Pricing strategy in marketing is the pursuit of identifying the optimum price for a product. This strategy is combined with the other marketing principles known as the four P's (product, place, price, and promotion), market demand, product characteristics, competition, and economic patterns. The pricing strategy tends to be one of the more critical components of the marketing mix and is focused on generating revenue and ultimately profit for the company. The success in pricing strategies for businesses is heightened with clarity on market conditions, an understanding of the consumer's unmet desire, and the amount they are willing to pay to fulfill it.
Types of Pricing
Companies will lean on discount pricing as part of product promotions, which are generally used for increasing traffic and attracting new customers. This discounted pricing draws attention to the product and can be used as a hook to bring in customers who will potentially purchase other items. Seasonal changes are good examples of times when companies utilize this strategy, when they discount the prices of the items that are going out of season.
Skim pricing is a technique that companies use to find the optimum price point for a product, usually a unique item with unknown consumer demand. The price skimming strategy consists of the company setting the initial product price high to quickly cover embedded costs, such as production or advertising, and then begins to slowly reduce the price to bring the product to a wider market. The goal with this strategy is to maximize the potential profits layer by layer until the optimum price is reached. Electronic devices are great examples of this strategy, where we see higher prices at market introduction that slowly decrease over time once the initial product buzz weakens.
The market penetration pricing strategy has the main objective of gaining market share early for a company. The introduction of the product to the consumer is provided at low-end prices in hopes to gain the attention, loyalty, and market share of the customer base. Typically, this pricing strategy can be seen in service offerings, such as cable or Internet, in which the provider offers promotions to gain the customers' business and then increases the price after the promotional period.
The ROI pricing strategy is unique to the company and the product offered. The strategy uses the return on investment calculation to set the product price based on a pre-determined profit structure. If the company desires a 10% profit, then they will set the price 10% higher than what it costs to produce and market the product. A similar strategy to this approach is known as cost-based pricing, which nearly mirrors the ROI pricing strategy, except that a company bases the price without a target profit in mind.
Pricing constraints are those things that keep you from having flexibility in your pricing decisions, such as ceiling prices set by customers and your own break-even point. But what your customers are willing to pay (ceiling) and your break-even point (floor) are not the only constraints you must deal with. In some industries, the government regulates prices. This can benefit or hurt you depending on the situation. If you’re in a regulated industry, you already know how this works. If you’re not, make sure you understand what you’ll be getting into if you consider moving into regulated markets.
Customer demand is often price sensitive.
For some products in some markets, raising or lowering your prices will have little effect on how much your customers buy. For example, when gasoline prices go up and down, people who drive to work and have no other transportation alternatives still have to buy the same amount of gasoline each week. When housing costs go up, customers have to pay the prices if they want a place to live.
In other situations, customers can be very sensitive to price changes. If the price of beef rises, people may buy chicken instead. If one 20-inch floor fan sells for three dollars less than competitive products, a vast majority of customers may select that product instead of
the more costly alternative. When competing products are very similar, prices can make a difference in people’s buying habits.
Creating Value for Customers
For most companies, even those that sell commodity products, there are ways to add value to avoid making price the only consideration for customers.
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