Effective Pricing Strategies for Businesses

Special Pricing Strategies

1. For a New Product

Different stages in a product’s life cycle involve different goals, which require different pricing strategies.

A. Market-Skimming Price

Setting a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price; the company makes fewer but more profitable sales. Example: Apple introduces new products with high prices, and then, when the new model is introduced, the older model decreases in price.

Conditions:

• Good quality and image
• Enough buyers
• Profitable → revenues can’t be offset by the costs of producing on a small scale
• Competitors can’t enter easily

B. Market Penetration Price

Setting a low price for a new product in order to attract a large number of buyers and a large market share. → selling more + economies of scale

Conditions:

• Price-sensitive market
• Economies of scale
• Low price deters competitors
• Customers stay with the company

2. For the Entire Product Mix

A. Product Line Pricing

Setting the price for the several products in a product line based on cost differences between the products, customers’ evaluation of different features, and competitors’ prices.

B. Optional-Product Pricing

Pricing of optional or accessory products along with a main product → base product for a fair price + extra options charged in addition.

C. Captive-Product Pricing

Setting a price for a product that must be used along with a main product. The company has to find a balance between the main product and supplies, and the same company has to sell the main and captive products.

D. By-Product Pricing

E. Product Bundle Pricing

Combining several products and offering the bundle at a reduced price than what customers would pay if buying them individually.

• Sell products that would not be sold
• Reduces items handled → operations are easier

3. Price Adjustment Strategies

To account for customer differences or changing situations:

A. Discount

A straight reduction in price on purchases during a stated period or of larger quantities.

B. Allowance Pricing

Promotional money paid by the manufacturer to retailers in return for an agreement to feature the manufacturer's products in some way.

C. Segmented Pricing

Selling a product or service at two or more prices where the difference is not based on a difference in costs:

• Customer-segment pricing: Different customers pay different prices for the same product/service
• Product form pricing: Different versions of the product are priced differently but not according to differences in their costs
• Location-based pricing: Different prices for different locations even though the cost of each location is the same
• Time-based pricing: Differences in price due to variations by season, period of the month, etc.

D. Psychological Pricing

Pricing that considers the psychology of prices and not simply the economics. Example: perception of discount → good deal or damage in quality? Reference price: the price that buyers carry in their minds and use as a reference when evaluating a given product → different products in the same category or the same product in different periods/ situations/locations.

E. Promotional Pricing

Temporarily pricing the products below the list price and sometimes even below costs to increase short-run sales/get rid of too much stock or fight competition. Note: It is a short-term fix tool that has to be used carefully because it can change the customer’s reference point.

F. Geographical Pricing

Setting prices for customers located in different areas.

G. Dynamic and Internet Pricing

Continuous adjustments.

H. International Pricing

Decide what to charge in different countries: unique or different prices?