Best Pricing Strategies

The choice of which strategy to use depends on numerous factors. Penetration techniques are generally supported through the potential to hold expenses down and the expectations of competitors for fast marketplace entry. Skimming techniques paintings high-quality when the opposite is authentic. This article is to enter elements of every one of the techniques.

Best Pricing Strategies

Penetration pricing

At the introductory level of a new product’s life cycle way accept a lower profit margin and to rate relatively low. Such a method must generate greater sales and set up the brand new product inside the marketplace more speedy. Penetration pricing is the pricing method of placing a highly low initial access fee, frequently decrease than the eventual market price, to draw new customers. The strategy works on the expectation that clients will transfer to the new brand due to the decreased charge. Penetration pricing is maximum normally associated with an advertising and marketing goal of increasing marketplace percentage or income quantity, in place of making profit inside the brief term. The benefits of penetration pricing to the firm are as follows:


  • It can bring about fast diffusion and adoption. This can achieve excessive marketplace penetration fees speedy. This can take the competitors through marvel, now not giving them time to react.
  • It can create goodwill in many of the early adopter's phases. This can create extra exchange via word of mouth.
  • It creates price management and price reduction pressures from the beginning, leading to more efficiency.
  • It discourages the access of competitors. Low prices act as a barrier to access.
  • It can create a high stock turnover for the duration of the distribution channel. This can create seriously crucial enthusiasm and assist in the channel.
  • It may be based totally on marginal fee pricing, which is economically efficient.

A penetration approach could commonly be supported by using the following conditions: price-sensitive purchasers, possibility to keep expenses low, the anticipation of brief market entry with the aid of competitors, a high probability for rapid popularity through capacity consumers, and an ok useful resource base for the organization to satisfy the new call for and income.


 Skimming

Skimming involves goods being sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price and sacrificing high sales to gain a high profit is therefore “skimming” the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product. It is commonly used in electronic markets when a new range, such as DVD players, is firstly dispatched into the market at a high price. This strategy is often used to target “early adopters” of a product or service. Early adopters generally have a relatively lower price sensitivity and this can be attributed to their need for the product outweighing their need to economize, a greater understanding of the product’s value, or simply having a higher disposable income. This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition. A skimming strategy would generally be supported by the following conditions:

  •   Having a premium product. In this case, “Premium” does not just denote the high cost of production and materials- it also suggests that the product may be rare or that the demand is unusually high. An example would be a USD 500 ticket for the World Series or a USD 80,000 price tag for a limited-production sports car such as this.
  • Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.


Product Line Pricing

Line pricing is the use of a limited number of price points for all the product offerings of a vendor. Line pricing is the use of a limited number of prices for all the product offerings of a vendor. This is a tradition started in the old five and dime stores in which everything cost either 5 cents or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It has the advantage of the ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices. Line pricing serves several purposes that benefit both buyers and sellers. Customers want and expect a wide assortment of goods, particularly shopping goods. Many small price differences for a given item can be confusing. If ties were priced at $15, $15.35, $15.75, and so on, selection would be more difficult. The customer would not be able to judge quality differences as reflected by such small increments in price. So having relatively few prices reduces this kind of confusion.


From the seller’s point of view, line pricing holds several benefits:

  1.    It is simpler and more efficient to use relatively fewer prices. The product and service mix can then be tailored to select price points.
  2.  It can result in a smaller inventory than would otherwise be the case. It might increase stock turnover and make inventory control simpler.
  3. As costs change, the prices can remain the same, but the quality in the line can be changed. For example, you may have bought a $20 tie 15 years ago. You can buy a $20 tie today, but it is unlikely that today’s $20 tie is of the same fine quality as it was in the past.


Psychological Pricing

Psychological pricing is a marketing practice based on the theory that certain prices have meaning to many buyers.

Price, as is the case with certain other elements in the marketing mix, has multiple meanings beyond a simple utilitarian statement. One such meaning is often referred to as the psychological aspect of pricing. Inferring quality from price is a common example of the psychological aspect of price. For instance, a buyer may assume that a suit priced at $500 is of higher quality than one priced at $300. Products and services frequently have customary prices in the minds of consumers. A customary price is one that customers identify with particular items. For example, for many decades a five-stick package of chewing gum cost five cents, and a six-ounce bottle of Coca-Cola also cost five cents. Candy bars now cost 60 cents or more, which is the customary price for a standard-sized bar. Manufacturers tend to adjust their wholesale prices to permit retailers to use customary pricing. Psychological pricing is one cause of price points. For a long time, marketing people have attempted to explain why odd prices are used. It seemed to make little difference whether one paid $29.95 or $30.00 for an item. Perhaps one of the most often heard explanations concerns the psychological impact of odd prices on customers. The explanation is that customers perceive even prices such as $5.00 or $10.00 as regular prices. Odd prices, on the other hand, appear to represent bargains or savings and therefore encourage buying. There seems to be some movement toward even pricing; however, odd pricing is still very common. A somewhat related pricing strategy is combination pricing, such as two-for-one or buy-one-get-one-free. Consumers tend to react very positively to these pricing techniques.


The psychological pricing principle is primarily based on one or extra of the subsequent hypotheses:

• Consumers ignore the least good-sized digits instead of doing the proper rounding. Even though the cents are seen and not definitely noted, they may subconsciously be partially ignored.

• Fractional fees propose to consumers that items are marked at the lowest viable fee.

• When items are listed in a way this is segregated into fee bands (including a web actual property seek), the rate ending is used to maintain an item in a decreased band, to be visible by using greater capability clients.


