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Pricing Strategies

Pricing Strategies

It's time to wear your salesman's hat. As the Regional Marketing Head for a digital watch company, Maple, you must capture market share quickly; otherwise, your competitors, Apple and Samsung, will put you out of business. You have a similar product and nationwide distribution channels to your competitors. Board members have approved the marketing budget you asked for. The only question left for you to decide is the watch's price. Will you launch the smartwatch at a higher price and cover costs quickly, or will you launch at a discounted price and capture the market first? Which pricing strategy will you implement?

Pricing Strategy Definition

4 P's of the marketing mix are product, price, promotion, and place. A marketing mix is a tool businesses use before launching a product or service in the market. It represents a combination of decision-making factors.

Price is one of the four most important factors. You have a product, place, and plan for promotion, but many customers will only make a purchase decision if they think they are paying fair value for the product. Therefore, determining the price of a product or service is tricky. If the price is too high, customers will not buy it; if the price is too low, the business may not recover the cost. Hence, the organisation must make a plan for setting prices. Every business needs a pricing strategy.

For any product or service, the lowest price is the price where the company will not generate profit, and the highest price is the price at which customers will not buy the product. A pricing strategy helps businesses set up a price that is between the lowest and highest pricing points.

Pricing strategy refers to all the methods businesses use to determine the price of a product or a service.

You may have noticed that price is the only element that generates revenue out of the four marketing mix elements; the others incur costs. Price is essential for building customer relationships. Therefore, price is a strategic tool for marketers.

The success of a pricing strategy depends on the type of business, market conditions, and the execution of the strategy. Hence, it is impossible to say that one particular approach is the most effective.

Types of Pricing Strategies

There are various types of pricing strategies. Businesses choose methods depending on what they want to achieve. Companies primarily implement pricing strategies to increase profits. However, pricing can also stop competitors from gaining market share or penetrating markets. Let's not take a closer look at three major pricing strategies.

Pricing strategies Promotional pricing strategies StudySmarter

Fig. 1. Promotional pricing strategy, Pexels

Customer value-based pricing strategies

This pricing strategy considers customers' perceptions about the value of the product. The company conducts deep research about customers' willingness to buy the product and then sets a price accordingly. After all, if the customer is going to pay for the product, the customer must see value in it. There are two types of customer value-based pricing methods:

  1. Good-value pricing

    Good-value pricing involves providing the same quality goods at a lower cost or reducing quality marginally to offer better pricing. This pricing strategy aims to offer goods at lower prices without compromising quality.

  2. Value-added pricing

    Businesses following a value-added pricing strategy try to justify the higher prices of their products by adding features such as better quality, better service, and quick delivery to increase their perceived value.

Cost-based pricing strategies

In a cost-based pricing strategy, the company calculates the product's base price by adding all incurred costs. This pricing method sets a floor price - a minimum price a company should charge to recover costs.

Some companies follow another cost-based pricing method called target profit pricing. Companies identify a profit goal and perform a break-even analysis. As you might know, break-even analysis is done to estimate the number of goods or services to be sold to cover the cost. Once, the company knows the cost and target profit, the company can then decide the price of the products and how many of those must be sold to achieve desired revenue.

Consider a chocolate manufacturer estimates total costs as £100,000. The chocolate manufacturer desires a profit of £50,000. The manufacturer estimates that around 30,000 chocolate bars will be sold through market analysis. Hence, the manufacturer should set the price of the chocolate bar at around £5. Here, £5 is the target profit pricing as the price was calculated using the target profit.

Competitive pricing strategy

Competition-based pricing considers competitors' market share, pricing strategies, and value created to set a price for a product. Consumers generally perceive a product's price by observing competitors' prices for similar products. If consumers perceive a product's costs as higher than competitors', the company must reduce the price or add value to it to change consumers' perception.

