Pricing Strategies

This is one of the vital decisions which a company makes during the life cycle of goods / services. Success and failure of product is directly linked to the pricing nowadays. Many goods are priced on higher side but are not demanded by customers & once the price is reduced, the same product becomes a huge success. Few goods are priced on higher side and are demanded very much by customers but once the price is reduced then demand also gets reduced. Hence, pricing decisions are very tough to be made. There are various strategies which are being followed nowadays related to pricing and few of them has been discussed in detail as under. 

1. Premium pricing: This strategy is being followed by companies who have unique or patented product or niche clientele. Customers don’t mind paying huge for those goods / services. You must have noticed that prices are higher for some life-saving drugs (cancer), premium cars (Rolls Royce, Aston Martin, Ferrari & many more), premium watches (Rolex, Cartier & many more), products which represents “status symbol”, airline tickets (during few days before journey). This strategy of charging premium prices is known as premium pricing strategy. 

2. Discriminatory pricing: You must have noticed that your favorite cold drink is priced at X amount in Cineplex, priced at Y amount at local retail outlets and same cold drink is priced at Z amount in ABC hotel. You can see this practice in Hospitality industry when they charge two different rates for season and off season room booking. This strategy of charging different prices for same goods / services is known as Discriminatory pricing. E.g. Beverages, Hotels, Museum tickets (Child, Adult & Foreigners are charged differently) & many more. 

3. Cost plus pricing: Companies who want to play safe in pricing the product generally adopt this strategy. This is the simplest and safest pricing strategy for newcomers in industry. You just need to add a desired profit margin, say 20% in the cost price of goods / services and pricing is done. 

4. Price skimming: Few companies start with higher price, thereafter reduce the price for same goods / services very fast and further stabilize after competitive pressure. This strategy is known as price skimming. It is more prevalent in Technology sector where companies add back new features / technology in new product and price it high and reduce the price of previous goods. Companies with unique product & want to take first mover advantage due to no competition resort to this strategy. This helps them in recovering the huge R&D expenses. E.g. Pen Drives were very expensive initially and that too with low storage space (when launched) but are very cheap nowadays, Television with new / unique features are always priced on higher side initially.  

5. Geographical pricing: Sometimes prices are charged depending upon the geography & demographic profile of the customers. You must have noticed that sea foods are cheaper at coastal areas but are bit expensive at other locations. Local factors such as demand supply gap, transportation, taxes& labor expenses plays an important role in this pricing. 

6. Penetration pricing: When you are new entrant, then in order to penetrate deep into market and create awareness about the products, prices are kept low initially with low margin and increased with slow pace after gaining substantial customer base. E.g. Online retailers (Introduced free shipping with no minimum order restrictions), Satellite TV Subscription (Set top box was given free by few players during introduction phase, few of them gave two month subscription free), Telecom (CDMA mobile handsets were provided free of cost by few companies initially but now they charge extra).

7. Economy pricing: Companies catering to middle or lower middle income group customers follow this strategy. Prices / margin are generally kept low to cater huge clientele and gain through bulk sale. E.g. Budget hotels, low cost airlines, few retail chains such as Wal-Mart are following this strategy.

8. Promotional pricing: This strategy is most frequently used in introduction phase to promote goods / services. Companies use various tactics to create awareness about the product, . Most popular of them is “buy one get one free”, “flat discount policy”, “bundle pricing” etc.

9. Psychological pricing: Have you noticed that few companies price the products in 3 digits but are actually getting amount close to 4 digit figure. This is done to break the psychological barrier of the customers. Think of paying $995.00 instead of $1000.00. There is no much difference between paying $995.00 & $1000.00 but this also affects the buying behavior of customers a lot and many of companies has started following this strategy nowadays. 

10. Optional product pricing: When companies charge extra for additional goods / services, minor customization, customer preferences etc & customers don’t mind paying for the same, then this strategy is used.  Customers prefer paying extra for Window seat in flights, automobiles accessories which adds to the beauty of cars / bikes, rare color preference etc.