Pricing Strategies

Premium Pricing.

Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.

Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom in order to

Economy Pricing.

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming.

Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.

Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar.

Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

Optional Product Pricing.

Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

Geographical Pricing.

Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.

Value Pricing.

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds.

Predatory pricing
(also known as destroyer pricing) is the practice of a firm selling a product at very low price with the intent of driving competitors out of the market, or create a barrier to entry into the market for potential new competitors. If the other firms cannot sustain equal or lower prices without losing money, they go out of business. The predatory pricer then has fewer competitors or even a monopoly, allowing it to raise prices above what the market would otherwise bear.
In many countries, including the United States, predatory pricing is considered anti-competitive and is illegal under antitrust laws. However, it is usually difficult to prove that a drop in prices is due to predatory pricing rather than normal competition, and predatory pricing claims are difficult to prove due to high legal hurdles designed to protect legitimate price competition.

Limit Pricing
A Limit Price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable.

Loss Leader
In marketing, a loss leader (also called a key value item in the United Kingdom) is a type of pricing strategy where an item is sold below cost in an effort to stimulate other, profitable sales. It is a kind of sales promotion.

International Pricing Strategies

Transfer pricing strategy
Transfer pricing is a strategy used when MNCs sell products to their divisions in other countries. Transfer prices between divisions will vary depending on variables such as the taxation rates (i.e., higher income tax rates in the parent’s home country will lead to lower transfer prices emanating from the home country to foreign divisions) and the desire to minimize profitability of subsidiaries as a barrier to entry. Market prices are charged when tax rates are less favorable in the receiving divisions.

Cost-plus pricing strategy
This is the most widely used pricing strategy. Cost-plus pricing plays an important role in export pricing of industrial products, especially when firms begin to export to guard against market related uncertainty. Thus, when entering countries for the first time, it is easiest to develop a price based on the most accurate available information, internal cost figures.

Parity pricing strategy
A firm adopts this strategy when it sets its prices in a range where most buyers would find the prices acceptable and appropriate. Parity pricing is used by firms with lower industry control and market share. Firms adopting this strategy do so in lieu of charging a higher price for fear that competition could gain a significant advantage due to volume sales and experience cost savings.

Second market pricing strategy
Second market pricing is a strategy where different prices are charged based on distinct international markets. This strategy is viable when the price differential between markets does not exceed the transaction costs associated with arbitraging a product from one market to the next. Accordingly, this strategy must be employed with caution. If price differences between markets are too great, parallel markets may develop, thus reducing overall profitability. Second market pricing is a particularly important international pricing strategy in the industrial products sector. In fact, the use of this strategy is pervasive in the industrial sector as most of the dumping (an extreme form of second market pricing) complaints filed with the International Trade Commission are for goods such as chemicals and machine parts.

Low price supplier strategy
Firms using this strategy tend to adopt one of Porter’s (1980) three generic strategies, low cost provider. Three conditions must be in place in order for this pricing strategy to be effective. The first is that the low cost suppliers need to be in a market in which their price changes are not easily detected by competitors. Second, these suppliers be in a market position in which competitors cannot effectively retaliate against them. For example, the ability of a competitor to retaliate would be limited if it is already producing at full capacity and cannot increase output. The third condition favorable to a low price strategy is that competitors’ willingness to retaliate should be low, or unthreatened. If larger competitors were to retaliate in the case of a restricted market, the price reduction might undermine overall sales and profits in the larger related markets. In some cases this type of retaliation may be restricted by governmental regulations that prevent larger firms from engaging in price retaliation.

Complementary product pricing
This pricing strategy is usually more appropriate with products with high switching costs. The motivation of firms to use this strategy is to enhance customers’ involvement with the original product to the degree that they are likely to purchase increased amounts of ancillary products or supplies. In effect, this scenario renders customers captive to the original product. As a result, higher profits are frequently realized by the supplier. Thus, the advantage-accorded firms using complementary products is that by charging a lower price for the primary product, they realize the benefits of higher profits through the sale of the complementary products or supplies. Firms that compete on price with their primary products are pressured to recoup their costs on these products, while no such pressure exists for producers of complementary products