Pricing Strategy

Updated on March 19, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Pricing Strategy?

A pricing strategy is an approach taken by businesses to decide how much to charge for their goods and services. The interaction between margin, price, and selling level is given specific consideration while pricing products. Therefore, it’s important and complicated to design a proper pricing plan that ensures business success.

The price is a component that affects a company’s revenue significantly. It forms the key variable in the company’s financial modeling and affects its income, profits, and investments in the long term. Price reflects the idea of a business and shows its behavior towards competitors and the value it gives customers.

Pricing Strategy

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Key Takeaways

  • Pricing strategy involves changing and adjusting the price of goods and services in response to market factors. Research, Market conditions, consumers’ willingness to pay, competition, trade margins, expenditures incurred, etc., are all considered while developing a pricing strategy.
  • Setting a price varies from pricing strategy. It employs factors that are not taken into consideration while setting a price. There are a variety of pricing strategies available. Price skimming, Pricing for market penetration, premium pricing, economy pricing, bundle pricing, value-based Pricing, and dynamic Pricing are a few of them.
  • Price determination involves assessing the business and competitors’ goals and consumer preferences.

Pricing Strategy Explained

Pricing strategy in marketing, in simple terms, is adjusting prices according to market determinants. Price is the value one assigns to a good or service which they determine by research. A pricing strategy considers market conditions, consumer willingness to pay, competition, trade margins, costs incurred, etc. Pricing involves setting a price for ownership and usage of goods.

Pricing is about making decisions. It starts with assessing the business requirements and the goals it aims to achieve. The next step is market research and evaluation of the level of competition. After that, an effective pricing strategy will help the business stand up. The final research stage involves speaking with the target audience—the consumers—about their views regarding the brand, product, or service.

Setting a price varies from pricing strategy. It employs factors that are not taken into consideration while selecting a price. For example, the approach considers the timing of the market, the seasonality of demand, and the customer’s preferences and purchasing patterns in addition to the analysis of the products available in the market. However, the strategy is most beneficial when consumers are heterogeneous (varying tastes and preferences). And when demand variability and uncertainty are high, especially with stable production levels (a chance to reap greater profits).

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Types

The following are a few pricing strategies that businesses adopt:-

#1 – Price Skimming

A skimming pricing strategy is a pricing technique in which a business sets its initial price high and gradually lowers it when more competitors enter the market. This is ideal for businesses that are entering an emerging market. Here, businesses maximizes profit utilizing the price demand of certain markets. They possess the first-mover advantage, where they are the first to introduce or market the product or service. The skimming pricing strategy makes a profit in the early stages of the product or service’s market until other competitors enter and supply increases.

#2 – Pricing for market penetration

It is the opposite of price skimming. Skimming starts with huge prices, and the penetration pricing strategy uses low prices to enter the market. This is done to attract the existing consumer base of the competitors. Once there is establishment of a reliable pool of consumers, the costs slowly increase. Penetration pricing strategy depends mostly on the ability of the business to bear the losses made in the initial years. Big MNCs especially employ this to get a strong footing in developing countries’ markets.

#3 – Premium pricing

Premium pricing strategy involves businesses that create high-quality products and market them to high-income or net-worth individuals. The key here is to manufacture unique, high-quality designs and products that convince the users to pay such huge amounts. The premium pricing strategy targets the luxury goods market.

#4 – Economy pricing

The strategy targets customers who prefer to save money. Big companies employ the strategy to make customers feel they are in control. Walmart in the U.S. is an example where they offer deals that please customers. This does depend on the overhead costs and the value of the products.

#5 – Bundle pricing

As the name suggests, it is a strategy where a business sells a bundle of goods together. Typically, the total of the goods is lower than the individual products sold separately. This helps in moving the inventory and selling the stocks that are left over. The strategy has the potential to make profits (or save from losses) on low-value items.

#6 – Value-based Pricing

A concept is similar to premium-based pricing. Here, the business decides the price based on the customer’s valuation of the product’s worth. This is best suited for unique products.

#7 – Dynamic Pricing

A dynamic pricing strategy in marketing involves changing the price of the items based on the present market demand.

Examples

Take a look at these examples to get a better idea:

Example – #1

Starbucks, a big American multinational chain of coffeehouses and roaster reserves, employs Value-based Pricing. It has been increasing prices despite Dunkin’ Donuts and Folgers (its competitors in the market) lowering their costs due to the declining price of Arabica beans in 2015. Starbucks’ customers buy coffee for convenience, brand loyalty, flavor, and caffeine addiction. In addition, the brand value it has created for itself is huge. It does not sell coffee as small or large. They have rebranded the sizes as “Grande and Venti,” making them popular. For the loyal base, it has hardly ever noticed the price change. Therefore, they would buy the coffee for the value they have as a perceived-an elite brand.

Example – #2

Uber’s American mobility service provider is a good example of a dynamic pricing system. The pricing system employed by Uber modifies charges depending on a number of factors, including traffic, the prevailing rider-to-driver demand, the time and distance of the route, etc. Occasionally, this may entail a brief price increase at very busy times. As a result, there will be consumer demand for travel for the purposes in the above situations. Accordingly, they use this customer urgency to make money.

Frequently Asked Questions (FAQs)

Companies can adopt a market penetration pricing strategy when?

The market penetration strategy can be adopted when the market is filled with competitors and does not have a first-mover advantage. This is employed when the business has to attract the pool of consumers possessed by its competitors.

What are the different pricing strategies?

There are a variety of pricing strategies available. Price skimming, Pricing for market penetration, Premium pricing, Economy pricing, Bundle pricing, Value-based Pricing, and Dynamic Pricing are a few.

Why is pricing strategy important?

Pricing determines the profit earned by the companies. They also decide the identity of the business and how these businesses value their competitors.

How to make a pricing strategy?

The pricing strategy depends on the individual company. However, certain factors can be looked into to help decide. Corporate image (cheap or luxury goods), geographic locations, the ability to provide discounts, assessing the consumer base’s price sensitivity, etc.

This has been a guide to Pricing Strategy and its definition. We explain the pricing strategy in marketing, types, examples, and key takeaways. You may learn more from the following articles –

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Comments

  1. Abubakar Abdullahi says

    Awesome

  2. nibishaka rukundo jean moise says

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