What is Pricing Strategy ?
Firms generally prefer to prepare a specific pricing structure, indicating various variables over a single price. Therefore, after deciding the method of pricing, the requisite price of the specific goods or services is finalized with the help of various pricing policies or customized pricing approaches. These include differential pricing, geographical pricing, promotional pricing, product-mix pricing, psychological pricing, new-product pricing and price allowances and discounts.
Types of Pricing Strategies
Types of pricing strategies with examples and explanation is given below :
New Product Pricing
New product pricing involves critical decision making. Lot of variability is involved in the pricing of new products. The level of newness of the product determines the level of difficulty involved in its pricing. The pricing decision becomes complicated it the idea behind the product is unconventional or novel Huge risk/uncertainty is associated with pricing of new products in comparison to mature of already available products.
Identifying consumer anticipations about prices, with the help of suitable marketing research (involving test market and/or surveys), is very essential for new product pricing. Test market enables the marketers to depict the level of demand generated through different prices. This technique helps to evaluate the preliminary graph of demand with changes in the price structure, to level up marginal revenue and marginal costs.
The two different new product pricing methods suitable for different marketing objectives and market situations are skimming and penetration pricing. New Product Pricing strategies are as follows :
1) Price Skimming :
Price skimming can be defined at a product pricing strategy where a consumer will pay the highest initial price demanded by firm. Once the demand of the initial consumers is fulfilled, it reduces the price of the product to interest other customers who have price sensitive approach while making purchase decisions. Thus, skimming term is derived from skimming of the creamy layer of customer segments because later the prices are lowered for attracting other customers.
Price skimming is one of the methods selected by firms who intend to launch new product in the market. Here, the launch price of the product is kept high, which is gradually decreased within a given time period to recoup the value of the product in a faster way.
For example, mobile phones having new and improved attributes are launched at high prices, which are gradually decreased by the company after a certain period. One more example can be of newly launched 3D televisions available at high prices.
2) Penetration Pricing :
It is a strategy used to enter the market at the initial level by offering the products at quite low prices. This gradually helps in expanding the market share. The prices are kept so low which does not allow the manufacturer to make any profits. This decision is not illogical or unjustifiable. When price for a new product is kept low (generally lower than the proposed market prices, to grab the attention of customers, it is called penetration pricing. The main motive of penetration pricing is t compel customers to buy the low-priced new product. This strategy is useful to introduce a new product in the market and functions as the most suitable option, in case of introduction of u product with minor variations in the market. It is also suitable in markets which have price elastic demands. Hence, it is learned that a low prices product (in comparison to similar products available in the market) acts as a competitive advantage.
Product-Mix Pricing
A relatively different pricing strategy should be utilized for pricing products, which are a part of the product mix. A combination of prices suitable for the entire mix is selected by the company to ensure the Increased revenues. Due to presence of inter relationships between demand and cost of different products and different levels of competition, this product-mix pricing is very challenging. Different product-mix pricing strategies are as follows :
1) Product Line Pricing :
Generally, product lines are launched by the organizations, in place of single products and therefore, pricing is also designed according to the product line. Most of the marketers, implement well-planned price ideas for the products in their product-line. For example, a gent's apparel outlet can offer suits at three different prices, , each costing 800, 1500 and 4500 respectively. The consumers will identify the quality of the suits as low, medium and high as per the three different price levels. It is the responsibility of the salesman to rationalize the variable price structure by proving the deemed difference of quality between the products. The prime objective of pricing a product line is to increase the profits to the optimum levels.
2) Optional-Product Pricing :
Besides the main product, a firm can also supply alternative or subsidiary products, added traits and many more. services. A person, who wants to purchase a four-wheeler, can place an order for other related products such as light dimmers. defoggers. warranty extension, electric window controls, etc. The automobile organizations should tackle the tricky issue of pricing by pre-determining the components which should form a part of the principal offering and those which should be considered as alternatives.
