PRICING STRATEGIES

The main of the management of organization is to maximize profits by effectively getting the
products of the shelf.

Pricing strategy is a way of finding a competitive price of a product or service. This strategy is
combined with the other marketing pricing strategies that are the 4P strategy (products, price,
place and promotion) economic patterns, competition, market demand and finally product
characteristic. This strategy comprises of one of the most significant ingredients of the mix of
marketing as it is focused on generating and increasing the revenue for an organization, which
ultimately becomes profit making for the company. Understanding the market conditions and the
unmet desires of the consumers along with the price that the consumer is willing to pay to fulfill
his unmet desires is the ultimate way of gaining success in the pricing strategy of a product or a
service

The ultimate goal of the company is to maximize profit being in competition and sustaining the
competitive market. However to maximize profits along with retaining your consumer you have to
make sure you choose the right pricing strategy. The correct strategy will help you attain your
objectives as an organization.

In terms of the marketing mix some would say that pricing is the least attractive element.
Marketing companies should really focus on generating as high a margin as possible. The
argument is that the marketer should change product, place or promotion in some way before
resorting to pricing reductions. However price is a versatile element of the mix as we will see.

Four Key Pricing Strategies

1) Economy Pricing
2) Penetration Pricing
3) Price Skimming
4) Premium Pricing

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The diagram depicts four key pricing strategies/policies. They form the bases for the exercise.
However there are other important approaches to pricing:

1) Psychological Pricing
2) Product Line Pricing
3) Optional Product pricing
4) Captive Product pricing
5) Product Bundle Pricing
6) Promotional pricing
7) Geographical Pricing
8) Value Pricing

Economy Pricing or No Frill Low Price

Used by wide range of business including generic food suppliers and discount retailers, aims to
attract the most price conscious of consumers. With this strategy, businesses minimize the costs
associated with marketing and production in order to keep product prices down. As a result,
customers can purchase the products they need without frills.

While economy pricing is incredibly effective for large companies, the technique can be
dangerous for small businesses because small businesses lack the sales volume of larger
companies, they may struggle to generate a sufficient profit when prices are too low. Still,
selectively tailoring discounts to your most loyal customers can be a great way to guarantee their
patronage for years to come.

Examples:

Supermarkets often have economy brands for soups, spaghetti, etc.

Budget airlines are famous for keeping their overheads as low as possible and then giving the
customer a relatively lower price to fill an aircraft. The first few seats are sold at a very cheap
price (almost a promotional price) and the middle majority are economy seats, with the highest
price being paid for the last few seats on a flight (which would be a premium pricing strategy).

Penetration Pricing or Pricing to Gain Market Share

You often see the tagline “special introductory offer”-the classic sign of penetration pricing. The
aim is usually to increase market share of a product, providing the opportunity to increase price
once this objective has been achieved.

Penetration pricing is the pricing technique of setting relatively low initial entry price, usually
lower than the intended established price, to attract new customers. The strategy aims to
encourage customers to switch to the new product because of the lower price.

It is most commonly associated with a marketing objective of increasing market share or sales
volume. In the short term, penetration pricing is likely to result in lower profits than would be the
case if price were set higher. However, there are some significant benefits to long-term
profitability of having a higher market share, so the pricing strategy can often be justified.

Examples

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This approach was used by France Telecom and Sky TV. France Telecom gave away free
telephone connections to consumers in order to grab or acquire maximum consumers in a given
market. Similarly, the Sky TV gave away their satellite dishes for free in order to set up a market
for them. Once there is a large number of subscribers prices gradually creep up. Sky TV or any
cable or satellite company, when there is premium movie or sporting event prices are at their
highest-so they move from penetration approach to skimming/premium pricing approach.

Price Skimming

Skimming involves setting a high price before other competitors come into the market. This is
often used for the launch of new product which faces little or no competition-usually due to some
technological features. Such products are often brought by “early adopters” who are prepared to
pay a higher price to have the latest or best product in the market.

One of the benefits of price skimming is that it allows businesses to maximize profits on early
adopters before dropping prices to attract more price-sensitive consumers. Not only does price
skimming help a small business recoup its development costs, but it also create an illusion of
quality and exclusivity when you item is first introduced to the marketplace.

There are some other problems and challenges with this approach:

Price skimming as a strategy cannot last for long, as competitors soon launch rival products
which put pressure on the price.

