Everything you need to know about the types of pricing strategies.
Pricing strategies are formulated using pricing policies and after consideration of overall consumer demand, business environment, and competitor’s pricing policies, stages of product life cycle and product mix strategies of the company and other marketing objectives of the company.
Companies may adopt different strategies to meet changing business objectives like to increase sales volume, increase short-term profit, stabilization of prices and so on.
Basic pricing strategies can be divided into three broad categories –
(1) those that are cost-oriented, based on total costs plus a desired profit, (2) those that are demand-oriented, based on a balance between estimates of demand in the market and the cost of supply, and (3) those that are competition-oriented, based on competitive conditions prevailing in the market.
Some of the types of pricing strategies are:-
1. Market Penetration Pricing 2. Market Skimming Pricing 3. Product Bundle Pricing 4. Product Line Pricing 5. Captive product Pricing 6. Discount and Allowance Pricing 7. Segmented Pricing 8. Psychological Pricing 9. Promotional Pricing 10. Geographical Pricing.
Types of Pricing Strategies: Market Penetration, Market Skimming, Product Bundle Pricing and Product Line Pricing
Types of Pricing Strategies – Top 3 Strategies: General Pricing Strategies, Product Mix Pricing Strategies and Price Adjustment Strategies
Type # 1. General Pricing Strategies:
Pricing a product is strategic aspect as it is deciding the very survival or absorption by the market. Various environmental and competitive factors influence the pricing decisions.’
A company has different dynamic pricing strategies to choose from, viz.:
A. Skim Off the Cream Method:
Enter the market with high price to reap the price advantage by selling to cream of customers who are highly selective with inelasticity to price (i.e., no impact on demand with higher price). A new product with high quality, unique product features, better service, and high customer’s loyalty can be pushed in the market with high rate. Initially the creams of customers are identified and product sold, later on second layer, third layer is sold with reduction in price. Here, every time producer charges high rates with a reduction each time.
This would be possible only when the following conditions prevail:
i. Unique product features.
ii. No immediate duplication of product.
iii. Inelastic demand.
iv. Possibility of identifying elastic demand.
v. Possibility of reduction in price.
vi. Firms ability to prove the quality.
B. Market Penetration Strategy:
To penetrate is to make an ‘entry’, Penetration strategy implies enters with ‘below’ competitive price to attract customers and increase sales volume. It always happens in a highly price sensitive i.e., more elastic market that lowest prices will attract higher demand. With more sales at entry point, firm can maintain same-price level with reduced cost of production. Basic principle is getting an entry, establish, beat the competitors, maintain lower prices, expand market share, and capitalise the economies of scale.
The penetration would be successful in the following conditions:
i. High price elastic i.e., low price should attract more number of customers.
ii. Ability to keep away competitors i.e., the competitors should find it difficult to reduce their prices, if, with a time gap.
iii. Ability to reap the economies of scale i.e., cost reduction with large scale production.
iv. Capacity to meet high demand i.e., created demand should be met with higher production capacity.
v. Product with long life cycle i.e., time to enjoy the created market.
vi. When there is no high-income section in the market i.e., has a bulk of population in middle and lower income group.
When a product is one among the product lines with different cost structures, it is quite difficult to fix the price of it. Because, various products have related demand and costs and face different degree of competition.
Therefore, at this stage, it is necessary to consider five product mix pricing strategies:
A. Product Line Pricing:
i. Producing a range of products or the same product has become a common feature of modern manufacturers. A single product has become outdated as it can reach limited market segment, (and price theory in this case is at the micro economic model).
ii. Hero cycles, sharp, TV, Godrej refrigerators, Philips radios, etc., have been producing different products in the same line with differentiation. The differentiation is so such that, consumers feel them different products, one considered to be perfect substitute for each other.
iii. Each product’s, cost difference should be considered while fixing price as customer evaluates their different features. The major feature in product line pricing is that, demand curve for each product is separate but as all are produced under the banner of one-organisation, they have one common marginal cost curve.
iv. The price determination is again an equilibrium between MC=MR with a common Equal Marginal Revenue (EMR) and different demand levels.
