Pricing strategy

A marketing strategy used by firms to attract customers to a new product or service. Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors. The reasoning behind this marketing strategy is that customers will buy and become aware of the new product due to its lower price in the marketplace relative to rivals.

Penetration Pricing Strategy

Penetration pricing is used when a company wants to really dominate a market. They lower almost all of their prices in order to keep customers buying. Retailers who use this strategy make their profits primarily through volume sales. Large sales enable those same retailers to buy in bulk, so to speak, and receive their wares at a much lower cost per unit. This increases their profit margin. The risk with penetration pricing is that the image of the company may be perceived as lower quality because the price is lower. Most managers, though, take the risk because of the huge promise of market share that will allow them to control a good portion of the industry.

Skimming

The best example of price skimming happens frequently with computers, mobile phones and other electronics. For a short time when the product is first released on the market as a new and highly coveted item, it is expensive. Only an exclusive group of people can afford to buy the product and be a part of the elite club of those who have “access.” Once the item becomes more popular and sales volumes begin to rise, pricing falls, and those early adopters who chased the prestige move on to the next greatest new product. The benefit of this strategy is clearly short-term profit. Over time as prices fall, the pricing strategy must shift to ensure a profit.

Competition-Based Pricing Strategy

Keeping track of your competitors is a basic business practice that does not always involve pricing. Sometimes, it is merely a practice to keep your company on its toes. When it is done for the purpose of pricing, however, it is a good way to stay informed about what is unfolding in your industry – and who is making things unfold. Choosing to orient your company as a competition-based company means that you will have to stay innovative to keep ahead of your competitors. Since it is also driven by supply and demand, it also means that the general public likely will get the best deal from the best company selling the product. While it is important not to be distracted by being obsessed with the dealings of other companies, it is just smart business to always have some idea of how they are delivering to their customers.

Consumer-Based Pricing Strategies

Consumers tend to consider prices in terms of what they think the price should be, comparing their perceived price with the actual price. Discrepancy in either direction (too high or too low) may cause the consumer to purchase the product from another company. A consumer-based pricing strategy can be advantageous because it goes inside the mind of the intended consumer to predict what the consumer would be willing to pay for a product. Market research and attention to other elements of the marketing mix help determine the consumer’s ideal price.

Pricing According to Demand

Price strategy may also be tied to the economic “law” of supply and demand. The law of supply and demand states that prices should rise as demand for the product rises. The rise in price leads to a rise in profits, which allows the company to produce more products. The additional products leads to a surplus, the surplus causes prices to fall once more, and the lower prices lead to an increase in demand, starting the cycle over again. Advantages of demand pricing include the ability to optimize prices using charts and mathematics that predict ideal prices. However, demand pricing may lead to revenue loss by failing to take into account variables such as production costs and the consumer’s desired price.