Posted in Marketing and Strategy Terms, Total Reads: 4616
Definition: Pricing Strategies
Pricing Strategies determine the pricing model that is compatible with the target market and is consistent with the pricing objectives. Pricing objectives can either be to obtain a target return on investment or to grab a target market share. The basic price strategies are:
a) Cost Based Pricing- this suggests to consider the costs and profits objectives of the business.
Calculate the cost to make/buy the product.
Calculate the related cost of doing business
Add the profit margin to come to the price call the MarkUp
b) Demand Based Pricing- assumes that the demand is inelastic and requires the willingness of the customer to pay for the product and price is set accordingly
c) Competition Based Pricing- price is dependent on the price of the competitors.
The pricing policy is important as it standardizes the pricing decisions of products in the future. There are 2 kinds of pricing policies:
a) Flexible Price Policy- this kind of policy takes the market conditions, demand and prices of competitors into account.
b) One Price Policy- the price is not based on the knowledge or bargaining skills rather same for all.
The pricing technique can be selected from the available pricing models by evaluating the most suitable technique that will meet the needs and is most satisfying to customers. The various pricing models are:
a) Cost based pricing- it is simply calculated by adding the profit to the cost of producing the product to arrive at the price.
b) Skimming: in order to break even the fewer sales, products are sold at a higher price to gain larger margins on them. This technique is not useful in grabbing market share.
c) Limit Pricing: It is usually employed by the monopolist to ensure that no competition exists in the market. It is done by making the price of the product lesser than he cost of production.
d) Loss Leader: it is used to increase the market share of the company and is done by reducing the price to the lowest in the market.
e) Penetration pricing: it is a strategy to grab the market share and is similar to the loss leader except that the company simply reduces the price to increase its share of the market with no intention to grab the maximum share of the market. The price is usually set for a short run and is increased in the long run.
f) Price discrimination: it is the practice of setting different prices for the same product for the different segments of the market.
g) Premium pricing: it is used to increase the perception of the customers. This is done by increasing the price of the product very high to give it a snob image.
h) Predatory pricing: this is an aggressive way of pricing and is done to eliminate competitors from the market.
i) Psychological pricing: based on the belief that customers base perceptions of a product on price.
j) Dynamic pricing: used to change the price of the product depending to the dynamically changing willingness of the customers to buy a product.
k) Price leadership: the market leader usually dictates the price of the product in the market.
l) Value based pricing: it is pricing of a product by evaluating the value added by the product to the customer.
m) Pay what you want: it gives freedom to the customers to pay whatever they want to.