B. Optional-Product Pricing:
Optional product means one which is sold with main-product. A TV with sound speakers, computer with CD’s, a bike with seats, etc. Basic problem associated with such products is which product to be sold as option? What rate? The strategy is to attract demand for main product by (offering optional products separately) reducing the total cost. A customer is free to opt only the main product.
C. Captive Product Pricing:
Captive product means one which must be purchased with main product. The difference between optional and captive product is that, the optional product enhances the satisfaction when brought but has no value. Film for cinema, Batteries for Transistors, CDs for CD player, refills for pen, ink for ink pens etc.
It is customary that, the captive products are kept at lower rates to attract demand for main products Ex KODAK Company sells film rolls, at cheap rate.
In case of service industry, it is called ‘two part pricing, incorporating fixed and variable costs separately.’
Ex -Telephone services, Electricity services, water supply services, in which fixed costs are charged for installation and variable monthly costs for services. Recently mobile companies offering ‘Set- Free’ for every connection i.e., price of main factor is kept at lowest- possible level to attract customers & later on get regular income. Another example would be cable Net Work Services, connections free with monthly rent.
By product means, a product which is received incidentally from the material used in the manufacture of recognised main product. In other words, such by products may be sold with further processing.
The favourable factor of such products is that in the production process no extra cost is incurred and only further processing is required i.e., with no extra cost another product emerges. Hence, the producer is at an advantageous-position to charge the minimum price which is just sufficient to recover the further processing costs.
According to Philip Kotler, “Combining several products and offering the bundle at a reduced price is product bundle pricing. Bundle is a group of related products, have related usefulness to specific area. Student compass Box. Contains a box, pencil, sharpener, scale, divider, etc., all together have a single price which is quite low when compared with the price of each article. Ex. Scientific Dissection Box.
The producer and buyer are put in an advantageous position as numbers of products are sold together, to one customer and number of articles available at cheaper rate, at one point.
Type # 3. Price Adjustment Strategies:
Heterogeneous markets, buyers, products, are common prevailing condition in the environment. It is a must for the producer to establish a pricing policy suitable in all vivid occasions. The price policy statement should frame a ‘frame’ with balanced approach to objectives, competition, costs, products, environment, elasticity buyers, etc. It should be like water, taking the shape of bowl. Practically has number of problems.
In the following headings, price adjustment strategies are discussed:
A. Price Variation Policies –
iii. Single Price
B. Geographical Policies –
i. Point of Origin
ii. Freight absorption
C. Price Differential Policies –
D. Segmented Pricing –
E. Psychological Pricing.
A. Price Variation Policy:
i. Variable Price:
Under variable price, the seller sells similar quantities at different prices, which is usually the result of bargaining. In case of non-standardised products with small retailers the customers who purchase in big quantities expect the seller to reduce the price. Such policy is called variable price. Seller differentiates between 10 kg., purchased and 1 kg. He, indirectly prompt more purchases. But, it is not possible to vary the price in all the time as some customers may dissatisfy with this.
ii. Non Variable Price:
Here the price does not vary to the customers but ‘class of buyers’ i.e., Products are sold at a different price to wholesalers group, retailers, dealers etc. As parity is maintained, among retailers no retailer can bargain further for any amount of purchases, and same case with other class too.
It is also called as one price, as same rate is charged for all similar products at a same time to a class of customers.
iii. Single Price:
No variation is made in the price of product to any class, customer, at any time at any place. Single price prevails for same product at all the time. All are equal when they purchase product. Hence, the customers instead of bargaining for their quantitative purchase concentrate on qualitative price i.e., purchase by comparing the quality, brand, pack, originality, date of manufacture etc.
But, this may result into no purchases by wholesalers and dealers. They cannot resell the product by purchasing at a single-price, at which the customer can also get the product.
B. Geographical Policy:
The distance between the seller and buyer is considered as base for geographical pricing. The price varies according to the distance, as cost of transportation has a direct bearing to distance.
i. Point of Origin Price Policy – In this policy, manufacturer quotes ‘ex-warehouse’ price and makes no allowance for transportation etc. It is the purchaser who has to bear all such costs, this is also known as – ‘As is where is’ (at warehouse). Here, the firms located at far off place can’t compete with local firm’s product, as transportation costs become material factor.
ii. Freight absorption price policy – It indicates that the price quoted includes freight charges either partly or fully. Seller bears the cost of forwarding and delivery to the place of customers.
