There are different ways of classifying the pricing strategies. One such way is to classify low pricing (cost-plus, loss-leader, market penetration, nearly predatory), medium pricing (Competitive, pricing below for perception of good value, price slightly above if more benefits are offered or brand equity is there), and high pricing (price skimming, prestige pricing, price signalling).
1. New Product Pricing Strategy:
Such a strategy has two choices – either to skim the price or to have penetration price.
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Price Skimming:
In skimming strategy, high price low volume, prices begin high to extract maximum surplus from customers willing to pay premium prices for new product. Subsequently prices decline as more price-sensitive segments are targeted or competition increases or costs come down. For example, the cost of 1GB Hard disk in May 1997 was $228, came down to $3.88 into $0.88 in March 2007, to $ 0.16 in March 2010. Costs come down due to expansion and improved efficiency through experience and scale economies.
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Managers use skimming in markets with high product differentiation when facing a cost disadvantage due to scale economies. In case of medicines, significant innovations follow a modified skimming strategy, with prices at launch displaying substantial premium over existing substitutes, then declining over time. It is suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) like Playstation, jewellery, digital technology, new DVDs, etc.
Skimming may be the best strategy when there are:
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i. High barriers to entry
ii. Demand is price inelastic
iii. Clearly define market segments (Rolex watch sells at premium price because its customers are unwilling to trade down)
iv. Short product life cycles
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v. Few economies of scale or experience.
Penetration Pricing:
Penetration price means to charge lower initial prices in the beginning to penetrate to every possible market and the segment – low price, high volume. Penetration pricing succeeds in taking the rivals completely by surprise, giving them no time to recover from the onslaught. This strategy makes sense when the following conditions exist-
i. A large market exists for the product;
ii. In the mainstream market the customers are Price-sensitive;
iii. Short-run and long-run cost benefits from scale economies and experience curve effects are available;
iv. Mainstream customers well understand the product characteristics;
v. Threat of competitive entry is ever present;
vi. In case of a brand if the threats of strong competitive imitation immediate after its introduction is there because there is no patent protection;
vii. There is mass market acceptance of the product; and
viii. Long product life cycles.
ix. Profit is possible for add-ons to function (Ink cartridges for a printer)
Penetration pricing focuses on scale economies. It is adopted when the there is a cost advantage due to scale economies and total market demand was price elastic. Most “me too” new products like chocolate bars, food stuff, household goods, etc. follow a penetration strategy with launch prices below the competition, and then possibly increasing.
When a product is placed in the market at an attractive “introductory price”, consumers expect a price rise in the near future, and sometimes decide to stock up on it, thus fulfilling the purpose of penetrative pricing. But this is possible in cases of products launched only by recognized brands. Some of the products for which it is used include – Automobiles, computer accessories, food supplies, cosmetics, etc.
Disadvantages of Penetration Pricing:
This kind of pricing works best with products which are in demand, but not with luxury products, high-end mobile phones and sedan cars, or limited-edition products. Following are the disadvantages of this pricing method –
i. No profit in the short term is possible. And if the product is not fulfilling consumer parameters, the company will have to withdraw the product.
ii. Once a lower price is initiated it is very difficult to hike the price, even when the cost has gone up.
iii. Cheaper price attracts even those who are not part of your target consumers, which is not a good sign for any product looking to establish itself in the market.
iv. It is an inappropriate strategy for the products meant for niche market segment. Whole lot of consumers equates premium quality with high prices.
v. This pricing may horribly backfire if the rivals decide to join the bandwagon and lower their product prices further, triggering a price war. This can have a disastrous end. Take the case of Coke v Pepsi.
vi. Predatory pricing is a cruel variant of penetration pricing to destroy competition, and in some countries it is illegal.
It is impossible to remove the crookedness out of penetration pricing. This strategy stands on the premise of elbowing out competition, straying on to unethical territories at times. However, there is no doubt about its success rate and its practicality, more so in the consumer packaged goods market.
Experience Curve Pricing:
Experience Curve Pricing is a particular case of penetration pricing. It also involves low initial prices. The experience curve pricing exploits learning by doing. This strategy is used when there was high product differentiation, the product was not a major innovation, and there was low capacity utilisation. The firms are market followers cutting prices now to drive down costs in anticipation of future commoditisation of the market.
2. Differential Pricing Strategies:
Marketers selling the same product to different buyers at different prices adopt differential or variable pricing strategies. In some of the businesses and some of the countries where haggling is in use this strategy is very popular. The popular methods under this strategy are.
Differential Pricing:
The price fixed by Group of Ministers for gas extracted from KG- D6 fields by RIL is at $4.2 per unit.
Global Gas Prices are $14.16 per unit.
According to Reliance Industries Ltd., the current pricing is sub-market and inconsistent with prices in the Production Sharing Agreements.
Negotiated Pricing, Second or Secondary-Market Pricing (at a particular price in the core market and at reduced price in a secondary market), Periodic Discounting (same product during non-discounting period sold at a higher price), Random Discounting, Geographic Pricing (Charging different prices in different regions), Optional product pricing (adding one unwanted extra feature and charging different price), and Internet Pricing (lower than the store pricing).
