Managing a Business/ms-91
What are the various pricing strategies available / suitable for different market structures? discuss
various pricing strategies
Pricing is one of the four elements of the marketing mix, along with product, place and promotion. Pricing strategy is important for companies who wish to achieve success by finding the price point where they can maximize sales and profits. Companies may use a variety of pricing strategies, depending on their own unique marketing goals and objectives.
Premium pricing strategy establishes a price higher than the competitors. It's a strategy that can be effectively used when there is something unique about the product or when the product is first to market and the business has a distinct competitive advantage. Premium pricing can be a good strategy for companies entering the market with a new market and hoping to maximize revenue during the early stages of the product life cycle.
A penetration pricing strategy is designed to capture market share by entering the market with a low price relative to the competition to attract buyers. The idea is that the business will be able to raise awareness and get people to try the product. Even though penetration pricing may initially create a loss for the company, the hope is that it will help to generate word-of-mouth and create awareness amid a crowded market category.
Economy pricing is a familiar pricing strategy for organizations that include Wal-Mart, whose brand is based on this strategy. Aldi, a food store, is another example of economy pricing strategy. Companies take a very basic, low-cost approach to marketing--nothing fancy, just the bare minimum to keep prices low and attract a specific segment of the market that is very price sensitive.
Businesses that have a significant competitive advantage can enter the market with a price skimming strategy designed to gain maximum revenue advantage before other competitors begin offering similar products or product alternatives.
Psychological pricing strategy is commonly used by marketers in the prices they establish for their products. For instance, $99 is psychologically "less" in the minds of consumers than $100. It's a minor distinction that can make a big difference.
Types of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs and is a form of cost-plus pricing
Contribution margin-based pricing[
Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's contribution margin per unit), and on one’s assumptions regarding the relationship between the product’s price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e. to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).
In cost-plus pricing, a company first determines its break-even price for the product. This is done by calculating all the costs involved in the production, marketing and distribution of the product. Then a markup is set for each unit, based on the profit the company needs to make, its sales objectives and the price it believes customers will pay. For example, if the company needs a 15 percent profit margin and the break-even price is $2.59, the price will be set at $2.98 ($2.59 x 1.15).
Creaming or skimming[
In most skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity - this can be attributed to: their need for the product outweighing their need to economise; a greater understanding of the product's value; or simply having a higher disposable income.
This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.
Method of pricing where the seller offers at least three products, and where two of them have a similar or equal price. The two products with the similar prices should be the most expensive ones, and one of the two should be less attractive than the other. This strategy will make people compare the options with similar prices, and as a result sales of the most attractive choice will increase.
Freemium is a business model that works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services or other) while charging a premium for advanced features, functionality, or related products and services. The word "freemium" is a portmanteau combining the two aspects of the business model: "free" and "premium". It has become a highly popular model, with notable success.
Method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products.
A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition.
The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labor for a long period of time. In this strategy price of the product becomes the limit according to budget.
A loss leader or leader is a product sold at a low price (i.e. at cost or below cost) to stimulate other profitable sales. This would help the companies to expand its market share as a whole.
In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.
Setting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. For instance if the competitors are pricing their products at a lower price, then it's up to them to either price their goods at an above price or below, depending on what the company wants to achieve.
In this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is done so as to give the buyers/consumers no gap for bargaining as the prices seem to be less and yet in an actual sense are too high, and takes advantage of human psychology. A good example of this can be noticed in most supermarkets where instead of pricing at $10, it would be written as $9.99. This pricing policy is common in economies using the free market policy.
Pay what you want[
Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity.
Giving buyers the freedom to pay what they want may seem to not make much sense for a seller, but in some situations it can be very successful. While most uses of pay what you want have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use.
Penetration pricing includes setting the price low with the goals of attracting customers and gaining market share. The price will be raised later once this market share is gained.
Predatory pricing, also known as aggressive pricing (also known as "undercutting"), intended to drive out competitors from a market. It is illegal in some countries.
Premium decoy pricing[
Method of pricing where an organization artificially sets one product price high, in order to boost sales of a lower priced product.
Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction.
Price discrimination is the practice of setting a different price for the same product in different segments to the market. For example, this can be for different classes, such as ages, or for different opening times.
An observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers.
Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.00. There are certain price points where people are willing to buy a product. If the price of a product is $100 and the company prices it as $99, then it is called psychological pricing. In most of the consumers mind $99 is psychologically ‘less’ than $100. A minor distinction in pricing can make a big difference in sales. The company that succeeds in finding psychological price points can improve sales and maximize revenue.
Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.
Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
Pricing a product based on the value the product has for the customer and not on its costs of production or any other factor. This pricing strategy is frequently used where the value to the customer is many times the cost of producing the item or service. For instance, the cost of producing a software CD is about the same independent of the software on it, but the prices vary with the perceived value the customers are expected to have. The perceived value will depend on the alternatives open to the customer. In business these alternatives are using competitors software, using a manual work around, or not doing an activity. In order to employ value-based pricing you have to know your customer's business, his business costs, and his perceived alternatives.It is also known as Perceived-value pricing.