Here, price is the attracting factor. The prices offered are different – i.e., price quoted and prices actually charged are different.
It may take the form of:
i. Discount – Is an allowance or deduction made from listed price/ quoted price. The net price is payable by a customer- there can be Trade Discount, Cash Discount and Quantity discount.
ii. Rebates – These are allowances given for certain loss suffered by customers because of defectives, damages, delay, deterioration quality etc. These are done as per prior agreement & agreed terms and conditions.
iii. Premiums – This is opposite of discount and rebates. Sometimes actual price paid by customer will be more than quoted price because of addition of some premium such as – charges for offering sales services.
It is a technique of selling a product at two or more prices having same cost of production. The intention is to differ the prices depending upon different type of customers (customer segmentation), different locations (location segmentation) a different form of products (product segmentation).
E. Psychological Pricing:
Here, the price is determined by quality of product. Customer’s psychology is such that the price of a product is high as its quality is high. It is customer’s perception that high priced products are quality products.
F. Promotional Pricing:
The intention of selling is to promote the sale of a product by keeping the price lower than the quoted price. It is a deliberate- pricing policy followed by sellers to make the product establish its market. If start increasing the price once it is accepted and customers are accustomed to it.
G. International Pricing:
Is the policy persued when products are to be marketed at the world market. The producer must have knowledge of markets of different countries and decide what prices be charged at different situations in different nations.
Types of Pricing Strategies – 3 Important Strategies: Cost-Oriented Pricing, Demand-Oriented Pricing, Competition-Oriented Pricing
Formulating prices for new products is one of the most difficult problems faced by company management. Such decisions are often complicated by lack of adequate information on both demand and costs. As the product has not been sold before, price elasticity cannot be estimated from an analysis of past data. In spite of all these problems the firm must set a price that will help sell the product and at the same time contribute something to the profits of the firm.
Basic pricing strategies can be divided into three broad categories – (1) those that are cost-oriented, based on total costs plus a desired profit, (2) those that are demand-oriented, based on a balance between estimates of demand in the market and the cost of supply, and (3) those that are competition-oriented, based on competitive conditions prevailing in the market.
Type # 1. Cost-Oriented Pricing:
The overall process in cost-oriented; pricing is known as cost plus pricing which means that the selling price is fixed in such a way as to be equal to the costs of production and marketing plus an amount to cover anticipated profit. One study of pricing behaviour made in UK by Hall and Hitch revealed that a majority of businessmen set prices on the basis of cost plus a fair profit percentage. By fair profit is meant a fixed percentage markup which differs greatly among industries and firms.
The use of rigid customary mark-up cost does not make logical sense in the pricing of products. Any pricing technique that ignores current demand elasticity in formulating prices is not likely to lead, except by chance, to the achievement of maximum profits, either in the short-run or in the long-run. As elasticity of demand changes, the optimum mark-up should also change. If mark-up remains a rigid percentage of the cost, then under ordinary conditions it would not lead to maximum profits.
Secondly, up-to-date cost data are not easy to collect. There are also some subjective elements in costing, particularly in the allocation of overhead costs. Again, cost data which are useful for accounting purposes might not be suitable for pricing decisions. Calculation of the costs is particularly difficult in the case of joint products.
So companies that use the cost-plus pricing strategy generally look upon it as a starting point. The price originally set on cost- plus basis is gradually adjusted to suit demand, competition and other conditions as the companies gain more knowledge and experience in these respects.
There can be no denying that all prices must be sufficient to ultimately cover the costs of production and marketing and yield some profit in the long-run. This is overall strategy. At the same time it is nothing else than foolhardiness, to try to have all the profits in one day. So the short-run prices need not cover all the costs that are incurred.
Type # 2. Demand-Oriented Pricing:
This strategy consists of setting a price according to the demand for a product. As Joel Dean puts it, what the product is worth to the buyers, not what it costs the seller, is the controlling consideration. It is also described as ‘Charging what the traffic will bear’— the price which will lead to profit maximisation, taking into account the price sensitivity of demand and the marginal cost of production and marketing.