3) Captive-Product Pricing :
The use of certain types of products is incomplete without a captive of supplementary product. For example, razor producing companies maintain low prices of razors, but increase the cost of razor blades to retrieve the cost price of razors. Similarly. producers of cameras increase the cost of films and keep the price of camera low. Moreover, the telecommunication service provider can gift a mobile phone free to the customer who promises to purchase the telecommunication services for the next two years.
4) Two-Part Pricing :
A pricing strategy, consisting of two separate parts including a fixed and a fluctuating charge (based on usage of the product), is frequently used by service providing firms. The telephone subscribers have to pay a fixed monthly minimum charge, in addition to costs incurred due to usage over and above the limit. An entry fee is paid by customers visiting an amusement park and an additional cost has to be paid for rides above the minimum limit. The same issue also arises in this pricing, as in case of captive-product pricing. Service providers face a lot of problems in determining the level of charge for basic service as well as for variable service consumption. The fixed charge is kept low to encourage the consumers to buy the services. Variable consumption charge is the only source of profit in this pricing.
5) By-Product Pricing :
In any production process (like production of chemicals, petroleum products, or meat), along with the main product, there are some side products which are developed. These side products are called 'by-products. The appropriate value of these by-products should decided if they are useful to a certain market segment. This value helps in determining the price of such by-products. The manufacturer can offer the products at reduced prices with the help of profits earned from these secondary by products, in case the company is facing extensive competition in the market.
6) Product Bundling Pricing :
Generally package of products and attributes associated with those products are offered by the firm. When a company sells products only in the form of packages or bundles, it is called "pure bundling". In case the company sells products individually as well as in the form of bundles, it is termed as 'mixed bundling'. The company charges less in case of a mixed pack, than the products which are offered individually. For example, the price of option package offered by a car manufacturer is lower than individual prices of such options.
7) Premium Pricing :
A company uses premium pricing for its different alternative products (having heterogeneous demand), which are developed through joint economies of scale. Nowadays televisions of various models with new and improved characteristics are available in the market. Some of them are offered with HD display and others without it. Both the products are substitute to each other as they satisfy the common need of the buyers Television manufacturing companies set higher prices for televisions with HD display and vice versa.
8) Image Pricing :
Image pricing is used in case of customers being able to understand the quality of a product by observing the cost of substitute models or products offered by the competitors. Generally, companies change their product prices according to the prices of same product lines offered by different brands. Companies manufacturing toilet soaps, cosmetics, perfumes, textiles, etc., make use of this pricing strategy.
Geographical Pricing
Under the geographical pricing technique, a company adopts different strategies to enter different markets at the same time, for the sake of maintaining economies of scale. It may enter a market by offering the product at a cost lower than the competition or follow a penetration strategy to enter the other market. The low pricing strategy is called as 'second market discounting'. Using the additional production capacity, a company can offer its products at a very low price under second market discounting (which is a division of differential pricing technique). Hence, a company using geographical pricing method may demand a high price in the first market, a discounted amount in the second market and offer the same product for a penetrative price in some other market.
Payment mode is a matter of concern for this pricing strategy. This becomes critical when customers do not carry adequate amount of cash to pay-off their expenses. Generally, consumers seek to exchange other items against the one purchased by them. It is called as counter trading. There are various types of counter trading as follows :
1) Barter :
Exchanging goods without using money and any intermediary is called barter system.
2) Compensation Deal :
Here out of the total amount payable to the seller, a certain amount is paid in cash and the remainder is paid through any item.
3) Buyback Arrangement :
In this type, in exchange to the supplied plant, machinery, technology or equipment to a foreign country, a seller receives products manufactured with the help of those equipment or machinery as partial payment and the remainder through cash.
4) Offset :
In the above case, if the seller accepts the whole due amount in cash and approves to employ a major part of the amount in that foreign country within a specified span of time, it is termed as offset.
Price Discounts, Allowances and Rebates
The concept of giving discounts on products or services can be a beneficial plan of action to counteract the competitive environment. Discounting, though being a segment of the marketing plan, should be diligently managed and formulated, to avoid any risk. Discounting is a regular event in several companies which makes the usual catalog or price lists almost insignificant This does not mean that discounting is problematic till the company is getting the desired return. It can be a matter of concern, when organizations get trapped in a problematic framework of quantity, cash and other discounts, resulting in nothing other than poor profit margin only.
