Comparing Main Types of Pricing Strategies - Essay Example

There are three main types of pricing strategies: New Product Pricing Strategies, Product Mix Pricing Strategies and Price Adjustment Strategies. This paper will discuss each one in detail. NEW PRODUCT PRICING STRATEGIES These are the pricing strategies that a company adopts at the launch of a new product. Often, this pricing decision is the most crucial one for the marketing managers. This is because at the launch of the new product, the price of the product is a tool that must be used to create the right perception of the product in the minds of the consumers. A high price set for the product depicts high quality whereas a low price represents low quality. There are two main pricing strategies from which to choose when launching a new product: Market Skimming Pricing and Market Penetration Pricing. Market Skimming Pricing In this pricing strategy, a high price is set for the new product to extract out the maximum possible revenues from the market that is willing and able to purchase the product at that high price. The demand for the product would be lesser when the price is kept high, but the revenues could be more because of the high selling price. (Bovay, 2008) There are many instances of new products following the market skimming strategy including Mercedes Benz, Sony High-definition television, Nokia N series cell phones and so on. All these products have one thing in common: they are all high quality products. Setting a high price for a new product could be disastrous for products that do not offer premium quality. As price gives a perception of quality to the consumers, setting a price too low for a high quality product just to make it more affordable, is also not a good strategy. It says to the consumers that the product is not of the premium quality they expected, and deteriorates the brand image of the company. Therefore, market skimming strategy is ideal for cases in which the product is innovative or does not have competition. Also, if the new product is of a strong brand, the company can use premium pricing because the consumers are less likely to switch to another product because of their loyalty with the brand. Apple Computers is an ideal example of such a case. Even though the company has several close competitors that offer the same products with the same specifications, it’s the perception of the brand that lets the company demand a higher price for its products. Market Penetration Pricing In contrast to the market skimming pricing, this strategy focuses on attracting a large number of buyers through setting a low price for the product. This pricing strategy is usually adopted when there are a number of sellers in the market and the company wants to penetrate into the market quickly. When the consumers see the low priced product that offers them the same product that other companies are offering, they are attracted towards the low priced one. In this way, the company is able to attract a large number of buyers and, consequently, attaining a large market share. (Bovay, 2008) Wal-Mart is a great example of this. It has positioned itself to offer the lowest rates in the market. Dell also used this strategy when it entered the home computer market segment to penetrate into it and attract customers. (Kotler & Armstrong, 2008) PRODUCT MIX PRICING STRATEGIES These pricing strategies are related to the products that are part of a product mix. The aim of the marketing manager is maximize the profits on the product mix as a whole. However, the products in the product mix have different demands, face different levels of competition, and so on. Therefore, it is a tough decision for the marketing manager to set their prices. There are five different product mix pricing strategies: Product Line Pricing Companies do not usually create a single product. Instead, they develop product lines to tap into different market segments (Kotler & Armstrong, 2008). Car manufacturers, such as Honda, make many different types of cars. They differ from each other in terms of their prices, the features they offer, the driving experiences they offer, and their brand positioning in the minds of the consumers. For instance, Honda makes different cars such as City, Civic and Accord to attract different kinds of consumers. The pricing of such products should be based on the differences in cost, customer evaluations, and the prices set by their competitors. (Hassan, 2010) Optional-Product Pricing Many companies, today, use this strategy. In this, the companies offer a number of optional goods to go with the base product (Hassan, 2010). Examples of this include car manufacturing companies that offer a base model with minimal features, where the customer can add more features like sport rims and a CD player for an additional price. This pricing strategy, however, is not as easy as it seems. Managers must decide what prices to keep for the additional items, what accessories to offer in the base model with no additional charges, and so on. Car manufacturing companies are often blamed to attract customers into the show rooms where they unleash the never ending list of options to choose from which increases the price of the cars a great deal. Captive-Product Pricing In this pricing strategy, companies set a low price for the product. However, certain main products