PRICING
STRATEGIES
There are several basic
pricing strategies:
Economy
and Premium
Premium pricing is adopted
when there is a substantial competitive advantage, and the product or service
is unique, and economy pricing strategy is adopted when the cost of marketing
and manufacture is kept at a minimum.
Penetration
or Low Price
Low profit margin will
penetrate the market. It is designed to grab market share quickly. Penetrating
the market with an exceptionally low-priced item creates a broad customer base.
It also provides high return on investment to the customer. Penetration is used
when prices are set first low in order to attract new customers and to gain
market share, and then the price is increased after the market share has been
achieved. To penetrate the market and gain market share, international
businesses set a low price in comparison to other competitors. Note that also
low price is sometimes perceived as indication of low-quality product. It may
also be difficult to increase price in the future without incurring loss.
Skimming
This is appropriate for some
product to be priced as high as the market will bear. However, few buyers are
attracted, and lower sales volumes can be achieved when price is such high.
This strategy is often used when a new product is introduced into the market,
and is in great demand. For this strategy, the product or service is charged
high because of a substantial competitive advantage. This high price tends to
attract new customers into the market, and then falls due to lower unit cost as
economies of scale are achieved. Skimming
is the opposite of penetration. The idea behind this pricing strategy is to
return high profits, even at the cost of losing a large number of customers.
Typically, when a company launches a new product, they charge higher prices in
the beginning to help recoup R&D expenditures as fast as possible. To be
successful, Firms / Organizations must have a unique product that’s in demand.
For example, “chip manufacturers” often use this methodology during the
introductory phase of a new proprietary product. Another aspect that closely
resembles “skimming the cream,” is the high-cost option. Companies like
Mercedes-Benz or BMW are good examples. Customers purchase products from them
knowing they probably paid too much. But these companies have the prestigious
reputation of high-quality products and customer service.
Competitor’s
Pricing
To attract the largest number
of customers and generate consistent turnover, it may be necessary to set price
not too high, not too low, just in line with other competitors. Prices are
tagged to the competition and profits are acceptable. In the long run, no single
pricing strategy will always work best, and producers should be prepared to
adjust to any opportunities or threats that may arise in the ever-changing
market.
Even though premium pricing,
penetration pricing, economy pricing, and price skimming are the main pricing
strategies for marketing mix, there are other strategies to pricing such as:
psychological pricing- product bundle pricing, marginal cost pricing strategies
etc.
Marginal
Costing
In highly competitive markets,
some companies may want to consider turning to marginal costing in order to
ensure that their products are competitively priced. Marginal costing ignores
the fixed cost incurred by companies, on the assumption that these costs will
be incurred by domestic sales anyway and therefore, only variable costs need to
be considered in pricing. Ignoring fixed costs will naturally reduce total
costs, enabling lower prices to be set. Where possible, however, companies
should not resort to this method of pricing.
Psychology
of Pricing
Value Bundling and Discounting
Psychology plays an important role in the marketing world. It helps build the
perception of price and value. The psychology of retail pricing is probably
more important than the price itself. For example, the psychology of not using
values ending in “0” or “1” in the price gives the customer the perception of
saving. For example, Rs.199.99 is viewed as a greater value over a product
priced at an even Rs. 200. Logically, the customer knows the difference is not
great. But there is still that sense of saving. Value Bundling gives the
customer the feeling of getting something. For example, buy one, and get second
free. Discounting also builds loyalty and encourages bulk purchases. Percentage
off the normal retail price attracts customers and, the greater the discount,
the happier the customer would be.
SUMMARY
AND CONCLUSION:
Pricing is probably one of the
toughest problems for a decision maker, when trying to price a product or
service. It may include the cost of producing and providing the product, the
profit that you need to make to stay in the business. Proper pricing takes into
account costs, market demand and competition. In domestic markets, few
companies are free to set prices without considering their competitors’ pricing
policies. If a foreign market is serviced by many competitors, you may have
little choice but to match the going price, or go below it, to win a share of
the market. If your product or service is new to a market, you may, however, be
able to set a higher price. Pricing in the international marketplace requires a
shrewd of market strategy and companies need to define their pricing
strategies, know their products, and understand host country’s environmental
factors.
International
Marketing - Pricing Strategies
With respect to marketing mix,
price is the least attractive element to be considered. Marketing companies
should really target on producing as high a margin as possible. The debate is
that the merchant should change item, location or advertisement in some way
before resorting to minimization of price. Anyhow, price is a flexible
component element of the mix as we shall see.
Penetration
Pricing
The rate issued for goods and services
is set artificially low in order to earn market share. After achieving, the
price is increased. This strategy was first used by France Telecom and Sky TV.
Enterprises need to grab the opportunity to hold on to customers, so they
offered free telephones or satellite dishes at minimal rates. And eventually,
people signed up for their services.
After getting large number of
subscribers, rates gradually go up. For example, Tata Sky or any cable or
satellite company, when there is a premium movie or sporting event rates are at
their highest. Thus, they shift from penetration strategy to more of a skimming
or premium pricing strategy.
Economy
Pricing
Here, the rates of marketing
and advertising a product are kept as low as possible. Supermarkets often have
economy brands for soups, spaghetti, biscuits, etc.
Budget airlines are popular
for keeping their overheads as low as possible and then providing the customer
a comparative lower rate to fill an aircraft. The first few seats are sold at a
very low rate almost an advertisement rate price and the middle majority are
economy seats, with the highest rate being sold for the last few seats on a
flight i.e. in the premium pricing strategy. During times of recession, economy
pricing records more purchase.
Price
Skimming
Price skimming sees an
enterprise charge a higher rate because it has a substantial competitive
benefit. However, the benefit tends not to be sustainable and reasonable. The
high cost tempts new competitors into the market, and the rate inevitably
decreases due to increased supply.
Producers of smart phones used a skimming strategy. Once other producers penetrated into the market and the smart phones were manufactured at a lower unit price, other marketing approaches and pricing approaches were executed. New products were launched and the market for smart phones earned a reputation for innovation.
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