PricingStrategies
PricingModels
Pricing isthe only element of theMarketing Mix whichgenerates revenue, the others are costs.
Establishinga price involves assessing what a company can expect to receive inexchange for its products.
Astarting point in the process is setting pricing objectives inaccordance with the overall mission of the company. A company’sobjectives may be as basic as ‘survival’, which means thepricing approach will be very short term and reactive. Otherapproaches may focus onprofitmaximization, returnon investment,orcashflow.In a stable market when the competitive threat is weak, there may beno incentive to manage prices.
Productquality objectives can be reflected in price as there is afundamental psychological association with the value ofproducts. This results in premiumpricingwithhigh prices for high quality brands or luxury products. At the otherend of the scale lieseconomypricing,when low prices are supported by low organizational costs withlower subsequent quality. The issue with discussing prices andproduct quality is that their perception is usually verysubjective and depends on every individual’s background.
Twoother approaches arepriceskimming and penetrationpricing.
Withapenetrationpricing approach,companies set lower prices compared to those of competitors in orderto attract new customers and gain market share. They may increaseprices at a later stage once the objectives have been achieved,e.g. sufficient market share.Priceskimming iswhen companies offer theirservice or product at the highest price a customer will pay. Thisoften happens with new products (seeProduct Life Cycle)but the price usually drops in time as new competitors enter themarket and substitute products begin to appear. Producers willoften switch to a penetration pricing strategy atthis point. A price skimming strategy implies that the producer willset a high price for a new and usually high quality or uniquelydifferentiated product which has innovators and early adopters astarget customers.
Prestigepricing ismaintaining a high price for a product throughout its entire life,as opposed to the short term high price of a skimming strategy.In this case, prestige is associated with value and it representsan intrinsic purchasing motivation.
Strategiessuch as pre-emptivepricing or extinctionprices involvesetting low prices to eliminate competition and discouragepotential new entrants. Some companies can set extinction priceseven lower than production costs for a short period, but oncethe competition is extinguished and they become leader in themarket, prices can be increased to a profitable level, turning intoa long term benefit.
Afinal strategy that we are introduced to is the so-called“Goldilocks”approach, which is the practice of providing both a premiumproduct as well as a lower priced option alongside the averageregular priced product in order to make it more appealing. Itis priced not too high and not too low – it’s just right,hence the name. This technique relies on the psychologicalpredisposition of individuals to choose elements betweenextremes, so marketers can present the product which generates thehighest profit as being centered between these two extremes.
