What is Pricing Strategy?

This are tactics that companies use to increase sales and maximize profits by selling their
goods and services for appropriate prices.
Pricing Strategy takes into account, the cost of the product, Labor, advertising expenses,
competitive pricing, trade margins and the overall market conditions.

NEW PRODUCT PRICING STRATEGIES

Pricing strategies usually change at different phases and stages of a product’s life cycle.
Product introduction is the most challenging phase. During this stage, Marketers face the
challenge of setting prices of business offerings There are two strategies that they can follow.
1. Price skimming
2. Pricing Strategies for Market Penetration

1.Pricing skimming
It involves setting high rates during the introductory phase. This will help business
maximize sales on new products and services. After the new products or services are introduce,
company lowers the price gradually. Price skimming allows you to maximize profits on early
adopters. After, you can drop the price to attract more price-sensitive consumers. This also
creates an illusion of quality and exclusivity when your item is first introduced to the
marketplace.

Example: Sony HDTV costed 43,000 dollars when it was introduced to the Japanese market in
1990. These television sets were bought by customers who can afford such a high price. These
are the customers who desperately wanted the new technology. But, the next few years, Sony
reduced the prices to lure more customers.

2. Pricing Strategies for Market Penetration

This strategy aims to attract buyers by offering lower prices on goods and services. New
companies use this to draw attention away from their competitions. But this strategy does lead
to an initial loss of income for the business. But overtime, it will increase in awareness of the
company and can drive profits. Small businesses can stand out from the crowd. After
penetrating the market, they will then start increasing the price of their goods.

Example 1: Netfix used penetration pricing to edge out competitor. In 2000, Netflix users could
rent four movies at a time with no return-by dates for the $15.95 subscription plan. That put
rentals at or below $1 per DVD for regular movie-watchers, where Blockbuster charged about
$4.99 for a single, three-day rental. This allowed Netflix to build its subscriber base and reach
profitability in 2003, five years after its opening.

Example 2: Oneplus launched its flagship phone which is the Oneplus 1. It had all the features
of an iPhone. But much cheaper than an iPhone. After the company acquired a good market
share, it started launching its products at a premium price.
 ADVANTAGES OF PENETRATION PRICING

1. Fast adoption- low price can help speed up how fast consumers test and
accept products or services.
2. Economies of scale- Penetration pricing can increase the volume of sales to
offset the risks of a low price. In addition, suppliers may offer bulk discounts if
a product is moving quickly. 
3. Goodwill- Customers value a good deal. By starting with an inexpensive initial
price, new companies can build goodwill with a large number of prospects
and customers. Price-sensitive customers are more likely to switch, and
potentially promote the product through word-of-mouth marketing.
4. Less competition- New market entrant with a low price point sometimes
catches competitors unaware.
5. Cost control- Penetration pricing requires diligent budgeting and forecasting.
With this strategy, your company may discover areas to improve cost
efficiency, lower marginal costs, and control business expenses. 

PRODUCT MIX PRICING STRATEGIES

- This variation in pricing is based on the costs, demand and the different level of competition
that a product has to face in the market.

1.  Product line pricing- You must set different prices for different offerings on a product
line in case your business offers different from product lines. This price differentiation
takes into account cost differences between the products in a given product line.
Ex. Smartphones with different features at different prices.

2. Optional Product Pricing- You have to add the price of accessories to the base price of
the product in case you offer accessory products along with the main product. This
means that accessories are given as an option to the customers.

3. Captive Product Pricing- This strategy is used by companies manufacturing products

that are essential for using the main products. For example, when you buy a razor you
need to buy cartridges for it. Gillette that sells razors offer their main product at a low
price but makes huge profit from the razor cartridges.

4. By Product pricing- Some industries generate by-products as a result of manufacturing

goods. These by-products hold no value at times and it is a costly affair to dispose them
off. This scenario may lead to increasing the cost of the core product. However, a
company can sell these by-products to make for the higher cost of disposing them off by
using by-product pricing. Thus, this makes the price of the core product competitive.

