In this article we are going to talk about how to design pricing strategy for a particular product or a service. Price is the amount charged in exchange of any commodity or service. While determining the price we need to keep various points in mind for building this marketing strategy.
Before understanding what is pricing strategy, we need to understand when it is used and what is the purpose of it. Whenever a marketer is asked to design a marketing mix, he/ she needs to consider four or seven core elements of the mix depending upon if it is for product or a service.
Along with the product, price, place and promotion marketing mix for services has extended three more element that are people, process and the physical evidence.
In this article, we will also discuss varies types of pricing strategies which are widely used by the marketer.
What’s in it for me?
- How to Determine the Right Price
- Types of Pricing Strategy
- Importance of Pricing Strategy
HOW TO DETERMINE THE RIGHT PRICE
So while deciding the price we need to understand why it is important to charge the right price from the customer? Since there are many reason, some of them are–
- Understand your target customer and keep it reasonable (Focus on customer value)-
Price decided by the marketer should be reasonably accepted by the target audience in such case he needs to ensure that the price make sense to the chosen target.
In other words, Price should be charged accordingly the way customer perceived to be the product or service marketer have been positioning in the mind of customer.
For instance, if the marketer charges only Rs. 1000 for a high- tech smart phone, obviously customer will think that there is some problem in the phone. So we can say that price should be directly proportional to the positioning of the product or service.
- Willingness and ability to pay-
Marketers must understand what amount our target customers are capable of paying for the product or service. Ultimately they have to find out the willingness and the ability of a customer to pay.
All things considered marketers must understand the budget constraint of the target customer to ensure that the good or service are not highly priced.
- Profit Margin-
The price that marketers choose must also supports the goal as well as the objective to maximize the profits that have been set to achieve with the product or service.
Finally, the price determined should be such that it covers all the costs and expenses incurred to manufacture the good or service.
TYPES OF PRICING STRATEGY
So below are the techniques through which we can design the price for our product or service:
Below are the core or widely used pricing strategy practices:
In this technique, for setting the price we use exactly what our competitor price is for similar product or service.
This method is entirely focused on competition. How competitor reacts to the market situation, how he prices his products and services in those situation, and other information related to market and competitor rather than what customer perceives the value of product to be, production cost, profitability, etc. This method only works in case of perfect competition.
Cost- Plus Pricing
Also known as the cost- based pricing, is determined by adding some mark up value to the overall cost of the product. That is adding variable cost, semi variable cost, fixed cost and a mark up percentage. This pricing strategy is the most easiest method to calculate price.
It is easy to justify the price to your customer as well as this pricing technique covers all your cost and expenses and also the profit margin of the product or service.
But this technique ignores the other factors such as market condition, competition and also the perceived value of the product is ignored.
Value- Based Pricing
Value based pricing is based on consumer perception on the value of the product. This technique works on the customer idea of what they think the product would be worth of?
Therefore designing the price completely depends on what your target audience perceives about the value of the commodity or the service.
This pricing technique mostly works because customer find the price reasonable and are willing to pay accordingly.
Skimming means removing layers. Likewise price skimming is a technique of removing layers according to the demand. At first, the price being set is very high and gradually over time it start decreasing and shedding off the layers of high price to acquire more price sensitive customers.
The reason behind to follow such idea is to maximize profit before the competition and pricing pressure increases. Since the price is high initially, the image of the product quality is perceived to be high.
But the greatest drawback about this strategy is that if the marketers fail to justify the high price. It may lose their potential customers and can cause low volume sales resulting in diseconomies of scale.
This technique is quite reverse the price skimming. Here the marketers imposes relatively low price to attract more customers for the newly launched product and then the price gradually increases after gaining the market share of the commodity.
The basic idea of this strategy is to penetrate the product into the market, attract new customers and build the market share.
Although it has some drawbacks. Major limitation in this strategy that customer might underrate the quality of the product and maximizing profit would be a challenging task.
Some additional strategies are below mentioned:
This can be called the alternative of price skimming but unlike price skimming it does not gradually let the price sink over the period of time.
This strategy focuses on keeping the price relatively higher than the competitors and let customer perceive the high- quality image about the product.
So as to encourages the customer to trust the brand name and the quality of the product. This strategy succeeds only in case of unique and luxury products and the production kept limited. As a result it creates a strong entry barrier for the competitor.
This Strategy clearly depends on the volume sold. It set the price according to the number of purchases being made by the customer. This strategy works mainly for generic products who does not have much marketing or promotional cost.
Since the generic commodity does not have much cost, the price being set will be relatively low which will ultimately attract the price- sensitive customers. But it has to keep the profit margin low.
This is the practice of offering a part of product or service for free to the customer to give a basic sample about the product or service. After using the free version, the customer has to pay for the full services.
Giving customer partial products for free acts as a sample and a key marketing tool which attracts heavy potential customer base.
This strategy is mostly used by online educational services where the marketer provides a piece of educational content for free and to view the whole content, one has to pay for it.
This Strategy is the offspring of cross selling, where marketers offer complementary products at lower prices with the primary product.
To make customer more delighted marketer combines and pack these products together and sell them at lower prices as compared to the individual prices of all the products.
Henceforth this increases the sales volume. If the customer buys the individual product it will cost him higher, so this bundle pricing will be a benefit to the customer.
In this strategy, the marketer set the price at such low level that it is very tough for the competitor to charge at that level. Hence forcing them to exit the market.
The major focus of this technique is to eliminate complete competition and create entry barrier for new entrants and acquire the majority of the market share.
Watch: How to Price Products – 7 Competitive Pricing Strategies to Make a Profit for more information.
IMPORTANCE OF PRICING STRATEGY
Out of the 4 or 7 marketing mix, this element is the most flexible one as it can be changed anything considering the other elements of the mix.
The most influencing part out of the whole marketing mix is price, any customer looks for price first before purchasing any product. Price of a product or service is the first impression for the customer.
The profitability, revenue and turnover depends majorly on the price. The right pricing strategy can lead to higher profitability as well as can make your product the market leader.
Competition can be measured through the price of the similar product. Eventually whichever price is accepted by the customer clearly shows the comparison.
Price influences the demand of any commodity. For different product this price- demand relationship pattern works differently.
This article gave a thorough detail on how to choose the correct price, types of pricing, importance of pricing and also covered some major examples.
The widely used strategies are:
1. Competitive Strategy
2. Cost- based Strategy
3. Value based Strategy
4. Price Skimming Strategy
5. Penetrating Strategy
1. Apple– Since the apple products are highly priced at the initial level, it adopts the price skimming strategy.
2. Reliance Jio– Initially to enter into the market, Jio adopted penetrating strategy and predatory pricing which lead it’s competitor to exit the market.
3. Amazon Prime– It’s 30 days free trail policy encourages the customer to continue the further subscription. It adopts freemium pricing strategy.
4. McDonald’s– It offers some meals together in a combo for less price if purchased together but individually it costs high. The strategy adopted by McD is bundle pricing for happy meals.