What is Pricing Strategy?
Pricing strategy is an activity or a process which any small businesses do to set the prices for their products or services. There are many things to be considered while setting up the prices and these are as follows;
- Input or raw cost of the product
- Variable cost
- Production & distribution cost
- Trade margin
- Segment account
- Customer’s capability to pay
- Market prices of the same process
- Competitor’s prices
Why Pricing Strategy is Important
Setting up the right pricing strategy is very important and useful for various reasons, and those reasons may from business to business and company to company. For instance,
- If the price of your product is too high, then people won’t be able to buy your product. Which means lower sales, low sale means less profit and your business won’t be able to cover up basic expenses.
- If you set the low price of your product or service to compete in the market and get maximum market share; perhaps you’ll maximize sales and achieve maximum market share in doing so. But you’re sacrificing your profit which covers up all of your fixed and variable costs and expenses, at the end your company would end up crippling down to its feet.
Therefore, setting up the right competitive price for your product or service at the right time is very important; which the customers would be able to pay and your company would end up making a profit and cover up all the relevant costs. Win, win situation for everyone.
10 Types of Pricing Strategies
Here are different types of pricing strategies, which are as follows;
Market Penetration Pricing
Penetration strategy means that if a small business owner wants to enter the market and also wants to make the name of one’s brand, then one should offer something competitive like a low price to attract the buyers and customers to one’s product or service.
Market penetration pricing strategies can be a bit risky because low pricing means there would be less profit that you need at the beginning of your business. But it can also be very helpful by establishing your brand which would be very profitable for you in the future.
For instance, if the price of a competitor’s product or service is 100$, then you should set the price 90$ to attract the customer by offering them the same quality and service, but with a less price. That’s how you can penetrate the market; increase your brand awareness and win customer loyalty with time.
Freemium is an internet-based pricing strategy where a service is offered for free in the beginning, but the price is charged on the premium package with some additional features. However, freemium pricing strategy is different from the premium pricing strategy because freemium offers free sample which you can use without paying anything, you’ll only be charged when you want additional features.
Candy Crush Saga is the most common example which offers you to play the game for free, but if you want more lives, and then you should pay to get those premium features.
Prestige pricing or image pricing are some other names of premium pricing. In such pricing strategies, the price of the product is set higher than the market competitive price of the same product. The purpose is to create a perception about the product in the minds of people that it has some higher value and more utility in it as compared to what competitors are offering in the market.
Premium pricing can generate more revenue and profit. But to make this premium pricing strategy successful, the business, company or brand has to work very hard on the product or service to achieve that status of maintains the quality and standard.
For example, prices of luxury cars are higher than regular cars. Companies like Tesla charge a much higher price than any other automobile industry and people pay for it because what features they are offering; others don’t have it.
In the price skimming strategy, the price of the introductory product is set higher because the product is new and unique, others either don’t have it or very few have it. This gives you a competitive edge over price and people pay for it. The purpose of price skimming is to make as profit as possible. Even though price skimming usually doesn’t cover the initial development cost of the product, but it gives the product an image of uniqueness and exclusive.
The most common example of price skimming is smartphones, both android and iPhones, when a new model is launched in the market, then the price is usually higher than the old models.
Economic pricing is based on the ‘no-frills’ pricing approach strategy; which means the expense of production cost is minimized. This strategy is usually adopted by many food generic businesses, where the purpose of the economy pricing strategy is to attract the price-conscious customer.
The key to succeeding in the economic pricing strategy is to have a much large volume of sales because higher sales would cover the initial cost and business would be able to make some profit out of it as well.
Retail businesses i.e. Walmart and Aldi adopt this strategy and they succeed is because of the huge amount of sales. On the other hand, small businesses with lower sale volume can’t afford this strategy.
Bundle pricing means that the bundle of products or services is offered at a very low price as compared to the separate price of each product which adds up much higher than the bundle. The purpose of this strategy is to minimize the inventory and sell those items which aren’t being sold. Higher selling products and lower selling products are sold in a combination.
Big business can afford this strategy; small business, on the other hand, should use bundle pricing at the end of the season instead of keeping the inventory for the next season.
Big Shopping malls use this pricing technique. Happy meal of McDonald’s is another example of bundle pricing.
In the strategy of psychological pricing, the emotions of customers are targeted rather than the logic.
For example, the price of an expensive watch is set 199$ which tend to attract more customer than the original price which is 200$. The difference in price isn’t much, but psychologically it attracts the attention of people.
Promotion strategy of pricing means discount is offered on a certain product. For instance, buy one & get one free offer, usually, such offers are given for a limited time. The purpose of providing such offers to play with the minds of customers, unconsciously; customers are tricked into believing that they don’t want to miss the offer.
Demand pricing is also synonymously used for dynamic pricing; it is a relative term used in the online platform. Dynamic pricing means different pricing is charged from the different customers depending upon the urgency, customer’s ability and demand of the customers.
For instance, Amazon and Flipkart use this strategy by collecting data from the browsing history of the customer. If the customer is in a hurry and urgent need of work; then relatively more price is charged than usual.
Pay What You Want Pricing
In this strategy of pricing, the decision power of pricing is given in the hands of consumers; they could set the price to zero. Surprisingly, customers usually pay more than the original price of the product. Sometimes, they set the floor price, which means that the price shouldn’t be less than the floor price.
There is no one such thing as good types of pricing strategy, it depends on the nature and type of business and what products or services you are offering. All of the above-mentioned strategies and techniques should be kept in mind while setting up the price.