The fact is that at a particular time or in the short-run there is something like a going rate for a product. Competition and other factors have already set a price for it. At this price a certain volume is sold which represents the aggregate demand for the product. For the industry as a whole, if the demand is elastic, its sales will decline with increase in price, so more units can be sold by lowering the price. In the case of products having inelastic demand, the producer is in a more advantageous position.
He can go on raising prices up to a point beyond which there are the risks of substitutes. Where demand is inelastic and the suppliers are few, the price can be set high. But, if there is keen competition and an individual supplier raises his price, it is bound to affect his sales. In case of old, established products certain prices already rule the market. Some firms are price leaders, others generally follow them still if a leader raises his price and others do not follow, he runs the risk of losing the market.
Under oligopolistic competition, most big producers are able to blunt the edge of competition through the introduction of product differentiation and emphasis on non-price aspects. By these means an individual firm becomes virtually a sole supplier of its products and exercises considerable control over its price.
One strategy, which is usually followed, is judging demand on the basis of the value perceived by the consumers in the product. The relative perceived value of the offer made by the seller is attempted to be measured and utilised in setting the price. Thus when a company develops a new product, it anticipates a particular position for it in the market in respect of price, quality and service.
Then it estimates the volume it can sell at this price, which in turn suggests the capacity to be installed, capital to be invested, unit cost and so on. Then the company fudges whether at the level of production and sale, it will have a satisfactory return on investment. If it appears to be so, the company goes ahead with translating the perception into practice, otherwise it drops the proposal.
The strategy has some advantages. First, it takes into account the prevailing market situation and turns it to advantage. Secondly, it goes a little deep into the matter and attempts measuring the intensity of demand as it exists in the minds of consumers. But it is not free from shortcomings – it is largely subjective; measurement of the intensity of demand is a very difficult as it depends upon many arbitrary elements, and; there is every chance the experiment may flop involving tremendous loss to the company.
Type # 3. Competition-Oriented Pricing:
This strategy means setting the price of a product on the basis of what competitors are charging irrespective of costs involved or the demand situation prevailing in the market. The cost of production or marketing may change and the demand may also change but still the firm would not change its price as the competitors have not changed theirs. It is not necessary to take into consideration the price charged by all competitors. It is the important ones that count – those who are able to lure customers away.
Competition-oriented pricing falls under three categories:
i. Market-equated pricing,
ii. Pricing below competition, and
iii. Pricing above competition.
i. Market-Equated Pricing:
It consists of setting a price at the level, which other competitors are charging. It is commonly called going rate, i.e., the average price prevalent in the industry as a whole. Under conditions of near-perfect competition, firms have other competitors and charge the going rate. It is virtually that price at which MR equals the MC. If price is set above this level, buyers will react by switching over to other suppliers.
On the other hand, there is no scope for reducing the price below the competitive level because that will lead to loss. No firm can operate at a loss for long. Producers of agricultural products in a locality and small firms, turning out standardised products generally follow market- equated pricing. Such pricing also prevails in the case of certain traditional products like soft drinks or chewing gums where a customary level has been reached over the year.
The advantage of the strategy is that it is easy to apply. It avoids the difficult process of knowing how buyers and competitors would react if price is changed. But it bogs down revenue to a more or less specified level. The so-called going rate has been upset by recent inflationary conditions, which are worldwide. The going rate maybe disturbed by technological improvement and once it is disturbed, there is no knowing where the conditions will drift.
ii. Pricing below Competitions:
In this strategy the price is set below the competitive rate, i.e., rate charged by competitors. Theoretically this is not possible under conditions of near perfect competition. If one producer can sell at a lower price and still make profit, there is no reason why others will not be able to do likewise.
In practice, however, cost structure, profit policies etc. vary from firm to firm. So one firm may be satisfied with a low margin of profit per unit and a high volume of sales. Another firm may sell cheaper on the ground that its product is of slightly inferior quality, yet not inferior to such an extent that buyers will be discouraged to buy. Some firms may be able to sell at lower prices because of their lower promotional expenses.
iii. Pricing above Competition:
Sometimes price is set at a level above that which is determined by competition or what prevails in the market. A producer who may want to skim off the cream of a market follows this strategy. It is most appropriate when the product has got certain distinctive characteristics or the seller has acquired a reputation in the market.
