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Pricing Strategies in Marketing

Price is an often overlooked marketing strategy, as many tend to focus on promotions or advertising. Pricing strategies, however, can have a large impact on sales and (more importantly) profit.

For clarification purposes, I am defining price as what your customer pays and/or what the end consumer pays for a product or service. In the case of products not sold directly to the end user, pricing is often described as “wholesale” and “retail.” When the distribution channel is long (such as when there is a manufacturer, broker/distributor, retailer, and end consumer), multiple mark-ups can occur between the wholesale and the retail price.

Your optimal pricing strategy will depend on more than your costs. Forces within your business environment such as your competitors, your suppliers, the availability of substitute products, and your customers come into play as well. Positioning (how you want to be perceived by your target audience) is also a consideration.


Pricing Strategies

There are a variety of pricing strategies in existence. Each strategy is used in a different set of circumstances. Some of the things to consider when choosing the best strategy for your situation are your costs; both short term and long term sales and profit goals; competitors’ activities; and customer lifetime value. While there are others, a few of the more popular pricing strategies to consider are:


*Cost plus mark-up

Here, you decide the profit you need to make before setting the price. Figure out your costs and your selling price is simply your costs plus your pre-determined profit number. This approach helps keep your profitability top-of-mind, but may also result in prices that are out-of-line with customer expectations and worth of your product or service.


*Competitive pricing

When competitive pricing, you look at the prices different competitors are charging and use those prices as a benchmark when pricing your own products. You and your competitors’ positioning strategies will determine whether you price at par, slightly below, or slightly above the competition.


*Price skimming

This technique is used when you offer a unique or scarce product with few or no substitutes. The price is set high, resulting in high margins for the seller. Buyers are those that are willing to pay the price because of the product’s prestige and/or uniqueness. In the case of a scarce but necessary product, customers pay the price because they have no choice. Often, price skimming is a short-term strategy as competitors enter with their own products, bringing prices down. In the case of scarce products, either the need passes (salt during an ice storm, for example) or the shortage is temporary. Before considering this technique, be aware that if your customers feel you have taken advantage of them, you will be building “bad will” for your business and undermining the trust customers have in your products or services.


*Penetration pricing

This is the opposite of price skimming. Prices are set low in an effort to gain large market share. Because the penetration price does not cover costs, this is also a temporary strategy. For this strategy to be profitable, customers must be willing to pay your normal, higher price later on.


*Loss leader

Here, you price one or more products below cost to attract customers. You hope that those customers will purchase other profitable products from you. This strategy is often implemented as part of a short-term promotion.


*Close out

This is a tactical move to clear slow-moving or excess products out of inventory. You sell the inventory at a steep discount to avoid storing or discarding the product. End-of season merchandise, perishables that are about to expire, and prior software versions or book printings are examples of eligible closeout items.


*Multiple unit pricing or quantity discount

The customer gets a lower price for purchasing multiple units or large quantities.


*Membership or trade discounting

Here, some customers (those that you know are heavy or frequent purchasers) are given an elite status, which gives them the privilege of a price discount on their purchases. This elite status can be based on occupation, membership in an organization, subscription status, or some other criteria.


*Variable pricing

With a variable pricing strategy, different customers pay different prices. Often, this strategy is used for project work. Each project has unique characteristics so is priced by the job.


*Versioning

This is offering similar products with different levels of functionality. Each level is priced differently and includes a different bundle of attributes. Software and Web hosting companies often use this pricing strategy. A trial or very basic version may be offered at low or no cost. Upgraded versions are available at higher costs.


*Bundling

Here, several items are sold together at a price less than if they were purchased alone. By bundling a popular item with lesser-known products, you can increase your sales. Additionally, in the case of inventoried items, you may be able to avoid a closeout.


Impact of Internet on Pricing Strategies

Aside from making some pricing strategies more prevalent, the Web has also affected the importance of choosing correct pricing strategies by allowing customers to be better informed and more vocal. In the case of consumer products, the purchaser can go to www.MySimon.com or another price comparison service and in seconds look at a side-by-side price comparison from several online retailers.

There are also numerous forums and discussion boards where members discuss their experience with providers. For example, your customer in Paris can complain or spread praise about you to a potential customer in St. Louis. This means the customer can not only make a better decision before purchasing, but can also better spread the word (both praise and complaints) after the purchase. For these reasons, the Web has made it more important that you remain competitively priced with your competition and maintain sensible pricing practices.

Combined, smart use of both the Internet and available pricing strategies can help boost your company’s bottom line.


Written by Bobette Kyle
Courtesy
http://www.websitemarketingplan.com/techniques/pricing2.htm

Pricing Strategies

There are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations.


Premium Pricing

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.


Penetration Pricing

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom in order to attract new corporate clients.


Economy Pricing

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.


Price Skimming

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.


Psychological Pricing

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.


Product Line Pricing

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.


Optional Product Pricing

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.


Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.


Product Bundle Pricing

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.


Promotional Pricing

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).


Geographical Pricing

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.


Value Pricing

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Courtesy
http://www.marketingteacher.com/Lessons/lesson_pricing.htm

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