Strategies on Pricing
Introduction
Earning more profit and acquiring more market share is the basic motto of any organization. The profit can be earned by selling our products in the market. Obtaining market share can be done by showing more qualitative products at less prices than the other companies. Pricing seems to be small but plays a crucial role in the growth of the organization. So, let's see how the prices are made and what are the Pricing Strategies available?
Definition
Pricing Strategy is a tool used to fix the price of a particular product or service by considering various factors like the consumption of resources, Market conditions, the ability of customers, demand and supply, need of the product like regular item or occasional, etc.
Types of Pricing Strategies
We have had different Pricing Strategies available in practice form for a long time. Organizations can opt for a suitable strategy that meets their requirements and expectations. Let us see all the product Pricing Strategies one by one to get a clear idea.
Premium Pricing:
In the premium Pricing Strategy, the prices of goods and services are a bit higher than the general prices. These are especially concentrated on premium segment people. Some people may have a perception that if the price of the product is high, then only the quality maintains up to the mark. If anyone announces a discounted sale or half price, they even suspect the reliability and quality of that product. Especially for those people, the premium Pricing Strategy was used at the same time they needed to maintain the quality, which means that price.
Penetration Pricing:
Penetration Pricing Strategy is one of the three major Pricing Strategies. Generally, it is used by the new traders to gain a foothold in the market. The sellers wanted to attract more customers by decreasing the price of the product. So that the customers can show interest in purchasing them and they can know the users and the quality of that particular product. Once the customers get used to that product, the price may increase.
Economy Pricing:
Economy pricing is one of the best Pricing Strategies, which considers the generalized category of customers. These are majorly affordable and reasonable prices as much as they can provide. The economy class can be easily understood if we consider the scenario of flight tickets. The least amount required for the entire journey will be fixed as the price for the economy category.
Price Skimming:
It is an occasional Pricing Strategy where the well-known product has reduced its sales drastically. Even though its market share is very good for some time, with any kind of factor, they may be reduced, yeah abnormally. Then to regain the market share and to get back its customers, the price will be reduced.
Psychological Pricing:
Among the three major Pricing Strategies, psychological pricing is also there. This Pricing Strategy can be seen everywhere. For example, Bata introduces a new kind of shoes, and the price is rupees 1,999 /-. The psychology of the human brain is ready to accept 1999 rupees, and it is not ready to take 2,000 figure 2. That's the reason several companies use this psychological Pricing Strategy. Usually, electronic appliances were tagged with this Pricing Strategy. Bata, Samsung, Amazon, etc., can be considered as examples of Pricing Strategies.
Product Line Pricing:
It is one of the differential Pricing Strategies. Here the prices may vary based on the size of the product. Even though the product is the same if we purchase a single product, the price may be 10 rupees. If we purchase 5 pieces, the price may be rupees 45. Similarly, 100gm oil is 20/- 500ml is 80/-.
Pricing Variations:
Another differential Pricing Strategy is variations in the pricing structure. It is usually observed in travel agencies. For example, if we book an air ticket 2 months before, the price will be less. If we book the ticket as we thought it would be before, the price may increase slightly. If we want to buy Tatkal tickets, the price may increase more.
These are the various types of product Pricing Strategies. It is to be noted that apart from these types, we have different kinds of classifications based on the requirement, scenario, product, etc. So, the company needs to choose according to its product, Market share, competitors, etc.
Conclusion
The topic Pricing Strategy is one of the important topics of the syllabus and students can get a good understanding of the topic with the information provided above. Also, students should know the pattern to complete the answers in the right format to score extra marks in their exams. Practice will help students to get good confidence before appearing in the examination. They can go through the practice papers and important questions prepared by Vedantu’s expert teachers who have deep knowledge about the subject and they have years of experience in providing the best study material to help students to prepare for the examination.
FAQs on Pricing Strategies: Types and Applications
1. What is a pricing strategy and why is it important for a business?
A pricing strategy is a method a business uses to set the price for its products or services. It is a crucial element of the marketing mix because it directly impacts revenue, profitability, and brand perception. A well-defined strategy is important for several reasons:
- Achieving Profitability: It ensures that the price covers costs (production, marketing, distribution) and generates a desired profit margin.
- Building Brand Image: Price signals quality and value. Premium pricing creates an image of exclusivity, while economy pricing positions the brand as a value-for-money option.
- Gaining Market Share: Strategic pricing can attract new customers, retain existing ones, and effectively compete with other players in the market.
- Managing Demand: Prices can be adjusted to manage customer demand based on seasonality, product lifecycle, or market conditions.
2. What are some common types of pricing strategies with real-world examples?
Businesses use various pricing strategies based on their goals. Some of the most common types include:
- Premium Pricing: Setting a high price to reflect high quality and exclusivity. Example: Apple's pricing for iPhones.
- Penetration Pricing: Launching a new product at a low initial price to quickly capture a large market share. Example: Jio's initial low-cost data plans in India.
- Economy Pricing: Keeping prices consistently low with minimal spending on production and marketing. Example: Generic store brands like Big Bazaar's 'Smart Choice'.
- Price Skimming: Introducing a product at a high price and gradually lowering it over time. Example: The launch price of new gaming consoles like the PlayStation.
