Pricing Strategies In Business

Pricing Strategies In Business

By Rupal Jain

Pricing is the only revenue generating elements among the 4 P’s (the other three are product, place and promotion), whereas, Strategy is explained by Henry Mitzberg as a pattern in actions over time and a position that reflects decisions to offer particular products or services in particular market.

Pricing Strategy is defined as the idea and practice of establishing an optimum price for a product or service that will result in the highest profit. Factors that determine the pricing decisions are the competitors, social / cultural / global environment, economic / natural / technological factors, legal / political aspects, the suppliers, the substitutes available, the customers, product positioning / differentiation, demand of the product and the cost involved.

Before deciding the Pricing Strategy the firm needs to answer the following questions to themselves: -

What is their organisational objective?

How much to charge for a product / services?

Why should the price be neutral / higher / lower than the competitors?

Where are the potential buyers?

When to use various strategies for products like skimming, cost plus, penetration, promotional techniques etc?

The different pricing strategies which can be adopted by the firm are explained below: -

1. PREMIUM PRICING: - Also known as “Prestige Pricing”, the company charges high price for its products / services when it has a competitive advantage, there is uniqueness about the product, exceptional quality / quantity or flawless performance.

2. PENETRATION PRICING: - When the company keep the prices for the product / services artificially low in order to gain market share, increase customer interest and establish a hold in the market it is known as the Penetration Price.

3. SKIMMING PRICE: - In this strategy the company charges a high price in the beginning and then gradually lowers its prices over a period of time. This method is generally used by the early adopters, where the product demand is relatively inelastic.

4. PREDATORY PRICING: - In Predatory Pricing Strategy (also known as Destroyer Pricing), the company sells the product at a very low price to destroy the competitors product; however; in many countries it is banned as it is considered illegal and anti-competitive.

5. PSYCHOLOGICAL PRICING: - When the seller wants the consumers to respond on the emotional basis and have a psychological impact it is termed as Psychological Pricing. For example – Dollar Shop charges Rs. 99, 199 and not Rs. 100, 200.

6. PRODUCT LINE PRICING: - When the seller links one product/brand with another brand / product to increase its sales it is termed as Product Line Pricing. e.g.: - If a company has two products namely “X” and “Y”, it offers each product for Rs. 100/- and jointly sell both the product at Rs. 170/ - it is known as the Product Line Pricing.

7. PROMOTIONAL PRICING: - It is a segmentation process where the company offers special discounts, reward points; freebies to its customers; like buy one get one free, 50% off and so on. It is done by the company to encourage trail for the new customers and retain the existing one.

8. GEOGRAPHICAL PRICING: - Factors like competition; shipping/airline cost; high cost of manpower, raw material, machinery, technology can lead to variations / differences in prices of the product in different parts of the world which is termed as “Geographical Pricing”, it is basically determined by the research compiled from the target market.

9. COMPETITION BASED PRICING: - Competition Based Pricing is based upon the prices of the similar competitors’ products which can be above, at par or lower than the competitor depending on the positioning strategies of the firm.

10. COST – PLUS METHOD: - This is opposite of Competition Based Pricing ; here; the organisation calculates the total cost of production (including fixed and variable cost) and then adds a certain percentage of profit to determine the selling price of the product / services.

11. TARGET PRICING: - It is rightly explained as a pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The Target Pricing method is used most often by public utilities whose capital investment is high. e.g.:- electric and gas company.

Written By: Rupal Jain, Lecturer, Atharva Institute of Management Studies (MUMBAI) She can be reached at  jainrupal@sify.com