Pricing Strategies and Policies

By Brian Monger

Here is a list of the most common pricing strategies

Pioneer pricing – setting the base price for a new product is a necessary part of formulating a marketing strategy.  The base price is easily adjusted (in the absence of government price controls) and its establishment is one of the most fundamental decisions in the marketing mix.  The base price can be set high to recover development costs quickly or to provide a reference point for developing discount prices to different market segments.

When marketers set base prices, they also consider how quickly competitors will enter the market, whether they will mount a strong campaign on entry and what effect their entry will have on the development of primary demand. If competitors will enter quickly, with considerable marketing force and with limited effect on the primary demand, then a firm may adopt a base price that will discourage their entry.

Price Skimming. – A firm introducing a new or innovative product can use skimming pricing, setting the highest initial price that customers really desiring the product are willing to pay. These customers are not very price sensitive because they weigh the new product’s price, quality, and ability to satisfy their needs against the same characteristics of substitutes. As the demand of these customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment. Thus skimming pricing gets its name from skimming successive layers of “cream”, or customer segments, as prices are lowered in a series of steps.  Demand tends to be inelastic in the introductory stage of the product life cycle (for example, the DVD player).

Penetration Price.  A penetration price is a price below the prices of competing brands and is designed to penetrate a market and produce a larger unit sales volume.  When introducing a product, a marketer sometimes uses a penetration price to gain a large market share quickly.  This approach places the marketer in a less flexible position than price skimming because it is more difficult to raise a penetration price than to lower or discount a skimming price.  It is not unusual for a firm to use a penetration price after having skimmed the market with a higher price.

Prestige Pricing.  In prestige pricing, prices are set at an artificially high level to provide a prestige or quality image.  Prestige pricing is used especially when buyers associate a higher price with higher quality.  Typical product categories in which selected products are prestige priced include perfumes, cars, alcoholic beverages, jewellery and electrical appliances. If producers that use prestige pricing lowered their prices dramatically, it would be inconsistent with the perceived images of such products.

Psychological Pricing  Psychological pricing encourages purchases based on emotional rather than rational responses.  It is used most often at the retail level.  Psychological pricing has limited use for industrial products.

Odd-Even Pricing.  By odd-even pricing – ending the price with certain numbers (odd or even) it is generally thought that marketers are trying to influence buyers’ perceptions of the price or the product.  Odd pricing assumes that more of a product will be sold at $99.95 than at $100.00.  Supposedly, customers will think that the product is a bargain-not $100.00 but $99.00 plus a few insignificant cents.  Some claim, too, that certain types of customer are more attracted by odd prices than by even ones.  However, there are no substantial research findings to support the notion that odd prices produce greater sales.  Nonetheless, even prices are far more unusual today than odd prices.

While it is true that a great many marketers and a great many buyers actually believe that odd-even pricing is designed to make buyers believe the product is cheaper, the most probable reason for its original introduction is often overlooked. A price such as $9.95 (originally perhaps9 shillings and 11 pence) required shop assistants to use the cash register to make change. Thus the transaction is recorded – the money is not just pocketed.

Price Lining  Often a firm that is selling not just a single product but a line of products may price them at a number of different specific pricing points, which is called price lining.

In some instances all the items might be purchased for the same cost and then marked up at different percentages to achieve these price points based on colour, style, and expected demand. In other instances manufacturers design products for different price points and retailers apply approximately the same mark-up percentages to achieve the three or four different price points offered to buyers.

The basic assumption in price lining is that the demand is inelastic for various groups or sets of products.  If the prices are attractive, customers will concentrate their purchases without responding to slight changes in price.

Customary Pricing.  In customary pricing, certain goods are priced primarily on the basis of tradition.

Demand-Backward Pricing  Marketers sometimes estimate the price that buyers would be willing to pay for a relatively expensive item such as a shopping good. They then work backward through the margins that may have to be paid to retailers and wholesalers to determine what price they can charge wholesalers for the product. This demand-backward pricing results in the manufacturer deliberately adjusting the quality of the component parts in the product to achieve the target price.

