can be short-term efforts. For instance, you may run a promotional pricing strategy over an extended holiday, like Memorial Day Weekend. By offering these deals as short-term offers, business owners can generate buzz and excitement about a product. Promotional pricing also incentivizes customers to act now before it’s too late. This pricing strategy plays to a consumer’s fear of missing out.
13. Geographical pricing
If you expand your business across state or international lines, you’ll need to consider geographical pricing. Geographical pricing involves setting a price point based on the location where it’s sold. Factors for the changes in prices include things like taxes, tariffs, shipping costs, and location-specific rent.
Another factor in geographical pricing could be basic supply and demand. For instance, imagine you sell sports performance clothing. You may choose to set a higher price point for winter clothes in your cold-climate retail stores than you do in your warm-climate stores. You know people are more likely to buy the clothes in the winter environments, so you set a higher price to take advantage of demand.
14. Value pricing
If you notice that sales are declining because of external factors, you may want to consider a value pricing strategy. Value pricing occurs when external factors, like a sharp increase in competition or a recession, force the small business to provide value to its customers to maintain sales.
This pricing strategy works because customers feel as though they are receiving an excellent “value” for the good or service. The approach recognizes that customers don’t care how much a product costs a company to make, so long as the consumer feels they’re getting an excellent value by purchasing it.
This pricing strategy could cut into the bottom line, but businesses may find it beneficial to receive “some” profit rather than no profit. An example of value pricing is seen in the fashion industry. A company may produce a product line of high-end dresses that they sell for $1,000. They then make umbrellas that they sell for $100.
The umbrellas may cost more than the dresses to make. However, the dresses are set at a higher price point because customers feel as though they are receiving much better value for the product. Would you pay $1,000 for an umbrella? Probably not. Thus, external factors like customer perceptions force the value pricing strategy.
15. Captive pricing
If you have a product that customers will continually renew or update, you’ll want to consider a captive pricing strategy. A perfect example of a captive pricing strategy is seen with a company like Dollar Shave Club. With Dollar Shave Club, customers make a one-time purchase for a razor. Then, every month, they purchase new razor blades to replace the existing one on the head of the razor.
Because the customer purchased a DSC razor handle, he or she has no choice but to buy blades from the company as well. Thus, the company holds customers “captive” until they decide to break away and buy a razor handle from another company. Businesses can increase prices so long as the cost of the secondary product does not exceed the cost that customers would pay to leave for a competitor.
Like penetration and promotional pricing, captive pricing is a type of competitive pricing strategy.
16. Dynamic pricing
Dynamic pricing is when you charge different prices depending on who is buying your product or service or when they buy it. It’s a flexible pricing strategy that takes many factors into account — particularly changes in supply and demand.
You might have heard dynamic pricing referred to as demand pricing, surge pricing, or time-based pricing. There are even different types of dynamic pricing, including price discrimination or variable pricing, price skimming (discussed in more detail above), and yield management.
A good example of dynamic pricing comes from the airline industry. If you’ve ever noticed how much flight prices can change depending on when you book, you’ve experienced dynamic pricing firsthand. While dynamic pricing is relatively common in ecommerce and the transport industry, it doesn’t work for every type of business. The greatest risks can come when variable prices are applied to products or services that are typically bought by price-sensitive customers. This is also known as price elasticity — when small changes in price have a large impact on demand.
17. Competitive pricing
Competitive pricing is when your prices either match or beat those of similar products that are sold by competitors. Often this simply means selling your products or services at a better price but you could choose to offer better payment terms instead.
As we’ve seen above, competitive pricing strategies include penetration pricing, promotional pricing, and captive pricing. The secret to knowing which of these could work best for your business comes from data. Gather as much information as possible about your market and what your competition is doing. If you combine this with the assistance of advanced pricing software solutions, you can analyze and update price data continuously.
Examples
Printer and ink cartridges
Printers are not overly expensive, but ink notoriously is a little pricey.
You can buy an HP printer for less than $100. Not too bad for a hunk of technology. The physical printer, like the Keurig, is the core product. A four-pack of ink costs more than the printer itself—making it the captive product. But, you can’t have a printer without ink. And, printers are a home office essential so people are pretty much forced into this buying situation.
18. Prestige pricing
Prestige pricing is a marketing and pricing strategy where prices are consciously kept higher than normal, recognizing that lower prices will inhibit sales and that buyers will associate a high price for the product with superior quality. In other words, it is a physiological pricing strategy that is set by the company for luxury products to the expectations of the niche class of customers who pay a high price for these products in return for the high quality as for them, their association with that quality image links to their perception of self-worth.
It is a strategy where companies mark up the price of their product to create the perception that they’re selling a high-quality product. This is the image pricing that has the potential to manipulate the human mind incredibly because lower prices will hurt the prospective customer’s expectations rather than helping sales, and that is why it is also called as premium pricing and image pricing.
For example, Nike is a perfect example of companies using a pricing strategy. Nike prices its products based on its image. To promote its brand, it hires celebrity endorsers as well. For its image and logo only, a person pays the amount more than the amount for which they can get the same type of product from other brands.
As there are many brands of watches in the market but people with high class prefer Rolex watch even with its high price as there is quality assurance, and it shows consumer’s financial wealth and the class they belong to.
In the Telecommunication industry, Apple is selling its mobile phones with prestige pricing and superior quality. Hence it is accepted as a top and superior brand in the telecommunication industry.
This type of pricing is applicable if the product is unique with no substitute and which represents the class with superior quality and luxurious products.
Sources: Investopedia, Entrepreneurship in a Box
Photo credit: Pixabay
