Pricing Strategies
Price is the amount of money given by buyers to sellers for the exchange of goods and services.
A pricing strategy is the method companies use for pricing their products and services. Most companies, big and small, base their prices on labor, production, and advertising expenses. Then they add a certain percentage to make a profit.
Pricing strategies consider factors such as competitor actions, market conditions, and consumer trends to determine the price of the goods. Before advertising products to customers, businesses must choose a pricing strategy. We will be reviewing the most popular pricing strategies and helping you choose what is best for your business.
For strong profits and long-term growth, it is essential to have great pricing strategies. Your company will not succeed if the prices of goods are too low. Customers won’t buy goods that are too expensive. Price can impact the success of a business, along with promotion, product, and place.
These are just a few of the many strategies businesses use to set prices for their products and/or services.
Price Skimming
A “market-plus” pricing strategy is also known as price skimming. It refers to a higher price than the price of comparable products. Price skimming comes from the phrase “skimming off the top”. This strategy is often used by companies to launch new products. Companies often use high prices in the beginning and slowly reduce the price over a period of time.
When there is strong demand for the product or service, price skimming works well. Apple uses price skimming to bring out new iPhones and Watches. Prices on older models are usually lowered as new models are revealed.
Price skimming can be used by firms when products are legally protected, when they represent a technological breakthrough or when they have in any other way prevented the entry of others.
When production is not possible due to technological problems, shortages, or the time and skill required to make a product, managers may adopt a price skimming strategy.
Management can quickly recover product development costs by using a successful price skimming strategy. Managers can reduce the price if the market considers the introductory price too high. Firms believe it is best to test the market with a high price, and then lower the price if sales slow down.
Price skimming is not just used for products. Price skimming is even used by celebrities, lawyers, celebrity hairdressers, and sportsmen. Skimming will naturally encourage others to enter the market.
Penetration Pricing
Penetration pricing is the opposite of price skimming. Penetration pricing is charging a low price for a product in order to get it into the mass market. This low price is intended to capture a large market share and lower production costs. Penetration pricing is an option if a marketing manager has set a high market share as their pricing goal.
Penetration pricing does mean lower profit per unit. To reach break-even, you need to sell more units than if you were using a skimming pricing strategy. It is possible that product development costs will take longer to recover. Penetration pricing is a deterrent to competition, as you might imagine.
In a price-sensitive market, a penetration strategy is more effective. Because the market can be expanded by a lower price, it is more likely that the price will drop quickly when there is more demand.
A firm with a low fixed costs structure can increase sales and profits. However, this is only possible if there are more customers or other companies that want to sell the product. A market can be attracted by low prices.
Increasing sales can justify the expansion of production or the adoption of new technologies that can lower costs. Even low-priced businesses can contribute incremental dollars to fixed costs if they have excess capacity.
Penetration pricing has the advantage that it often discourages or blocks competitors from entering a market. Penetration means that you have to plan for large-scale production in order to sell a lot of products at a low price. The company could lose a lot of money if the volume does not materialize.
Status Quo Pricing
Status quo pricing is another pricing strategy that a company may consider. This pricing strategy involves charging the same price as or very close to that of the competition. While status quo pricing is simple, it has the disadvantage of not being able to address demand or cost. If the firm’s size is small, however, it may be safer to meet the price of the competition for long-term survival.
Premium Pricing
Premium pricing is available to businesses that produce high-quality products and market them directly to high-income customers. This pricing strategy requires that you create a product of high quality that customers consider high-value. To appeal to the right consumer, you will likely need to create a “luxury”, or “lifestyle” branding strategy.
This pricing strategy can be described as psychological pricing. It appeals to the buyer’s mind. While the price might be a deterrent to some buyers, proponents of premium pricing believe that the market will perceive premium pricing as more reliable and quality. This will eventually lead to higher revenue.
Premium pricing helps companies to outperform their competition in the market. Companies can make it difficult for new businesses to enter the market by investing in premium-brand products and marketing. You also create an entry barrier that forces other businesses to sell their product at lower prices if they want to gain market share.
Economy Pricing
Economy pricing models are popular in big box stores like Costco and Walmart. As with premium pricing, an economy pricing model is dependent on overhead costs and the overall product value.
Economy pricing is where marketing and advertising expenses are reduced to lower the price of the product or service than their competitors. Firms will lower their prices to make a small margin on each product. Due to the high volume of sales, overall profit does not decrease.
Economy pricing is used by companies because it offers a lower price than the product that’s next to it on the shelf. This increases sales. Economy pricing is especially effective during economic recessions.
Dynamic Pricing
Dynamic pricing refers to a store or company that adjusts its prices continuously throughout the day. These price changes have two goals: companies want to maximize their margins and increase sales.
Dynamic pricing refers to a pricing strategy where variable prices are used instead of fixed prices. Instead of setting a price for a season, retailers are able to adjust their prices daily in order to take advantage of the changing market.
Businesses should consider factors such as the customer’s location and time of day, demand levels, and pricing of competitors. Businesses can make price adjustments easier with the aid of big data and analytics. A vendor can predict the price a customer will pay and adjust prices by collecting and analyzing data.
Dynamic pricing can be legal. The general public is now more comfortable accepting dynamic pricing when booking hotel rooms or purchasing airline tickets online.