Nine laws of price sensitivity and consumer psychology[
1. Reference Price Effect – buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.
2. Difficult Comparison Effect – buyers are less sensitive to the price of a known or more reputable product when they have difficulty comparing it to potential alternatives.
3. Switching Costs Effect – the higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
4. Price-Quality Effect – buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.
5. Expenditure Effect – buyers are more price sensitive when the expense, accounts for a large percentage of buyers’ available income or budget.
6. End-Benefit Effect – the effect refers to the relationship a given purchase has to a larger overall benefit, and is divided into two parts: Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit. Price proportion cost: The price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component's price.
7. Shared-cost Effect – the smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.
8. Fairness Effect – buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.
9. The Framing Effect – buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.
Marketing departments use different but complementary strategies to increase revenue and profit. Pricing strategies use the price of a product or service to draw in new customers while maximizing profit from current customers. Non-pricing strategies use other methods such as branding to maintain market share without altering price. While pricing strategies are more common during economic downturns, real-life examples demonstrate that marketers often use non-pricing strategies alongside pricing strategies.
According to pricing consultant Rafi Mohammed's strategy blog, Starbucks lowered the prices of its popular low-end drinks such as plain coffee and lattes in 2009. It adopted this pricing strategy to compete with McDonald's and Dunkin Donuts, who introduced less expensive low-end drinks to take over some of Starbucks' market share. However, Starbucks simultaneously raised the prices of its high-end drinks such as caramel macchiatos. Starbucks' non-pricing strategy of ubiquitous convenience developed brand loyalty and allowed for a price hike among loyal customers.
Apple frequently adapts the pricing strategy called skimming, according to "Apple's Pricing Strategies," a Marketing International report. Skimming means selling products at a very high price to increase profits but lower the available customer base; companies using this strategy "skim" the top off the available market. What made this strategy possible, however, was Apple's non-pricing strategy of branding: customers who purchase Apple products think of themselves as "members of the Apple family" when they pay more for an Apple computer or other electronic device, says the report.
A Knowledge@Wharton article reports that Ford offered introductory-level vehicles for a near-cost price in the 1990s so that young customers would purchase Ford cars and then upgrade to its more expensive vehicles later in life because of brand loyalty. However, Ford's non-pricing strategies did not attract much brand loyalty; Ford sold few of its expensive models and made little profit on entry-level vehicles. The same Knowledge@Wharton article states that Ford adopted a new pricing strategy to compensate in 1995: by slightly lowering the prices on higher-end vehicles, Ford increased profits even though it gained relatively little market share.
Pharmaceutical companies face strong pricing competition from companies manufacturing generic equivalents of their brand-name drugs, but they avoid reacting with pricing strategies and turn instead to non-pricing strategy. Even though the primary ingredients and dosages of drugs like Tylenol are identical to their generic equivalents, marketing the brand name's superiority continues to result in high profits, according to Wharton's Knowledge@Wharton blog.
Premium Pricing => This method uses a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries
E.g. Star Hotel rooms and Concorde flights.
Penetration Pricing => The price charged for products and services is set low in order to gain market share. Once this is achieved, the price is increased.
E.g. Youtube.com and Myspace.com giving away free subscriptions to land grab market share for new start-ups.
Economy Pricing => The cost of marketing and manufacture are kept at a minimum.
E.g. Supermarkets often have economy brands for soups, spaghetti, etc.
Web pages designed with minimal cost
Price Skimming => This method charge a high price because there is many substantial competitive advantage. However, the advantage is not sustainable.
E.g. new product launches online such as albums or game.
Psychological Pricing => This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis.
E.g. AirTel : This launch ‘price point perspective’ 99 piece not 1 Rupee a Call for one minute to any other mobiles.
Product Line Pricing => This method having a range of product or services the pricing reflect the benefits of parts of the range.
E.g. many travel agencies provide tour option for even in India
1 person (4 countries) => 49,000
2 person (4 countries) => 62,000
Family pack(2 person ,1 child ) => 65, 000.
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.
E.g. 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 => This type of pricing on products have complements, companies will charge a premium price where the consumer is captured.
E.g. Buy virus software from one brand, their updates must also come from them. (F-Secure Anti Virus – Free update providing)
Product Bundle Pricing => Here sellers combine several products in the same package. This also serves to move old stock.
E.g. a) Videos and CDs are often sold using the bundle approach
b) Furniture marts sold full house accessories as a pack (Fridge, washing machine, A/c.)
Promotional Pricing => This pricing to promote a product is a very common application.
E.g. BOGOF (Buy One Get One Free).
Geographical Pricing => This type of pricing is evident where there are variations in price in different parts of the world.
E.g. Compare Petroleum products cost in Kuwait and Oman with India.
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.