For introducing new products, two alternatives are open – (a) initially setting a high price and lowering it in the later stages of the product life cycle, and (b) setting a low price from the very beginning and lowering it further as the cost of production declines with increase in volume. The former is known as skim the cream pricing and the latter, penetration pricing.
a. Skim the Cream Pricing:
Skim the cream pricing means the strategy of setting the price high in order to take away the cream of the market in initial stages. This high price need not be maintained later but may be lowered progressively as the product moves into later stages of its life cycle. Many books are priced on this basis. They start with a high-priced hardcover edition. Subsequently paperbacks are brought out and sold cheaper.
The skimming price policy assumes that the demand for the product is likely to be inelastic with respect to price in the early stages than it is when the product is full-grown. The situation is illustrated by Figures 23.2a and 23.2b.
The high price P (Figure 23.2b) is designed to skim off the segment of the market that is insensitive to price and subsequent price cuts (P2 P3), rather broaden the market by tapping more elastic segments of the market.
The skimming pricing strategy has the advantage that it generates more profits per unit than would be possible with lower prices. By setting a high initial price and then gradually lowering the price, the company is able to reap the maximum that each market segment is willing to pay for the product. Another advantage of a skimming price strategy is that it helps to restrict sales at a time when the firm may be unable to keep up with customers’ orders. Moreover, a high price carries the impression of good quality.
This strategy has many disadvantages. The most important disadvantage of a skimming price strategy is that the high margins associated with such a strategy attract competitors into the field. This suggests that the skimming price strategy is best used when the product has patent protection or any barrier to entry. Secondly, the initial high price may scare away large sections of buyers.
The goal of short-term profit maximisation may even mean premature death of the product. In India, Colgate-Palmolive once introduced a good quality perfume Spree Forever with an attractive outer package but it did not succeed as it was priced very high—in the Rs.20-25 range.
b. Penetration Pricing:
A penetration price is a relatively low price designed to stimulate the growth of the market and to capture a large share of it. The penetration price strategy is based on the assumption that the demand for the product is highly elastic as the Figure 23.2b shows and that there is no elite market that can be exploited with high initial prices.
Under these conditions, a high price (P) may actually result in zero sales. The unit cost of production and distribution fall with increased output. A low price would discourage actual and potential competition. Market penetrators are prepared even to lose money in the initial years if they find that they will be able to make up later when they will have a dominant position in the market.
Penetration policy will be successful when certain conditions are fulfilled viz. (i) the product has a highly elastic demand and the saleable volume is sensitive to price even in the initial stages, (ii) the product is such that there is the danger of competition soon after its introduction, (iii) substantial economies can be achieved in the costs of production and distribution through large scale operation, and (iv) there is no elite market for the product.
Types of Pricing Strategies – Top 10 Strategies: Market Penetration, Market Skimming, Product Bundle, Product Line, Captive Product Pricing and Few Other Strategies
Pricing strategies are formulated using pricing policies and after consideration of overall consumer demand, business environment, and competitor’s pricing policies, stages of product life cycle and product mix strategies of the company and other marketing objectives of the company. Companies may adopt different strategies to meet changing business objectives like to increase sales volume, increase short-term profit, stabilization of prices and so on.
The different pricing strategies are discussed below:
Penetration pricing strategies as the name suggest implies that marketer tries to penetrate into a highly competitive market by offering goods and services to buyers at a price lower than that of its competitor. This method of pricing is applied in the introductory stage when the product is newly introduced and faces high competition and it is essential to attract customers to penetrate into the market.
The firm may maintain a low price in the initial phase of product introduction or until the product is finally accepted by the customers. At the initial phase, a low price may result into loss of income for the business but once the marketer becomes successful in gaining consumer’s loyalty and attracting consumers towards the product and expanding their market share, can afford to raise their prices.
The marketer tries to “skim the cream” i.e., skim a high profit from the market in the initial phase of product introduction. The marketer sets a very high price for goods and services during the introductory phase to build an image of quality, uniqueness and prestige to the new product in the mind of the customers.
Consumers perceive that products having high price are of high quality and value and using such product adds prestige to one self and hence it is worth paying a high price for high quality, unique products or services.
Skimmed pricing strategy helps the marketer to recover the high research and development and promotional expenditure incurred in the initial stages of product development and launching of the product within a short period. This gives the company few but more profitable sales but this is possible only if the competitors are unable to enter the market easily and undercut the high price.
