How Do You Fix Selling Prices to Best Advantage?
Pricing Strategies Have Promotional and Profit Maximization Goals
Jan 15, 2009
You can only charge a price that the customer will pay. This will typically be the ruling market price. This price must cover your production, marketing and overhead costs, and generate a profit. It is by using a variety of pricing strategies that you manage these opposing pulls, and even manage to promote your product and maximize your returns.
Pricing and Product Life Cycle
Product life cycle simply means that the marketing conditions you face are different depending on whether you are:
- Introducing an innovative product into the market
- Selling when the demand for the product is growing fast
- Maintaining sales volumes in an increasingly competitive market
- Selling in a market where the product is being replaced by better alternatives
Every product goes through the above four (Introduction, Growth, Mature and Declining) stages. The pricing strategies you adopt will have to face the different market realities at each stage. For example:
- You use penetration pricing at the introductory stage, keeping prices lower than costs to get people try the product or service.
- At the growth stage the opposite strategy of price skimming is used, with the prices kept very high compared to costs. Competition is not yet high while demand is outstripping supply.
- At the mature stage with high competition and stable industry sales volumes, you use different promotional pricing strategies to maintain or enhance your market share.
- When demand for the product starts to decline (and competition is still high) you might use loss leader pricing for this product in the hope that you can sell other products to the same customers at profitable prices.
Promotional Pricing Strategies
Premium Pricing: A high price can make a product exclusive creating a desire to possess it. For example, diamond-studded watches of well known brands might be priced at several times their making cost. Even for lower end products, a premium price might create an impression of high value.
Economy Pricing: A no-frills product with low production and marketing costs can appeal to the budget-conscious, and achieve high volumes. An example is a store branded commodity sold only through a particular franchise store.
Psychological Pricing: It is quite common to see prices like 9.99 that create an impression that the price is lower than $10. Unwary buyers might feel that at the "low" price, they are getting a bargain.
Captive Product Pricing: You can get an HP Printer at a surprisingly low cost, and then spend a fortune buying HP Ink cartridges to use it.
Loss Leader Pricing: Publicized discount pricing (half price) can attract customers to your store. They will typically buy other merchandise priced normally in addition to the half-priced item.
The above is only an illustrative list. You will find other tactics such as geographical differentiation and optional extras, all of which go to increase the profit volumes of the seller.
Setting the price is thus not a simple matter of recovering costs with a fixed percentage of profit. Instead, pricing can be used to promote products, skim the market demand, compete in the marketplace and push those products that are getting out of fashion.
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