Pricing strategies are methods through which companies price products and services in relation to their cost structures, positioning strategy, market conditions, influences and competition. The objective is – maximization of profits while minimizing loss of sales opportunities. The best pricing strategy satisfies both criteria.
There are 4 basic pricing strategies :
This strategy aims at setting the price somewhere at the bottom of the pricing ladder, sometimes even lower. Companies use this approach when they are new to the market, wish to lure customers away from competition or gain market share quickly. Some companies even run losses on products deliberately but recoup those losses through the customer’s operating cost of those products.
With time, awareness and growth in adoption, businesses that employ this strategy tend to revise prices upwards to more realistic and sustainable levels.
Economy pricing dictates that the business controls costs prudently. It involves a lean setup and leverages economies of scale. This allows the business to offer prices consistently lower than what competition can sustain in the long-run. The implication being that competition isn’t pursing a similar strategy. This approach is designed to attract price conscious customers and is usually practiced in a high-volume no-frills game.
Premium pricing is setting a price higher than competition. This approach is apt for a high-end products, unique offerings or products at an early stage in the life-cycle. Premium pricing requires justification for the higher price tag. This may be in terms of quality, features, design, packaging, etc. It also means that all supporting endeavors must reflect the product’s premium position like advertising, store-fronts, brand ambassadors, website designs and so on.
Market skimming is a practice used to cover the entire spectrum of pricing. Starting high at the introductory phase, the business then lowers the price in response to the product life-cycle, market conditions or new pipeline products. It is a good tactic to use when the product is sure to make waves with innovators and early adopters.
Gradually, the price falls to meet the most price conscious customers, late-adopters and laggards, remaining stagnant until it is phased out. This approach allows the company to capitalize on high profits at the beginning of the lifecycle before settling from smaller profits later on.
Some products are affected by demand and supply conditions. Unfortunately, setting a firm price is not possible in the long-run. The price volatility of these categories are often well-known and customers tend to accept such variances when they occur.
There are other supporting pricing strategies that work in tandem with the pricing strategies discussed above. For instance, psychology pricing, tiered pricing and bundle pricing. No matter which pricing strategy you choose to pursue, it is vital that the strategy reaps maximum profit while ensuring sales opportunities are not lost.