Skimming Pricing Strategy

A skimming pricing strategy is used when a company wants to launch a new product or service in the market. A company following a skimming pricing strategy launches a product or a service at a higher price to increase its profits. The company then systematically reduces a product's price to match competitors' pricing. A skimming pricing strategy is highly market-dependent, and before applying it, a company must ensure the following:

1. Many customers are willing to pay a high price.

2. Competitors cannot disrupt the market.

3. The costs of producing a smaller volume are not high.

You can read more about this topic here: Price Skimming

Market Penetration Pricing

Another pricing method companies might use when launching a new product is market penetration pricing. It is almost exactly the opposite of a skimming strategy.

In a market penetration strategy, companies set a low initial price. Low pricing helps companies attract many customers in the short run. It is important to note that a market penetration strategy only works in price-sensitive markets - when production and distribution costs decrease with increased production. To avoid temporary profits, the firm must be able to hold out on low pricing for an extended period.

Other important pricing strategies

Although we have now covered the main pricing strategies, there are many factors like the marketing mix, target customers, and market conditions that businesses also need to consider when setting prices. Let's take a closer look at how these factors impact pricing strategies.

  • Bundle pricing: Products are bundled together and sold at a lower price than the total price of each individual product in the bundle. It helps sellers clear stock quickly and earn a profit on otherwise low-selling products.

  • Promotional pricing: includes offering discounts to attract more customers. Businesses try to initiate a push during festivals or holidays by offering huge discounts on their products. The main concern with this strategy is that if the business stops offering promotions, people may not want to buy the goods anymore.

  • Psychological pricing: triggers emotional impulses within customers to buy the product. Many stores now keep prices at £99.99 rather than £100.

  • Dynamic pricing: Changing the pricing of goods and services as per the customer and market conditions. For example, hotel rooms will be expensive during holiday seasons, and flight tickets will be cheaper if very few are sold. Members of a loyalty program will often get offers and discounts.

  • Geographical pricing: Offering different pricing per location. Tax, shipping, supply, and demand may affect pricing. Businesses that trade internationally have to consider geographical pricing.

  • Premium pricing: A pricing strategy that is opted for by businesses that target high-income groups. Customers pay a premium price for goods not only because of value but also for brand image. Customers feel special owning such goods and feel like they are part of an elite group.

Pricing Strategy Examples

Deciding the prices of goods and services offered are not as straightforward as it may seem. Let's now examine some businesses and their successful pricing strategies.

Zara pricing strategy: Zara is a well-known fashion retailer that has outlets all over the world. Zara offers fashion clothing to the masses at affordable prices. Zara's primary strategy is value-based pricing. Zara considers customers' perceptions of prices and offers clothes with up-to-date fashion trends. It promotes fast fashion and charges lower rates than high-end brands like Gucci, Louis Vuitton, etc. Zara analyses sales every day and offers discounts on unsold clothing lines. Apart from these strategies, Zara uses promotional strategies. As a result, you may see long queues in front of Zara outlets on Black Friday or during a summer sale.

Tesco pricing strategy: Tesco, one of the largest grocery retailers in Europe, tries to serve customers at low prices. Tesco follows a cost-based pricing strategy. Tesco works to reduce production and transportation costs by implementing economies of scale. Tesco also uses dynamic pricing via its membership program. Members get some items at a reduced price and collect points while shopping. Tesco claims to be a cost leader because of these strategies.

Gucci pricing strategy: Gucci offers premium pricing. Gucci products are of high quality and designed by world-renowned fashion designers. A limited quantity of stock is produced, and its limited accessibility creates high demand. Apart from quality, Gucci has become a status symbol. People who carry Gucci products feel proud to be associated with such a brand. Gucci is one of the brands that never offer discounts (except in their outlet stores). Even during the pandemic, Gucci was able to maintain its prices. Retailers selling Gucci products may offer some discounts, compromising their profits.

Pricing strategies Gucci products StudySmarter

Fig. 2. Gucci products, Pexels

There are many other examples. Fruits, like mangoes imported from tropical countries, will hold premium pricing in the UK. Fuel prices in any country depend upon international prices and the value of the dollar. It is clear that there is no 'best' pricing strategy. Each business needs to optimise and continually improve its marketing mix.

