While creating new and innovative products that are appealing to customers is surely a difficult, time-consuming, and detailed process, deciding the price at which such a product or service is to be sold at the market is equally important. This is particularly true because when the price of a product or service is set too low, the business stands to lose out on the revenue earning potential and if it is priced too high, customers might just not be interested. Therefore, it is very important for a company to understand what is pricing strategy and implement one that is the most efficient for the product being sold.
1. What is Pricing Strategy?
Pricing strategies refer to specific pricing methods or models that help a business come up with a price for a particular product or service. These pricing policies and strategies can help you maximize your revenue and profits while at the same time ensuring that consumer demand in the market is not affected. There are different types of pricing models or pricing strategies that a company or business may opt for in order to ensure that they do not lose out on revenue or price the product or service so high that it becomes unaffordable to their potential customer base.
Pricing strategies in marketing are becoming increasingly important nowadays owing to the sheer amount of competition in almost every sector of the economy. Read on to learn more about some of the most popular types of pricing strategies today.
2. Types of Pricing Strategies
- Competition-based Pricing Strategy: Very popular among new product pricing strategies, this method encourages businesses to come up with a price for a new product or service based on the current prices for similar products. The prices of the competitors’ products are set as the benchmark and costs of production and profit margins are not given great importance.
- Cost-plus Pricing Strategy: Of all the different pricing strategies, this is one of the most popular. Businesses that opt for this strategy will mark-up their products over and above the cost of production based on how much profit they would like to earn.
- Dynamic Pricing Strategy: When a business opts for a dynamic pricing strategy, it continuously alters and modifies the prices of its goods or services based on various factors such as market demand and competitor pricing. Hotels and airlines are classic examples of this strategy in action.
- Freemium Pricing Strategy: A combination of free and premium pricing strategy, this is one of the most popular online pricing strategies. Businesses offer a limited free version or a free trial of the product or service so that customers can gain a peek into the software or product and then they are required to pay for full and continued access to the features offered.
- High-Low Pricing Strategy: This is a popular retail pricing strategy where products are initially priced at high rates but are then reduced drastically when there is a drop in demand or market relevance. Year-end clearance sales are an example of this strategy in action.
- Hourly Pricing Strategy: One of the most talked-about pricing strategies in economics, individuals such as freelancers use this strategy where they are paid for every hour of work or effort that goes into the service offered. It is considered undesirable by many as they feel that it rewards only labor without considering efficiency.
- Skimming Pricing Strategy: Skimming is the most popular of all the international pricing strategies in the world of technology. Here, the product is launched at the highest possible price and the price is then slowly reduced over time in gradual steps as the product declines in popularity and relevance. Sony’s PlayStation gaming consoles or Apple smartphones are examples of this strategy.
- Penetration Pricing Strategy: Penetration pricing is a disruption strategy wherein a product is launched at a very low price point to disrupt the market and draw customers away from competitors even at a loss. This is then followed by the gradual increase in prices and hoping that customers stick around and display a form of brand loyalty. Netflix is an example as they launched at very low prices and gradually increased them.
- Premium Pricing Strategy: Based on brand awareness and perceived value of the brand, companies that use this strategy price their products at a very high rate since customers perceive it as a luxury product of very high value. There is often a massive disparity between the actual cost of production and the price. A Rolex watch is an example of such a strategy being used.
- Project-based Pricing Strategy: This pricing strategy is also commonly used by freelancers and service-oriented businesses where an overall price is quoted for an entire project requirement instead of the number of hours required to complete it.
- Value-based Pricing Strategy: Companies who use the value-based pricing strategy, keep their prices aligned with customer perception of value, and do not increase it even if it offers economic benefits in the short run. This is a method that if used properly, will greatly enhance customer sentiment and loyalty.
- Bundle Pricing Strategy: Where two or more products or services are sold together in one bundle, instead of separately, the company opts for a bundle pricing strategy where one, often competitive and cheaper price is set for the entire set of services being sold.
- Psychological Pricing Strategy: A psychological pricing strategy is one that aims to capitalize on human psychology to boost sales and revenue. The 9-digit theory where a product priced at $499 is more preferred than one at $500 is a classic example of this pricing strategy.
- Geographic Pricing Strategy: In this strategy, the company looks into various factors such as average income levels, costs of export and distribution, and so on before deciding the prices of the products. The product will therefore be priced differently in different countries or regions.
3. Objectives and Conclusion
Of the various pricing strategy examples discussed above, anyone can be chosen to help you price your product at the best possible rate in order to achieve your objectives. There is no straight-jacket formula to determine the best pricing strategy for you as it depends on a number of factors such as cost of production, novelty, perceived value, competition in the market, and so on but we hope you now have clarity on what pricing strategies really are and how you can leverage them to get the most out of your business.
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