Pricing Strategies

If the product is branded, it will have a distinctive name and packaging, and be aimed at a particular part of the market. It will be important to select an appropriate price to complement the brand image; a value-for-money brand should have a low price. Today many products have a brand image. Price will not just be determined by demand and supply in the market. The producer will have a lot of influence over the price of the product.

If a product has many competitors in its market, the price it charges will be very important. The business must constantly monitor what its competitors are charging for their products to make sure its prices remain competitive.

A business can adopt pricing strategies for several reasons:

• To try to break into a new market
• To try to increase its market share
• To try to increase its profits
• To make sure all its costs are covered and a particular profit is earned

The business objective being sought will affect which of the pricing strategies the business decides to use. The price the business chooses to charge may not be related to the cost of manufacturing the product. Sometimes they might charge what they think the consumer will pay and this may be well above what it has cost them to manufacture the product.

Some pricing strategies that a business could use for its products are:

Cost-plus pricing:

It involves estimating how many of the product will be produced, then calculating the total cost of producing this output and finally adding a percentage mark-up for profit.

The advantage is that the method is easy to apply; the disadvantage is that you could lose sales if the selling price is a lot higher than tour competitor’s price.

The way to calculate it is:

Penetration pricing:

It is usually used when trying to enter a new market. The price would be set lower than the competitors’ prices.

The advantage is that it ensures that sales are made and the new product enters the market; the disadvantage is that the product is sold at a low price and therefore the sales revenue may be low.

Price skimming:

With price skimming, the product is usually a new invention, or a new development of an old product, and therefore it can be sold on the market at a high price and people will pay this high price because of the novelty factor. The product will often have cost a lot in research and development, and these costs need to be recouped. Sometimes the high price can be due to the high quality of the product.

The advantage is that skimming can help to establish the product as being of good quality; the disadvantage is that it may put off some potential customers because of the high price.

Competitive pricing:

It involves putting prices in line with your competitors’ prices or just below their prices.

The advantage is that sales are likely to be high as your price is at a realistic level and the product is not under- or ever-priced; the disadvantage is that in order to decide what this price should be, you would have to research what price your competitors are charging and this costs time and money.

Promotional pricing:

It would be used when you want to price the product at a low price for a set amount of time.

The advantages are that it is useful for getting rid of unwanted stock that will not sell, and it can also help to renew interest in a business if sales are falling; the disadvantage is that the sales revenue will be lower because the price of each item will be low.

Psychological pricing:

It is an approach when particular attention is paid to the effect that the price of a product will have upon consumers’ perceptions of the product.

• This might involve charging a very high price for a high quality product so that high income customers wish to purchase it as a status symbol
• It could also involve charging a price for a product which is just below a whole number, for example, 99c is just below $1 and creates the impression of being much cheaper
• Supermarkets may charge low prices for products purchased on a regular basis and this will give customers the impression of being given good value for money