What are Pricing strategies?
Pricing strategies are the techniques that businesses use to determine what to charge for the goods and services they sell. Pricing is a key component of the business’s marketing strategy which takes into account factors such as:
the cost to the business to produce or purchase the good, or to deliver the service (where applicable)
- the target market and what price it is likely to bear for that good or service
- competitor pricing
- the current financial health of the business (for example, it may offer heavy discount to encourage sales to help a struggling cash flow)
- the business’s overall objectives.
Prices are usually set to maximise profit, but not always so. Some pricing strategies may be primarily designed to introduce a new product to the market, even if the lower price will only be temporary. Others may be classified as a ‘loss leader’, meaning that while that particular product is always sold at a loss, its availability and ready visibility encourages consumers to buy other business products better geared to returning a profit.
There are a range of different pricing strategies available.
Factors such as those mentioned in the first paragraph above help to determine which is most appropriate. Some of these strategies are:
- Profit-margin pricing: The price set covers the total business costs in purchasing or manufacturing the product for sale, or in setting up for the service to be delivered, to which is added a specified percentage to return a profit.
- Penetrative pricing: The price set aims to undercut the prices of similar competitor products on the market, in order to gain exposure for a new product or service. The price would be raised once the market is familiar with that product or service.
- Premium pricing: The price set aims to create an aura of excellence and is thus set artificially high. This strategy plays on the psychology of the buyer who thinks that a cheap product is ‘no good’ and that an expensive one must be better. It is based on what it is expected customers will be prepared to pay for a quality product.
Incentives may also be built into the pricing of products to encourage sales. These may include discounts of various types and cash rebates. On the other hand, prices often include additional fees, such as a delivery or administrative fee, which adds to the price at which a product is sold
Pricing strategies may be business-wide (for example, no discount, or, alternatively, discount on everything) and may vary during the lifetime of a good or service. They are critical to successful marketing and sensitive to economic factors, business financial health, competitor behaviour and supply and demand pressures. Ultimately, pricing is about helping a business to achieve its objectives in a way that preserves its financial health.
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