Rebating involves the partial cash refund or reimbursement to consumers for their expense on purchases. It is tax-free, as according to the IRS (Internal Revenue Service) rebate is not an income, but a decrease in the total amount payable for the purchases made by the customer. Offering rebates is quite beneficial for producers as it increases the sales and prominence of the firm in the market, prompts the potential buyers to buy offered products and helps to seek the attention of retailers, who give additional space to display these products in the outlet and thus promote the scheme. Therefore, this rebating is helpful leveraging with retailers as well as building brand loyalty (leading to repeat purchasing) within consumers. Such benefits are not one-time incentive, but are generated in the long-run. Seasonal industries involving manufacturers of small batteries frequently use rebating strategies. The methods most often used for discounting and rebating are explained below :
1) Quantity Discounts :
A purchaser is said to get a quantity discount when he/she acquires many units of an item (or buys more than a particular amount) and the price charged is comparatively lower Quantity discount can take place in two forms, i.e., cumulative quantity discount and non-cumulative quantity discount. The discount incurred on list price of total number of items purchased within a particular period, is called "cumulative quantity discount. It is implemented to build customer loyalty. Whereas, a discount incurred on list price of a single order (not the total number of orders) placed within a particular period, is called 'non-cumulative quantity discount. It is implemented to encourage large size orders.
2) Cash Discounts :
When a consumer, a marketing intermediary or any organizational buyer, is given a discount on price, for immediately paying the bill for the goods purchased, it is called 'cash discount'. The holding or inventory cost and all the billing expenses of the seller are retrieved by the immediate payment and thus, it rescues the seller from incurring any bad debts.
3) Functional Discounts :
Functional discounts are the discounts given to distribution channel intermediaries like wholesalers or retailers which carry out certain task or activity beneficial for the manufacturer. It is a discount provided for compensating the task or activity performed by the intermediaries. It is given on the basic price of the product. Functional discounts, also called as 'trade discounts', may differ to a great extent from one distribution channel to another, and are determined by the service or function performed by the middlemen.
4) Seasonal Discounts :
Seasonal discounts are the discounts provided to buyers for buying off season products. With this, the product storage activity is transferred to buyers. This facilitates producers to continue a constant and sound production schedule throughout the year.
5) Promotional Allowance :
When a dealer is paid for promoting or advertising the products of a producer it is called as promotional or trade allowance. This allowance aids the promotion of the product and also acts as a pricing mechanism. Promotional allowance acts as a functional discount in case of pricing mechanism. For example, a producer may contribute towards the expenses for an advertising campaign run by the retailer for the producer's goods.
6) Zero-Percent Financing :
Demand for new cars and automobiles decreased during the mid and end phase of the year 2000. At that time, the sellers came up with an innovative concept of zero per cent financing, under which the buyers, without being charged any interest, could get their new car financed. This concept received enormous response and fast growth was observed in the car sales figures. The only drawback of this tactic was the burden of extra cost of over 1,99,995 on every car sold during this scheme.
Psychological Pricing
Price of a product creates an opinion about the product. Psychological pricing is a technique used to establish a price structure which will draw the customer's attention. Price is not the only factor to determine the quality of a product, when the customers can analyze and determine it by previous information or by inspecting it personally. But price can become a crucial indicator of quality of a product, if the customer does not have the necessary knowledge or skill-set to determine the quality. Reference pricing' is another facet of psychological pricing. It is a perception about the price of a product, which the customers assume while judging a product. This perception may be formed by evaluating current buying circumstances, recalling former price structure or present day prices. These perceptions can be utilized while forming the new cost structure. The various kinds of psychological pricing are odd-even pricing, reference pricing, and prestige pricing, which are described below :
1) Odd-Even Pricing :
The price of the product ending with an odd or even digit is termed as 'odd-even pricing'.
2) Reference Pricing :
The price of a product is formulated on the basis of comments and references of the customers.
3) Prestige Pricing :
Creating an image of quality: products, by offering high priced items, is called 'prestige pricing'.