As per Product Bundle Pricing, multiple products – some high valued products and some low valued products, are offered together at a lower rate than consumers would face if they had purchased each item individually. It helps to sell out the unsold items that are taking up space, and also helps to increase the value perception in the eyes of customers, since they are given something for free.
Under this pricing strategy the business makes up for the losses they take on the lower-value product, by the profits they earn on the higher-value items. Bundle pricing is more effective for companies that sell complimentary products. For example, a restaurant combines several of their products like offers a beverage in combination with a meal; computer makers include attractive software packages with their personal computers.
Product line pricing strategy is applied in setting price for multiple products that a company offers within the product line. Instead of setting price for each product separately the marketer sets the price for multiple items in the product line. The prices are set in such a manner that there are sufficient gaps between the products in the line with respect to cost differences between the products in a product line and different quality levels in the mind of customers.
Different products within the same product line are priced differently. The more the benefits and features offered the more will be the price. For instance a company offers different smart phones with different features at different price.
Captive products are those products that cannot be used alone but must be used along with a main product. For example razor blades, camera film, video games and printer cartridges. In this case the value of the main product is low as it cannot be used alone while value of the supporting product, which is necessary for working of main product, is high. Printer cannot work without ink; blades are needed for razor, to work.
Usually companies tend to provide a lower price for the core product in order to attract the customers and place higher mark up on captive product in order to increase their profits. The core product is usually purchased one like a printer, a razor but the print cartridges, blades have to purchase frequently and repetitively. Since captive products are purchased repetitively marketers expect stable profit margins as well as potential customer loyalty.
But while applying captive product pricing strategy marketer must be aware of the fact that captive products cannot be substituted by other captive products for the same core item. If this happens the buyers will purchase the core product but will purchase the captive product from a competitor offering at a lower price. Consumers may finally give up the use of the initial product and search for cheaper substitutes.
Discount Pricing is a popular strategy where the basic price is adjusted and reduced to reward the customers’. Discounts are offered to customer for early payment of bills, for making large volume of purchases or seasonal discounts are offered to buyer who purchases during off seasons. Like discounts are offered on air conditioners during winter when the sales is low. Allowances are reductions from list price.
For example trade in allowances are offered on exchange of old item for a new one. Like trade allowances offered on exchange of old model car for a new model car. Promotional allowances are payments or price reductions offered to dealers for participating in advertisement and sales support program.
As per the segmented pricing strategy a company sets more than one price for the same product or services even though there is no difference in the cost of producing and delivering the product or service. Different customers are charged different prices for the same product or services. For instance Airlines charge different prices for the same flight seat on the basis of the time when the ticket is purchased by the buyer.
A person purchased an air ticket from Kolkata to Mumbai 4 months before paid Rs.5000 while another passenger sitting just beside this person who bought the ticket last minute had to pay Rs.10,000. This shows that segmented pricing is possible if the market can be segmented and the segment show a different degree of demand.
Segmented pricing is noticed in events like:
i. Seasonal Pricing in hotel industry – Hotel rooms cost more during peak seasons and holidays than the normal days.
ii. Price Segmentation on basis of Product/ Service characteristics – In trains, the cost of a reservation in the Sleeper Non-A/c compartment is lower than that of a First Class A/C compartment.
iii. Geographical Locations – In areas or regions where the customers are less price sensitive, the prices of products are higher and vice versa.
iv. Price segmentation on basis of time – For instance movie tickets are charged at different prices on the basis of time like tickets in morning hours are less priced than that of the evening hours. Even “Happy hour price” is available in food outlets. Food items are charged less than usual during the happy hours.
v. Based on perceived value – Movie or theatre halls fixes different price for different seats based on the audience preferences for certain seat location.
vi. Discounts are given for large/bulk orders – Goods purchased in bulk enjoy discounts. For example, a standardized North Indian combo meal dal, sabzi, rice, roti and a desert will be available at say Rs. 200. But, individual items on the menu, on ala carte could be priced differently.
Psychological Pricing strategy is based on the psychological impact that the prices may have on customer’s response. As per psychological pricing strategy company may increase sales without significantly reducing prices. This pricing strategy is based on customer’s perception of products’ prices. For instance consumers perceive that a higher priced product have a high quality.
