Pricing strategies are the backbone of business performance. Products require a definite and inclusive pricing strategy that ensures adequate profits are earned while customer retention remains high. (Learn Marketing, n.d), defines pricing strategies as methods that various companies use to set prices for products they offer for sale in the market. Product pricing strategies normally depend upon various factors including production, labor and advertising costs. A pricing strategy works to ensure that a business entity recovers unit costs plus some marginal profits to make up income. This income will pay for other indirect expenses of the business that cannot be attributed to specific product units.
Pricing strategies for different products vary across the world and from one market to another. Gitmna comments that some products can use one strategy for quite a long period such as one year or more while some will require adjustments in prices every new quarter (123). Competitive products will require competitive pricing strategies. This will ensure market retention across all market segments. Class A products will often require competitive pricing strategies because their demand is influenced even by a small change in prices. Such products contribute a bigger percentage in the consumption thus prices affect buy decisions made by consumers. Other products in class B and C do not require much adjustment and hence can use a single pricing strategy for some time.
Various ways of selling goods and services will affect materially pricing strategies adopted for use by the business. Pricing strategies will require adequate market analysis of the business environment to establish exact prices. This will ensure that prices so generated will attract sustainable sales revenue for different products. These strategies should ensure that market responsive product prices are maintained throughout a particular period. (Maravilla 20) notes that pricing strategies are more than numbers; it involves a play of perception aimed at meeting the target demand for a particular product.
Clark highlights that, the choice of a good pricing strategy often relies on the pricing objectives chosen for a given product (32). Product attributes are supposed to be analyzed so as to decide on the type of pricing objective to employ. Many business people ask themselves questions as to how they will choose a pricing objective. Selections of these objectives normally consider financial and business goals in mind. Various elements within the business plan can be useful in making the right pricing strategies and objectives. Pricing strategies heavily rely on pricing objectives chosen for a given period.
Types of Pricing Strategies
Examples of pricing objectives include partial cost recovery, profit margin maximization, profit maximization, revenue maximization, quality leadership, quantity maximization, status quo and survival. Any of these objectives will enable a business entity to set different prices for its products. Different strategies will be required at different seasons of a fiscal year so that changing market conditions and product life cycles do not affect product sales in any respect. Several types of pricing strategies exist; they include competitive pricing, penetration pricing, product line pricing, skim pricing, product bundle pricing, premium pricing, optional product pricing, multiple pricing, loss leader and finally good, better, best pricing.
Els Gijsbrechts comments that competitive pricing involves setting prices for products based on the competitor’s prices on the same product in the market (22). This strategy is good when products are extremely similar to extent where the customer cannot differentiate from one company to another. The only way to get products differentiated is by setting competitive prices. This will make products stand out from the rest and allow consumers to buy more of them thinking that they have better taste compared to others in the shelf. In addition, this strategy also allows businesses to maintain sustainable profits by avoiding price wars that are prevalent in competitive markets.
Penetration pricing is one brilliant strategy of entering into a new market with an attempt to attract and retain consumers. It also attempts to grow and expand market shares for a product. Penetration prices normally do not have profit maximization for beginning periods, but after some objectives have been met then prices can be adjusted to earn better profits from the same market. Revenue maximization and quantity maximization go well with this pricing strategy.
Product Line Pricing
Product line pricing is similar to multiple pricing strategies. It is used when there is a range of products that complement each other and will require packaging together in order to increase their value. Consumers will perceive the actual price charged as low because they are buying more than one product at the same price. However, customers are not particularly keen on quantities packaged, but are only after the ingredients. This strategy works well with quality leadership and profit maximization objectives.
Skim pricing calls for the highest prices for products that a company is selling. As more competitors enter the market, these high prices are lowered to retain more customers. This strategy is commonly used for new products that are in short supply, and have a high demand. When the company needs to maximize profits, revenues and profit margins, then skim pricing is the best for the job. (Roth 7) notes that customers must buy new products because there are no substitutes in the market.
Product Bundle Pricing
Product bundle pricing is normally used when a business entity wants to group various items together for sale. This strategy is good for overstock, complementary and older products in the store. This strategy ensures that consumers purchase the product they need together with another one they less likely need just for a few additional money. Additional items can be bought by customers easily, and by this way, demand is created and maintained at exceptionally low costs. Businesses can get rid of overstock items at the end of fiscal years.
