Pricing Strategies: A Comprehensive Guide
Pricing Strategies
1. Pricing Strategies for New Products
Prices for Innovative Products:
- Market Skimming: Many companies that invent new products set high prices to target different market segments.
- Market Penetration: Some companies set a low initial price to penetrate the market quickly and thoroughly.
Prices for Imitation or New Products:
When developing a new product imitation, a company faces the challenge of product placement. They must determine the price while considering the target market segment.
2. Strategies for Pricing Depending on the Product Mix
Product Line Pricing:
Product characteristics and cost differences are considered when pricing products within a company’s offerings. If the price difference between two products is small, buyers will likely choose the more advanced product. If the difference is significant, customers may opt for the less advanced product.
Optional Product Pricing:
Companies offer optional products or accessories alongside their core product at the point of sale. For example, soap and a soap dish.
Captive Product Pricing:
Companies utilize this strategy when products are used in conjunction with a main commodity. Prices for the main product are kept low, while prices for necessary supplies are set higher.
By-Product Pricing:
If by-products have little value and disposal is costly, the prices of primary products may be affected.
Product Bundle Pricing:
Sellers often combine several products and offer them as a package at a reduced price.
3. Strategies to Adjust Prices
Discounts and Allowances:
- Cash Discount: Reduces the price for buyers who pay their bills promptly.
- Quantity Discount: Price reduction for buyers who purchase large volumes.
- Functional Discount: Offered by a seller to retail channel members.
- Seasonal Discount: Granted to buyers who purchase goods or services during the off-season.
- Allowance: Reduces the price based on a specific quota.
Discriminatory Pricing:
Allows a company to offer a product or service at two or more prices, where the price difference is not based on cost differences.
- Customer-Segment Pricing: Different customers pay different prices for the same product or service.
- Product-Form Pricing: Different versions of the product are priced differently.
- Location-Based Pricing: Different locations have different prices, even if the cost of supply is the same.
- Time-Based Pricing: Prices vary by season, day, or month.
Psychological Pricing:
Considers the psychology of pricing rather than just the economics. Reference prices are prices that buyers have in mind when they see a product.
Promotional Pricing:
Companies temporarily price their products below the list price and sometimes even below cost.
Value Pricing:
Offers a combination of product quality, service, and price to the market.
Geographical Pricing:
- Zone Pricing: The company sets two or more zones. Customers within a zone pay the same price, with prices increasing for farther zones.
- Point-of-Origin Pricing (FOB): Goods are delivered free on board a carrier, and ownership and responsibility transfer to the client, who pays for transportation from the factory to their destination.
- Uniform-Delivered Pricing: The company charges the same price plus transportation to all customers, regardless of location.
- Basing-Point Pricing: The seller chooses a city as their basing point, and transportation costs are charged to all customers from that city.
- Freight-Absorption Pricing: The seller absorbs all or part of the actual shipping charges to gain a competitive advantage.
International Pricing:
Companies must decide how to price their products in different countries where they operate.
4. Price Changes
Initiating Price Reductions:
A company may start with lower costs than competitors and offer lower prices to gain market share.
Initiating Price Increases:
Prices can be increased due to factors like inflation.
Competitor Reactions:
Customers may interpret price changes as indicators of quality, product updates, or the company’s financial status.
Responding to Price Changes:
Companies must analyze their product’s life cycle stage, intentions, resources, and potential consumer reactions to price changes when responding to competitor price adjustments.