Pricing During Difficult Economic Times

Every company has a unique pricing strategy during a boom period, based on their own product, market, and managerial decision-making. However, during a recession, many companies may be tempted to abandon these strategies. After all, if customers are less willing to spend money, simplistic logic suggests that, by cutting prices, you can attract more customers. However, this strategy should be approached with caution. Cutting prices can quieten customer complaints and help boost sales for a time but can have longer-term effects on profitability, and weaken the brand’s image. Reductions can also lead customers to expect discounts whenever the economy dips, causing them to wait to make purchases in the future.

A model of pricing based on ‘rational’ economic theory suggests that prices are set by the forces of supply and demand, and individual companies in a perfectly competitive market must follow the equilibrium price. However, real life is not so simple; people do not always act in the prescribed logic. Sometimes prices go up and people buy more, and vice versa.

A smart pricing strategy during a recession can become a competitive advantage. By knowing what value a company delivers to its customers, it can price more confidently and not panic into slashing prices when it does not necessarily need to. Price-cutting may even lead to price wars where nobody wins. If cuts must be made, companies should focus on cutting the prices of low-value items and retaining high-value products.

Similarly, price increases during a recession can also be a bad idea. Many firms try to recover higher costs through price increases, which can turn away customers. Customers locked into contracts may have no regress if a company raises prices on them, but it tarnishes the seller’s reputation and will make the customer think twice when the time comes to renew.

Ultimately, the pricing strategy becomes even more important during a recession, and companies must consider all these factors when attempting to adjust. It is important to protect the brand, not alienate customers, and remember what value the company offers in order to get through the difficult economic period unscathed.


Fighter Brands

In marketing, a fighter brand (sometimes called a fighting brand) is a lower-priced offering launched by a company to take on, and ideally take out, specific competitors that are attempting to under-price them. Unlike traditional brands that are designed with target consumers in mind, fighter brands are created specifically to combat a competitor that is threatening to take market share away from a company’s main brand. The strategy is most often used in difficult economic times. As customers trade down to lower-priced offers because of economic constraints, many managers at mid-tier and premium brands are faced with a classic strategic conundrum: Should they tackle the threat head-on and reduce existing prices, knowing it will reduce profits and potentially commoditize the brand? Or should they maintain prices, hope for better times to return, and in the meantime lose customers who might never come back? With both alternatives often equally unpalatable, many companies choose the third option of launching a fighter brand. When the strategy works, a fighter brand not only defeats a low-priced competitor but also opens up a new market. The Celeron microprocessor, shown here, is a case study of a successful fighter brand. Despite the success of its Pentium processors, Intel faced a major threat from less costly processors that were better placed to serve the emerging market for low-cost personal computers, such as the AMD K6. Intel wanted to protect the brand equity and price premium of its Pentium chips, but it also wanted to avoid AMD gaining a foothold on the lower end of the market. So it created Celeron as a cheaper, less powerful version of its Pentium chips to serve this market.


Everyday Low Pricing

Everyday low price is a pricing strategy offering consumers a low price without having to wait for sale price events or comparison shopping. Everyday low price (EDLP) is a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping. EDLP saves retail stores the effort and expense needed to mark down prices in the store during sale events, as well as to market these events. EDLP is believed to generate shopper loyalty. It was noted in 1994 that the Wal-Mart retail chain in America, which follows an EDLP strategy, would buy “feature advertisements” in newspapers on a monthly basis, while its competitors would advertise 52 weeks per year.

An example of a successful brand (other than the infamous Wal-Mart) that uses the EDLP strategy is Trader Joe’s. Trader Joe’s is a private-brand label that conducts a Niche marketing strategy describing itself as the “neighborhood store. ” The firm has been growing at a steady pace, offering a wide variety of organic and natural food items that are hard to find, enabling the business to enjoy a distinctive competitive advantage. Apart from the many strengths of Trader Joe’s, the most prominent is their commitment to quality and lower prices. The company has worked hard to manage this economic image of value for its products that competitors, even giant retail stores, are unable to meet. Trader Joe’s is not an ordinary store. It is unique because it does not market itself as other grocery stores do nor does it require its customers to take out a membership to enjoy its low prices.


High/Low Pricing

High-low pricing is a strategy where most goods offered are priced higher than competitors, but lower prices are offered on other key items. High-low pricing is a method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors. However, through promotions, advertisements, and or coupons, lower prices are offered on other key items consumers would want to purchase. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products. High-low pricing is a type of pricing strategy adopted by companies, usually small and medium-sized retail firms. The basic type of customers for the firms adopting high-low prices will not have a clear idea about what a product’s price would typically be or have a strong belief that “discount sales = low price.” Customers for firms adopting this type of strategy also have a strong preference in purchasing the products sold in this type or by this certain firm. They are loyal to a specific brand.

There are many big firms using this type of pricing strategy (ex: Reebok, Nike, Adidas). The way competition prevails in the shoe industry is through high-low prices. Also, high-low pricing is extensively used in the fashion industry by companies (ex: Macy’s and Nordstrom) This pricing strategy is not only in the shoe and fashion industry but also in many other industries. However, in these industries, one or two firms will not provide discounts and works on a fixed rate of earnings. Those firms will follow everyday low price strategies in order to compete in the market.



References

WEB: lUMEN Boundless Marketing - lUMEN Boundless Marketing, 1 ... https://courses.lumenlearning.com/boundless-marketing/chapter/specific-pricing-strategies/

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