Pricing strategy
It is a way for thinking and acting that highlight key strategic objectives of prices on the market. Pricing strategies of the company determine the answers to two questions: how the company wants to position its brand-name product on the market and which objective ensure optimization of value for shareholders. Product positioning in the market involves selection of consumers, to establish a market area that is the target to which it is addressed, as well as the differential advantages of product brand.
This is a collection of decisions on issues related to prices on a given market, organized in a logical whole, within which the management takes into account the decision-making stages in accordance with the marketing rules of price formation, calculation of the base price and its adaptation.
Types of pricing strategies
- Cream collection Strategy - involves the use of inflated prices in the short term. This strategy is usually used in relation to products that are new or most wanted versions of products existing on the market.
- Prestigious prices strategy - involves setting high prices for products which are considered prestigious (luxury) and of high quality. The high price in itself constitutes an important incentive to purchase the product.
- Penetration strategy - a strategy of low prices designed to infiltrate markets and achieve in them a large share. This strategy works only when the price elasticity of demand for the product is high enough, to cause large increase in the sales volume after price drop.
- Expansive prices strategy - price formation as a greater form of penetration strategy. It this strategy price are set at a very low level in order to establish a massive market share, sometimes at the expense of other competitors. This strategy concerns products with very high price elasticity of demand.
- Preventive prices strategy - this strategy involves the use of low prices, in order to prevent potential competitors from entering the market..
- Pricing strategy to eliminate competitors - the prices are set at a very low level, to destroy the competition. Prices are usually below the level of the costs of production.
In addition, there are three types of framework strategy:
- High-price strategy - is to designate the relative price level above average prices on a given product market.
- Neutral prices strategy - consists in determining the relative level of prices of the product on the similar level as the average prices on a given product.
- Low-price strategy - is to designate the relative level of prices below the average level on a given market.
When managers choose a price strategy, they need to keep in mind that one company can use in parallel multiple strategies for different products and market segments. This is due to the fact that the company supports various product markets or works in different markets or market segments. Then arises the need to adapt company strategy to the specifics of market segments.
See also:
- Expansionary prices strategy
- Prestigious price strategy
- Preventive pricing strategy
- Price strategy to eliminate competitors
- Aggressiveness strategy
Examples of Pricing strategy
- Penetration Pricing: This involves setting the price of products or services lower than the competitors, to attract customers and gain market share. This strategy is used by companies to entice customers with a discounted price to gain their business and increase their market share.
- Price Skimming: This involves setting a high initial price for a product, then gradually lowering it over time. This strategy allows companies to capitalize on the early adopters of a product or service who are willing to pay the higher price.
- Competition Based Pricing: This involves setting prices based on the prices of competitors. Companies will look at what the competitors are charging for their products and services and then price their own accordingly. This strategy allows companies to remain competitive in the market and remain profitable.
- Premium Pricing: This involves setting a high price for a product or service as a way to maximize profits. This strategy is used by companies when they are offering a premium product or service that is of higher quality than the competitors.
- Loss Leader Pricing: This involves setting a price for a product or service that is lower than the cost of the product or service. This strategy is used by companies to attract customers who are then expected to purchase other products or services with higher profit margins.
Advantages of Pricing strategy
A pricing strategy is an important component of a company’s overall marketing plan. It has many advantages, including:
- Setting a competitive price - A strategic pricing strategy allows companies to set prices that are competitive in the market. This can give companies an edge over their competitors, helping them to increase sales and market share.
- Increasing customer loyalty - Strategic pricing can help a company build customer loyalty by offering customers value for money. By offering lower prices or discounts, companies can attract new customers and encourage existing customers to remain loyal.
- Maximizing profits - Strategic pricing helps companies maximize their profits by setting prices that reflect the value of their products and services. Companies can use pricing strategies to help them identify their target markets, optimize their pricing structure, and increase their profits.
- Improving brand recognition - Strategic pricing can help companies increase their brand recognition and visibility. By setting prices that reflect the value of their products and services, companies can attract new customers and establish a strong market presence.
Limitations of Pricing strategy
- A pricing strategy is limited by the market and its demands. Consumers may be willing to pay a certain price for a product, but if it is too high, they may choose to look elsewhere.
- A pricing strategy may also be limited by the cost of production. If the cost of production is too high, the price of the product may need to be increased to keep the company profitable.
- A pricing strategy may also be limited by the competition. If the competition is offering a similar product at a lower price, the company may need to lower its price to remain competitive.
- A pricing strategy may also be limited by the company’s ability to market and advertise the product. If the company does not have the resources to successfully showcase the product and its benefits, it may not be able to charge a premium price.
Pricing strategy is an important factor for successful management of a company. Other approaches related to pricing strategy include:
- Price Skimming - setting high prices initially in order to maximize profit from customers who are willing to pay a premium for the product.
- Penetration Pricing - setting lower prices in order to attract customers and increase market share.
- Bundling - combining products or services together into a package for a single price.
- Psychological Pricing - setting prices slightly below the whole number, such as $9.99, in order to create the perception of value to the customer.
- Loss Leader Pricing - setting a price below cost on a particular item in order to increase sales of other products.
- Dynamic Pricing - setting prices based on changing market conditions.
- Geographical Pricing - setting different prices in different regions or countries.
In summary, pricing strategy involves a number of approaches to determine the best price for a product or service in order to maximize profits while meeting the needs of customers.
| Pricing strategy — recommended articles |
| Competitive Pricing — Product line pricing — Competition-based pricing — Focus strategy — Market based price — Range of products — Price strategy to eliminate competitors — Skimming pricing strategy — Strategic position |
References
- Ellickson, P. B., Misra, S., & Nair, H. S. (2012). Repositioning dynamics and pricing strategy. Journal of Marketing Research, 49(6), 750-772.
