There are several different pricing strategies that can be used and these are broadly categorized into: cost-based methods, competition-based methods, market-based methods, perception-based methods and pricing strategies for introducing new products.
Market-based pricing
Three different approaches to setting prices based upon the conditions that prevail in a certain market can be found in this category depending on the marketing objectives of the business. The pricing strategies include perceived-value pricing, price discrimination and dynamic pricing.
1. Perceived-value pricing
Perceived value pricing is a pricing strategy that sets prices based on the value that customers perceive a product or service to have. This is in contrast to cost-plus pricing, which sets prices based on the cost of producing the product or service plus a profit margin. It takes into account the emotional and psychological factors that influence customer purchasing decisions.
When is perceived-value pricing used?
Perceived-value pricing (customer-based pricing) is used in markets where demand for a product is inelastic and the price reflects value of the product as perceived by the consumers in the market. For example, a customer may be willing to pay more for a product that is perceived as being high quality, even if it is actually more expensive to produce than a lower-quality product. Perceived value pricing can be a successful pricing strategy for businesses that understand their target customers and can create products and services that offer clear and significant value. It is important to conduct market research and understand your target customers’ needs and wants before setting prices.
Rolex watches bear extremely high prices. A high-end luxury car may be priced much higher than a comparable mid-range car. This is because customers who purchase luxury cars are often more concerned with status and prestige than with price. A brand-name pair of jeans may be priced higher than a generic brand of jeans. This is because customers who purchase brand-name jeans are often willing to pay more for the perceived quality and status that comes with owning a particular brand. A new iPhone may be priced higher than a comparable Android phone. This is because customers who purchase iPhones are often more concerned with the latest technology and features than with price.
✅ Advantages of perceived-value pricing:
Perceived value pricing can be a powerful tool for businesses that want to increase sales and profits. The more prestigious the brand name, the higher the perceived value, and so the higher the price that can be set. And, the higher the price, the higher the sales revenue, as long as the demand remains the same.
❌ Disadvantages of perceived-value pricing:
Studying the market in many ways is necessary as the actions of consumers in that market need to be looked at from different perspectives. A study of the market should be more detailed than just looking at the responses of the consumers. Perceived value is subjective and can vary from customer to customer. Additionally, charging the lowest price may not be the best marketing strategy for management to adopt, not even for products with the lowest quality, when the customer expects high quality products with a good brand image.
2. Price discrimination
Price discrimination is a pricing strategy where a firm sells the same product, usually a service, at different prices to different customers. This can be done based on a number of factors, including customer demographics, willingness to pay, or the time and place of purchase.
When is price discrimination used?
Price discrimination happens in markets where it is possible to charge different prices for the same product to different groups of consumer’s. Firms can price discriminate different groups of consumers with different price elasticities of demand for the product.
What is very important is that the firms must be able to avoid resale between the groups and when it does not cost too much to keep the groups of consumers separate.
Children and adults pay different prices for entering the same cinema, theme park or hair salon. The product they pay for is essentially the same but the prices are different. Airline operators who charge many different rates for the same journey. Also, airlines hike their prices during the school holiday season on the same route. Selling train and bus tickets more cheaply to children or the elderly and setting different prices for products in different export markets. Restaurants and cinemas throughout the world face their quietest trading day of the week on a Tuesday so that is why many of these businesses offer discounted prices to diners and cinema-goers on Tuesdays. Cable companies often offer discounts to customers who bundle their television, internet, and phone services. Hotels often charge different prices for rooms depending on the time of year, the day of the week, and the length of stay.
✅ Advantages of price discrimination:
Price discrimination can be a profitable strategy for firms, as it allows them to extract more revenue from their customers because firms are likely to raise prices during peak periods as there is increased demand. Customers are willing to pay higher prices and are less responsive to price variations; hence, sensitivity of demand to changes in price during peak periods is lower.
❌ Disadvantages of price discrimination:
It can also be controversial, as it can lead to some customers being charged more than others for the same product or service. Also, all three conditions must be met for successful price discrimination: the business has some degree of market power to set prices, different segments of the markets must have customers who have different degrees of willingness to pay and markets are kept separate to prevent resale such a child cannot sell his or her theater or train ticket to an adult.
3. Dynamic pricing
Dynamic pricing involves selling products at a price that changes according to the level of demand and the customer’s ability to pay. Businesses set prices based on real-time market conditions. This means that prices can change frequently, often multiple times a day.
When is dynamic pricing used?
Dynamic pricing is becoming increasingly common in a wide range of industries, including retail, travel, and hospitality. Constantly changing prices when selling goods to different customers is especially popular online through E-Commerce which is a hot spot for dynamic pricing models. It is because customers can be separated by and communicated with over the Internet as they cannot tell what other buyers are paying. That is why businesses can vary the price according to demand patterns or knowledge that they have about a particular consumer and their ability to pay.
Airlines often use dynamic pricing to set ticket prices. The price of a ticket can vary depending on the time of purchase, the day of the week, and the time of travel. For example, a ticket purchased on a Friday night is likely to be more expensive than a ticket purchased on a Tuesday morning. Hotels often use dynamic pricing to set room rates. The rate for a room can vary depending on the time of year, the day of the week, and the length of stay. For example, a room booked on a weekend is likely to be more expensive than a room booked on a weekday. Retailers often use dynamic pricing to set prices for products. The price of a product can vary depending on the time of day, the day of the week, and the popularity of the product. For example, a product that is in high demand is likely to be priced higher than a product that is not in high demand. Streaming services such as Netflix often use dynamic pricing to set subscription prices. The price of a subscription can vary depending on the features that are included in the subscription. For example, a subscription that includes all of the streaming service's content is likely to be more expensive than a subscription that only includes a limited selection of content.
✅ Advantages of dynamic pricing:
Dynamic pricing can help businesses to increase profits by charging more for products and services when demand is high. Also, dynamic pricing can help businesses to improve customer satisfaction by offering discounts to customers who purchase during off-peak hours or who are willing to purchase less popular products or services. Additionally, dynamic pricing can help businesses to increase sales by making it more likely that customers will purchase products or services when they are available at a lower price.
❌ Disadvantages of dynamic pricing:
Dynamic pricing can be a complex and challenging strategy to implement. Businesses need to have a good understanding of their customers, their competitors, and the market in order to use dynamic pricing effectively. Businesses need to ensure that they comply with all applicable laws and regulations when using dynamic pricing. For example, some countries have laws that prohibit businesses from charging different prices to different customers for the same product or service. Some customers may be unhappy with dynamic pricing, especially if they feel that they are being charged more than they should be. Businesses need to be prepared to deal with customer backlash, if they decide to use dynamic pricing.