Recently Haryana Urban Development Authority has invited applications for allotment of freehold institutional plots. The rate per square meter for one – acre plot, for Haryana Govt. Departments/Boards/Corporations is Rs 26,900; for other Govt. Departments/ Boards/Corporations it is Rs 28,200; and for private organisations it is Rs 38,900.
3. Competitive Pricing Strategy:
Competitive objectives of pricing may make the marketer to go in for competitive pricing strategy. Strong marketers may exploit their dominant positions, but the weaker ones have to follow the leaders.
The tactics available for competitive pricing strategies include – Leader Pricing (can adjust prices without starting price wars and can make their announced prices stick; Parity Pricing (the followers adjust their prices to the leader’s prices); Low-Price Supplier (discount stores undercutting the competition through lower markup); Predatory Pricing (setting prices so low to eliminate competition and then increase the price) which is illegal in most of the countries; Traditional Pricing set by tradition and remain unchanged for a long time, like Rs 2 shampoo sachet; and Inflationary Pricing (no frill pricing).
4. Product Line Pricing Strategy:
Product-line pricing strategy focuses on total-profit pricing rather than item-profit pricing. Objective is to maximise profit for the total product line instead of obtaining a larger profit for any individual item in the line.
This strategy includes Captive/Complementary Pricing (selling razors at lower prices but blades at a higher price); Premium Pricing (Pricing one version of the product at a premium, offering more features than are available on other versions); Bait Pricing (attracting customers by advertising low-priced models available in plenty but expecting to sell a higher priced model); Price Lining (to have three prices of three versions in a product line to differentiate them from each other to attract different categories of buyers); By-Product Pricing (to sell the by-products at low value to get rid of them like saw dust and make the main product’s price more competitive); and Price signalling (setting price to signal relationship with the quality of product).
5. Psychological Pricing Strategy:
A price may be perceived selectively by customers. Sometimes consumers may believe it to be cheaper (though not so), or sometimes perceiving the quality to be better (because prices have been set high).
This strategy plays on emotions rather than rationalities and includes Reference Pricing (displaying a moderate price version next to higher-priced model to show isolation effect- a fridge priced at Rs 19,000 along with a model priced at Rs 20,000); Bundle Pricing (three pairs of socks at a rate which shows that the three are cheaper than buying one); Multiple-unit Pricing (two or more products sold in one package at a single price); Everyday Low Pricing (low prices on a daily business); Odd-Even Pricing (keeping the prices at Rs 99 or Rs 149 – now in India coins below 50 paise denomination are no more legal tenders – Indane Gas in UP is priced at Rs 397.50, though the delivery man never returns the balance); Customary Pricing ( Nestle reducing the quantity of noodles from 100 grams to 80 grams to have the same price per packet, i.e., Rs 10); and Prestige or Image Pricing (when quality is difficult to ascertain by seeing, quality is inferred on the basis of price).
In the Western world the price ending with 9 dominates, in East Asian countries price ending with 8 is very common. More than 40% of prices on restaurant menus in Hong Kong end with an 8. The 8 is not a cue for price, but a cue for quality. In China, a 5 price ending works better. When a price ends on Rs 99 the seller implicitly communicates that the item is priced carefully.
The difference between Rs 149 and Rs 150, is minuscule. But the difference in the implied message matters. When a price ends on a zero, the customer suspects the price has been rounded up and that the seller does not worry about the price.
6. Cost-related Pricing Strategy:
The marketer may opt the strategy to recover cost(s) and earn sufficient profit. (Some of the writers do not include it as a strategy rather they discuss it under the head establishing exact price). This strategy includes Mark-up Target Pricing (add the standard industry fixed % to the costs to earn specified profit.
Simple mark-up means markup on the selling price, but markup on cost focuses on cost); Cost-plus Pricing (based upon average cost and adding a particular rupee amount as profit); Break-even Pricing (revenue is equal to costs); Loss- Leader Pricing (deliberately sold below cost to lure buyers), and Marginal Cost Pricing (Allows variable pricing structure).
7. Promotional Pricing Strategy:
The objective of promotional pricing strategy is to promote the sale for a short-term. It includes Leader Pricing (taking lead in the reduction of prices); Special Event Pricing (to promote sale through Sale or price cutting on a particular day, festival, etc – Big Bazaar offers the lowest prices on Wednesday); Comparison Discounting (setting price at a specific level & comparing with a higher price which may be regular list price – Most of the organised retail stores do it.
The Economist subscription for one 51 weeks is at Rs 5,000, for 102 weeks Rs 9,180, and for 153 weeks Rs 12,240 ); ‘Off-peak’ pricing, and Early bird Pricing (High discounts offered during off season – Dry cleaners during summers, Half sleeve shirts during winters – or offering lot of discounts on immediate booking-Estate developers).
8. Other Strategies:
At times the marketers follow a method which may not be included in any of the above strategies. The methods or tactics include Tender Pricing (the basis is kept secret and includes payment under the table); Professional Pricing (Instead of Itemised billing Fortis Escorts has offers for ballooning and bye-pass surgery, or advocates may ask for one fees for a case instead of number of appearances); Ethical Pricing ( Lowering prices on humanitarian considerations DDA application forms are priced for economically weaker groups at a price lower than what is charged for HIG and MIG applicants); and Close-out pricing (to eliminate the items no more in currency or the last piece in the lot, or of odd size – It is quite common to find lower price for the marble left out in a lot).