Different psychological pricing strategy includes odd pricing strategy like instead of charging Rs.500 for a product the seller fixes the price at Rs.498. The buyer feels that price is closer to Rs.400 (the figure in Hundred i.e., 4 is important) although it is just Rs.2 less than Rs.500. Other psychological pricing strategies that attracts buyer are buy one get one free, Buy one and get 25 percent off on your next purchase.
Consumers feel that they are gaining a great deal from such strategies of the company. Psychological Pricing strategy banks more upon consumer’s emotion than on consumer’s logic and economics.
Promotional pricing strategies aim at increasing sales volume by reducing the price of a product or services for a short duration. This pricing strategy enables companies to attain rapid and high sales and market share. Buy one get one free, Sale with 20% or 30% off, 0 percent interest on car and housing loan etc some promotional pricing strategies. Sometimes it is found that companies offer regular discounts or provide other price promotional offers every year during a specified period.
This may adversely affect the image of the company or this may lead to anticipation by the customers, who holds back their purchase decision till the discount offer begins and purchases only during the period of promotional offers. This hampers the sales during normal period.
Geographical Pricing strategy is applied by companies that operate in multiple countries or multiple regions within a country. In case of geographical Pricing strategy, the sale price of the product is based on the buyer’s location. Marketer charge different prices for the product in different location due to the cost incurred for shipment of goods to that location.
Marketer adopts different geographical pricing strategies like free on board (FOB) pricing, uniform geographical pricing, zonal pricing and freight absorption pricing. In case of free on board (FOB) pricing the transportation, shipment cost is borne by the customer. In case of Uniform geographical pricing strategy the prices are kept the same regardless of the possible differences in regional prices.
The company charges same price plus the freight and transportation to all customers, regardless of their location. Under Zonal pricing strategy the company sets up two or more zones and all customers within the zone are charged the same total price and company frames different pricing strategy for each different zone depending upon the market condition and competition.
The seller in order to penetrate distant markets may be willing to bear the whole or part of freight cost. This is termed as freight-absorption pricing strategy.
Types of Pricing Strategies – Pricing Strategies for Entry, Positioning, Synchromarketing, Loss-Leader and Price Bundling
Type # 1. Entry Price Strategies:
The concept of the pricing strategy is to use price as an element to achieve specific marketing goals. The most sensitive and important time for strategy formulation is before the launch of a new product.
This involves the coordinating pricing decisions in the context of their longer-term impact and implications, and requires the firm to take an extended view of factors such as – (i) probable product/brand life, (ii) volume and price sensitivity of potential demand, (iii) opportunities for segmentation of demand by price, (iv) pace of likely consumer acceptance, taking into account the competing, alternative and substitute products, (v) build-up of production capacity and the opportunity for scale economies in unit costs, and (vi) time scale for recovery of R&D costs.
At the entry stage a company has two basic pricing strategy options:
Skimming strategies involve the deliberate setting of an initial price which is high in relation to anticipated long-term price levels towards which the price will be gradually lowered as competition and demand conditions change.
Penetration strategies are intended to generate the highest possible volume of sales from the start by ‘keen’ (low margin) pricing. In practice, these strategies can be divided into two categories—demand-oriented and competition-oriented.
Demand-oriented strategies are based primarily on a combination of two factors – (a) an expected high level of price sensitivity among potential buyers, and (b) a need for a high volume of demand in order to justify plant investment or achieve projected economies of scale in production (i.e., some products have to be produced in volume or not at all).
Penetration strategies have the potential advantage of creating a strong market position or an image as a market leader before competition emerges (although this will depend on the speed and strength of the competitive response). The prices of many electronic goods were lowered in the world market due to production in substantial volumes.
One specific variant of demand-oriented penetration strategies is called the ‘razor and razor blades’ strategy. It involves the pricing of a unit of hardware (e.g., razor, labeling gun, cyclostyling machine) at a level which achieves the maximum market penetration or placement, so that profits can be achieved on repeated sales of related consumables. A number of companies selling computers and photocopiers make more money in the supply of consumables and maintenance, than possibly from selling the original machines.
