Not all major pricing strategies will always be appropriate for all market situations. That is why it is very important for a business to know when to use each pricing strategy.
Wide range of pricing strategies available
Pricing strategies are useful to break into a new market, increase the market share, increase the profits, ensure that a profit is earned to name just a few benefits.
There are 15 main pricing strategies grouped into five different categories:
1. Cost-based methods:
- Mark-up pricing
- Target pricing
- Full-cost pricing
- Contribution-cost pricing
2. Competition-based methods:
- Competitive pricing
- Price leadership
- Predatory pricing (destroyed pricing)
3. Market-based methods:
- Perceived-value pricing
- Price discrimination
- Dynamic pricing
4. Perception-based methods:
- Psychological pricing
- Promotional pricing
- Loss leader
5. Introducing-new-product methods:
- Penetration pricing
- Price skimming
Choosing the most appropriate pricing strategy
While there are plenty of different pricing methods, how do business managers decide on the best pricing methods for their products? Typically, a pricing strategy must consider a product’s costs, how much customers are willing to pay, profit targets, competition, etc.
Marketing managers will look at the context of the situation before deciding which pricing strategy is the most appropriate for their business. To start with, businesses should consider the following factors when setting the price for their products:
- Marketing objectives. Marketing objectives will determine the choice of pricing strategy at large. Different pricing strategies will be chosen depending whether the business is trying to increase sales, increase market share, maximize profit or build brand loyalty. Usually, different pricing strategies will be chosen to meet a different business objective.
- New or existing product. Is the business trying to sell new product or an existing product? When a product is new to the market, it will most likely use a different pricing strategy (either penetration pricing or price skimming) than products in the maturity stage of Product Life Cycle (PLC). Older products will try to maintain sales and customer loyalty, so pricing strategies will be different for more mature products. When a product enters into its decline stage, its price might be heavily decreased just to sell off the remaining inventory.
- Unique Selling Point (USP). The uniqueness of the product unique will allow the firm to choose pricing strategies that allow the firm to sell it charging a very high price. This is because the product has no close substitutes. However, once other similar products are launched to the market, the competition will intensify and this will cause prices to fall. Hence, the pricing strategy will have to be changed into a new one.
- Profitability. The costs of making and supplying the product to the market will also determine how the product is priced. Clearly, the price has to be greater than the cost of producing and selling the product, so that the company can earn its profit. That is why cost-based pricing strategies are a popular choice among manufacturers of goods.
- Competition. Marketing managers need to ask themselves whether there is a lot of competition in the market.Very competitive markets will force businesses to charge very similar prices for their products. This is because consumers will most likely buy the least expensive one, if there is little difference between various products. On another hand, when the product is very different from other products, the price can be heavily distinguished from other products.
- Branding. Does the business have a well-known brand image? Companies with strong and recognizable brands are able to charge a higher price for their products despite the availability of many similar products on the market. Consumers tend to trust the brand believing that the products are of a better quality than unknown alternatives. The brand acts as a promise to customers. Brand image helps to differentiate the product, so that the price can be different from other products’ on the market.
Other factors that can influence the choice of a pricing strategy include production costs, consumer perception, market conditions and market structure, characteristics of the market segment, legal constraints set by the government, etc.
In short, remember that there are several different pricing methods that can be used to sell a product. These are broadly categorized into: cost-based methods, competition-based methods, market-based methods, perception-based methods and pricing strategies for introducing new products.
Therefore, choosing the best pricing strategy for a give situation may not be that easy.