- Psychological Pricing: Using prices that have a psychological impact, such as ₹999 instead of ₹1,000. Example: Bata often prices its footwear this way.
- Bundle Pricing: Offering several products together for a single, lower price. Example: McDonald's 'Happy Meal' combos.
3. What key factors must a company consider when setting the price for a product?
According to marketing principles outlined in the CBSE syllabus, several factors must be analysed before setting a price. The primary considerations are:
- Product Cost: This is the base for any price. The price must cover all fixed, variable, and semi-variable costs associated with producing, distributing, and promoting the product.
- Customer Demand and Utility: The price must align with the value customers perceive in the product and their willingness to pay. High demand allows for higher prices, while low demand may require lower prices.
- Competition: A company must analyse the prices of competitors' products. The business can decide to price above, below, or at par with the competition, depending on its own product's strengths.
- Company Objectives: The pricing strategy should align with the firm's overall goals, whether it is to maximise profits, become a market leader, or simply survive in a competitive market.
- Government and Legal Regulations: Prices of certain essential products may be regulated by the government, and all prices must comply with legal standards, including taxes like GST.
4. How does penetration pricing differ from price skimming as a strategy for new products?
Penetration pricing and price skimming are opposite strategies used for new product launches. Penetration pricing involves setting a low initial price to attract a large number of customers quickly and gain significant market share. It is effective in price-sensitive markets and helps discourage new competitors. In contrast, price skimming involves setting a high initial price to 'skim' maximum revenue from early adopters who are willing to pay more for an innovative product. The price is then gradually lowered to target other market segments. This strategy works best for unique, high-demand products with little to no initial competition, such as new technology.
5. How does psychological pricing, like setting a price at ₹999, influence a customer's buying decision?
Psychological pricing works by appealing to a customer's emotional and perceptual biases rather than purely rational thinking. Setting a price at ₹999 instead of ₹1,000 leverages the 'left-digit effect'. Consumers tend to focus more on the first digit and perceive '999' as being in the '900 range', making it seem significantly cheaper than '1,000'. This creates the perception of a bargain or better value, which can act as a powerful trigger for a purchase decision, even though the actual difference is negligible.
6. Can a single business use different pricing strategies for its various products? Explain with an example.
Yes, it is a common and effective practice for a single business to use a mix of pricing strategies across its product line. This approach, often part of product line pricing, allows a company to target different customer segments and maximise overall revenue. For example, a car manufacturer like Maruti Suzuki might use:
- Economy pricing for its entry-level models like the Alto to attract first-time car buyers.
- Competitive pricing for its mid-range models like the Swift and Baleno to compete with other brands in the segment.
- Premium pricing for its top-end models like the Grand Vitara to target customers seeking more features and status.
7. How is a company's pricing strategy directly linked to its brand positioning in the market?
A company's pricing strategy is a core component that actively shapes its brand positioning. Price is one of the first signals a customer receives about a brand's identity and value proposition. A high price, as seen with brands like Rolex or Gucci, reinforces a position of luxury, exclusivity, and superior quality. Conversely, a low price, used by brands like D-Mart or an airline like IndiGo, positions them as providing value, affordability, and accessibility. A mismatch between price and other marketing elements can confuse customers and weaken the brand's position in the market.
8. What are the strategic risks of an economy pricing strategy, apart from just low profit margins?
While economy pricing can attract a large volume of customers, it carries significant strategic risks beyond just thin profit margins. These include:
- Perception of Low Quality: Customers may associate the low price with inferior materials, poor performance, or bad service, which can permanently damage the brand's reputation.
- Vulnerability to Price Wars: This strategy can easily be copied by competitors, leading to aggressive price-cutting wars where margins are destroyed for everyone and no one wins.
- Lack of Customer Loyalty: Customers attracted solely by the lowest price are often not loyal. They will quickly switch to another brand if it offers an even cheaper alternative.
9. Why would a business choose a penetration pricing strategy when launching a new product in a competitive market?
A business would opt for a penetration pricing strategy in a competitive market for several strategic reasons. The primary goal is not immediate profit, but long-term market dominance. Key objectives include:
- Rapid Market Share Gain: The low price quickly attracts a large volume of buyers, establishing a strong foothold.
- Creating Entry Barriers: The low price and thin margins can discourage potential competitors from entering the market, as the profit potential seems low.
- Achieving Economies of Scale: High initial sales volume can lead to lower production costs per unit, making the low price more sustainable in the long run.
- Building Brand Awareness: A successful launch with high sales helps in quickly establishing the brand name among consumers.
10. How do external factors, like government regulations or economic conditions, influence a firm's pricing decisions?
A firm's pricing decisions are not made in isolation; they are heavily influenced by external environmental factors. Key external influences include:
- Economic Conditions: During a recession, consumers become more price-sensitive, forcing businesses to consider value pricing or discounts. In a period of high inflation, firms may need to increase prices to cover rising costs.
- Government and Legal Regulations: The government can set price ceilings on essential commodities (e.g., medicines) or price floors for agricultural products. Additionally, tax policies like GST are a mandatory component of the final price.
- Social Factors: Growing social consciousness might lead companies to price eco-friendly products at a premium, as some consumers are willing to pay more for sustainability.