Distribution place can also be a challenge for innovative new product. It may be necessary to
give retailers higher margins to convince them to stock the product, reducing the improved
margins that can be delivered by price skimming.

A final problem is that by price skimming, a firm may slow down the volume growth of demand
for the product. This can give competitors more time to develop alternative products ready for
the time when market demand is strongest.

Examples:

Innovative electronic products, such as the Apple iPad, iPhone, and Sony Playstation 3

Manufacturers of digital watches used skimming approach in 1970’s. Once other manufacturers
were tempted into the market and the watches were produced at a lower cost, other marketing
strategies and pricing approaches are implemented. New products were developed and the
market for watches gained a reputation for innovation.

Premium Pricing

Premium products are priced higher due to their unique branding approach. A high price for
premium products is an extensive competitive advantage to the manufacturer as high price for
these products assures them that they are safe in the market due to their relatively high price.

Because customers need to perceive products as being worth the higher price tag, a business
must work hard to create a value perception. Along with creating a high quality product, owners

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should ensure their marketing efforts, the products packaging and the store’s décor all combine
to support the premium price.

Examples

Premium pricing can be charged for products and services such as precious jewelry, precious
stones, luxurious services, cruises, luxurious hotel rooms, business air travel, etc.

Psychological Pricing

Psychological pricing refers to techniques that marketers use to encourage customers to respond
on emotional levels rather than logical ones.

1. When Similarity Costs Sales

According to research from Yale, if two similar items are priced the same, the consumers
are often likely to buy one than if their prices are even slightly different.

The implication isn’t to set your identical vintage T-shirts at variable prices. Rather,
recognize the why behind the inertia: when similar items have the same price,
consumers are inclined to defer their decision instead of taking action.

2. Price Anchoring

The best way to sell a $2,000 watch is to put it right next to a $10,000 watch. The culprit
is a common cognitive bias called anchoring. Anchoring refers to the tendency to heavily
rely on the first piece of information offered when making decisions.

Placing premium products and services near standard options may help create a clearer
sense of value for potential customers, who will view the less expensive options as
bargain in comparison

3. Weber’s Law

According to a principle known as Weber’s Law, the just noticeable difference between
two stimuli is directly proportional to the magnitude of the stimuli. In other words, a
change in something is affected by how big that something was beforehand. Weber’s law
is often applied to marketing, particularly to price increases for products and services.
When it comes to price hikes, there is no magic number, but Weber’s law shows that
approximately 10% is the average point where customers are stirred to respond. As

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 always, many variables have an effect on pricing. Weber’s law serves as a testing
threshold rather than as an ironclad rule.

4. Reducing Pain Points

The human brain is wired to “spend till it hurts” according to the world of
neuroeconomics. The limit is reached when perceived pain is greater than perceived
gain.

Methods:
a) Reframe the product’s value

It’s easier to evaluate how much you’re getting out of an $84/month subscription
than a $1,000/year subscription, even though they average out to around the
same cost.

b) Bundle items purchased in tandem

Professor George Lowenstein notes that the LX version of car packages is a great
example of successful bundling. It’s easier to justify a single upgrade than it is to
consider purchasing the heated leather seats, navigation, and roadside
assistance individually.

c) Appeal to utility or pleasure

For conservative spenders, a message focusing on utility is more effective: “This

back massage can ease back pain.” More liberal spenders were persuaded by a
focus on pleasure: “This back massage will help you relax.”

d) It’s either free or it isn’t

“Free” is a powerful word, as demonstrated in Dan Ariely’s book Predictably

Irrational. In the example, Amazon’s sales in France were drastically lower than
all European countries. The problem was that French orders had a 20-cent
shipping charge tacked on (versus free shipping elsewhere). Pricing well means
extracting maximum value but nickel-and-diming can cause more resistance in
the long run.

e) Sweat the small stuff

In another CMU study, trial rates for a DVD subscription increased by 20% when
the messaging was changed from “ a $5 fee” to “a small $5 fee,” revealing that
the devil sometimes is in the copy details.

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 5. Challenging a Timeless Tradition

Ending the prices with nine is one of the oldest methods in the book. According to
research from the journal Quantitative Marketing and Economics, prices ending in nine
were able to outsell even lower prices for the same product.

