Pricing strategies followed by businesses when pricing their products play a key role in the profit or loss in the businesses. Many businesses set their product prices without paying much thought about it. This can cause a loss to the business as the set price may not be the ideal price for the product.
It is important for business organizations to optimize their pricing strategies in order to maximize the profit that can gain by selling the products. Pricing strategies are the processes and methodologies followed by business organizations to set prices for their products and services.
Pricing the product is deciding how much is to charge for a product and pricing strategies are how to determine what that amount should be. There are many different types of pricing strategies that can be seen in the business world.
Many companies focus on growing their business but it is identified that most of the businesses do not pay any attention to setting the right pricing strategy for their products. It can be identified as a missed opportunity for businesses to achieve immediate growth by putting a little effort to set the price right.
It is important to clearly understand the different pricing strategies available for the businesses to choose the best and most suitable strategy for their products.
Types of Pricing Strategies
– Value-based pricing
Value-based pricing is a pricing strategy that sets the prices according to what consumers think the product is worth. This is also known as ‘customer-based pricing’ due to the customer’s focus on the pricing method. In other words, this is about setting the price based on the product or service’s price on how much the target consumers believe it’s worth.
– Competitive pricing
Competitive pricing is the method of pricing based on the amount that the competitors are charging for the product. This is one of the most popular pricing methods in the modern business industry. The term can be used in a bread meaning to mention the competitive strategies such as the design of the product and marketing decisions. This can be considered as an effective pricing strategy in the right circumstances, such as startup businesses. However, this pricing strategy does not leave much room for the business to grow.
– Price Skimming
Price skimming is a pricing strategy where the product will charge the highest price at the introductory stage and reduce the price over time. The expectation of this pricing strategy is to skim the top off the market and eventually lower the prices to reach the level of competitors. This can be successful with the right product. However, it is considered a risky pricing strategy.
– Cost-plus pricing
This is considered one of the simplest pricing strategies. According to this strategy, the production cost of the product and the profit percentage is added together to decide the price of the product. Even though it is simple, it is only suitable for physical products.
– Penetration Pricing
Penetration pricing is a pricing method used by businesses mostly to enter into highly competitive new markets. Since it is difficult for new products to survive in the highly competitive markets, they use price as a method to penetrate the market. They provide the product for a lower price than competitor prices. This may help them to get a good sales volume. However, the business has to put an extra effort to get a large number of customers to get a good profit and a method to create returning customers and brand loyalty that will make the customers stick to the product even in future price increases.
– Economy pricing
This pricing strategy is popular in the commodity goods industry. The expectation of this pricing method is to price a product for a lower price than the competition and make the money back with the increased sales volume. It is expected that the sales will rise if the price is lower than the competitor’s price.
– Dynamic pricing
Dynamic pricing strategy is a pricing method that uses variable prices instead of fixed ones to match the current demand for the product. It is also known as surge pricing, demand pricing, and time-based pricing.