5. Bundle Pricing- Selling a package of goods or services for a lower rate that when
buying it individually.
For Example: Restaurants bundle desserts to every meal.

PRICE ADJUSTMENT STRATEGIES

Companies adjust price of their products. This is undertaken to consider customer differences
and changing situations.

1. Pricing at Premium- Business sets costs higher that their competitors. This is ideal to
small companies that sell unique goods.
2. Economy Pricing- This strategy aims to attract price conscious consumers. This is
used by wide range of businesses.
Example: Wal-Mart and target uses this pricing strategy. However, this can be
dangerous for small businesses. Small business will have a hard time generating
sufficient profit wen prices are too low.
3. Psychology pricing- Techniques where they encourage consumers to respond on
emotional levels.

There are different ways in which a marketer can use psychology pricing.
1. Offering discounts or buy one take one.
2. Differential pricing.
3. Price ending.

-Charm Pricing- involves reducing the price by a minimal amount like 1 cent which
customers perceive it to be less.
Ex. 2.99 - where customers’ brains process this price to be nearer to 2
rather than 3.

-Prestige Pricing- involves rounding off and setting a higher price for premium and
exclusive products as rounded figures are easily processed and are preferred in such
cases.

-BOFOG- buy one get one- Strategy often use to clear stock or increase sales volume.

-Price Anchoring- concept of making a product that was first offered seem cheaper when
it is put alongside another product.

4. Segmented Pricing- This strategy involves selling a product or service at two or

more prices. The difference in pricing is due to customer segment, location and
timing when product is offered.
 a. Customer Segment pricing- example of this are prices of bus tickets. It
takes into account the age of the customers. For senior citizens, prices are
discounted.
b. Location Pricing- A company may charge different prices for products at
different location. Examples of this is prices of land in a subdivision. The
closer the location is to the entrance the more expensive it is.
c. Time pricing-Prices change as season, month, day or hours changes. For
example, some restaurants offer discounted food or beverages during happy
hour.

5. Discount and Allowance Pricing Strategies- Brands usually change the basic
price of their offerings in order to honor customers for their actions. These actions
may include volume purchases, early clearance of bills, off season purchases or
stays etc.

a. Discounts- This can be offered in different forms.

1. Cash discount- offering products at prices for customers
making prompt cash payments.
2. Quantity discount- refers to offering products reduced prices
to customers who make bulk purchases. These discounts
instigate customers to purchase more products from a single
seller
3. Trade discount- offered by a seller to its channel partners for
performing various functions. These functions include selling,
storing, and record keeping.
4. Seasonal Discount-  giving products at reduced prices to
customers who purchase merchandise or services during the
offseason.
b. Allowances- refers to money paid by a brand to the retailer in return for the
retailer promoting the products.

6. Promotional Pricing- Companies reduce product prices below the market price for
a temporary period of time.
7. Geographical Pricing- the practice of adjusting an item's sale price based on the
location of the buyer. Sometimes the difference in the sale price is based on the cost
to ship the item to that location. But the difference may also be based on what
amount the people in that location are willing to pay. Companies will try to
maximize revenue in the markets in which they operate, and geographical pricing
contributes to that goal.
Mark-up Pricing
- Also called “Cost plus pricing”
- Method of adding a certain percentage of a markup to the cost of the product to
determine the selling price.
It is a pricing strategy wherein the price of a product is determined by calculating the sum of the
products and a percentage of it as a markup. It is adding a percentage to a product’s cost to
determine the selling price.

Cost of good or service + markup = selling price

This means businesses can set their retail or selling prices by adding a certain markup to the
cost they incurred from creating the goods or services. If you want the markup percentage, you
can use the following formula:

Markup percentage = ( (sales price - unit cost) / (unit cost) ) x 100

Mark-up pricing is very simple to calculate and understand. However, there are limitations like
actual demand of the product is ignored when computing the mark-up price. The amount of
competition prevailing in the market is overlooked.

