What are some examples of pricing strategies

Definition and examples of pricing strategies

What is a pricing strategy? Price is the value attached to a product or service and is the result of a complex series of calculations, research, and understanding and the ability to take risks. A pricing strategy takes into account, among other things, segments, solvency, market conditions, competitor actions, trading margins and input costs. It is aimed at the defined customers and against the competitors.

There are different pricing strategies

PremiumPricing: The high price is used as a defining criterion. Such pricing strategies work in segments and industries where the company has a strong competitive advantage. Example: Porche in cars and Gillette in blades.

penetrationPricing: The price is set artificially low in order to gain market share quickly. This happens when a new product is introduced. It is assumed that prices will be increased once the eligibility period is over and the market share targets have been achieved. Example: mobile phone tariffs in India; Housing loans etc.

Economy pricing: No frills price. The margins are very thin; the overheads such as marketing and advertising costs are very low. Aims at the mass market and high market shares. Example: Friendly Laundry Detergents; Nirma; local tea producers.

Skimming strategy (also pricing strategy skimming): The price for a product is set high until the competition allows it, after which the prices can be reduced. The idea is to win back as much money as possible before the product or segment attracts more competitors, which lower the profit for everyone involved. Example: The earliest prices for cell phones, VCRs and other electronic devices that a few players decided on attracted lower cost Asian suppliers.

These are the four basic strategies that the industry uses in different ways. Pricing strategies can also be used actively, as an aggressive pricing strategy.

Deciding how much to charge for your product takes more than just calculating your cost and adding a markup.

"How much the customer is willing to pay for the product has very little to do with the cost and has a lot to do with how much they value the product or service they are buying," says Eric Dolansky. Associate Professor of Marketing at Brock University in St. Catharines, Ont.

Finding out how much the customer appreciates your product or service and structuring the pricing accordingly is called value-based pricing. A technique Dolansky believes more entrepreneurs should use.

5 common pricing strategies

The pricing of a product is one of the most important aspects of your marketing strategy. In general, the pricing strategies include the following five strategies.

  • Cost-plus pricing - just calculate your costs and add a surcharge
  • CompetitivePricing - Set a price based on the fees charged by the competition
  • Value-orientedPricing - Setting a price based on how much the customer believes that what you are selling is valuable.
  • Price skimming - Setting a high price and lowering it as the market develops
  • penetrationPricing - Establishing a low price for entering a competitive market and increasing it later.

Deciding how much to charge for your product takes more than just calculating your cost and adding a markup.

"How much the customer is willing to pay for the product has very little to do with the cost and has a lot to do with how much they value the product or service they are buying," says Eric Dolansky. Associate Professor of Marketing at Brock University in St. Catharines, Ont.

Finding out how much the customer appreciates your product or service and structuring the pricing accordingly is called value-based pricing. A technique Dolansky believes more entrepreneurs should use.

Price elasticity of demand

The price elasticity of demand is used to determine how a change in price affects consumer demand. If consumers keep buying a product despite a price increase (e.g. cigarettes and fuel), that product is considered to be inelastic. On the other hand, elastic products suffer from price fluctuations (such as cable TV and movie tickets).

You can calculate the price elasticity using the formula:% change in quantity /% change in price = price elasticity of demand.

The concept of price elasticity helps you understand whether your product or service is sensitive to price fluctuations. Ideally, you want your product to be inelastic - so that demand stays stable when prices fluctuate.

Competitive pricing strategy

Now let's cover some common pricing strategies. Competitive pricing is also known as competitive pricing or competitor-based pricing. This pricing strategy focuses on the existing market price (or current price) for a company's product or service; it does not take into account the cost of the product or consumer demand.

Instead, a competitive pricing strategy uses competitors' prices as a benchmark. Companies competing in a highly saturated space can choose this strategy as a small difference in price can be the deciding factor for customers.

With competition-based pricing, you can offer your products slightly below, equal to or slightly above the price of your competition. For example, if you sell marketing automation software and your competition's prices are between $ 19.99 per month and $ 39.99 per month, you would pick a price between these two numbers.

Whatever price you choose, competitive pricing is a way to stay on top of the competition and keep your pricing dynamic.

Cost-plus-price strategy

A cost-plus pricing strategy focuses exclusively on the costs of manufacturing your product or service or your COGS. It is also known as the markup because companies using this strategy “markup” their products based on the profit they want to make.

To use the cost-plus method, add a fixed percentage to the cost of your products to produce. For example, let's say you sold shoes. The shoes cost $ 25 to make, and you want to make $ 25 in profit on every sale. They would set a price of $ 50 which is a 100% premium.

Cost-plus pricing is typically used by retailers who sell physical products. This strategy is not the best for service-based or SaaS businesses as their products typically offer far greater value than the cost of making them.

Dynamic pricing strategy

Dynamic pricing is also known as "Dynamic Pricing", "Demand Pricing" or "Time Based Pricing". It is a flexible pricing strategy where prices fluctuate based on the market and customer demand.

Hotels, airlines, venues, and utilities take advantage of dynamic pricing by applying algorithms that take into account competitor pricing, demand, and other factors. These algorithms enable companies to modify prices so that they actually pay when the customer is ready to pay, and when they are ready to make a purchase.