Promotional Pricing
Various forms of promotional pricing are utilized by organizations. Supermarkets and departmental stores come up with strategies, where certain products are offered at lowest rates, which compel the customers to come and purchase not only those products but also other products with normal price range. Various pricing methods are practiced by organizations to make the products move faster and increase sates. These are described below :
1) Loss Leader Strategy :
When a retailer slashes down the prices of products offered by very popular brand to induce consumers to visit the outlet, it is called as 'loss leader strategy. Departmental stores and super marts practice this technique to increase the number of visitors to the store. It is beneficial, as revenues made by the low pricing are more than the original cost.
2) Special-Event Pricing :
Sellers design attractive prices for different commodities in a particular season, which improves their sales.
3) Cash Rebates :
Cash rebates are often given by companies selling consumer goods or automotive companies to inspire customers to buy more products within a given time period to increase the sales of goods offered by such companies. It results in increased sales, leading to clear inventories, without any deduction in list price.
4) Low-Interest Financing :
Low-interest financing schemes are made available to induce customers to invest and purchase more products. Automobile sector is the biggest example to implement this strategy and even zero-interest financing has been offered by automakers.
5) Longer Payment Terms :
Sellers like automobile companies and financial institutions, extend the duration of the payment for loans taken by the customers, which ultimately reduces the monthly installment for customers. Generally, customers focus on the monthly installments to be paid, as they have to determine whether they can afford it or not.
6) Warranties and Service Contracts :
Majority of companies provide warranty and service contracts with the purchased product. Offering these benefits free or by charging low-prices, is very helpful in promoting sales.
7) Psychological Discounting :
Originally fixing the price of a product above its normal range and eventually offering the same product at considerably reduced rates, is called as psychological discounting.
Companies should be very careful while implementing promotional pricing strategies as these are regarded as a zero-sum game. In case, the promotional pricing strategy becomes successful, competitors follow it, and unknowingly diminish their own value in the market. On the other hand, if this strategy fails, the money invested gets wasted This invested money could have been better utilized in other marketing areas like improving product or service quality of designing effective advertising strategy to enhance the product image.
Differentiated Pricing
A firm offering the same product with different prices throughout various market segments is id to use differential pricing strategy. The firm presumes that each market segment has a distinct search cost structure as well perceived value of the product or there is no communication between different market segments. It can also be said that a firm is inspired to use this strategy due to significant diversity in the market.
The basic cost of a product is modified to suit variance in products, areas, consumers, etc. When a product is sold at different prices, which do not show any corresponding difference in structure, it is said to create price discrimination Mainly three degrees of price discrimination are found in the market, i.e., first degree, second degree, and third degree price discrimination First-degree price discrimination includes charging different prices from different customers based on their level of demand for a particular product or item. Second degree price discrimination includes charging comparatively less prices from customers buying products in bulk. In third-degree price discrimination, different classes of customers are offered products at different prices, as per the situations given below :
1) Customer-Segment Pricing :
Different classes of buyers are offered the same product or service at different prices. For example, an entry fee charged at museums is different in case of senior citizens and student visitors as compared to general public.
2) Product-Form Pricing :
Prices of different variants or forms of a particular product are different. However, these prices are not in accordance with the costs of such variants.
3) Image Pricing :
Image differences help a firm to sell the same product in different price categories. For example, a producer selling perfumes can sell the same perfume in two different bottles with distinct product name and identity at separate prices of 50 and 200 each.
4) Channel Pricing :
Different prices are set for selling through different distribution channels. For example, the popular brand Coca Cola charges differently for the same product in a fast food outlet, vending machine located at different locations or in a fine-dine restaurant.
5) Location Pricing :
A product is charged differently in various areas despite the fact that the costs incurred at each area are identical For example, cinema theaters located various locations cost differently for the same movie as per liking of the audience.
6) Time Pricing :
Prices of the same product differ as per the hour, day or season. The prices of basic necessities provided by authorities differ from the particular time of the day, weekdays or weekends. Products which remain unsold are offered at low costs by airlines and hotel owners before the product becomes expired. The early entrants in a restaurant are charged less for their expenses.