Pricing Strategies - Key takeaways

  • Pricing strategy refers to all methods businesses use to determine the price of a product or a service.
  • Good-value pricing involves providing the same quality goods at a lower cost or reducing quality marginally to offer better pricing.
  • In a cost-based pricing strategy, the company calculates the product's base price by adding all incurred costs.
  • Competition-based pricing considers competitors' market share, pricing strategies, and value created to set a price for a product.
  • A company following a skimming pricing strategy launches a product or a service at a higher price to increase its profits.
  • In a market penetration strategy, companies set a low initial price.
  • Psychological pricing triggers emotional impulses.
  • Dynamic pricing is changing the pricing of goods and services per the customer and market conditions.
  • Other pricing strategies include bundle, promotional, geographical, and premium pricing.

Frequently Asked Questions about Pricing Strategies

Pricing strategy refers to all the methods businesses use to determine the price of a product or a service.

A high/low, or a skimming pricing strategy is used when a company wants to launch a new product or service in the market. A company following a skimming pricing strategy launches a product or a service at a higher price to increase its profits. It is appealing to sellers as it allows for profit maximisation in the short run.

There are a variety of different pricing strategies. Some of the key pricing strategies include customer value-based pricing, cost-based pricing, competitive pricing, skimming pricing, and penetration pricing. 

In a market penetration strategy, companies set a low initial price. Low pricing helps companies attract many customers in the short run.

There is no such thing as a most effective pricing strategy. Companies set pricing strategies based on their own needs and objectives. For example, if a company wants to attract as many customers as possible in the short run it might use a penetration pricing strategy. However, if the company aims to maximise profits in the short run, it might choose a skimming strategy. 

Final Pricing Strategies Quiz

Question

What does pricing strategy mean?

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Answer

Pricing strategy refers to all the methods businesses use to determine the price of a good or service.

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Question

This pricing strategy that considers customers' opinions about the value of the product or service is called

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Answer

Customer value-based strategy

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Question

What is competition-based pricing?

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Answer

Competition-based pricing considers competitors' market share, pricing strategies, and value created to set a price for a product.

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Question

What is price skimming?

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Answer

A company following a skimming pricing strategy launches a product or a service at a higher price to increase its profits. The company then systematically reduces a product's price to match competitors' pricing. 

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Question

Which of the following market conditions are necessary for a company to successfully implement price skimming? (Multiple options may be correct).

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Answer

Enough customers are ready to pay a high price

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Question

What is a market penetration strategy?

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Answer

In a market penetration strategy, companies set a low initial price. Low pricing helps companies attract many customers in the short run.

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Question

When do companies use a market penetration strategy?

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Answer

While launching a new product

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Question

What is a high/low pricing strategy?

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Answer

 In a high/low pricing strategy, a single product is offered at a discounted price to attract customers to the business. The business then tries to recover costs and earn profit by selling other non-discounted products that consumers may want to buy. 

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Question

What is bundle pricing?

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Answer

Products are bundled together and sold at a lower price than the total price of each individual product in the bundle.

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Question

What is the importance of a bundle pricing strategy?

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Answer

Bundle pricing helps sellers clear stock quickly and earn a profit on otherwise low-selling products.

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Question

What is psychological pricing strategy?

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Answer

Psychological pricing triggers emotional impulses within customers to buy the product. For example, many stores now keep prices at £99.99 rather than £100. 

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Question

What is dynamic pricing?

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Answer

 Changing the pricing of goods and services as per the customer and market conditions. 

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Question

What is geographical pricing?

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Answer

Offering different pricing per location.

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Question

Why are the prices of goods different in different geographical locations?

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Answer

Prices may be different as tax, shipping, supply, and demand may vary based on geographical location.

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Question

What is a premium pricing strategy?

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Answer

A pricing strategy that is opted for by businesses that target high-income groups. Customers pay a premium price for goods not only because of value but also for brand image. 

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