Benefits of markup pricing

1. Increases Profit- This can help you set strategic prices for your goods and services that
can generate profit.
2. Recover costs- Since you have the potential to earn a profit when you mark up the
pricing of your products and services, you can put this profit toward what you spent for
the labor and materials. This can prevent you from going into debt just for creating your
goods and services.
3. Simple Calculations- Though creating a pricing strategy involves several important
figures, calculating the right markup price comes fairly easily thanks to its simple
equation.

Markup Pricing examples

RESTAURANT INDUSTRY
-Restaurant owners typically aim for price that is a 300 percent markup above the cost of
the raw ingredients for their meals. However, there are items that are so expensive that
customers won’t tolerate a 300 percent markup. Because these items cannot be markup by the
desired amount then owners must use larger markups on less expensive products.
- Psychological factors affect restaurant pricing. Pricing an item too low might make
customers feel that there is something wrong with the product.
PRICE DISCRIMINATION

-identical or largely similar goods or services are sold at different prices by the same provider in
different markets
-distinguished from product differentiation by the more substantial difference in production cost
for the differently priced products involved in the latter strategy.
- relies on the variation in the customers' willingness to pay and in the elasticity of their demand.

There are three basic requirements for successful price discrimination:

1. Firms must possess some degree of monopoly of market power. This will enable them to
charge a price in excess of the costs of production.
2. Firms must be able to separate customers into different groups that have varying price
elasticities of demand.
3. Firms must be able to prevent resale among different groups of customers. Customers
that were charged less than the others can resell the products at a much cheaper price.

THEORETICAL MODELS OF PRICE DISCRIMINATION

-Demand and Willingness to pay- how much a given customer would be willing to pay for a
particular product or service.

-First Degree Price Discrimination-

- “Personalized Pricing”
- Manager is able to charge the possible maximum amount that the
consumers are willing to pay for each unit of the product.

-
- Second Degree Price Discrimination-
- Firms changing the maximum price consumers are willing to par for
different blocks of output.
- also called nonlinear pricing
- prices depend on the number of units bought.

Example: Electric utilities charge different rates for various blocks of kilowatt hours of electricity.
-Third Degree Price Discrimination-
- Firms separate markets according to the price elasticity of
demand and charge a higher price in the market with the most inelastic demand.

Seller can charge different prices in two or more different markets at the same time.

Also known as market segmentation.

-Versioning-
-It is a price descrimination strategy where different versions of a product are offered to
different groups of customers at various prices.
Ex: a book introduced in the market. They publisher will public a hardcover
edition then wait for months before publishing a paperback version.

-Bundling-
- products are sold separately but also as a bundle. Where the price of the bundle is less
than the total amount. This can help in getting consumers to purchase both products.

-Coupons and sales: Promotional Pricing-

- use of coupons and sales.
 - It’s an effective pricing strategy because they not only focus on different price
elasticities of demand, but also impose costs on consumers.
- individuals who clip coupons or watch newspaper advertisements for sales are more
price sensitive than consumers who do not engage in these activities, and they are also willing
to pay the additional costs of the time and inconvenience of clipping the coupons and monitoring
the sale periods. This strategy is beneficial for the firm because it does not have to lower the
price of its products for all customers and lose additional revenue.
-Two Part Pricing-
- consumers are charged a fixed fee for the right to purchase the product and then a
variable fee that is a function of the number of units purchased.

Ex. You have to pay a membership fee in order to avail their services.

RESOURCES:

https://www.myaccountingcourse.com/accounting-dictionary/pricing-strategy

https://www.feedough.com/the-10-types-of-pricing-strategies/

https://www.profitwell.com/recur/all/product-line-pricing

https://www.priceintelligently.com/optional-product-pricing

https://medium.com/swlh/how-to-estimate-customer-demand-and-willingness-to-pay-
b1d14ee4f806

Farnham, Paul G. (2014). Economics for Managers, 3rd ed. London: Pearson Education.
https://www.brex.com/blog/penetration-pricing-strategy/