need supplies to make them useful. Companies then keep high mark ups on those supplies to reap maximum profits. Examples of such a pricing strategy are razor blade cartridges that must be used with razors. (Hassan, 2010) By-Product Pricing By-products are left after the production of many kinds of goods including petroleum, chemicals, meats, and so on. If companies decide to dispose-off these by-products, this would add cost to the main product and make it less competitive in the market. Therefore, many companies adopt the by-product pricing strategy. They try and identify a market for the by product, and sell it off for any price above its cost. (Kotler & Armstrong, 2008) Product Bundle Pricing In this pricing strategy, companies combine different products and sell them as a package. For instance, fast food restaurants combine together a burger, drink and fries and sell it off at a price lower than the combined prices of individual products. This strategy can be used to promote the sale of those products that the customers would not otherwise buy. PRICE-ADJUSTMENT STRATEGIES Companies have the option to adjust their pricing strategies based on the differences in customers or circumstances. Following are the ways through which companies may do so. Discount and Allowance Pricing Companies tend to offer discounts and allowances to customers to promote certain actions. For instance, when a customer buys in bulk from the company, the company offers a discount for the high revenue that they are getting from the customer. Allowances can also take many forms such as trade in allowances, and promotional allowances (Tatun, n.d.) Segmented Pricing In this pricing strategy, the company charges different prices for the same product to different customers (Derrick, 2008). For instance, theatres may offer a student discounts for the same movie. Also, the same product may be priced differently depending on where it is being sold or when it is being sold. The same theatre can charge different prices for the different locations of the seats because certain seats may be preferred by the audience. Psychological Pricing Companies know that the price of the product can tell a lot about the product to the customers. A high price says that the product is of good quality and is aimed at the higher end of the market. Customers may be drawn to certain goods just by looking at the high price of it because they would expect great results to come out of the product. Promotional Pricing In this strategy, the company reduces the price of the product on a temporary basis to boost up the sales. This can be done to attract the attention of the customers, increase off season sales, and so on. However, it must be used wisely as it also has potential to deteriorate the brand image of the company Geographical Pricing Companies must decide whether to set different prices for the products for customers in different geographic regions or not. There are many ways of going about it but basically, the question is whether to add the additional costs of transportation in the price of the product, and make the customers pay or should the company bear the additional costs itself. Dynamic Pricing Companies may even choose to vary their prices based on the different characteristics of individual customers. For example, many online stores such as Amazon.com can analyze individual customers based on their past records and offer a price to maximize the chances of sales and, at the same time, capitalize on revenues. (Kotler & Armstrong, 2008) CONCLUSION As we saw, there is a huge array of pricing strategies that the companies can apply to their products. Whether the product is new or a part of a product mix, there is a pricing strategy for every situation. Companies may also mix different strategies to maximize the gains. However, it is very important that a considerable amount of time and effort is spent on choosing the right pricing strategy or the entire product strategy could fail. BIBLIOGRAPHY Books and Journals Author Last Name, First Name Initial. (year) Title. Book Edition. Place. Publisher Kotler, P. & Armstrong, G.(2008) Principles of Marketing. Twelfth Edition. Peasrson Education Guthrie, J.(1950) The Journal of Marketing, Vol. 14, No. 4 (Jan., 1950), pp. 538-543. Published by American Market Association Website Bovay, K.(2008) When to Use Price Skimming or Market Skimming As a Pricing Strategy. Ezine Articles [Internet] Available from http://ezinearticles.com/?When-to-Use-Price-Skimming-Or-Market-Skimming-As-a-Pricing-Strategy&id=1341511 [Accessed 26th February 2010] Bovay, K.(2008) Is Psychological Pricing an Effective Strategy? Ezine Articles [Internet] Available from http://ezinearticles.com/?Is-Psychological-Pricing-an-Effective-Strategy?&id=1341535 [Accessed 26th February 2010] Derrick, E.(2008). The Advantage of Price Segmentation. Branding Strategy. Available from http://www.brandingstrategyinsider.com/2008/01/the-advantage-o.html [Accessed on 26th February, 2010] Hassan, N.(2010) Product Mix Pricing Strategies. Marketing and Selling. Available from http://mgmt280.blogspot.com/2009/11/product-mix-pricing-strategies.html [Accessed 26th February 2010 Tatun, M.(n.d.). What is a Trade-In Allowance? Wise Geek [Internet] available from http://www.wisegeek.com/what-is-a-trade-in-allowance.htm [Accessed on 26th February 2010] Read More