Why Pricing Strategy Matters
Obviously, if we get our pricing wrong, we'll miss out on business.
In order to increase profits, we could devise new services and products. However, by adjusting our existing pricing strategy on goods or services we already provide, we can squeeze out extra revenue with little effort.
To get greater returns from pricing, companies typically find ways to charge different prices to different customers.
Obviously, if we get our pricing wrong, we'll miss out on business.
In order to increase profits, we could devise new services and products. However, by adjusting our existing pricing strategy on goods or services we already provide, we can squeeze out extra revenue with little effort.
To get greater returns from pricing, companies typically find ways to charge different prices to different customers.
Factors Affecting Price
1. Supply and Demand
2. Cost and Expenses
3. Competition
4. Image Desired
5. Government Regulations
6. Price versus Non-Price
1. Supply and Demand
2. Cost and Expenses
3. Competition
4. Image Desired
5. Government Regulations
6. Price versus Non-Price
Pricing Strategies
1. Price Skimming
Price-skimming strategies are used to price luxury goods. Price skimming is a type of strategy that businesses use when they are first to enter the market with a product or service. With price skimming, when a product is released, it's offered at high price and then lowered later in the product's life cycle or when competition begins to enter the market.
Establish the Brand: Attracting consumers to a product or service requires establishing a strong brand your target market can connect to. Whether looking to establish a brand based on quality or status, companies use price-skimming strategies to reach their target markets.
Perceived Quality: Consumers seek quality when they shop for products and services for their families and businesses. Quality is measured by various factors, with price being a measure used by many consumers as they shop for everything from foods to electronics. Products priced using a price-skimming strategy are perceived as high-quality products.
2. Penetration Pricing
Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.
Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified.
Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.
Advantages of Penetration Strategy:
- Catching the competition off-guard / by surprise
- Encouraging word-of-mouth recommendation for the product because of the attractive pricing (making promotion more effective)
- It forces the business to focus on minimizing unit costs right from the start (productivity and efficiency are important)
- The low price can act as a barrier to entry to other potential competitors considering a similar strategy
- Sales volumes should be high, so distribution may be easier to obtain
Disadvantages of Penetration Strategy:
- The low initial price can create an expectation of permanently low prices amongst customers who switch. It is always harder to increase prices than to lower them
- Penetration pricing may simply attract customers who are looking for a bargain, rather than customers who will become loyal to the business and its brand (repeat business)
- The strategy is likely to result in retaliation from established competitors, who will try to maintain their market share
3. One Price Policy
Pricing policy in which all customers are charged the same price for goods and services.
4. Flexible Price Policy
Pricing strategies are practices companies engage in to sell the most products at the most reasonable price. Flexible pricing generally indicates a company is open to some price bargaining for goods or services. Buyers and sellers use this practice to get the best price in order to purchase more items or save money.
1. Price Skimming
Price-skimming strategies are used to price luxury goods. Price skimming is a type of strategy that businesses use when they are first to enter the market with a product or service. With price skimming, when a product is released, it's offered at high price and then lowered later in the product's life cycle or when competition begins to enter the market.
Establish the Brand: Attracting consumers to a product or service requires establishing a strong brand your target market can connect to. Whether looking to establish a brand based on quality or status, companies use price-skimming strategies to reach their target markets.
Perceived Quality: Consumers seek quality when they shop for products and services for their families and businesses. Quality is measured by various factors, with price being a measure used by many consumers as they shop for everything from foods to electronics. Products priced using a price-skimming strategy are perceived as high-quality products.
2. Penetration Pricing
Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.
Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified.
Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.
Advantages of Penetration Strategy:
- Catching the competition off-guard / by surprise
- Encouraging word-of-mouth recommendation for the product because of the attractive pricing (making promotion more effective)
- It forces the business to focus on minimizing unit costs right from the start (productivity and efficiency are important)
- The low price can act as a barrier to entry to other potential competitors considering a similar strategy
- Sales volumes should be high, so distribution may be easier to obtain
Disadvantages of Penetration Strategy:
- The low initial price can create an expectation of permanently low prices amongst customers who switch. It is always harder to increase prices than to lower them
- Penetration pricing may simply attract customers who are looking for a bargain, rather than customers who will become loyal to the business and its brand (repeat business)
- The strategy is likely to result in retaliation from established competitors, who will try to maintain their market share
3. One Price Policy
Pricing policy in which all customers are charged the same price for goods and services.
4. Flexible Price Policy
Pricing strategies are practices companies engage in to sell the most products at the most reasonable price. Flexible pricing generally indicates a company is open to some price bargaining for goods or services. Buyers and sellers use this practice to get the best price in order to purchase more items or save money.
Pricing Techniques
The idea is the marketer wants the consumer to respond on an emotional, rather than rational basis. It’s about leveraging the buyer’s ego and self image. The general assumption is price is an indication of quality and the goal with psychological pricing is to exploit that as much as possible.
1. Odd Pricing and Even Pricing
Odd Pricing In the internet marketing world there is a rule that prices should end in a 7. Looking for an ebook or information product? Chances are the price will end in a 7.
We’re all used to prices end in a 9 in the retail world – such as $19.99.
Prices ending in 99 indicate low prices and signal “this is a value”. There are several studies that have been done around using prices ending in a 9 to increase sales. This technique works, and it works well.
It’s harder to find any concrete information about the now ubiquitous 7 used in internet marketing but give it a few years and I suspect some will appear. There are theories that 7 is the most friendly number so it will increase sales but I was unable to find any definitive answers on why 7 would be superior to the use of 9 (except a sketchy looking ebook that cost $47 that I was able to resist). Some say that 7 and 9 work equally well when pricing and by using a 7 internet marketers leave $2 (or $.02) on the table on every transaction.
3. Prestige Pricing
It's all about image. Does the price and the product image desired match?
4. Promotional Pricing
Have a sale!
5. Price Lining
Offer three lines.
6. Loss Leaders
Advertise a loss on a product to lead customers into your store
The idea is the marketer wants the consumer to respond on an emotional, rather than rational basis. It’s about leveraging the buyer’s ego and self image. The general assumption is price is an indication of quality and the goal with psychological pricing is to exploit that as much as possible.
1. Odd Pricing and Even Pricing
Odd Pricing In the internet marketing world there is a rule that prices should end in a 7. Looking for an ebook or information product? Chances are the price will end in a 7.
We’re all used to prices end in a 9 in the retail world – such as $19.99.
Prices ending in 99 indicate low prices and signal “this is a value”. There are several studies that have been done around using prices ending in a 9 to increase sales. This technique works, and it works well.
It’s harder to find any concrete information about the now ubiquitous 7 used in internet marketing but give it a few years and I suspect some will appear. There are theories that 7 is the most friendly number so it will increase sales but I was unable to find any definitive answers on why 7 would be superior to the use of 9 (except a sketchy looking ebook that cost $47 that I was able to resist). Some say that 7 and 9 work equally well when pricing and by using a 7 internet marketers leave $2 (or $.02) on the table on every transaction.
3. Prestige Pricing
It's all about image. Does the price and the product image desired match?
4. Promotional Pricing
Have a sale!
5. Price Lining
Offer three lines.
6. Loss Leaders
Advertise a loss on a product to lead customers into your store