Pricing is one of the parts of the marketing mix or 4 Ps, the other three being Product, Place and Promotion and so is as important, if not more, than the other 3 Ps. Pricing depends upon many factors such as the cost of the raw material and hence the cost of production, the competitive market scenario, the demand for the product, the overall business strategy of the company etc. The company will always choose a price point that gives it the maximum sales and profits. But it is ultimately the market forces that dictate the price adjustments. Let us now discuss the various pricing strategies that companies employ to sell their products in order to gain the desired sales and profit margins.
1. Penetration Pricing
In this form of pricing, the company, in order to launch a high quality product successfully and gain a significant market share, keeps the price much lower than expected as compared to its competitors. This creates awareness in the market about the new product and also garners a significant market share for the product. So, despite the strong competitors in the market, the product makes a place for itself.It also builds a loyal customer base for itself in the market from the very beginning.
This sort of pricing is done for a limited time period during which the product gains a strong hold in the markets chosen.
2. Premium Pricing
Here the strategy is based upon the fact that a certain segment of customers believe that “expensive is high quality”. Thus a premium price is placed on the product. But the product should be high in quality, should be able to justify its price and should have something unique which its competitors do not have. It is a good strategy for companies who are entering the market with a new product and want to maximize profit margins in a short time, the customer base is limited though. Premium pricing can be charged for products and services such as precious jewelry and gems, star cruises, luxurious hotel rooms, luxurious cars, business air travel, etc. The higher the price, the more will be the value of the product among that segment of the audience.
3.Introductory Pricing/Skimming Pricing
When some quality products, specially hi-tech ones first enter the market, they are highly priced but gradually, the prices fall considerably. A skimming price strategy is when a company sets a high initial price for a product and is designed to skim the top of the market in order to gain maximum revenue and profits before competitors begin offering a similar product. Mobile phones are the best example for this type of pricing strategy.
Psychological pricing strategy relates more to the emotions and less to human logic. For example a company will price its product at Rs 9.95 instead of Rs 10 because RS.9.95 is psychologically less in the minds of consumers than Rs.10.The Rs. 9.95 price of the product makes the customer feel that the product is not very expensive.
5. Economy pricing or No-Frills Low Pricing
Economy pricing or no frills pricing is basically a budget pricing where the company doesn’t spend much money on the promotion of the products and keeps the prices to a bare minimum in order to target the price sensitive segment of the market.
6. Promotional Pricing or Loss Leader Pricing
The loss leader pricing approach is to get new customers even if you make a loss from the initial sale. But along with the loss leader product, these companies can offer their other products at normal prices. Thus the company can attract customers into the stores and also make an overall profit because customers are very likely to purchase other products along with the loss leader product.
7.Competition Based Pricing Or Rock-Bottom Pricing
In this sort of pricing, the motive is to keep your prices lower than what your biggest competitors are charging. We can see that in the case of internet marketing, companies like Amazon, Flipkart, Snapdeal, Shop Clues etc. have the same products mainly and the only deciding factor is the price.Thus the companies have to work on thin profit margins and economies of scale..
8. Product Line Pricing
Product line pricing or price bundling by a company is when it does the pricing of its single product or service vis-a-vis pricing a range of its products and services.The company thus sells their single product at a normal or high price but starts reducing the price as the customers also buy the other products from its range of products. For example if you buy Clean Mate toilet cleaner, you will be charged its normal price but if you buy the combo pack comprising Clean Mate Toilet Cleaner, Floor cleaner and Glass Cleaner, you will be charged much less than the sum total of the individual prices of the three products.
9. Captive Product Pricing
A Captive product is one that complements the main product without which the main product cannot be used. For example, a plastic razor has no use without the blades.If the company is manufacturing a plastic razor, it will have to manufacture the blades too because none of the other companies’ blades will fit into the particular plastic razor. Thus, the customer has no alternative but to buy the complementary products from the same company.
It is another very common strategy where the promotion offers the companies give include, discount offers, gifts, gift cards, credit points or vouchers etc. to promote the products.
11. Geographical Location Pricing
While doing the pricing, the companies need to be very aware of the shipping costs to various destinations, tax difference between the countries( if the product is exported), and the fluctuations in the conversion rates of the currencies. In order to keep the selling price uniform across the country, the landed cost of the product to every destination should be the same. In order to achieve this, the company can tie up with a logistics company and settle the overall average freight, taking the average monthly volumes of the product shipped to different destinations under consideration or else its profit margins will vary from one destination to another. If the buyer is bearing the freight, he would also be benefited because of the freight settlement with the logistics company. In case, the company has manufacturing facilities at multiple places, the task becomes simpler.
12. Value Pricing
When a company is wary of factors such as competition or recession affecting their sales, it reduces its price. For example, the job services provider, naukri.com has a resume services package or value packs for job seekers viz: Profile Highlighter, Featured Value and Job Search Value. You can save 10% to 15% on these resume services packages. These value packs give various benefits to the job seekers, a few being, making your profile visible to 2.5 lac + recruiters, grabbing recruiters’ attention with a visually appealing CV, Profile Enhancement, searching and following recruiters on Naukri etc.
13. Going-Rate Pricing
This happens when customers pay the same price regardless of where or from whom they buy the product. Going-Rate pricing is used on commodity products such as gold, silver, copper, aluminium, wheat, coffee, cocoa,sugar etc. People tend to see these commodities as being similar in all the markets. Hence, there is a going rate for the product that all the sellers get.
14. Sealed Bid Pricing
It is an offer to carry out work, supply goods, or buy land, shares, or other assets at a stated fixed price that is not disclosed and kept in a sealed tender. The sealed tenders from various sellers or buyers are later opened on a decided date and reviewed in their presence. The seller with the lowest bid or the buyer with the highest bid gets the contract.