Pricing strategies

Pricing in relation to the marketing mix may be regarded from two opposed views, namely the perspective of the entrepreneur who produces the product and the opposing perspective of the customers who eventually purchase the goods. Normally, producers charge greater costs for their products in order to make a bigger profit, but customers want cheaper prices for their items.

Price refers to the amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

Pricing is defined as those activities involved in the determination of the price at which products that will be offered for sale considering the various objectives of the firm.

PRICING OBJECTIVES: Before setting prices, the firm’s pricing objectives must first be determined. These are the following:

PRICING APPROACHES

Prices of products and services may be based on any of the various pricing approaches:

I. Cost Based Approach. This refers to the setting of prices on the basis of costs. Under this approach the total costs are calculated and a margin of profit is added. There are two types of pricing under the cost-based approach. They are the following:
a) Cost plus Pricing. This method calls for adding a percentage of cost on top of the total cost. The added percentage constitutes the profit margin, while total costs represent the direct costs and the overhead costs.

The formula adapted, is as follows:

b) Target Rate of Return Pricing. This approach enables a company to establish the level of profits that it feels will yield a satisfactory return. The procedure will be:

1. To identify what percent is a satisfactory return and

2. To use the standard return in determining whether a particular price and marketing mix combination is feasible.
   
   Buyer Based Approach of pricing deals with consumer perceptions or behavior as bases for determining the selling price of a product or service. This approach is composed of the following methods:
   a) Perceived Value Pricing. This method establishes the price for a product based on the buyer’s perceptions of the value of the product or service. Most works of art, like paintings and sculptures, are sold at prices based on the buyer’s own value analysis. Costs have a little to do with the selling price.
   b) Price-Quality Relationship Pricing. This approach hinges on the observation that consumers associate high price with high quality and low quality with low price.

   III. Competition Based Approach. This refers to the setting of prices based on what prices are being charged by competitors. There are two kinds of pricing under this approach. They are the following:

   1. Going-Rate Pricing. Under this pricing method, the firm adapts a price based on the competitor’s prices. The price adapted may be a little higher or lower that the competitors. Less attention is given to the firm’s own costs and demand.

   2. Sealed Bid Pricing. In sealed bid pricing, the firm sets its price which is thought to be a little lower than the competitor’s. This happens in biddings where competitors outdo each other in winning the bid. As in going-rate pricing, less attention is also given to the firm’s costs and demand.

NEW PRODUCT PRICING STRATEGY

Pricing strategies typically alter as the product passes through its life cycle. The introductory stage is especially demanding. Companies launching a new product and face the challenge of setting prices for the first time. They can decide between two broad strategies which are market-skimming pricing and market-penetration pricing.

Pricing Strategies

Price Skimming

• Setting a high price for a new product before other competitors come into the market

• Maximize profit per unit to achieve quick recovery of development costs

• Best used in introduction or early product stage of product life cycle

• Product is sold to different market segments at different times; top segment is skimmed off first with the highest price

• Disadvantages: cannot last for long as competitors soon launch rival products which put pressure on the price

Penetration Pricing

• Starting with a low price to achieve market share, then raising the price later

• Gain market share quickly, build customer usage and loyalty

• Advantages: new business must attract new customers, product differentiation, attract lower price

• Disadvantages: less revenue

Premium/Prestige Pricing

• High price to enhance/reinforce a product’s high quality/luxury image

• High price is maintained throughout the life of the product

PRICE ADJUSTMENT STRATEGIES

Many companies frequently modify their basic prices to account for distinct consumer differences and changing market conditions. When a firm uses effective pricing tactics, it is possible to get a larger market share.

Discount and Allowance Pricing refers to reducing prices to reward customer responses such as paying early or promoting the product

• Discount - a straight reduction in price on purchases during a stated period of time or of larger quantities.

• Allowance – promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way.

Promotional Pricing is used when sellers temporarily price products below list price and sometimes even below cost to create buying excitement and to increase short-run sales.

Segmented Pricing - selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

• Customer Base Pricing. Different customers pay different prices for the same product or service. For instance, museums and theatres may charge a lower admission for students and senior citizens.

• Product-form Pricing. Different versions of the product are priced differently, although the difference is not due to cost differences

• Location-based Pricing. Marketers consider proximity and the quality of the area in setting prices.

• Time-based Pricing refers to companies that consider a certain time frame in setting price.