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.
Perception-based pricing
Three different approaches to setting prices based only on customer perception can be found in this category depending on the marketing objectives of the business. The pricing strategies include psychological pricing, promotional pricing and loss leader.
1. Psychological pricing
Psychological pricing uses psychological factors to influence customer behavior. It is based on the idea that people make decisions using emotions and perceptions, rather than rational thinking.
When is psychological pricing used?
Psychological pricing involves producers and retailers to set prices just below key price levels such as USD$999 instead of USD$1,000 or and USD$1.99 instead of USD$2.00 to make the price appear much lower than it really is. By rounding down numbers, the final prices when seen by customers will actually perceived as being lower. In fact, the prices of USD$9.99 or USD$14.99 seem lower than USD$10 or USD$15 respectively. Aren’t they? It is important to use it carefully and to make sure that the prices are not set too high. It is because customers may not be easily fooled by the psychological pricing and may simply choose not to buy the product in the end. Businesses should also avoid setting prices that consumers consider to be inappropriate for the quality of the product.
Wholesalers such as Costco might sell a product at USD$4.99 for one or USD$14.97 for three. While the price is exactly the same per product, it can be deceiving when purchasing many products packaged altogether.
✅ Advantages of psychological pricing:
Psychological pricing can work for almost any product, from groceries sold in a supermarket or clothes sold in retails stores to expensive cars and residential properties that is why it is so widely used. It also works well when selling the same product in larger quantities because customers psychologically feel that they are getting a better price. When customers feel like they are getting a good deal, they may buy more products which will lead to increased sales. Psychological pricing can also help to generate more attention for products. When the price is set in a way that is perceived as being lower, customers are more likely to notice the product. Psychological pricing can also be used to differentiate products from one another when prices are set slightly lower than competitors’ products.
❌ Disadvantages of psychological pricing:
Psychological pricing may be difficult to implement effectively because the prices may not be set in a way that they are actually perceived as being lower. Some customers may even see psychological pricing as a way for businesses to manipulate them, or trick them, into buying products. A very low perceived price for certain products perceived as luxuries such as cosmetics or jewelry will create the status and exclusive image that the firm is trying to portray. Therefore, potential consumers may be put off by the fact that the quality may not be as high as they originally believed. On another hand, the price can be still seen so high that it exceeds consumer perceptions of the quality and image of the product. Therefore, sales will be damaged as a result. Additionally, psychological pricing will not work well for some businesses such as TAXI firms or food trucks where whole numbers are more suitable to give back correct change. Finally, when too many businesses in the same industry use psychological pricing, it can lead to price wars, which can drive down prices and hurt profitability of businesses in the long run.
2. Promotional pricing
Promotional pricing involves temporarily reducing the price of a product in the interest of quickly driving sales. Promotion deals and discounts are often supported by intensive advertising campaigns.
When is promotional pricing used?
Features of promotional pricing include the normal price is discounted, sometimes even below the cost of producing a product. There are several methods of promotional pricing. They are used for different reasons but all involve pricing the product as low as possible for a limited period to get consumers to buy.
- Discounts: This is the most common type of promotional pricing. Discounts are typically offered as a percentage off the regular price. Discounting the normal price is also used to create product awareness and build up customer loyalty.
- Free shipping: Free shipping is another common type of promotional pricing. This can be a very effective way to attract customers, especially those who are price-conscious.
- Bundle deals: Bundle deals are a type of promotional pricing where multiple products are sold together at a discounted price. This can be a very effective way to increase sales and clear out inventory.
- Buy One Get One Free (BOGOF): Buy one, get one free is a popular type of promotional pricing. This can be a very effective way to attract customers and increase sales. It is used to create product awareness and develop customer and brand loyalty. Consumers are offered more of the product for less than the full price buy-one-get-one-free.
Black Friday is a day after Thanksgiving when many retailers offer deep discounts on a wide variety of products. This is a great opportunity to find deals on electronics, appliances, clothing, and more. Cyber Monday is the Monday after Thanksgiving and is a day when many retailers offer online-only discounts. This is a great opportunity to find deals on electronics, appliances, clothing, and more Back-to-school sales are a great time to find deals on school supplies, clothes, and electronics. Many retailers offer discounts of 25% or more during this time. Retailers often offer discounts during the holidays, such as Christmas, Hanukkah, and Kwanzaa. This is a great time to find deals on gifts for friends and family. Retailers also offer discounts during certain seasons, such as summer, fall, and winter. This is a great time to find deals on seasonal items, such as swimsuits, sweaters, and snow gear.
✅ Advantages of promotional pricing:
Promotional pricing can be a very effective way to increase sales, especially for new products or products that are in the early stages of the product life cycle. This strategy can be used to clear out excess inventory to sell off unwanted inventory before it becomes out-of-date, such as products that are nearing the end of their product life cycle or products that have been discontinued. Promotional pricing can be used to attract new customers, especially those who are price-conscious. It can be used to build customer loyalty by rewarding customers for their continued patronage.
❌ Disadvantages of promotional pricing:
If promotional pricing is used too often or for too long, it can erode profit margins. As revenue on each item is lower, so profits may also be lower. It can lead to customer expectations: If customers become accustomed to seeing promotional pricing, they may expect it all the time. This can make it difficult to raise prices in the future. Promotional pricing can be difficult to manage, especially if there are multiple products or services involved. It is important to track sales and inventory carefully to make sure that promotional pricing is not being used too often or for too long.
3. Loss leader
Loss leader involves setting the price of a small number of products below the cost to attract customers into the shop in the hope that they will buy other products sold at their normal profitable prices.
When is loss leader used?
Loss leader is a common tactic most often used by retailers such as grocery stores and supermarkets who set very low prices for few products only in the expectation that consumers will buy other goods too. These prices, which are well below the normal price, or sometimes even at a loss below Variable Costs (VC), attract customers into the store who will also buy other products at their normal, profitable prices. It is unlikely that customers will only purchase the loss leader. Once they are in the store, they are more likely to buy other products that the store makes a profit on. The firms hope that the profits earned by these other goods will exceed the loss made on the low-priced ones.
Another purpose of loss leaders is to encourage the purchase of closely related complementary goods such as cheap games console and expensive games, or cheap razors and expensive razor blades.
Walmart and Kroger often use this strategy by heavily marketing the loss leader such as toilet tissue, milk, eggs or soft drinks to get customers in the door. In the gaming industry, games console producers such as Sony, Nintendo and Microsoft often sell their hardware at a very low price or even at a loss to attract buyers. The aim is to recoup the loss by sales of complementary goods such as games, gaming software and accessories which are sold for very high prices.
✅ Advantages of loss leader:
Loss leader is a common marketing strategy used by retailers to attract customers into the store and increase sales as they do not only buy the loss leader but also other goods at their normal price. It can also be used to encourage brand switching which in the long term can make up for losses incurred whilst the product was priced at a loss. When customers see that a store is willing to sell products at a loss in order to attract them, they are more likely to shop at that store in the future. Therefore, loss leaders can also help to build customer loyalty.
❌ Disadvantages of loss leader:
They can be an effective way to get people into a store, but they can also be risky. If a store sells too many loss leaders, it can lose money. If a store sells too many loss leaders, it can lose money. This is because the store is selling products at a price below their cost. When a store starts selling loss leaders, it can attract competitors to do the same. This can lead to a price war, which can hurt all of the stores involved. Loss leaders can be difficult to manage. The store needs to make sure that it is not selling too many loss leaders, and it needs to make sure that it is not losing too much money on them.