Bundle Pricing  A frequently used demand-oriented pricing practice is bundle pricing – the marketing of two or more products in a single “package” price.

Professional Pricing  Professional pricing is used by people who have great skill or experience in a particular field or activity.  The concept of professional pricing carries with it the idea that professionals have an ethical responsibility not to overcharge unknowing customers. Some professionals who provide such products as medical services feel that their fees (prices) should not relate directly to the time and involvement in specific cases; rather, a standard fee is charged regardless of the problems involved in performing the job.

Promotional Pricing Price is an ingredient in the marketing mix, and it is often coordinated with promotion.  The two variables sometimes are so interrelated that the pricing policy is promotion orientated.  Examples of promotional pricing include price leaders, special-event pricing, and experience-curve pricing.

Price Leaders.  Sometimes a firm prices a few products below the usual mark-up, near cost, or below cost, which results in prices known as price leaders.  This type of pricing is used most often in supermarkets and department stores to attract buyers by giving them special low prices on a few items.  Management hopes that sales of regularly priced merchandise will more than offset the reduced revenue from the price leaders.

Special-Event Pricing.  To increase sales volume, many organisations coordinate price with advertising or sales promotion for seasonal or special situations (Sales).  Special event pricing involves advertised sales or price cutting that is linked to a holiday, season, or event.  If the pricing objective is survival, then special sales events may be designed to generate the necessary operating capital.  Special-event pricing also entails coordination of production, scheduling, storage, and physical distribution.  Whenever there is a sales lag, special event pricing is an alternative that marketers should consider.

In cost-orientated pricing, a certain monetary amount or a percentage is added to the cost of a product.  The method thus involves calculations of desired margins or profit margins.  Cost-orientated pricing methods do not necessarily take into account the economic aspects of supply and demand, nor do they necessarily relate to a specific pricing policy or ensure the attainment of pricing objectives.  They are, however, simple and easy to implement. 

Cost-Plus Pricing. In cost-plus pricing, the seller’s costs are determined (usually during a project or after a project is completed) and then a specified amount or percentage of the cost is added to the seller’s cost to set the price.  When production costs are difficult to predict or production takes a long time, cost-plus pricing is appropriate.  Custom-made equipment and commercial construction projects are often priced by this method.  The government frequently uses such cost-orientated pricing in granting defence contracts.  One pitfall for the buyer is that the seller may increase costs to establish a larger profit base.  Furthermore, some costs, such as overheads, may be difficult to determine.

Mark-up Pricing.  A common pricing method among retailers is mark-up pricing.  In mark-up pricing, a product’s price is derived by adding a predetermined percentage of the cost, called mark-up, to the cost of the product.  Although the percentage mark-up in a retail store varies from one category of goods to another (35 percent of cost for hardware items and 100 percent of cost for greeting cards, for example), the same percentage is often used to determine the price of items within a single product category, and the same or similar percentage mark-up may be standardised across an industry at the retail level.  Using a rigid percentage mark-up for a specific product category reduces pricing to a routine task that can be performed quickly.

High-volume products usually have smaller mark-ups than do low-volume products.

Cost Plus Fixed-Fee Pricing  In buying highly technical, few-of-a-kind products such as aircraft or space satellites, governments have found contractors are reluctant to specify a formal, fixed price for the procurement. Therefore it uses cost plus fixed-fee pricing, which means that a supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final cost of the project.

Target Profit Pricing  A firm may set an annual target of a specific dollar volume of profit, which is called target profit pricing.

Target Return-on-Sales Pricing  A difficulty with target profit pricing is that although it is simple and the target involves only a specific dollar volume, there is no benchmark of sales or investment used to show how much of the firm’s effort is needed to achieve the target. Firms like supermarket chains often use target return-on-sales pricing to set typical prices that will give the firm a profit that is a specified percentage, say 1 percent, of the sales volume.

Target Return-on-Investment Pricing  Firms set annual return-on-investment (ROI) targets such as ROI of 20 percent. Target return-on-investment pricing is a method of setting prices to achieve this target.