Pricing strategies

Pricing strategies can be grouped into four categories: new-product pricing strategies, product mix pricing strategies, price adjustment strategies, and price reaction strategies (Table 2.4).

These will be discussed below.

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New-Product Pricing Strategies include two strategies:

 Market-skimming pricing is a strategy with high initial prices to “skim” revenue layers from the market. It is applied when a new product is introduced into the market with fine features and high value, and a high price is targeted at the well-off customers (as the example of HD TV sets or the newest smartphone models show).

 Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers and quickly gain a large market share. This pricing strategy is often applied by stores selling mass products, targeted at not only the most affluent, but to the poorer segments of customers.

Table 2.4: Summary of Pricing Strategies New product

Product Mix Pricing strategies are applied for a group of products linked to each other in some ways. There are five ways of such pricing according to the product groups and their relations to each other.

- Product line pricing takes into account the cost differences between products in the product line, customer evaluation of their features, and competitors’ prices.

The product line is a group of products that are closely related because they funtion in a similar manner, are sold to the same customer group, are marketed through the same types of outlets, or fall within a given price range.

- Optional product pricing takes into account optional or accessory products that can be used and sold with the main product (e.g. air conditioner, or a built-in music box in a car).

- Captive-product pricing involves products that must be used along with the main product, i.e. accessories that are not optional but necessary for the full applicability of the main product. In such cases two-part pricing is a possible pricing method. Two-part pricing involves breaking the price into a fixed fee,

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and a variable usage fee. An example is a laser printer sold at a low fixed price, while the toner cartridge, representing the variable usage fee, sold at a rather high price.

- By-product pricing refers to a product with little or no value in itself, produced as a result of the main product. Producers offer it at low prices, because they will seek little or no profit other than covering storage and delivery costs. An example of such a by-product is straw harvested together with the cereal grains.

- Product bundle pricing combines several products at a reduced price. This happens when a hotel room price includes food and entertainment, internet access and use of the hotel sauna in an all-inclusive price.

Price Adjustment Strategies are applied when the already set basic prices are modified, i.e. adjusted to customer differences or a changing purchase situation. There are seven typical approaches to price adjustments:

- Discount and allowance pricing reduces prices to reward customer responses such as paying early or promoting the product. It is also applied when an old product model is offered to clear the warehouses. There are seasonal discounts (e.g. summer clothes sold at half price in autumn) or quantity discounts (a 6-pack of mineral water costs less than six bottles bought separately).

- Segmented pricing is used when a company sells a product at two or more prices even though the difference is not based on cost. This method is applied to allow for differences in customer perceptions, tastes, incomes, or different features of product versions, targeted to particular customer segments.

- Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics of production costs and profits. Customers will compare the price to reference prices that they carry in their minds about a given product. They will note the current price, remember past prices, and assess the buying situations.

Due to the psychological pricing effect they may develop a feeling that the current situation is beneficial for them, and buy the product. A typical example of such a pricing is when the customer feels that a product at a price of $99.9 is much cheaper that a similar product at $102 – though the price difference is negligible.

- Promotional pricing is used when a product is temporarily priced below list price or even below costs to increase demand (e.g.: a bookshop organises a promotional event for a new book, when readers can meet and talk to the writer, and as a special offer, the new book can be bought at a lower price). However, a risk is associated

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with promotional pricing: it can create “deal-prone” customers who will wait for promotions and avoid buying at regular prices.

- Geographical pricing is used when the product is sold at different prices for customers in different parts of the country or the world. When the product is transported to distant places its price is usually higher because of the associated higher transport costs. Geography and the associated climate differences may incur additional costs of cooling or heating, or other handling costs, too. Geography may also represent differences in tastes, promotion, or ways of usage.

- Dynamic pricing is when prices are adjusted continually to meet the characteristics and needs of the individual customer and situations. These differences may be associated with demography, cultural values, incomes, lifestyles and many other features.

- International pricing is the pricing strategy applied when prices are set in a specific country based on country-specific factors, such as the economic conditions, the competitive conditions, laws and regulations, infrastructure, or the company marketing objective regarding that particular country. The average income level of a country determines the price range at which reasonable market demand for the product may be expected, the national cultural traditions influence the customer value perceived, the market laws (including customs charges) will have a direct influence on the price, and the company may have a priority objective of getting a larger market share in a foreign country, therefore it may enter the market with low prices.

Price Reaction Strategies represent the process of assessing and responding to competitor price changes. The process is described in Figure 2.30. The company will have to respond when the competitors decrease their prices, but there is no action needed in response to rising competitor prices. Basically four options are available in response to decreased competitor prices: to reduce our own prices, to raise the perceived value of our own product, to improve the quality and increase the price of our own product, or launch a “fighter brand” of our product, i.e. a product variety that can be sold at a really low price to beat competition.

In addition, the following methods of pricing are applicable as general response strategies in a competitive situation:

- Price fixing means that sellers set prices without talking to competitors.

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- Predatory pricing is selling below cost with the intention of punishing a competitor, or gaining higher market share, and ultimately putting competitors out of business, and gaining long-term profits.

- Retail (resale) price maintenance is a pricing strategy when a manufacturer requires a dealer or retailer to charge a specific retail price for its products.

- Deceptive pricing occurs when a seller states prices or price savings that mislead consumers, or are not actually available to consumers. An example of deceptive pricing is scanner fraud, the failure of the seller to enter current or sale prices into the computer system, therefore at the cashier a higher price will be charged than what is announced at the display shelf. Another example is price confusion, which occurs when firms employ pricing methods that make it difficult for consumers to understand what price they are really paying.

Figure 2.30: The Process of Assessing and Responding to Competitor Price Changes

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