Premium pricing is employed when businesses are dealing in unique products that are of high quality and when small amounts are expected to be sold. Consumers of these products normally view such products as luxuries that give them the levels of comfort they deserve. They are not sensitive to the price charged. This strategy can enable a dealer to recoup high profits by selling few quantities of products. Optional product pricing is best used when customers can be assured that they will get exactly the same features they want from a product. Some consumers can even pay more for not delaying their delivery of products. This can be an excellent strategy for those custom operators who sell by way of orders.
Multiple pricing allows discounts based on the quantity of goods purchased by consumers. Prices for purchases of different products are displayed vividly so that customers can make instant choices. Sales and profits can be maximized in this manner because consumers normally end up buying those that have more discounts on them. Loss leader is one way of selling products at extremely low prices that competitors can never imagine. This is one way of luring customers to purchase more products now and in the future. This strategy is good when a business entity is attempting to pass on some attributes to the consumers so that they will come back for more eventually. Partial cost recovery pricing objectives work well with this type of strategy.
Good, Better, Best Pricing
Finally, good, better and best pricing is one crucial strategy that charges more prices for those products that receive more attention in the market. The same product can be packaged in different levels so that varying prices are set. This will ensure that consumers are able to afford varying quantities and hence attracting more sales for better profits. This strategy is good when a business needs to maximize revenue and quantity sales.
Kinds of Sales Perceptions
The Perception Different Prices
Perception plays a crucial role in determining the right strategies to be adopted by any business. Customers will often react differently to changes in prices whether it is an increase or a decrease. Good approaches to pricing strategies are needed so that favorable perception is developed and maintained by potential and existing consumers of a product. It is wise to look into various roles that perception play after adopting different prices.
The Perception of Value
Retailers enjoy the perception of cost savings when they ambiguously use prices ending with “.99” because consumers end up choosing them. Customers look at such priced products to be favorable as they include some cost savings. In some instances, consumers could be buying more of those products with prices ending with ambiguous numbers. This will enable them to save more and use it on other products in the market.
Internet marketers and some retailers employ perception of value to sell more and get massive revenues. Perception of value allows sellers to bundle many products and give away some for free only if a customer buys the bundle. Since everybody likes freebies bundled products with some free gifts will certainly make the consumer to buy products thinking they have paid less than they have bought. Offers such as “buy 4 and get 1 free” are one example of perception of value. This is one powerful pricing strategy which gets things done at the right time. Sales will be made on time because a bonus environment is created.
The Perception of Discounts
Another method to consider when preparing pricing strategies is the perception of discounts. Discounts ranging between 5% and 75% off the actual prices of the product will surely attract reliable and loyal consumers for a product. Bigger discounts often mean better sales to be made because that will mean greater reduction in prices. Consumers just love to buy products at the lowest prices possible. However, this pricing strategy requires adequate communication for it to bring good results. Such discounts normally come in different seasons of the year, and they should be brought to the market at the right time. In times when personal disposable incomes are high people feel like spending and so such discounts should come in to give them a better perception to buy more of a given product.
The Perception of Unbundling
Pricing strategies can also be affected significantly by another psychological factor; the perception of unbundling. This perception works well by inducing the customers to think that prices have been broken down to affordable levels to them. The best example is life insurance policies that are charged at exceptionally low rates such $5 dollars a day. To many consumers such a price is not difficult to pay because life cover starts after paying the first premium. Marketers have found out that even costly ventures can be made easy by unbundling up the prices just to suit daily earnings of the households.
Suttle notes that, other common systems that enjoy this perception of unbundling prices are hire purchase payments for goods (34). Highly costly products are sold on hire purchase terms that enable consumers to pay up their accounts in installments. For consumers, it is one way of being in possession of a good and using it rather than waiting to accumulate enough cash to buy. However, marketers perceive them as good sales made because at the end of the day under installment basis higher profits are earned.
Finally, pricing strategies are affected by various factors, the main ones being psychological factors and pricing objectives of the business. (Hello Trade Team, 2012), comments that business objectives must be dynamic so as to make pricing objectives immensely appealing because product survival in the market should be ensured as much possible.