The study compared women’s clothing priced at $35 versus $39 and found that the
prices ending in nine outperformed the lower prices by an average of 24%.

Sale prices—“Was $60, now only $45!”—were able to beat out the number nine. But
when the number nine was included with a slashed sales price, it again outperformed
lower price points.

For example, consumers were given the following option:

• Was $60, now only $45!
• Was $60, now only $49!

The sale price ending in nine outsold the one ending in five, even though it was more
expensive. Apparently, pricing with nines may be an old trick, but it’s still effective.

6. Time Spent vs Money Saved

According to Jennifer Aaker of Stanford university, in many product categories,

customers recall more positive memories when asked to remember time spent with
product over the money saved.

“Because a person’s experience with a product tends to foster feelings of personal

connection with it, referring to time typically leads to more favorable attitudes-and to
more purchases,” Aaker says. Aaker notes that many purchases tend to fall in either the
“experiential” or “material” categories. Purchases like concert tickets benefit more from
“time spent” messaging, whereas designer jeans sales are aided by reminders of money
and prestige.

7. Comparing Prices

According to research from Stanford, the act of comparative pricing can cause
unintended effects if there is no context for why prices should be compared. Asking
customers to make explicit comparisons about the price of your product and a
competitor’s can cause people to lose trust in your messaging. The lead researcher
noted, “the mere fact that we had asked them to make a comparison caused them to
fear that they were being tricked in some way.”

A classic example of price comparison done right can be seen in the early days of
Esurance. They explained why bottom-line insurance isn’t always the best solution, and
they positioned their messaging around how they lower prices the right way—by
eliminating needless expenses through their online-only approach ("Born online and built
to save.").The focus should be on why prices are cheaper, not just that they are.

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 8. The Power of Context
Is there ever a time when one Budweiser is worth more than another? Logic would
dictate no, but bar hoppers know this just isn’t the case. Where you buy affects how
much you spend. Economist Richard Thaler put this to the test years ago, and found that
customers were willing to pay higher prices for a Budweiser if they knew it was coming
from an upscale hotel versus a run-down grocery store. Thaler asserts that context was
the simple explanation here: the perceived prestige of the upscale hotel allowed it to get
away with charging higher prices.

This is why people will pay more for a “multimedia course” over an eBook, even if the
information offered is exactly the same. Perception goes a long way toward justifying
whether or not a price is reasonable, so it’s beneficial to create a compelling narrative
around a product. Head-slappingly obvious, yet so often forgotten by founders who
neglect to position their products.

9. Different Levels of Pricing

Most of us are clueless about the concept of “value,” says prof William Poundstone,
author of Pricelss: The Myth of Fair Value. As such, we can be swayed in ways we
wouldn’t believe possible. Poundstone discusses a study around the purchasing patterns
of consumers over a selection of beer.

Test#1 (only two options available: a regular option and a premium option)

Four out of five people choose the more popular premium option.

Test#2

The cheap beer was ignored and it upended the ratio of standard to premium purchases.
This was clearly the wrong choice, since anchoring was playing a negative role.

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 Test#3

These examples show just how important it is to test out different pricing brackets,
especially if you believe you may be undercharging. Some customers are always going to
want the most expensive option. That doesn’t make an enterprise plan right for every
product, but it serves as a compelling reminder that you can always find a proper reason
to charge more.

10. Keeping Prices Simple

In a paper published in the Journal Consumers psychology, researchers found that prices
that contained more syllables seemed drastically higher to consumers.

Here are the pricing structures that were tested:

• $1,499.00
• $1,499
• $1499

The top two prices seemed far higher than the third price. This effect occurs because of
the way one would say the numbers out loud: “One thousand four hundred and ninety-
nine,” versus “fourteen ninety-nine.” This effect even occurs when the number is
evaluated internally, or not spoken aloud. As silly as it may seem, the implication is
similar to editing prose—avoid all unnecessary additions, and prefer the simplest style
possible.

Product Line Pricing

Product line pricing is defined a pricing a single product or service and pricing a range of
products. For example car washes; a basic wash could be $2, a wash and wax $4 and the whole
package for $6. Product line pricing seldom reflects the cost of making the product since it
delivers a range of prices that a consumer perceives as being fair incrementally – over the range.
In another example if you buy a pack of chips and chocolate separately you end up paying a
separate price for each product; however of you buy a combo pack of the two you end up paying
comparatively less price for both and if you buy a combo of both in a higher quantity you end up
paying even lesser.

