“How much the customer is willing to pay for the product has very little to do with the seller’s cost and has very much to do with how much they value the product or service they’re buying,” says Eric Dolansky, Associate Professor of Marketing at Brock University in St. Catharines, Ont. Here, we delve into the five most common pricing strategies that companies frequently use:
1. Cost-plus pricing
Cost-plus pricing is a simple and straightforward strategy. Businesses simply add a markup to their costs to determine their selling price. This strategy is easy to calculate, but it does not take into account the value of the product or service to the customer.
Example: A company that produces a new widget has costs of $10 to produce each widget. The company then adds a markup of 50% to determine a selling price of $15.
2. Value-based pricing
Value-based pricing is a more sophisticated strategy that takes into account the value of the product or service to the customer. Businesses use this strategy to set prices that are perceived as fair and reasonable by customers.
Example: A company that produces a new smartphone uses research to determine that customers are willing to pay $1,000 for the phone. The company then sets the price at $1,000.
3. Competitive-based pricing
Competitive-based pricing is a strategy that sets prices based on the prices of competitors. This strategy is often used in markets where there are many similar products or services.
Example: A company that sells shoes sets its prices at the same level as its competitors.
4. Skimming pricing
Skimming pricing is a strategy that sets high prices initially and then lowers prices over time. This strategy is often used for new products or services that are in high demand.
Example: A company that releases a new video game sets the price at $60. After a few months, the company lowered the price to $40.
5. Penetration pricing
Penetration pricing is a strategy that sets low prices initially to gain market share. This strategy is often used for new products or services that are competing with established brands.
Example: A company that enters a new market sets its prices at $20 for a product that is typically sold for $30.
Choosing the right pricing strategy
The right pricing strategy for a business will depend on a number of factors, including the type of product or service, the target market, and the competitive landscape. Businesses should carefully consider these factors before choosing a pricing strategy.
Can you combine pricing strategies?
Certainly, you can combine and use multiple pricing strategies to best reflect the product or service’s lifecycle and market conditions. These pricing strategies can coexist and evolve over time as the product develops and adapts to the market.
For example, initially, you might apply a value-based pricing strategy to showcase the unique value of your product or service to customers. Then, when you want to expand your market or attract new customers, you can switch to a penetration pricing strategy to create attention and stimulate demand. Finally, when you aim to penetrate the market more deeply or compete with strong rivals, you can use a penetration pricing strategy to compete on price.
Flexibility in combining and adjusting pricing strategies across different stages of the product will help you optimize profitability and meet the changing needs of the market.
Conclusion
In conclusion, Every pricing strategy has two sides. This means that when you attract certain customers by applying a specific strategy, it may alienate others. There is no one-size-fits-all pricing method. What’s important is that you need to identify your primary goal: attracting and retaining customers in your target market. This implies that you should use the most suitable pricing strategy for your target audience and your business objectives.