Competition-oriented penetration strategy is of two types. One is when a new product is being launched in a market where the competing goods comprise substitute or alternate goods. Here, (low) price can be used as a means of persuading potential users to try the product (about which they may have, for example, technical doubts) on the assumption that when it has proved itself, they would be prepared to pay a price equal to, or higher than, the existing alternatives.
The second example of penetration strategy concerns the use of a low entry price to displace or force the entrenched competition out from the market-place, or, alternatively, to gain a substantial market-share on the basis of which prices can be subsequently increased to a more profitable level.
Type # 2. Pricing Strategies for Positioning:
Price is one of the more commonly used means of segmenting a market. The broad segments are high, medium and low. Based on the relative quality and relative price, Buzzel and Gale 1987 offer the five value segments.
A company may offer average value by – (i) offering comparable quality at a comparable price, (ii) offering superior quality but charging a premium price, (iii) offering a discounted price for inferior quality. These forms of average value correspond to three common product/service offerings respectively – average, premium and economy.
When the relative perceived quality and relative price are out of balance, a competitor adopts either a better value position (superior quality at the same or lower price) or a worse value position (inferior quality at the same or higher price).
It has been found that companies that offer average value at the premium end of the market show the highest rate of profitability, on an average. The surprising fact is that businesses that provide better value (superior quality but no premium price) are nearly as profitable. What they lose in price they make up with lower costs that result from their strong tendency to gain market- share and the lower marketing costs that result when one sells superior quality at a less than premium price.
But these findings have their limitations too. In certain product categories where the customer has no experience in judging the quality, she always feels that the higher the price, the better the quality. Body-care items, such as creams, lotions, and powders, are especially priced high because when it comes to personal care people (mostly women) are very particular.
Similarly, items bought infrequently and which reflect a person’s image, e.g. a tie-pin, are not appreciated by customers at a low price. The reason for this is that the person is not buying the tie-pin to fix his tie to his shirt but to cultivate a self-image to be reflected at a party.
Type # 3. Pricing for Synchromarketing:
In the case of products and services that have an uneven demand, price can be effectively used to make the demand uniform. Consider the case of movie theaters. Typically, the demand is high during weekends and for the evening shows. In order to attract public for the morning and matinee shows during weekdays, theaters offer a reduced price. Similarly hotels in hill stations offer off-season discounts to attract tourists.
Type # 4. Loss-Leader Pricing:
Loss-leader pricing is particularly used by retailers. Normally, retailers keep the price of some sensitive product at the bare minimum and display the price tag prominently to attract customers into the shop. Once they are in, the customers end up buying some other items also, which provide the required profits to the retailer.
Many TV dealers offer to sell TVs at prices lower than the list price, but make it up with the pricing of the accessories such as TV stands, covers, antennae and stabilizers, which the customers buy along with the TV sets.
Price bundling is practiced by diverse businesses such as computers, publishing and tourism. For example, computer companies offer a system price which includes hardware and software. If one were to buy these individually, it would certainly cost more. Similarly, tour operators offer package deals that cover travel, food and stay in various places. A publishing company can offer substantial rebates (known as ‘title combination rates’) to companies advertising in its various magazines.
They have what is price bundling is ideally suited for complementary products. During Onam (a festival) in Kerala, the vegetables needed for making the side-dish avial are sold in a bundle. It is possible to extend this strategy to a large number of products that are bought together.
Irrespective of the entry strategy adopted, as competition develops, as product differentiation becomes increasingly difficult to sustain, and as sales reach saturation, it may become necessary to review the pricing decision. A firm should further assess the opportunities available to it.
Some opportunities which can be available to a company are as follows:
1. To switch from the skimming strategy to the penetration strategy to exploit the mass market potential of a product initially pioneered (introduced) at a high price. This can be done by introducing a simplified and cheaper version of the product rather than by cutting the price of the original product.
2. To replace the original product or introduce a second generation product that can be sufficiently differentiated to command a premium price.
3. To ‘re-package’ a product in a way which takes it out of the competitive arena into a class of its own. A good example is of the two-in-ones or the five-in-ones (TV, VCP, radio, audio- player and time-piece).
4. To concentrate on more profitable market segments, even at the cost of volume-diversion of released production resources into other products.
5. To improve margins by concentrating on cost savings through more efficient production rather than by increasing prices.