For the manufactures of the product manufacturing and marketing of larger pack is much more
expensive as it does not fetch them good amount of profit, however they do the same to attract
more consumers and keep them interest in their products. On the other hand manufacturing

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smaller packs and lesser quantity is more beneficial and fetches more profit for the manufacturer
of the product.

Optional Product Pricing

It is a general approach, if the companies decrease the price of a product or a service they do
increase their price for their other available optional services. Let’s take a very simple and a
common example of a budget airline. The prices of their airfare are low however they will charge
you extra if you want to book a window seat, if you want to travel with your family and want to
book an entire row together you might have to end up paying extra charges as per the their
guidelines, in case you have too much of luggage to carry you will end up paying extra on the
same, in fact you will end up paying extra charges even if you need extra leg space in a budget
airlines. You can say that even if the price of the air fare is low you will end up paying more for
the extra yet mandatory services that you will require as you travel.

Captive Product Pricing

Captive products have products that compliment the products without which the main product is
of no use or is useless. For example an inkjet printer is of no use without its cartridge it will not
work and have no value and a plastic razor will have no value without its blades. If the company
is manufacturing the inkjet printer it will have to manufacture its cartridges and if the company is
manufacturing a plastic razor it will have to manufacture blades for the same. For a simple
reason that any other company cartridge will not fit into the inkjet printer and neither will any
other companies blade fit into the plastic razor. The consumer has no other option but to buy the
complementary products from of the same company. This increases the sales and the profit
margin of the company anyways.

Product Bundle Pricing

With bundle pricing, businesses sell multiple products for a lower rate than consumers would face
if they purchased each item individually. Not only is bundling goods an effective way of moving
unsold items that are taking up space in your facility, but it can also increase the value
perception in the eyes of your customers, since you’re essentially giving them something for free.

Bundle pricing is more effective for companies that sell complimentary products. For example, a
restaurant can take advantage of bundle pricing by including dessert with every entrée sold on a
particular day of the week. Small businesses should keep in mind that the profits they earn on
the higher-value items must make up for the losses they take on the lower-value product.

Promotional Pricing

Pricing for promoting a product is another very useful and helpful strategy. These promotion
offers can include, discount offers, gift or money coupons or vouchers, buy one and get one free,
etc. to promote new and even existing products companies do adopt such strategies where they
roll out these offers to promote their products. An old strategy yet it is one of the most successful
pricing strategies till date. Reason of its success is that the consumer considers buying the
product and service for the offer that the consumer receives.

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Geographical Pricing

Geographical pricing sees variations in price in different parts of the world. For example rarity
value, taxes differ in few countries, differences in the currency rate for the products, and
shipping costs of the product, etc.

For example, when a few fruits are not available in a country they are imported from another
country, these fruits are exotic fruits, they are also scarce this increases their value in the country
they are imported to, scarcity, the shipping cost of the imported product along with its quality
increase its price, where as it is much cheaper where it is originally grown. Similarly the
government implies heavy taxes on a few products such as petrol or petroleum products and
alcohol to increase their revenue; hence such products are expensive in a few countries or part of
the country compared to the other parts. Geographic location does create a huge impact on the
pricing strategy of a product as the company has to consider every aspect before they price a
product. Hence the price needs to be perfect and appropriate.

Value Pricing

Value pricing is reducing the price of a product due to external factors that can affect the sales of
the product for example competition and recession; value pricing does not mean that the
company has added something or increased the value of a product, When the company is afraid
of factors such as competition or recession affecting their sales and profits the company
considers value pricing.

For example McDonalds the famous food chain has started value meals for their consumer since
they have started facing competition with other fast food chains. They offer a meal or a
combination of a few products as a lower price where the consumer feels emotionally content
and continues to buy their products.

References:

https://quickbooks.intuit.com/r/pricing-strategy/6-different-pricing-strategies-which-is-right-for-
your-business/

https://www.marketingteacher.com/pricing-strategies/

https://www.educba.com/pricing-strategies-in-marketing/

https://www.helpscout.com/blog/pricing-strategies/

https://www.tutor2u.net/business/reference/pricing-strategies-gcse

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